[Editor’s Note: This is a republished post from Passive Income MD (PIMD), the newest member of The White Coat Investor Network. The original post ran here, but if you missed it the first time, it’s new to you! I like this post because it provides details to a plan that is actually pretty common among those who favor real estate as an investment. As readers know, I invest in both low-cost index mutual funds and in real estate, although I prefer not to own individual properties myself due to the hassle factor. We'll have an update on our real estate investments in a couple of weeks, but until then, let's hear about PIMD's take on it.]
There is a physician that I know, Dr. C., who is well-known to be a very savvy real estate investor. Everyone thinks he lives the good life, and he’s at the age that most doctors start thinking about retirement. In one of our conversations, he let me know that he had technically retired years ago but had continued working simply because he enjoyed it. What doctor wouldn’t want that? So, of course, I asked him, “How did you do it?”
He readily admitted that he’s not particularly savvy or smart when it comes to investing. He just listened to the advice of a mentor:
“Buy one real estate investment property a year.”
I tried to nail down some specifics (ie. condo, house, apartment building). He simply stated, “Doesn’t really matter, whatever you can reasonably afford, just do it.”
So I went home to see what that might look like and tried to model it out on paper.
Here’s my disclaimer: this is my N=1, my one simplified example.
This might be a good time to quickly address the oft-debated simple vs complex model argument. I think the answer is that no one can definitively state which model truly has a better predictive value. This quote by a well-known British statistician, George Box, sums it up perfectly,
“All models are wrong, but some are useful.”
Buy a Rental Property Every Year for 10 Years
With that in mind, here is what it might look like if you tried to buy a rental property every year for 10 years. Here are the rules of this model:
- Each property purchased is a single family home.
- The purchase price stays constant at $100,000 (to keep the numbers round).
- Each year requires a 30% initial investment ($30,000 in this case).
- The home loan starts at $70,000 (= $100,000 purchase price – $30,000 investment)
- The max # of home loans at any one time is four. According to Fannie Mae / Freddie Mac, you can possibly have up to ten residential home loans, but after four it becomes a bit more difficult to get additional loans, so decided to keep it at four.
- Cash flow per property is $400 a month – vacancy, property management & future maintenance have already been taken into account. This number was chosen because this is very attainable, as proven by my own rental property.
- All the cash flow throughout the year is saved and goes back into paying down the home loans at the end of the year.
- Once a property is paid off, the property cash flows $800/month. That’s because there is no longer mortgage and interest to be paid.
- If you have the max 4 properties, the $30,000 initial investment goes towards paying down one of the loans.
- Referencing the Case-Shiller index, used 3.4% as the appreciation rate
What is not taken into account in this model:
- Equity pay-down over time, which works significantly in your favor but can get confusing for the calculation.
- Rents increasing over time, which would work in your favor
- Increased maintenance over time
- Any cash flow changes
- Taxes
- Depreciation
- Purchasing your own home
After all that, here it is. If the details become excessive, skip to the bottom for the summary. (At this point, you might want to have one window with the graph open on one side and one with the explanation on the other if you want to follow along easier.)
Year 1
- $30,000 invested and you have your first rental property. Congrats!
- Cash flow is $400 a month ($4,800/year).
- At year-end, this $4,800 reduces Home #1’s loan to $65,200 (= $70,000 – $4,800).
Year 2
- $30,000 invested and you have your 2nd rental property.
- 2 cash-flowing properties at $400/month results in $9,600 for the year.
- At year-end, this $9,600 reduces Home #1’s loan to $55,600 (= $65,200 – $9,600).
Year 3
- $30,000 invested and you have your 3rd rental property.
- 3 cash-flowing properties at $400/month results in $14,400 for the year.
- At year-end, Home #1’s loan is at $41,200 (= $55,600 – $41,200).
Year 4
- $30,000 invested, you now have the max 4 rental properties.
- Cash flow is $19,200 per year (= $4,800 x 4).
- At year-end, Home #1’s loan is $22,000, the rest are still $70,000.
Year 5
- Since you have max 4 houses, your $30,000 investment goes to paying of the rest of Home #1, and the remainder reduces Home #2’s loan to $62,000.
- Cash flow is $24,000 ($800/mo for home #1, $400/mo for homes #2,3,4)
- At year-end, Home #2’s loan is $38,000.
Year 6
- $30,000 investment buys Home #5.
- Cash flow is $28,800 ($800/mo for homes #1-2, $400/mo for homes #3-5).
- At year-end, Home #2’s loan is down to $9,200.
Year 7
- Since you have the max 4 houses, your $30,000 investment goes to paying of the rest of the home #2, and the remainder reduces Home #3’s loan to $49,200.
- Cash flow is $33,600 with 2 paid off houses and 4 cash flowing at $400/mo
- At year-end, home #2’s loan is $15,600.
Year 8
- $30,000 investment buys home #6.
- Cash flow is $38,400.
- At year-end, home #3 is paid off and remainder goes to home #4’s loan.
Year 9
- $30,000 Investment buys home #7.
- Cash flow is $48,000.
- At year-end, home loan #4 is paid off, and remainder goes to home #5’s loan.
Year 10
- $30,000 Investment buys home #8.
- Cash flow is $57,600
- Pays down house #5
Summary After 10 Years
- You own 8 rental properties at this point. You were very close to your goal of purchasing one a year and you didn’t need to violate the max four loans at a time rule.
- Four homes are completely paid off, four still have mortgages on them.
- Cash flow by end of year 10 is $57,600 a year ($4800 per month). If you had a $2 million portfolio at this point, and started to draw down 3%, you’d have a very similar cash flow.
- Again, roughly figuring out the appreciation of each home using a rate of 3.4% yields total equity in the properties around $750,000.
- Total investment has been $300,000.
My Thoughts
- You can start seeing a snowball effect happening although it seems to just be hitting its stride by year 10.
- This is something most physicians could replicate.
- The cash flow is starting to amount to something substantial by Year 10. What would that cash flow by year 10 allow you to do? Would it cover educational expenses for your child? How many shifts would that allow you to give up?
Just for fun, I modeled it out to 15 and 20 years. The problem is that the model starts to break down because the cash flow becomes so overwhelming and I wasn’t sure whether to buy several new homes at a time or roll some of the cash back into the loans. But hey we’re just having fun here, so here are the results:
Year 15
- You own 12 homes, 10 of which are paid off by year-end.
- Cash flow is $100,800 a year ($8,400 a month).
- Equity in the properties is around $1.4 million.
Year 20
- You own 19 homes (very close to one a year!), all 19 of which are paid off by year’s end.
- Cash flow is $172,800 a year ($14,400 a month).
- Equity in the properties is around $2.8 million and growing.
I think it’s worth mentioning that if you were able to amass a nest egg of $6 million dollars and you withdrew 3% a year, that would put you somewhere in the range of $180,000 your first year.
At this point, I think it’s pretty safe to say that working is relatively optional and total retirement is a possibility. That’s some serious passive income! Imagine starting this when you’re in your early to mid 30’s when you first became an attending physician.
So Did I Follow This Advice?
I’ve had to play a little catchup but I’ve been fortunate to be able to get enough rental units to match the number of years I’ve been out an attending. Okay, that’s only five, but I’m right on track to buy one rental property per year. I’ll keep you updated…
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I think John Schaub popularized this idea with his seminars and book: building wealth one house at a time?
I didn’t do it but I know people who have with great success.
I recently bought a $100k house for cash that cash flows $800 per month. I remember thinking, if I had 10 of these I could live on that ($8k/mo).
John Schaub wrote the book on the concept. “Building Wealth One House at a Time” was his best book. Try to find the original or older ones used on Amazon. I read his newer ones and was not impressed. His book helped keep me motivated on my journey to ten properties in ten years. You will defintely experience some ups and downs like any business venture. The key is to focus on the end zone.
So how would someone who’s never gotten into the rental property market start? It seems that real estate has become a pillar of success for many of the people you have interviewed recently. How do you find a property in the first place, how much are you putting in the legwork vs just supplying the capital, etc. Can you break it down into a step by step guide?
It’s a second job to do it this way, so you have to learn it like you would any other job. Read a few books, talk to experts in the field, get some experience, make some mistakes etc.
You tend to “make your money when you buy” and there are lots of people out there constantly looking for the best deals. But you only need to find one a year. You don’t have to find a good deal every week.
A great resource for getting started is http://www.biggerpockets.com It’s free and very educational. No hype. Just be a little careful on the forums. Some of the folks are simply looking to profit of your inexperience.
I like the warning about biggerpockets. I would add listening to many of the podcasts on biggerpockets.
I like http://www.affordanything.com and http:/www.coachcarson.com for a good intro and responsible approach to real estate.
I keep running the numbers on AA’s cashflow, and it seems like she’s barely breaking even. I’d love her to elaborate and explain more fully, but her most recent posts make it seem as though she’s barely covering her expenses.
I dont know this blogger, but remember even if you’re just breaking even thats only in the cash flow department, someone is still paying down a liability and building up an asset for you. All your doing is the legal holding of the premises.
Getting the asset at even a steep discount is still pretty great.
We had a duplex for a period of time, paid in cash.
Did receive some cash flow.
But there was quite a bit of work.
One of the tenants smoked in the home, despite a clearly stated prohibition.
Direct real estate investment is not nearly as passive as a bond.
Management companies are available, and may be worth the cost if you do not want to DIY.
A carefully chosen REIT would be a more passive way to diversify into the real estate area.
The concept here is great. Real estate should be a part of a physicians portfolio for diversification IMO. I had tried this when I finished residency buying can’t miss condo units. I rented them and found the process of being a landlord and the accounting part of it more than I bargained for. I think if one were to adopt this model, there are some other key po8bts to consider:
1- you must buy the right property at the right price and rent to the right people
2- renters destroy your places, be ready to put a lot back into the places
3- maintenance- stuff breaks. AC, appliances, plumbing, leaks, you name it. That eats up money too.
4- accounting- my accountant charged me quite a bit to deal with the properties on my taxes.
5- who bought your units? It is probably best to establish an individual LLC for each property you own and have the LLC own it with you as president. Asset protection here is critical
I finally and thankfully sold all 4 of my can’t miss condo units and limped away a bruised man. I learned a lot in the process.
My suggestions from school of hard knocks:
1- buy your office building or unit and rent it to your practice. This is what I do. I have 3 offices, 2 are condos and one a free standing building.
2.- establish an LLC for each property to own the units with you as President
3- loans- this will be tough, but I got a smaller bank to give me 10 year mortgages at fixed rate. This way, at the end of 10 years all that rental income is mine.
4- rent- charge yourself enough rent to cover mortgage, taxes, insurance, accoubt8ng fees, and a little extra for routine maintenance. Stuff breaks and things need a coat of paint, etc.
5- accounting- my CPA charges me too much to handle my LLCs, but that just IMO. Taxes are just too complicated for me.
6- asset protection- make sure you get an umbrellas and extra lif3 insurance should something happen to you. Oh, you also must have a will!
In sum,
I love the concept of a physician buying real estate as it grows faster in value, you build equity and it’s not crazy money. It’s just a lot of headaches to be a landlord that just wasn’t for me. I am much better off being my own landlord and with the 10 year notes, I will paid off with my first office condo soon! This will be an amazing revenue stream for many years to come and I can always sell it if I needed to or get an equity loan to strip the equity!
Good luck colleagues, this is just my 2 cents and it probably has its flaws too!
Thanks for your experience sharing!
What you said was exactly what I awas thinking when I was reading the blog.
There is alot of risk (tenant, natural/act of god, etc.) as well as the cost of extra services (insurance, taxes, accounting, maintenance/repairs) and also the opportunity cost of using time to manage these properties.
The separate LLCs are a good idea, but I suggest two caveats. First, there is less asset protection than you might think. It works if you are sued for another reason; that is, you can keep the property separate in that case. But if you manage your property, your tenant can still sue you personally for whatever (e.g., negligence if he or she falls on your icy sidewalk)even if the LLC owns the property. Second, they do add some complexity. Not much for one, but nested LLCs might be more than you want to bother with. It probably limits me, but I like to be able to do my own taxes, with software of course.
The caveat is of course anyone can sue anyone else for almost anything. Whether or not there is an award is another story.
Above, he already stated the need to have personal umbrella insurance. As cheap as it is to purchase, its easy to add to the policy as your assets grow.
Yes. I keep an insurance policy on each property and sufficient umbrella insurance for liability. I don’t bother with LLCs since I find the umbrella insurance to be sufficient. I understand why others do, and particularly that a doc needs a good general asset protection plan. Just wanted to register the thought for other readers that LLCs are choice, not a requirement.
Can you still have properties under LLC if there is mortgage? I was told you have to totally pay them off to put them under LLC!
You don’t need the mortgage paid off. But you will likely be asked to give a personal guaranty outside of the LLC for the mortgage. The bank doesn’t want you to default and then not have a way to get you to pay the loan because of the LLC protection against creditors. I have had bank mortgages within an LLC.
Dr. Cory S. Fawcett
Prescription for Financial Success
Would this apply in a high cost of living city such as NYC? If not, is it recommended to start purchasing a rental unit outside of your own city?
I’m not sure it’s “recommended” to purchase a rental unit at all. But if you want to be a landlord, it is a viable path to wealth. There are significant additional hassles to being the sole owner of rental property you can’t drive over to easily. I won’t do it again.
Unfortunately, these numbers are difficult if not impossible to find and reproduce in a high cost of living city like NYC, LA, SF, etc. However, there are still areas of the country where this is possible if you decide to pursue a strategy like this.
There are some good reasons not to own out of state properties. The first is management. Hard to do it yourself absentee, and hiring a management firm will be at least 10% of your gross rents. Also, just a personal opinion, the management company is unlikely to give a small landlord the necessary level of attention. Second, Financing is harder. Doable, but harder. Third, and not a deal killer, but this forces you to do a second state tax return for the state in which the property is located. All that said, landlords find themselves in this situation and do fine, and some more committed landlords deliberately set out on this path. It’s definitely another business though. I sold all my out of state and only kept my cash flow positive properties that my wife and I can manage locally
I’m in the military, so I move all the time, but my real estate is all in Alabama. I have a good management company that takes care of everything for me. I keep adding properties to my portfolio even while I’m overseas. I’ve set up a system that makes it work. It’s possible.
Military career was also when I owned my out of state. I had a local partner though, and even then there was one real disaster. So, yes, it can be done. Just a lot easier if you can manage locally.
Though I haven’t bought a property, I have done a TON of research on real estate investing because I wanted to be well-versed before I jumped in. For those interested, BiggerPockets podcasts (and the website) is the place to start. That being said, all of those interviews have taught me one overarching truth about REI: it’s not passive investing, it’s a job. Even those with the best business systems in place devote 20 hours/week to their rental portfolio. If that sound appetizing to the standard physician, then it’s a great way to build long-term wealth.
That 20 hours per week is grossly overestimated. I own several properties in Hawaii (out of state, no PM), several in middle America (with a PM), and a few passive real estate partnerships.
I am 1.5 yrs out of residency and have $4.5K per month in net income from real estate. I spend roughly 25 hours per YEAR on my real estats business.
I spent (a lot) more than 25 hours in 2017 on browsing financial forums such as this and bogleheads. I spent more than 25 hours in Dec 2017 learning and investing in cryptoassets.
I consider my real estate portfolio one of the least time consuming ventures in my life. And I don’t have a PM for a chunk of my portfolio! (just friends on the ground).
The 20 hours per week is truly bs. I don’t buy that for a second.
How do you manage these properties, out of state, especially the Hawaii ones with no PM?
I mean don’t you have to show the place, rent it out, sign the leases, vet the tenant candidates/applications?
Also, what happens when things break, or needs maintenance?
I’d love to be able to own properties and be passive but not spend that much hours on it.
What’s your secret?
I did live there for a while so I have folks that could help me out, if need be.
Condos require MUCH less upkeep than SFHs. I pay HOA fees and all CapEx is built into that. Across the entire portfolio, outside of HOA fees, I average <$100 in repairs per property, per year. I still budget 5% of rents but its been much much less. Vacancy rates are <2%, I have tenants stay 2 years on average, and places get re-rented in 4-5 days. I pay someone $100 for each showing, and $50 for a signed lease. A PM would cost me thousands on a single property, no need for that. I spend only slightly less time "managing the property manager" than I do with the unmanaged portfolio. I have once calculated how much I saved by not having a PM, it was something like I 'earned' $500 an hour to not have a manager - I'll take that. Choose properties with B+/A- tenants with a good credit score, that have something to lose. If someone earns >$10,000 a month, they tend to take great care of your property. Hope this helps!
Awesome. Thanks for the advice. Are there reputable ways to find trust worthy people to have your condo keys and show them around? I guess that’s one thing that’s the key.
Funny thing is, I’m actually doing a locum gig here in Honolulu and am doing a 6mo rental on a condo here. I think your idea is great and the condo can be less headache that SFHs.
I’m actually dreaming of how I can own my own condos and rent them out!
Just got out of residency last year so just starting to pay down my loans and trying to find ways to add passive income stream!
Did you do lot of on the go learning or were there specific websites/books that you thought was helpful to get started? I’ve never bought any property so far so am a bit lost/scared as to where exactly to start. Especially with my loans.
Thanks again!
I’ll be back on Oahu in 2 weeks for my yearly business trip to check on my rentals/real estate related shenanigans.
If you’ll be around then, hmu on here, I’ll happy to meet and chat over a drink.
Ok, wait. You say you spend less than 25 hours per year on real estate, but make a yearly trip to Hawaii for real estate? That’s more than 25 hours of travel (if you include time to and waiting at the airport). Your math doesn’t add up…
Too good to be true. You sound like a scammer.
We own outright 4 Properties. Cash flow 50-60k a year. No loans. All are condos so upkeep and maintenance is minimal. Finding renters can take a little time. Cant recommend more highly!
Interesting. That’s alot of cash flow for just 4 properties! Another person said too that they avoid SFHs and just do condos since they are bit easier in terms of upkeep/maintenance. Advice on how to go about getting your toe into the water with investing in condos?
Having owned a number a rental units myself i can say that my experience wasnt quite as clean as the numders show. 1 bad HVAC unit and it could push you back 2 yrs cash flow. Location and future renters are huge. Transaction fees and rehab costs also play a part. Be sure you include all costs before you pull the trigger. More expensive properties are easier to manage due to better future tenants.
Also, even with a property manager it takes time. From some 15 units, im now down to 2 units beyond my primary residence, due to the time factor. I just do better if i work harder at work.
I still believe in real estate, my first true love (investment wise), but i find im looking more into crowd sharing venues as well as NNN properties, due to time.
I second Obtur8. And I am politely skeptical of Re3iRtH’s ability to manage out of state long term with such little effort. It can work for a while, but sooner or later something will break. Good on him if he can get friends, family, or the tenant to take care of it. Some will. But the cost still goes up for each repair or improvement.
That “something will break” is a 6 minute call to Lowe’s. I’ve had 2 appliances break in 5 years, in 4 properties in that state. Thats 12 minutes of my time. Repair costs are factored into the analysis of each property. 5% of gross rents, although personally I have see about 1.5%. What else you got? 🙂
My best wishes for your long term success. My property experiences are over 25 years, and they range from lighting strikes, to floods, to tenants being deported (shocking, I know, but he lied on his application). Anyway, many people have been very successful in real estate. I’m one of them. Sounds like you are too and are happy in your management approach. But if you really think over the long term you can do this in 25 hours a year you should quit medicine and teach the course. That will make you millions.
“The One Thing”. That book’s a game changer.
Great advice PMID!
After investing and learning about real estate investing for the past 2-3 years, and being an index investor for 8 years, I can clearly see that real estate investing is one of the best (if not the best) wealth building strategies out there.
Initially, I used to think that real estate investors were a bit “cult-like” or “biased” in their thinking/comments on forums and blogs, such as WCI. However, now that I am a real estate investor myself, I find myself sounding a bit like them now! 🙂
I think it’s because once you understand and feel comfortable with leveraging in real estate, the light turns on in your head. It’s as if you have found the “secret key” to creating wealth, and you feel excited and want to share this knowledge with others.
The analogy I use is how readers of WCI almost feel like it’s one’s duty to spread the word about DIY low-cost index investing to others. I do that too. Once you have this knowledge, then you almost feel an obligation/duty to share it with others. Sometimes you may get too excited explaining about DIY index investing to others (I know I do), that they may perceive you as a bit “cult-like” too.
Yes, they’re both great ways to invest. One has a lot more of a “second job” aspect to it, but also some unique benefits (like safer user of leverage). No reason one can’t do both.
I totally agree that if you become an active real estate investor, then this is basically a “second job”. Some physicians may want to pursue this as a second career. However, it is definitely hard to find the time/energy learning to become a good active real estate investor while holding down a demanding day job. This is what I realized early on.
That is why I would recommend physicians to look into becoming a joint venture “money” partner with a “sophisticated” active real estate investor. I emphasize “sophisticated”, because in the real estate investing world, it is the “wild west”. There is a huge disparity of skill and integrity when it comes to who calls themselves an “active real estate investor”. Unfortunately, there are no diplomas/degrees/exams to verify his/her competency like in medicine. Due diligence is required.
There are also many real estate strategies out there, but the “best” one, in my opinion, is the “Buy, Renovate, Rent, Refinance” (BRRR) Strategy. This is the strategy that most “sophisticated” investors use with multifamily homes (triplexes and up) and small apartment buidlings.
Sure, you can buy on your own a single detatched house or condo, rent it out and be a landlord yourself, but there is no question that this is a “second job” and this strategy does not come close to cdo the BRRR strategy.
However, if you look into partnering up in deals with a “sophisticated” investor who is experienced with BRRR strategy, then you will find that your ROI (return on investment), even with 50/50 split, far exceeds what you can get on your own with single homes. Rinse, Repeat. And before you know it, you have your real estate empire without the hassle of being a landlord or contractor.
I have so far found it to be very lucrative being the money partner in joint ventures. It is a “win-win” situation for both parties.
WCI, you must be bombarded by real estate investors asking you to be a partner for joint ventures. If you don’t mind me asking, have you partnered up in any deals yet?
Thanks! I absolutely believe that investing in real estate is a great way to build wealth when you factor in cash flow, appreciation, leverage, and tax benefits. Returns can be significantly higher than investing in index funds, but it does require more work. I guess it follows the general rule of thumb that the more control & influence you have over an investment, the greater the potential for return. It’s just what you’re interested in and willing to take on.
When you factor using a management company into your numbers from the start and find the cash flow to support that, it really can be almost as passive as index funds, and my returns have been significantly higher. I can only speak for the last 5 years, but that’s still a pretty good stretch. I’ll keep my fingers crossed…
For those of us in high price markets. How do we find a good team (management company, broker, etc.) to invest in real estate in other parts of the country?
If you click on my name, it’ll take you to my website. I have a very detailed post under my real estate tab that goes into great detail as to how to find a great management company. Since I’m in the military, I have some experience doing this.
This plan works well as long as everything goes according to plan. If there is a wrench thrown in the cogs here, one could find themselves in some trouble, especially if a property doesn’t cash flow, there is a job loss or a significant downturn in the economy etc. I own several rentals and have paid cash for each. The concept of real estate as part of ones portfolio is an excellent point.
It’s hard not to cash flow when there is no leverage at all. The best way to make sure you always cash flow is put down 30-50% or buy it cheap enough that your loan to value ratio is the same as if you put down that kind of money.
Show me a property that costs $100K and cashflows $400 a month. I’ll buy ten of them from you today. I would stay away from condos, most today have high HOA and will eat that cashflow right up. I know docs that were doing this 20 years ago, it is obviously a heck lot more expensive (and risky) to jump in on this today.
My coastal condos cost $150-180K and net cash flow >$800-1500 per month each, with very conservative numbers. Don’t pay retail.
What coast, Maine? Kidding, but seriously where are you finding those kind of discrepancies, you did say that you had stuff out of state so you definitely dont limit yourself geographically.
The only thing about the article is that its untrue that one has to limit themselves to only 4 mortgages, obviously that would really limit an actual real estate investor, they have all kinds of options for those beyond 4.
Hawaii 😉 some are a stones throw to the beach, others 3-5 miles away. Either way, yearly appreciation and rent growth DOES happen.
Btw I went to Maine last summer. Went to the beach and it waa 54 degrees!
“Live where you want to live, invest where the numbers make sense.”
I thought in HI everything was expensive. Thats great.
I wish I had the gusto to invest out of my area, Im in Cali and do have a rental here, but average costs keep me from doing as much as I want. Would preferably have duplexes/four plexes, but these do not seem to exist in parts of cities that I deem reasonable to own property.
Someone mentioned partnering in apartments, and that sounds good as at a certain door number scaling really works well.
Lately I have just been investing in large apartment syndications. I am not seeing any good single unit deals coming up in any market. Also looking for the perfect Triplex/Quadplex market. Hit me up if you find one you like!
Here you go. I see these low priced 3/1 residential deals regularly from one of our local RE investors who renovates out-of-state properties. This particular property is $60,000 with Net Operating Income (NOI) of $487 / month with property mgr in place. Knock off another $265 / month for an 80% mortgage.
Current Rent $785 per month but the Market Rent in the area is $850. This completely renovated one story 3 bedroom/1 bath single family home is perfect for a rental due to the low price of the home and yet high monthly rental and great potential for future appreciation. A Comparative Market Analysis has been done and the suggested sales price is $80,000. We are only asking $60,000 which is giving you $20,000 in immediate equity. This 1960 home features a newer roof, newer air conditioner, newer furnace, newer paint inside and out, newer carpeting, and newer flooring. Tenant pays all utilities.
Purchase With Leverage
$20,000 Immediate Equity
Purchase Price: $60,000
Expenses w/o mortgage
Down Payment: $12,000
Vacancy Loss: $544
Total Financed: $48,000
Property Tax: $603
Closing Cost: $2,150
Insurance: $470
Gross Income: $9,420
Utilities: $0
Maintenance: $754
Prop Mgmt Fee: $1,200
Total Expense: $3,571
NOI: $5,849
Mortgage
P & I: $3,181
Net Cash Flow: $2,668
COC: 18.86%
Oh man that’s a lot of guts to deal with properties that cheap. It doesn’t take much of an expense to chew up a big percentage of profits. Reminds me of this post from bigger pockets:
https://www.biggerpockets.com/renewsblog/2015/08/22/truth-30k-investment-properties/
I was expecting someone to ask “Well, why didn’t you buy it?” 😉
It definitely doesn’t meet my investment criteria. The current list is 3/1 residential within an hour drive, $150K – $200K purchase price, $1,500 – $2,000 gross income and a list of particular areas. $400 / month (at best) is *way* too much hassle and doesn’t move the needle at this stage in our life. I’ve gotten much better at explaining to friends that a “great deal” doesn’t mean it’s a great deal for YOU, much less buying 10 of them right away.
The real problem with real estate is buying a property is no more difficult than buying a mutual fund. At least you can teach someone how to buy the “right” fund in about five minutes.
We’ve owned investment properties in the past but found out that being a landlord isn’t for me. Management companies eat most of the profit, and dealing with tenants directly was way too much of a hassle for us. That said, I know people who own properties – even self-managed – with a lot of both success and enjoyment.
I’m with you Brad. That’s why I’m doing syndicated properties, private funds, and publicly traded REITs for my real estate investing.
This is a fine and dandy plan if you are buying properties in Indiana where you can find a single family home for 100K. It’s difficult to find a good deal in Sourthern California
I agree that it is tougher to buy multiple properties when the ratio of property price to your income income is a lot higher. But I don’t think it’s any tougher to find a good deal in Cali than in Indiana. It’s just that everything costs more.
Ten years ago this month I went under contract on my first rental property, and I had this exact goal. Today I own 7 rental units (I sold 3 this past year).
Property cost – $834,900
Total out of pocket to close – $177,230
Current estimated value – $1,085,000 today.
Current mortgage balances – $590,000.
It’s true that the snowball – both in terms of cash flow and mortgage amortization as well as, in my experience, valuation increases – really becomes noticeable and powerful around year 8-10.
My cash flow overall pretty much broke even over the decade due to several large maintenance issues (one $30k plumbing overhaul, one awful tenant from hell who trashed a unit and caused me a 6 month vacancy loss early on, fixture and flooring upgrades needed in one to keep it competitive). However going forward now I predict annual cash flow of $15,000, and nearly half my mortgage payments are now going to reduce principal.
I quit buying rentals a few years ago though and started putting money into real estate partnerships as well (once I hit accredited investor status). I now have about $300k in several different apartment building projects. Those are much lower effort and are generating much higher returns than I’ve gotten landlording. My husband and I still plan to hold and maybe even buy more rentals though; for example when/if we ever move we’ll rent out our town home. And if there’s another RE recession we may jump in and buy a SF home or two.
All in all my “buy one rental a year” adventure has been fun and lucrative – and stressful and annoying at times. Reality is though that if I’d kept my down payment money in the stock market (where it was to begin with), I’d probably have just as much equity right now and would have saved a lot of trouble. You never know though, which is why I diversified in the first place.
Thanks for sharing your experience. I love hearing about both people’s successes and their struggles.
This was very helpful. I was using a compound calculator to reach to the same conclusion: that perhaps investing the down payments over the years in index funds would have resulted in the same net worth at the end of 10 years.
From what I have seen rental homes often require extensive involvement (as delineated already by some of the other posts). IF you can find the right homes, IF you can find the right renters, IF they don’t destroy the properties, IF, IF, IF, ……. My preference is commercial properties which have a multitude of advantages. Unfortunately, you do need to buy them right so a novice could easily get burned. I was lucky to have connections to excellent commercial real estate brokers who made sure we bought the right properties at the right price. The result is that, although we only have two properties (I was originally shooting for three but just couldn’t find a third which was a good buy) with a combined initial investment of $425,000, they have, over a period of ten years, risen in net value to just under 2 million – a pretty good return by any measure. If I were to pay off the mortgages at this time the cash flow from the two properties would be in excess of $200,000 per year. This doesn’t even take into account the overall cash flow I can generate from my portfolio of other investments. Needless to say, I am semi-retired in my mid 50’s (I got a later start than many on building my retirement portfolio) and am enjoying working now much more than when I HAD to work. I mention all this, not because I am tooting my own horn, but rather to point out that the route to financial independence can take may routes, doesn’t necessarily have to start at an extremely early age, and should be geared to concentrating on areas of investment where the individual has some expertise / knowledge or, at least, some excellent advisers. Making sure you set aside as much money as possible is probably the key to any successful early retirement (as is evident from any perusal of the various blogs available). It doesn’t necessarily require fancy investing to achieve your goal and, although we have had great success with commercial property investing, it is not for everyone so do what you can with what you have and don’t go chasing every possible rainbow with the thought it will have a pot of gold at the end. Often the slow but sure method works the best (as I have also seen with most of my other investments).
I love the part about leveraging your expertise. One great thing about real estate is it is inefficient enough that your skill or lack thereof really does have an effect on your returns.
It’s likely a product of coming of age during the housing boom-bust cycle of the early 00s,* but I inherently don’t trust the stability of the real estate market, to the extent that I find it difficult to believe these kinds of predictions. Are you really going to be getting a 3.4% appreciation rate? Is an average of $400 a month cash flow a realistic prediction for a $100,000 house? Is that going to stay steady over the next 10 years, let alone 20? Maybe they are accurate enough predictions, but I don’t trust them.
There’s also the fact that owning property is a lot of work. Heck, owning your own property is a lot of work — we’re looking to get out of that situation ourselves. Owning a property that you rent out is even more work, given that you have the added tasks of researching properties, finding renters, screening renters, dealing with the inevitable deadbeat renters that make it through your screening process, responding to renters’ complaints, etc. I would absolutely not count that income as “passive”. If you outsource all of that work to a third party, it becomes passive, but now you’re cutting into your cash flow, I’m guessing pretty substantially.
And yes, I know, the stock market is also volatile. But index funds allow you to negate a lot of that, and because it actually *is* passive, you can ride out a lot of the volatility by just doing nothing. Investing in individual properties is a lot like investing in individual stocks. It takes a lot more work, the risk is a lot higher, and I am yet to be convinced that the reward isn’t considerably less.
I’m considering investing in a real estate index fund when we have some spare cash and have met all our other investing goals, but that’s going to be as far as I go with real estate.
*We bought our first house in 2006, we are looking to sell it this year as I am starting residency in June, and it is worth exactly what we paid for it. Not nearly as bad a situation as many people who bought around the same time, but it hasn’t even kept pace with inflation, so we’ve still lost money on it. Obviously that situation is going to color my views on real estate a fair bit.
Honolulu, SF, and SD, have seen year-over-year appreciation of 9%, going back to the 1960s! 55+ years. This includes the downturns.
I cash flow $450 on my $90K property. I cash flow $1000++ on my HI properties, each. I actually think the numbers in that article are VERY conservative, as they don’t include the fantastic tax benefits (depreciation, etc.) and principal paydown. Those are only 2 other ways real estate investors are paid.
That is great you are getting such good cash flows in HI, how long ago did you buy your properties there? Do you see cash flows like that now a days over there?
Much much harder to find, but they are out there if you want to dig outside the MLS. I bought my properties on the MLS in 2011, 2013, 2014, and 2015.
would the SALT cap have an effect on owning multiple rental properties? Does the $10,000 income + property tax limit apply if you own under an LLC?
No, those taxes are business expenses and still fully deductible.
If interest rates rise and appreciation isn’t as strong as assumed, is it still a good plan?
I’ve been looking into HomeUnion and RoofStock and neither suggest that strong appreciation and interest rates look like they’re on the slow rise plan.
Big fan of buying one property a year. I’m a financial advisor and decided to add buy and hold rentals in between my commute to offset the ups and down of my advisory business (revenue determined by Mr. Market and client emotions).
I started with a goal of 10 duplexes in 10 years. I call this the “ten to million strategy”. Hit that early and decided to continue with one property a year. Discovered I could retire in my early 40’s after blowing past the 10 property goals.
I’ve also helped clients hit this goal. One of my clients hit his ten property goal faster than me on a modest income in todays standards!
Today, my day job takes on a whole new meaning since I only take on financial advisory clients that are the right fit. Bottom line, it’s fun again.
I’m still buying and holding and hit over 1 million in rents (still climbing) as a result of 30 or so properties over 19 years.
A couple of pointers for the docs out there.
If you can bring your spouse on board, you may qualify as a real estate professional. This will enable you to offset your wages with the rental income losses as a result of depreciation and other write offs that are a normal part of living-cell phone, internet, computers, home office, etc.
Another angle is to work part time as a physician after you have built the real estate and then you can group the rentals together and declare yourself a real estate professional.
Make sure you check with a CPA on this since you may have to elect to group the rentals in the beginning of your journey to the golden ticket of being classified as real estate pro for tax purposes.
You absolutely need a good accountant who works with lots of real estate investors to make this happen. It pays to find the right CPA. They may charge more, but will save you tens of thousands in taxes in the process. I happily pay my CPA over $10,000 a year. She keeps me in a 2-5% combined tax bracket.
Finding $400/mo cash flow is tough depending where you live. In the beginning, I would only net about $200-$250 per month per property. Over the years, the rent on these properties increased once I had them dialed in. Today, they cash flow over $500/mo.
If I had to do it all over again, I’d try to buy 4 unit properties instead of 2 unit properties. You can still get the 30 year Freddie/Fannie favorable financing up to ten loans. I’m not sure if the ten includes your primary since I moved past this and work with small regional banks for loans on properties in the 5-15 unit range. It’s way easier to get these once you build a track record.
Nice properties attract nice tenants. You don’t need to buy Class A properties, but you can avoid a lot of tenant drama by focusing on a nice, clean and affordable parts of town. I rent to young professionals and mature college students and find that 80% of them are awesome. Just make sure you screen them properly. Getting married is easy, getting divorced is hard. Same rule for renters.
You mentioned “Dr. C”who owned a bunch of real estate. His advice is spot on. Just get started and don’t worry about the details. The key is one property a year. You should interview him.
Your comment about qualifying as a Real Estate Professional was intriguing, so I did some more digging and found this BiggerPockets post that explains the benefit – Super cool, and my husband loves the idea. https://www.biggerpockets.com/renewsblog/2014/09/25/your-complete-guide-to-the-real-estate-professional-tax-loophole/
Glad I could help! The day my Cpa said i was getting a refund on my taxes due to real estate was a game changer for me.
Yea, it’s great if you’re, well, a real estate professional. I think it’s a 750 hour/year requirement as I recall. A doc + a real estate professional is a pretty good combination of careers though.
I agree a CPA who specializes in real estate investors would be a great choice for someone doing the one property a year thing.
Your advice is also spot on.
I’m confused. You seem to be assuming the investor doesn’t need any of the rental income to pay the primary loan and can use it all to pay down extra principal? This seems unrealistic for many. Not to mention an extra 30,000 per year for the domino effect. You are not showing real world calculations.
Hopefully this helps clear things up a little. The cash flow in this model ($400) is net of all expenses including the primary loan for each property. It’s possible as some of the commenters on this post have mentioned. So the only additional infusion of cash needed is $30,000 a year. I guess whether a person has that much to invest is dependent on their income & savings rate. There are a good number of assumptions made in the post, but I find that many higher-income professionals are able to save $2500 per month towards the goal of buying an investment property if they’re dedicated to it.
Thanks that does clarify things!
“Cash flow” is different than “rental income.” Cash flow is the amount left over after paying obligations that include the primary loan/mortgage payment. Here’s an example with some numbers: https://www.thebalance.com/cashflow-of-a-rental-property-an-example-2866811
That aside, whether $400/month cash flow is realistic on a $100k property with 30% down is a whole other question and would depend on the market.
Probably not with only 30% down. I mean, with 100% down, $400 cash flow a month is a cap rate 4.8 property. If you put a mortgage on that thing it’s going to be tough to get $400 a month out of it. The payment on a $70K mortgage at 5% is $375 a month.
Very nice road map. I know of an Ob Gyn who did this for 30 years successfully, and now retired.
I wrote down a plan like this – first time in 2005. My wife and I did groundwork – we looked, and talked to a few people, including property managers. We never carried out this plan, and our other plan – passive indexing has worked out well so far. We do have REITs in there.
This plan is doable, but will take a lot of time if you want to earn money. You have to enjoy doing this work – looking for properties, buying process, loan approval process, finding renters, maintenance, and other things people have mentioned here, and the time it would take. Otherwise, you will be bleeding money.
Don’t underestimate this step. That Ob Gyn is still working, retired from medicine, but working to run this real estate business.
One alternative is to become a realtor first- you get in the money business and get to pick what you want, and get to know the business well. This obviously will take time. And focus more on business properties.
WCI has a link to a review of a very good book on this process – John Reed’s book – it will cure a lot of real estate fever- and is good money & time spent rather than wasting a whole lot more money and time spent on ventures that may not be so fruitful.
I’ve had good luck (so far) in the single family home space. It is a lot of work initially. However, once the team is in place and everything is set up, there is not much to do. Dr. Meadow describes this aspect of renting homes well. The owner might get an email to authorize a fix of the furnace, but an email back and you are done. Just like there are vast differences in salary among a single medical specialty, there are vast differences in returns among markets. Some markets are “landlord friendly.” One key is to find a manager that manages the most homes in a market (over a thousand). I was reluctant to enter this space. My father’s day present was getting the light bulb changed next to my bed. I had a bear of a time finding the right bulb, removing the top of the lamp, etc…Podcasts and audio books (Brandon Turner) are good places to start. The formula to my mind is simple. Assume you are only going to get 50 percent of the rent money due to all of the expenses. It requires a lot of computer time and phone time to achieve a high gross yield, but there are deals out there. I would LOVE to have a thread on the forum discussing an offering memorandum on a syndicated deal. I think the WCI community would really feed off of each other’s strengths. I am in year 9 of a some syndicated deals and have had a very positive experience. However, INITIALLY, there was a tremendous amount of due diligence that starts with reading EVERY WORD of the offering memorandum. A focus on the RISKS in the offering document are paramount. Jim, can you start a concurrent thread on a syndication deal? The idea would be to have your audience read the memorandum and we can discuss it—almost like a journal club in medicine. That would be really fun. I have Dr. Black’s Atlanta deal on my desk but I did not get to it.
Go on over to the forum and start a thread then. This isn’t the forum side of the site, it’s the blog side. Anyone can start a forum thread.
Will do. But, what syndication are you currently studying? Are you allowed to say? My thought is to get that prospectus (the one your are studying) and start a discussion on that. If it is the Dr. Black Atlanta deal then I am good because I have that prospectus. What I am getting at is that I don’t want to start a discussion where I am the only one that has read the prospectus. That would not be very much fun. One way I look at rentals is to borrow at a rate lower than the cap rate of the property. If you can get a 5 percent fixed for 30 years, and a cap rate on a property of 9 percent, you are good to go. I take 1/2 of the rent money, multiply by 12, and divide by the price of the property to get the cap rate on my rental return.
Why would I be currently studying a syndication? Do you “study” syndications for fun or something? That seems odd to me. But I guess I’m studying a book about the Black Plague and that’s kind of weird too.
I don’t know anything about the “Dr. Black Atlanta deal.” My investments this month went to Backdoor Roth IRAs, HSA, 529s, and our individual 401(k)s. I don’t anticipate buying any syndicated properties this month, so I’m not studying any of them.
Not sure there’s anything magic about the relationship between cap rate and the interest rate. The higher your cap rate and the lower your interest rate the better.
LOL. I just sent over the Dr. Black deal to you by email. He is the ED doc that retired and set up a syndication business. The Atlanta deal is one of his syndications. I sent you the basic brochure, but the main document is a prospectus that you get later on. These are fascinating. The prospectus is typically very well written and tells you everything that can go wrong with the investment. The key is getting a talented manager that is honest. It is a truly passive investment. Dr. Black wrote a book entitled “Passive Income Physician.” On the cap rate thing, yes, the wider the spread the better the investment. 5 percent loan and 6 percent cap is bad, but 5 percent loan and 12 percent cap is great. Not rocket science, just common sense.
I agree the manager matters most.
Why don’t you send me a guest post about how to evaluate a syndicated deal? I haven’t had one since this one:
https://www.whitecoatinvestor.com/alternative-thinking-private-real-estate-investments/
It’s a very attractive looking prospectus. Lots of nice colors. But I’ve looked at so many proformas like that. They all look the same. 8% cash on cash. 9% cash on cash. Whatever. Then what do I get? 4% cash on cash. 5% cash on cash. I think the most interesting comparison to be made is to go back to a deal you looked at 4 or 5 years ago and compare what you got to the original pro-forma.
Great example. I have done a version of this and it works beautifully. I am retired early because of this concept, not from saving in my retirement accounts. I only bought 5 apartments, about one a year. After 5 years my wife made me stop buying more and put the money into paying off the mortgages we already had, because we already owned enough property to produce way more income than we needed. She was right. It has now been almost 17 years since the first purchase and the cash flow is more than we need. My purchases were no money down. We have never sold an investment property as we are long term property investors not property speculators.
The example in this blog does not take into account that the tenants are making mortgage payments and when the mortgage is paid off, the cash flow goes up by about $4,000 a year. That understates the cash flow at 10 years by more than $16,000 a year. I would also point out that the first $16,000 is tax free every year due to depreciation. So, financially this example understates the results by a big margin.
It was interesting to read the comments. I didn’t add them up, but it seems the people who have done this say it works well and the people who have not tend to tell you why it won’t work. Be careful about whose advice you take. In general, if you want to do something well, ask someone who has done it well what to do. They can usually help you succeed. There is usually no shortage of people who have never done something who are quick to give you advice.
Also beware of advice from a “reluctant landlord.” This is the person who was stuck with a property they couldn’t sell and started renting it out. They did not buy the property for rental profit, they don’t want the property, they did not want to be landlords, they usually do not live near the property, and they did not know what to do before they started. Under those circumstances, it would be surprising if they had a positive experience to tell you.
Thanks Passive Income MD for this great example of the benefits of direct property ownership.
Dr. Cory S. Fawcett
Prescription For Financial Success.
Great insights. Especially this one.
“It was interesting to read the comments. I didn’t add them up, but it seems the people who have done this say it works well and the people who have not tend to tell you why it won’t work. Be careful about whose advice you.”
Once you get a property dialed in, it is not much work. I self manage 121 units and could easily dial down to 10-15 hours a week if I outsourced more of the work. This is in addition to my day job. Real estate is simple if you know what you are doing, create systems and let the magic of tenant mortgage paydown and cash flow work for you.
The systems are key.
When I managed my 64 units I was a full time general surgeon and I would say it took me 10-15 hours a month to manage. Now I travel too much (home only 50% of the time) to be the manager so I turned it over and it is totally passive now. I’m writing this from my room in a cruise ship in the Pacific ocean.
Couldn’t agree more. I have stated my own experience with owning real estate, and how the numbers shake out. I have done this on this forum, and on bogleheads as well. I am met with accusations that I am lying about the numbers, why it can’t be done, why its just a hassle, etc. It wasn’t a hassle at all. As I recall, I was able to complete a radiology residency, do very well at it, have an active social and dating life, travel 2-3x internationally per year, and invest in real estate managing my own rentals, all at the same time. Its either the folks that haven’t done it, or an uncle’s friend’s sister who used to own a rental and had a terrible experience with one property weighing in trying to discourage others.
I’ve run into too many people with an experience similar to yours to dismiss it. That said, I think you’re downplaying your skill and interest level. If this blog hadn’t taken off, I’d be doing real estate on the side, but I would have expected it to take a lot of work, study, and experience. I did my monthly investing this month in a few minutes- basically just following my written plan and putting some money in index funds. It takes much more effort than that to do real estate well. Maybe not a full time job, but certainly a part time one. The better you are at putting systems in place and delegating/hiring, the less of a job that is, but it is always a job to own individual rental properties.
Well said. For the record, you haven’t dismissed what I said as I recall. It is usually the pessimistic folk or non-action takers that dismiss it.
I think we tend to gravitate towards what we enjoy. Despite how TFerris acts, not every thing you do in life is a time/money calculation. Often, we do things we enjoy regardless if it fits our “time valued in $” rules. If it was only about personal benefit and money, I don’t think many people would have children.
I have spent more hours in Dec. alone on cryptocurrency, than on real estate in the whole year of 2017. Not because the profit per hour was so high, because I just wanted to 🙂
I still feel infinitely more in control of the results of my real estate investments from start to finish, than indexing.
I love hearing about your success and how you did it. I certainly have had a rough experience as a landlord, but will agree that perhaps I need to pick different properties and submit that others will succeed with the right skillset. For me, I’m a worrier, a dedicated introvert, and I’ve had a difficult time assembling a reliable team…these things have also conspired against my success in real estate. Add to this local pricing is above pre-crash levels…. Have looked into commercial and apartment properties, but all-cash deals are scooping faster (thanks, CA). Maybe someday!
Thats funny that you mentioned that. I was a lifelong introvert. Forcing myself into real eatate investing, as well as into decidedly uncomfortable social situations, has turned me into a somewhat extroverted introvert.
I think HI and CA are now better markets for flips, not more passive B&H. Lets hope for a correction soon, then we can jump in like a pack of hyenas on a gazelle carcass!
I’m curious how much control you feel of your cryptocurrency “investments”.
Not much. Its more a “hobby”, than an investment. ~4X returns so far in 5 weeks. Makes me think, if I put in $100K, I would have $400K!! Didn’t have the cahones to do that 😉
Probably wise to only put play money into an “investment” with that kind of volatility.
I think this comment is exactly correct. I know you mentioned you wanted to get 20 percent of your portfolio in real estate. But, may I gently say that the time required to become an expert in it would be much better used for the WCI? It would likely be more remunerative as well. Even a syndication will require a tremendous amount of due diligence initially. The only disadvantage of this idea is that you do miss out on some of the fun, but the WCI is fun and probably more remunerative than real estate for you. You can’t do everything.
How much due diligence you put into a syndication depends on how much money you put into it. $2K? I’m not going to spend much time on due diligence.
Real estate investing has it’s place as part of a diversified portfolio. If doing individual properties like this, it is very local and you need to make sure that the market is favourable. Yes, you can always find deals, but just like stocks, a rising market makes it easier.
The environment down there in the US seems more favourable than up here in Canada for this type of investment at present. We side stepped the major housing correction that you folks had and our house prices have continued to increase with low interest rates to nosebleed levels detached from fundamentals. Everyone and their uncle around here, from all walks of life, talks about their (unrealized) huge house equity and their multiple investment properties. Some Canadians may come out of the woodwork to say how much they have made with real estate here – it has made an exceptional run and has almost become like a religion. I won’t argue with them, but the contrarian in me says stay away. Our govenments here have also been generating laws at a rapid rate to try and pop what they see as an affordability bubble. I would not want to stand in their way. I have been a landlord and got out of it a few years ago for the above reasons. I currently prefer REITs for my real estate exposure at present. One reason is the above, with REITs moving differently from the individual housing market here. The other is that rental income here is taxed at my marginal rate (54%) and dividends from REITS at 39%. Capital gains are taxed at half your marginal rate here which is the good part and where you make the good after-tax money, but you need a good entry point for that.
I am actually a bit jealous of you because I did enjoy the real estate investment process and am actually pretty handy with the renos and repairs. You paint an attractive picture. Maybe someday…
I’ve had some experience with this over the past 16 years, both good and bad. Short summation: my original plan was (in 2002) to buy 1 property per year for 10 years with the goal that once paid off they would cash flow about $100k/year. I found my actual return to be 1/2 of my goal return, meaning I would need 20 properties to cash flow $100k. Realizing this, I am no longer pursuing new investment properties.
Details:
Property 1: Purchased townhome in 2002 in MD for $168k using with 5% down (doctor’s mortgage) for fiancé (now spouse) to live in during residency. When she re-located to PA in 2005 with me we tried renting it without success through a realtor. Same realtor offered to list it for sale for $300k (this was around the market peak before the drop in 2008). The property sat, and sat, and sat. I eventually wisened up, got a new realtor, and sold it in 2007 for $260,000.
Pro: spouse got to live rent free & therefore max out her 403b & Roth IRA during residency.
Con: Despite the $92k increase in property value, I only walked way with a few thousand dollars profit due to the prolonged holding costs & upkeep on a vacant property.
Pro: financially, it still worked out better than renting. Merely through dumb luck I learned a lot about owning real estate without losing my shirt.
Property 2: Purchased duplex in PA in 2002 for $175k with 5% down, 80% primary mortgage, and 15% secondary mortgage (to avoid private mortgage insurance). I lived in one unit and rented out the other unit. Moved out after 3 years and continued to rent both units. At one point tried a local realtor to rent & manage but he did a poor job in tenant selection and management. I took over those duties and did a better, but not great, job myself. Sold in 2016 for $250k.
Pro: Made a decent profit, and the cash flow usually covered the expenses. Learned something valuable about myself: While I love OWNING properties, I really hate MANAGING them.
Con: Would have probably made similar money by simply investing in index funds and avoided the hassle of tenants and property upkeep.
Property 3: Purchased single family home in MI in 2014 for $36k, $15k rehab; total rent ready cost about $55k or so – but owned free and clear. Initially rented for $825/mo; now $950/mo. Excellent management company charges about 10%/month to manage and handles all of the details promptly and competently.
Pro: this property is hassle free and has no mortgage.
Con: this deal will be very difficult for me to duplicate