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Getting started in rental real estate

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  • Getting started in rental real estate

    Well last week we were contemplating purchasing a rental property out of state where daughter goes to grad school ~ Chapel Hill, NC.  For various reasons, the math just would not work.  However, this experience has me interested in rental real estate.  As a novice, I see this a binary issue.  Go the low energy low time approach and invest in REIT OR go high energy & possibly high time approach to own individual properties. My concern is that with individual properties, I would be in direct competition with real estate professionals ~ hence at a distinct disadvantage (obviously many WCI have been rewarded handsomely as owners of real estate ~ so this can't be all true).  As I have heard, it is often all about acquisition price that leads to future profit.   Please show me the light.  Thanks for your time and thoughts.

  • #2
    i’m sure some have been rewarded handsomely but most just get middling returns. And you’ll rarely hear about the people who take a dump.

    My rental real estate is a nice thing to have, but it’s not making me rich. Even with modest taxes, no HOA, and a low interest mortgage, expenses eat up half or more of the rent each year.

    Remember that the competition for your investment dollars includes a plain old stock index fund. It’s hard to beat that for simplicity and tax efficiency, and you’ll likely earn 10% annually over a few decades.

    If you do buy real estate, remember the money is made on the buy. If you buy the right property at the right price the rest will work out. If you don’t, you’ll always have a dog.


    • #3
      Real estate isn’t quite as binary as you made it. Direct ownership, Syndication (multifamily, warehouse, storage, NNN, office, retail), notes, land.

      I’d research it further and see if it’s for you. There’s no need to jump in today, but after reading for a month or two you may be able to better figure out which investment model you’ think works best for your situation.


      • #4
        I think it’s a good thing this out-of-state investment didn’t pan out. What happens when your daughter is no longer there and you have a hard asset needing to be managed that’s out of state?

        We have some real estate in our portfolio. And I can’t wait to get rid of it.


        • #5
          You might want to check out PIMD, which you can link to from WCI. Don’t worry about the competition with professionals issue. There are a lot of properties out there to own. But you do need to approach direct ownership of real estate as a business, not an investment. So, if you want to diversify from stocks, real estate is a reasonable choice. But consider the other ways to invest (e.g., Wonka’s list above) before direct ownership. Less hassle. If direct ownership still looks good, read a few books. Search WCI for recommendations. He likes Reed’s books. I often recommend every landlord’s tax deduction guide by Stephen Fishman. Everyone has there own idea about ownership, so all I will say is know why you own it. Cash flow? Long term appreciation? Eventual retirement home... Then buy and manage accordingly. My own anecdote: we bought one property for each kid that we eventually planned to refinance or sell for college expenses. Managed them ourselves, and were always at least break even. Cash flow positive very quickly and ever since. Turned out I changed careers, so plenty of money for college, but properties now paid off. (Well, two years out on one of them.) About 10% of our net worth and 20% of our retirement cash flow. So, as with FIREshrink, real estate didn’t make us wealthy, but it has been a good “side hustle.”


          • #6
            I like real estate but it is something you have to babysit unless you get a property manager which hasn't been financially feasible for my situation. My usual purchase is an ugly property in a pricey young professionals neighborhood with good schools. I have tended toward townhouses and duplexes rather than condominiums due to the condo fees and often over supply of a similar product. Most of young white collar first time home buyers, at least before all these flipping shows became so popular, won't give a second look at a cosmetically unattractive property and these properties tend to be higher in price than the hardcore real estate investors are looking for. A builders grade fluff of $20-$30k can result in a property that is worth more than you have invested and will quickly rent to reliable tenants. If it doesn't have wood or laminate floors that is well worth the money both for the cosmetic and practical value it adds. Although turnover has averaged 2-3 years I have not had significant vacancies and so far no problem collecting rent or excessive wear and tear. The expected upgrades and repairs can be annoying but I have a few tradesmen I've met over the years who can do most anything well and for a fair price. I haven't been fortunate enough to make much extra from the monthly rent in the early years but have covered repairs and the mortgages. I do 15 year loans and they have all appreciated in value. N=7 over 20 years so not a large sample size.

            The main thing to accept is real estate is not liquid so if you need to pull out without being thoughtful about the market environment you are liable to take a beating. The good news is most anything will sell if the price is right. If you can hold off barring an unforeseen negative change in the neighborhood's value, which doesn't happen instantly like the stock market can, its likely to work out profitably in the long run if you bought smart.


            • #7
              I'm mildly tempted by this but in all honestly I find my primary home to be such a PITA that I realize I don't have the patience to deal with rentals.


              • #8
                Loving my RE investments for the beauty of passive income, and would never consider direct ownership as I have enough work to do with my own house, working full time (for now), kids, and leisure time.  So I did much of what Wonka mentioned - hard money lending funds, syndicated property funds like multifamily, commercial office buildings, one storage property, and a large NNN lease private REIT, along with several single syndicated properties.  All vetted and now income producing; could always be issues down the road - just like direct ownership - but I prefer my research upfront and then sitting back, instead of ongoing management, even if that's with a management company.  For whatever reason, the income from these investments is so much sweeter than the same amount from my practice!


                • #9
                  It takes a lot of time, money and experience to be truly successful as a real estate investor. It's not for everyone.

                  If you plan on pursuing it as an individual property owner, there's definitely a lot to learn. If you have the time and desire to do it, it can work. Just know there are always bumps in the road and obstacles to get over as in any business.

                  Good luck with your decision!


                  • #10
                    Syndications clearly offer less potential return, but won’t call you for a leaking toilet at 3 AM


                    • #11

                      Even with modest taxes, no HOA, and a low interest mortgage, expenses eat up half or more of the rent each year
                      Click to expand...

                      Half? i'd be in heaven to have 1/2 left over!!