How can I go wrong? ( retiring early )

Question

Experienced investors, please explain if I'm being unrealistic. I'm middle aged, and my home is mortgage free. I also have 3 rental houses in Las Vegas, which I purchased at the ideal time a few years ago. Those are running smoothly with a good property manager, but they have appreciated to a point where the rent to value ratio now looks low.This might sound like I've been relatively successful, but frankly I'm miserable. I desperately want to stop wasting my life worrying about how I'll make money in the future. The methods I've used in the past are no longer working well. My current income is low.My plan is to sell the Las Vegas properties, netting approximately $400K. I would then reinvest that by purchasing eight <$40K (after repair) middle America houses renting for >$800 month. Leaving $10K in reserve for each house.Assuming 50% expenses, those should cashflow approximately $3200/month before tax. Not sure what tax would work out to; 20% maybe? That would leave me $2560/month to live on, which is enough for my modest lifestyle indefinitely. 40+ years I hope.At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you. This might sound like I've been relatively successful, but frankly I'm miserable. I desperately want to stop wasting my life worrying about how I'll make money in the future. The methods I've used in the past are no longer working well. My current income is low.My plan is to sell the Las Vegas properties, netting approximately $400K. I would then reinvest that by purchasing eight <$40K (after repair) middle America houses renting for >$800 month. Leaving $10K in reserve for each house.Assuming 50% expenses, those should cashflow approximately $3200/month before tax. Not sure what tax would work out to; 20% maybe? That would leave me $2560/month to live on, which is enough for my modest lifestyle indefinitely. 40+ years I hope.At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you. My plan is to sell the Las Vegas properties, netting approximately $400K. I would then reinvest that by purchasing eight <$40K (after repair) middle America houses renting for >$800 month. Leaving $10K in reserve for each house.Assuming 50% expenses, those should cashflow approximately $3200/month before tax. Not sure what tax would work out to; 20% maybe? That would leave me $2560/month to live on, which is enough for my modest lifestyle indefinitely. 40+ years I hope.At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you. Assuming 50% expenses, those should cashflow approximately $3200/month before tax. Not sure what tax would work out to; 20% maybe? That would leave me $2560/month to live on, which is enough for my modest lifestyle indefinitely. 40+ years I hope.At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you. At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you. So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?Thank you.

George Wendt · Answer

I would go for it.  My Dad quit a job he hated and went to work retail and he was never happier.  Retire early, do something you like and enjoy your life.

Just me .02

Ned Carey · Answer

How could you go wrong?

You could buy in areas you are not familiar with and overpay, you could wind up buying in areas that are in steep decline, You could have bad luck with tenants and/or property managers., etc. etc.

On paper I think you plan works.  If your basic living expenses are covered anything you do above and beyond that only builds safety, net worth and increasing lifestyle for the future.

Well it is an indication of a bad investment via over leveraging or in your case a poor return on equity. Equity in a property does you no direct good. (It can provide indirect benefits, like a lower loan to value ratio) The properties will appreciate or not regardless of the equity. Restructuring your portfolio to get a better return on your equity is what good portfolio management is about.

One thing you left out in your analysis is the capitals gains tax  when selling the LV properties.   A 1031 exchange may eliminate that.

Ned Carey · Answer

Originally posted by @Bob Bowling:

Agreed that appreciation can be a significant factor in the total return of an investment. However the property appreciates at exactly the same rate  whether you have 100% equity or zero equity in the property.  IF you can tap that equity to use in other investments there may be a net gain.  Each situation needs to be evaluated separately and in your example below it would clearly be foolish to sell. However it might make sense to borrow against the $400K and invest it in something new.

Agree totally, that is a good way to put it.

Bob if I understand your numbers you are getting a 15% return on your equity.

$24,000 +$36,000 = $60,000/ $400,000 = 15%

That is an exceptional return and good portfolio management would say to keep it because you are making an outstanding return on your equity.

However I don't think your situation is typical. Over time the return on your initial investment tends to increase however because the value of your property is going up the return on your equity is often dropping. There comes a point when it is often advantageous to redeploy that  equity in a higher returning investment.

Pyrrha Rivers · Answer

@Mike Holmes

Congratulations on posting a question we all will struggle with at one point or another. Not experienced yet, but I do believe you are on the right track when thinking of re-positioning your money that may have reached its peak in the Vegas homes and could be getting stagnant and considering the possibility of Vegas losing its uniqueness as other areas open up to the casino life, it may be wise to consider 1031 exchanges and move out of there.

@Ned Carey  I appreciate how clearly and detailed you make your responses. Helps us all learn. Thank you.

@Jean Bolger

Same as Ned, I thank you for the details and hope to soon read more of how this venture has turned out for you. Best wishes!

Pyrrha

Jean Bolger · Answer

Hi Mike!

I think this is possible, because it is very similar to what I'm in the middle of doing. I sold a Denver property that had seen some good appreciation and bought a small apartment complex in Ohio. I say "in the middle of" because the property I bought was pretty distressed and the turnaround is still underway. Cost to purchase and get it fully stabilized will be just under 400k out of pocket. So obviously, I can't say "whee! what a success!" just yet, but the end is in sight. After the property has seasoned at full occupancy for a while I should be able to refi and get most of my capital back out and still have at least the cash flow you are talking about. Now, I want to emphasize that this hasn't yet come to pass, so I'm not offering it up as proof that you should jump into something similar, just as a verification that your idea isn't completely nuts (or that I'm nuts too!)  People who know more about this stuff than me assure me that all will be well, but I'm a "believe it when I see it" kind of gal. Maybe I'm just trying not to jinx it, lol!

As to your question "how can I go wrong"...

1) buying the wrong property, obviously. I analyzed a bazillion properties that I thought would be OK but bore down until I finally found one that I thought it would be pretty darned impossible to lose money on. And it's still taking longer and costing more than I had planned for.

2) buying in the wrong area. This was a town that, until I flew in to look at this property, I only knew from google-driving. I have since learned that, while the area my property is in is really OK, there are other areas in town that are a lot dodgier than my google investigations and initial drive  around town revealed.

3) bad property management. Again, I was lucky here. Super lucky. I found a manager who has been in the biz for years, owns several similar properties, has managed a lot of turnarounds, and has very clear bookkeeping and organizational transparency. People like that are rare, you won't find one in every town. And it doesn't take spending much time on the forums here to  know that if you have bad management the whole thing can go to hell really fast.

Now, my strategy involves a multi, not SFR. One of the benefits to that is the ability to get some forced appreciation for a refi. That's hard to do with SFR, your ability to pull equity will be dependent on the values of the houses in the area and if you're buying in those 40k-50k neighborhoods you're probably out of luck. But you may have better luck with tenant stability (and therefore management costs) with SFRs.

Your idea of different towns sounds good in theory, but make sure you factor in the cost of getting out to see these properties, at least twice a years at first, until you have utmost confidence in your managers. Flying to four different cities will eat up cash flow. Finding four excellent managers will be difficult. So maybe one good city...

OK, this was kind of an epic-length response. And I didn't get to the part about  getting by on that income (IMO, no, you'll feel pinched. But you'll probably find something else that you want to do/be/learn that you can earn from when you get out from whatever job is oppressing you right now)

So good luck, and never say never...

Mark B. · Answer

@Mike Holmes I would not want to be 100% all in Real Estate.

Mike Holmes · Answer

This is off topic, but for perspective:  $2500+/month after tax, plus the value of a rent-free/mortgage-free  house, is getting close to the median USA household income after tax.  And nearly double what a quarter of American households earn. So those  who suggest someone would struggle to survive on that are fortunate to suffer from  the bias of being unusually wealthy. My wife could choose to get a job  if she wants "fun money", but my priority now is freeing myself from the  rat race. I personally have no material desires beyond a comfortable  home, reliable transport, and internet access.Back on  topic, yes, similar cashflow could be achieved with $60K houses that  rent for $1K/month. My impression is such deals would be a rare find anywhere in today's market, but if anyone can suggest some places where those deals are still common, I would  be very grateful. Ditto on apartment blocks with real 10+ cap rates  that aren't in warzones or depressing dying areas.

Terry Hershberger · Answer

@Mike Holmes , I have done something similar. My strategy was a bit different. I focused on buying homes in the under $60K bracket in a city that I am very familiar with but live 2500 miles from. I put down 20% on each property with a 15 year ammortization. You could buy approximately 20-30 properties and still have a good nest egg left over for emergencies. You should be able to get them to cash flow a minimum of $200-$300 a door or more if purchased in the correct areas. That would give you a cash flow of around $4,000 on the extreme low end of each to $9,000 on a high end on each. Or maybe you could do even better! Just something to think about.

Happy Investing!

Account Closed · Answer

@Ned Carey  I can agree that price to rent ratio will indicate an immediate lower cash flow and should be considered by a novice investor but any seasoned INVESTOR should understand leverage/overleverage and that cash flow OVER TIME and appreciation is the true indicator of PROFITABILITY.

People that overleverage don't have BAD investments, they are BAD investors!  Please don't confuse the difference.

Poor return on equity?  Who's equity?  I have $2,000 of my money in on a property that has appreciated over $400,000.  Am I losing money on that?  How would I access it?  Where would I invest it?  If I sell to get the equity it will cost $30,000 in transaction fees and I'll lose the $24,000 in annual rents AND the #36,000 in appreciation!!!  Show me an investment that will make up that IMMEDIATE $100,000!  Heck, I just lost the value of 3 Memphis investments!  $100,000 divided $100 per door.............

BUT, I did access that equity when a property came up in 2008 because the first purchaser couldn't finance.  I was able to use my equity to pay cash for the property.  Any bank would discount the "cash flow" on Indiana properties if I'd moved my equity there.  I'm up over $200,000 on the new property at the sacrifice of some cash flow on my equity!

Darron Stewart · Answer

Lots of options, more than one source to me is always appealing.  There are pros and cons to each area and ups and downs with different streams.  I have about a half dozen streams either started or progressing toward the finish.  So find something you are comfortable with and will reach your goal.  Best of luck in working through some options, plenty of tool and advice on this site when you narrow down your possible solutions!

How can I go wrong? ( retiring early )

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