Where to start for reasonably safe, passive cash flow?

Question

Looking to start investing in real estate as part of my portfolio to get some reasonably passive cash flow going.

A little about me and where I'm at.

Been in the tech industry for a number of years in SF, but trying to plan my escape route.  In between jobs right now, but expect to stay in the industry (here or elsewhere) for another 5 years or more.

We were saving to buy a house in SF, and went through a number of offers last year, but in the end just seemed too crazy of a market to buy into.  Currently we’re living in a rent controlled one bedroom in a good part of town so rent is so cheap it just doesn't make sense to buy (just going from 1 bedroom rent to 2 bedroom purchase would have us paying out about 4x per month what we pay now). Although with a wife and newborn child, I'm guessing we can only handle another year or two squeezing into the 1 bedroom we have.

Since we didn't buy, we have a large cash reserve sitting in the bank not even keeping up with inflation (using online savings account that is currently at 1.15% interest).

We have about 40% of our money sitting in a handful of stocks that have been performing well over the last handful of years, and plan to keep enough money in the bank account to cover about a year and half of expenses should something go wrong.  This leaves us with about $250k to try to get some cash flow working.

Considering buying some rental properties out of our area that have a decent return.

Passive is ideal, so would most likely want to work with a property management company.

Would love to do AirBnB for the higher returns (and would be willing to be more active in that space), but would need it to be legal and above board, and since regulations are so risky I would need to have the numbers work as a long term rental as a fallback to feel comfortable (I have some experience in that space, as I have a family house that I AirBnB in the summer just to keep up with the house's expenses and upkeep).

My research has only just started this week, so not expecting to dive in until I've had a few months to gather information and make a plan.

Any recommendations on directions to go in, or places to get started?

I don’t want to be too risky with this money as our stocks are already in the riskier area (although luckily getting us pretty good returns so far).

I've been looking into some turnkey company options in markets that seem to have a decent return.  Also, been looking into Roofstock.  Has anyone interacted with them or any turnkey companies that make sense?

Steve K. · Answer

@Frank Bee ,

There is a continuum of perspectives on whether to use leverage (i.e. debt) on the passive rental properties or pay all cash.

On one end of that continuum, I know a widow lady in Denver that used her life savings to buy a $250k rental duplex for cash several years ago. She indeed is a REI. She is happy that she has no debt, and her monthly cash flow is large (has no mortgage payment). She's also seen great appreciation in Denver....her property has probably doubled in value in 8 years. But, she is averse to debt, and she's on a slow path to wealth building.

Elsewhere, a different REI could have used that same $250k and put 25% down on each of 4 such properties (i.e. 75% LTV mortgages). Arguably, that REI is on a faster path to wealth building. They control $1 million in real estate. They have tenants paying off 4 mortgages over 30 years, but due to mortgages, monthly cash flow is small (after PITI). If that were in Denver 8 years ago, the properties have appreciated to being worth about $2 million now. (vs. the Widow's $500k). Admittedly, in times of recession, this investor is subject to suffering a % decline in $1 million invested, vs. $250k). But if you're comfortable with the risk/reward of what leverage can help you to grow, I'd consider it.

The same issue comes up from time to time on BP, wherein someone asks "should I pay down my mortgage early and retire the debt early"? If you're buying rental properties with great IRR%, then why would you put $$ into the mortgage that in effect, yield the 3.5 to 5% APR of the mortgage? This is the same argument as putting 25% down or all cash.

In fairness, many successful BP'ers will advise you they sleep better with no debt....or less debt. But I'm personally comfortable with the leverage.

On the fastest growth end of the continuum, read about the BRRRR strategy....it allows you to essentially have 100% financing on each rental property (after cash out refi; provided you rehabilitated the property and have 25% equity). There are many BPers that have used BRRRR to become financially free in 5 to 7 years.

Ali Boone · Answer

I'm down in LA and have always bought turnkeys (since 2011). Happy to share resources or experiences anytime if you want to send me a direct message or email me at my email address below!

Twana Rasoul · Answer

@Frank Bee congrats your newborn and on the success so far.

Maybe holding on to buy something of your own later in the year might be an option for you. Don’t know your market or surrounding too well but if possible, why not house hack a 2 -4unit (multi family around $700k-$1M) property, live in one and rent the other unit(s). You’ll accomplish having a bigger place to accommodate your growing family  and having rental property (the other units).   Having a couple of rentals is easy to manage and doesn’t take much time at all.

I house hack a multi family  with wife and newborn with a 2-4 unit property as well and it’s great and I highly recommend it.

I have out of state investments as well as local ones in San Diego. If you want safe investments then you will want to avoid high cap rate cash-flowing markets. The higher the average cap rate in a market the riskier that market is.

I’m a fan of starting at home then expanding out of state.

Best of luck to you and your family.

Jonathan H. · Answer

Above board legal Airbnb is a bit tricky because laws generally fall into 3 categories or somewhere between:  defined and strict, defined and flex ( rare, but check texas :), or undefined ( not stable, because they will change ).

At the same time, even defined yet strict areas will often have small tickets for breaking the rules, which many operators consider a cost of doing business, in fact, many businesses are built that way.

Do you want to invest in texas?  In that case you might be in luck.

If not, you probably are going to need to settle for less high demand areas to be able to scale anything related to airbnb, which means less returns... but its not so bad if your creative.

My personal angle is to go for unincorporated areas outside of city limits for somewhere I want to be.  Sure, its a lot less $$ per dollar than downtown, but I personally grew up 'out of town' so its familiar, and theres lots of wild nature at my finger tips at an airbnb house of mine.

Its an odd market, most go for 1BD houses, or studios, because they are easier, simpler, higher in demand, and more scalable.  I, for some reason, have aimed for 5 BD houses that folks would want to throw a wedding reception in, up in the hills, out of town, with nature and views and walks.

It's an odd market, more high maintenance, and yet, it's just my style.

That said, covid has destroyed Airbnb completely for now in both the places I had houses set up.   The old market is gone.  I quickly adapted, anticipated a demand for rooms for rent outside of large cities, which were designated safe zones, with staff performing CDC level disinfecting 2x/week in the commons.   That worked, and Im now easily at full occupancy and generating 3k/month on one house net, I shut the other down as the owner wanted to sell.

At this moment, getting into airbnb is a gamble for sure if you don't know the market, and theres a damn good chance that just traditional rental is the best path to really feel you can count on something till the pandemic passes.

Larry Fried · Answer

@Frank Bee Here is a BP blog article I wrote that you might find helpful in thinking about passive REI:

Three Key Routes for Passive Real Estate Investing

Frank Bee · Answer

Would also like to hear people's thoughts on purchasing properties in full vs. taking out a mortgage.  Pros and cons of both.

Also, what are people's thoughts on setting up an LLC to hold the property?  Looks like the cost of setting up a LLC in California are pretty expensive (about $800/year).  Would I have to set it up here even if my properties are elsewhere?

Where to start for reasonably safe, passive cash flow?

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