Who's on first?

Question

Being somewhat of a newbie, I'm taking full advantage of asking some embarrassing questions... just like the one below.

I want to live off the income of the properties I (will) own. Yet, if I'm only clearing a couple of hundred dollars a month on a rental property, then doesn't that mean I'd have to own enough properties to generate an amount equal to my personal monthly expenses?
Yes, it might seem I'm asking the obvious but I'm very new to RE investing and have no doubt there's a lot of ways to create profit I don't know about.

VERY loosely put, my strategy is to buy a rental property (which at the very least I break even on) use the equity from that buy another property, and on and on. But, (big big but) if all I'm ever doing is breaking even I'm only generating equity, but not positive monthly cash flow.

Is this correct, and what can I do to break out of this cycle so I can generate the profit I'm looking for?

N/A N/A · Answer

Thanks eveyone. You've confirmed what I was thinking. So, it seems clear (at least to me) that true profit is gained from a property where the income from rentals amounts to more that all the expenses related to that property. 
(Light begins to dawn)

My 3 unit building is in a lower middle income area. Having just gotten it my plan is to make some improvements. Nothing huge. One unit needs the carpet replaced. A tub here, new paint there. Yet these improvements would allow me to raise the rents and that would definitely put me above the break even point. 
Are there other things I can do to reap higher profits? To me it seems like a simple problem containing two factors; 1. the mortgage (including taxes insurance etc), 2. the rent.
The only solution I can is to to make RENT greater than MORTGAGE.

Okay, I've done my talking. Now I'll listen to all of you.

Frank Adams · Answer

The secret is don't get into the (BAD) habit of thinking that breaking even is the same as making money. You can't count on appreciation building up your equity, although historically it does.

The way to make real money is to buy BELOW MARKET, fix up and rent for market or above. Also PAY OFF ALL YOUR DEBTS, don't let others convince you that a dollar paid to a bank to keep from paying the government a quarter is a good deal. It isn't.

It took me a long time before I felt that I was making any REAL MONEY from my REI. Sure there were years that I made an extra $20K-$40K due to rehab/flips. But the real money started rolling once I snowballed my mortgages and started whacking the off in sequence. By the time I was in my late 40s I had an extra $60K/year coming in over and above our salaries. However, during my 30s and early 40s I spent a lot of evenings and weekends painting, roofing and other "fun" things.

During those years my friends always said, "you're sure lucky to have those rental houses", although they didn't realize I wasn't making anything/very little from the properties back then. Of course when we retired in our early 50s and our friends kept working they didn't say a thing. We just smiled.

all cash

John Public · Answer

One note I wanna make on appreciation is that monetary inflation is the opposite of it, and in many markets appreciation only fights evenly against inflation to bring you to a break even point.  I remenber reading in the WSJ recently that if you bought a house in '69 for $30,000 and sold it today for $300,000 you would have gained nothing when adjusted for inflation.  Of course you WOULD have gained ALL that cash flow rental money (and thats the profit)!

Appreciation is nice when it beats inflation, and it sure has for the last 5 years (at least just about anywhere in Florida or Cali), but don't count on it to do so always as part of your strategy.  Just view it as gravy on top of your otherwise already good (I hope) deal.

John Public · Answer

Mr. Toad

While I'm no expert REI investor yet, I think I have it figured out that those who say that its not important to pay off mortgages ASAP are putting EVERY last penny of that money they would be putting into that mortgage, into another property instead.  In other words, they are choosing to build equity into as many properties simultaneously at once, instead of all cash's strategy of building it in one property at a time as quickly as possible to minimize interested paid overall.

I'm sure both strategies have pros and cons, but what all cash is probably saying is that if your not going to pay the mortgage down ASAP, then you better be using that money (that your essentially borrowing from the bank every day that goes buy) in a way thats even more beneficial to you than it would be to avoid the interest payment on it.  And that frankly is kinda hard to do these days in a RE market with slower appreciation (which I believe it will be for the next 10 years at least).

If you had asked me 5 years ago weather it was better to buy as many properties as fast as possible (to capitalize on appreciation of all your properties) or to pay off each one as fast as possible (to capitalize on paying less interest overall).  I would have said the former.  However more and more its dawning on me these days I am seeing the value of all cash's strategy in a slowing RE market.

Please someone feel free to correct anything I got wrong as I don't wanna be giving bad info out myself.

If you really wanna make money in RE, sell a seminar or boot camp for $700+.  People eat that stuff up, and you never have to deal with "toilets and tenants" again.
 :wink:

N/A N/A · Answer

Except for my personal house payment I have no debts. What do you mean by snowballing your mortgages? Without fail everyone in REI says it's not important to pay off the investment mortgages. Just make sure to pay the interest.

N/A N/A · Answer

The answer to your question is yes you have to buy enough to create enough positive cash flow to cover all of your expenses.  I am always concerned when I hear someone saying I just want to break even on my rentals.

For some people this means collecting rent equal to the mortgage payment.  This is not breaking even.  You will lose money this way. There are other expenses to consider too, such as taxes, vacancies, maintenance etc.  You have to build all of these into your accounting for profit and loss.

Look at appreciation as a bonus and not a guarantee.  It is nice when it happens but it doesn't make for a very solid business model.

Good Luck

Rick