Real estate planning/goals. Are rentals the way to go?

Question

Hello!  Looking for any input on some general questions...

Some quick real estate background on me.

I have one rental property 90k in equity, zillow estimate of home value is 200k and about the same in equity in my current home, zillow estimate 290k.  I plan on renting out my current sf home and my girlfriends sf home  (She has about 90k equity in her home as well.  She has 10yrs left on her 15 yr mortgage.  This house is valued at 189k.  Then we would buy a new sf to live in soon (we are engaged and plan on getting married in a yr or two).

My real estate goals are not based on instant money now but on long term goals 15-20 yrs from now.  I am 31, I work as an electrican making 70k a yr.  Being a sparky is a great career w/ great fringe benifits but like most of us I want off of the hamster wheel.  I don't see that happening in the near future due being a fulltime single dad of two children and needing that expensive Healthcare and somewhat reliable income my career provides.

My questions are...

-how does the bigger pockets community look at rentals? My goal is to accumulate as many rentals as possible, 15 yrs from now my kids will be out of high school and then I would like to make the leap from being an employee to fulltime real estate investor/property manager.

Thoughts on using equity to accumulate more rentals ot just have 4-5 sf rentals and pay them off as soon as possible?

Single family homes or small apartments?

Should I constantly be doing a 1031 exchange to keep climbing the real estate ladder?

Or since life is so busy take the equity and invest it, have no management and maintenance head aches?

Has anyone started a lawn care business to cater to their rentals?

My goals are realistic, I'm looking for a way to gain passive income 15 yrs from now and get out of the 7-4 monday-friday grind.

I hope you guys catch my point since it's somewhat vague and look forward to any ideas, thoughts or input!

Scott

Steve Vaughan · Answer

Hi @Scott Johnson!  I like your plan!  Solid and doable. I quit my 9-5 back in 2003.  I know what you mean by running the gerbil wheel.

Alas I have nothing to sell you or any easy answers. I have build my rental portfolio slowly and learned a lot along the way.  I self-manage and do not consider my time working and seeing my tenants in my rentals a waste.   Most don't agree and that's fine.  I just ask that you take advice from others as it caters to their profession.  All barbers are going to suggest you get a haircut.  There can be slants and angles in other's advice sometimes and you will see them if you are aware.

I do want to bring the tax advantages of selling your primary homes to light. No I am not an acct and don't want to do your taxes! You both have $90k-ish in equity in your primary homes.  If you sell within 3 years of renting them out (if you decide to), you will probably qualify for the sec 121 tax free exclusion on your gains.  You could then re-invest any way you like.

Whether you do that or refinance everything until the fees pile up enough have bought a new property outright, I wish you the best and look forward to seeing you around the site!

David Dachtera · Answer

@Scott Johnson,

A lot is going to depend on your financial goals.

@Max James already touched on the idea of beginning with the end in mind as taught by Dr. Steven Covey (The 7 Habits of Highly Effective People). You may want develop your goals a bit more and bring them into sharper focus. It's hard enough to hit a target you don't have, but also hard to hit a target you don't see clearly.

Equity has value, but that value is volatile, as we have seen thru the recent crash. Equity tends to be illiquid and tough to access when you need it.

Cash flow also has value and is rather more liquid. Cash flow in your business will support growth and allow you to leverage your equity.

You'll want to strike a balance between those two. Your paycheck should support the household. Learn to self-direct your retirement accounts so you can access those funds, as well. Business income should support the business. Ultimately, you want the business to provide your "paycheck" (in quotes intentionally) rather than a j.o.b.

Most folks want to eliminate debt, yes. However, learn about arbitrage first so you can learn to put otherwise dead equity to work for you producing income.

Remember also that your time has value. Every hour you spend fixing toilets or mowing lawns is an hour not devoted to growing your business.

Think this thru now while you're devising your strategy. Then, plan your work and work your plan.

Max James · Answer

You're in the right place if you're looking for setting goals in 15 years from now.  That is where I would start, from the end.  Look at where you would like to be in terms of what REI can do for you in 15 years from now.  Say your goal would be to have $100,000 of cash flow per year from your rental properties.  Read, read, read, learn, educate, listen to podcasts, as hard as you can to learn how you can achieve your goal.  It's not going to come easy by any means.  But your very first thing you should do is engulf yourself into the REI world.  Dedicate your free time to learn how to become the best REI you can be.  Remember, people do not get rich during work hours, people get rich during their free time and what they chose to do with it.

Jack Fletcher · Answer

why has no one brought up that they should move in together rent the other house pool as much cash as possible  then do an FHA for your primary living quarters  live cheep and do it again

Scott Johnson · Answer

Thank you for all the input!

Barbara G. · Answer

You have gotten good advise and a number of suggetions.

Your job and the fringe benefits sound good and being an electrician is good both job.  It;s also a great assest for a Real Estate Investor.  You know construction you can add value  to an investment property.  You and your girlfriend should join some real estate clubs and or Real estate meet up groups and network.  You will learn a lot and you need to do that.  Continue being active here on BP and up your learning curve and then start small but start.

Jerry Padilla · Answer

@Scott Johnson

My best advice would be to .....

• Cash out refinance all of your properties and your girlfriend's property while it is still a primary residence. The interest paid is a tax write off and you can get a fixed rate. Then you can get an equity line of credit - on the properties..... which will be an adjustable rate, typically.
• This will give you a chunk of change for a down payment on your new property and to purchase more properties in the future.
• You can get up to 10 conventional mortgages in your name.

Arlan Potter · Answer

I always encourage people to start buying cheap houses. You can ramp up your portfolio rapidly. The returns are higher.

Real estate planning/goals. Are rentals the way to go?

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