Is real estate investment as simple as it seems?

Question

It seems to me that if you find the right combination of rental income (1%+ monthly)  / cash paid, it's very hard not to make money.

Example: an $80,000 property, 25% down at 4.5%, and rented at $900/month.

You invest $20,000 cash.

The costs would be:
about $450 mortgage after taxes and insurance (assuming 2.5% property tax)
let's throw in another $200 in monthly repairs
let's assume I live remotely and have it managed by an outside company - $150/mo

$900 rent - $800 expenses = $100/mo cash flow

That comes out to 6% a year interest from cash flow and another 4%+ interest from paying off the mortgage over 30 years. That's all assuming no appreciation, no rent increases, not managing the property yourself, and what I think are pretty conservative expense numbers.

10%+/year for no work aside from buying a property and finding a management company sounds insane, and the return goes way up if you add a small % rent increase or appreciation. Where are my assumptions wrong?

Is it that hard to find properties you can rent for more than 1%/mo? People on here talk about finding properties in Michigan that rent 1.5% and higher all the time. Is it that hard to get financing? Are the expenses even more than I assume?

What is it I'm missing here? Because if all it takes is finding properties that aren't broken down and can rent for 1%+/monthly, then having someone manage them, I don't understand why everyone's not doing it. The return seems very high compared to many things out there.

Steve Babiak · Answer

"Simple" and "easy" are two different things.  I'll illustrate with an example.  Weightlifting is simple, but put a couple hundred pounds of iron on that barbell and it sure isn't easy.

Rich Weese · Answer

Is real estate investment as simple as it seems??????

No.......

However, it can get easier with knowledge to begin the trek and experiences along the way. It is that simple, imo. Rich

Mike H. · Answer

What I can say is that if you do find properties with those numbers, then they're good deals and you probably will make money doing them all day long.

I personally look for $350 to 400 a month in profit before vacancies and repairs.  I'm convinced that if I'm at that number, its a good deal and I'm going to make money over the short term and long term no matter what issues arise.   How much money is debatable but I'm pretty sure I'm going to have a true positive net cash flow.

The real trick in being an investor is getting those deals AND getting the financing to take those deals down.  Doing one or two is easy. But if all you have is one or two, you do run the risk of having to dip into your pocket for things.

And then once you get to that 5 or 6 mark, you dip in a lot less but the financing gets much, much trickier.

At 12 to 15, you aren't dipping into reserves at all. Your real estate is feeding your investing finally. But now financing difficulty is even harder.

So, yes, real estate is pretty easy on the numbers when you can find deals that produce like that. But finding them is the trick and taking them down (i.e financing) is an even bigger trick.

The rest (leasing, tenant management, rehab, village inspections, etc) is something that anyone with some decent problem solving ability and people skills will pick up and do well at.

And one other thing that people tend to forget. Investing in real estate is, by far, one of the most exciting/fun things you can possibly do for a business  or side-business.

Its a rush when you are looking for a property and putting offers in. Its another rush when you get a really good deal under contract. Then there's when you actually lock in the financing and go to closing and know its yours.  Next is when you see the finished rehab and its finally done and the house looks fantastic. There is definitely something to be said for the feeling you get after you know how much you've just improved the home and, subsequently the area.  Lastly, there's the rush of when you're leasing and you finally get a good tenant in there and collect that first month and security deposit.

I know we tend to only talk about the numbers and I'm all for looking at my numbers (which is yet another rush in and of itself). But there's an absolute entertainment value and sheer quality of life that comes with investing in real estate for those of us who simply love the process of doing another deal.

Ali Boone · Answer

Hey Mike! Good question and good start. I have two answers, each goes a different direction. No, everything isn't that easy because the world isn't perfect and you will never always have good tenants and never always have good property management. But there are mitigations for both (one is don't buy in bad areas). My other answer is YES, it can be that simple. A lot of people don't realize that. I preach all day long that I only buy turnkey rental properties because of how easy they are. The ones I have haven't been perfect, 100% because of the property management company handling them, but in that case I just fire them and get a new one. Easy. So many people swear you have to rehab and find motivated buyers and find tenants and slumlord....no way. Investing can be so much easier than that.

As for property management, how much you have to manage the manager is solely dependent on how good they are. The manager I have that is my favorite, and who has slowly taken over all my properties... I don't manage him at all. None, zero, nothing. I don't have to. If there's a problem, he reaches out. I never have questions, I never wonder, nothing. Other management companies I've had, every single month I had to be on them for something. It was horrible.

Hope that helps!

Ryan M. · Answer

When financing was easy to get, people took a weekend seminar and went off buying. This is easy they thought and it was to get the properties purchased. Then the tenant variable enters with an inexperienced LL.

I have been taking the problems off their hands, on a short, with a smile.

Bill Gulley · Answer

Mike, any good PM can miss anyone of those issues with a tenant. There was a small town mayor who had his family in the house dealing. Expecting druggies to have bad credit, and wear bandanas is an error in judgment. I knew (know) 2 attorneys that went to prison, a banker and a teacher! People do crazy things, you can't underwite that away.

Consider that your qualification process needs to be uniformed, applied equally to all applicants. Are you going to ask if they are a good cook and never walk away from a stove? WIll they keep thier mower in good shape and have funds to replace it if it blows up or to at least call you?

Yes, the dog bite is on the tenant. If it is a breed that might be seen as a threat it can also be on you for allowing a dangerous animal to reside there! That doesn't stop claims being made or you having to show up in court or pay an attorney or contact your insurance agent.

I didn't list any issue that can be easily underwritten away or screened, it all happens, it all takes additional attention, time and usually money and if your PM charges for additional unforseen rare occurances, moe money again.

Those issues aren't restricted to war zones either. The banker killed his wife, the house didn't sell for over 5 years!

I don't mention this stuff to discourage holding rentals, it can be a great business, just don't go in thinking it's all about the math or returns, even with a PM it's not that passive in reality. You'll be getting calls, making decisions and answering questions as well as being held responsible. :)

Mike Tikh · Answer

From your experience, how much do you have to "manage the management teams?" Are there any issues you've found them to be bad at handling?

J Scott · Answer

Yes, generating something around 6-10% cash-on-cash returns plus another couple % in principle pay-down is pretty easy.  You'll have to do some upfront research to ensure you understand the numbers, understand where you should be looking, and ensure that you're putting a management team in place that is reputable.  Then, throughout the investment, you'll need to manage the management team (hopefully not too hard if you selected a good one), tangentially deal with some difficult issues (capital expenses, evictions, etc), and make sure that you are correctly covered from a tax and legal standpoint.

But, with the right upfront effort, some good decisions with respect to management and some ongoing diligence to ensure everything is going smoothly, it's not too tough.

If it's not clear from what I wrote above, owning rentals is not completely passive, and if you don't find a good management team, it may not be at all passive.  There are definitely risks and variables that will play into the success of your investment.

Mike Tikh · Answer

To clarify, I'm not trying to insinuate that it is a piece of cake and everyone can make money, I'm asking why it's not. On the surface it seems easy, but I'm sure many of you have experiences that would say otherwise. Obviously things don't always work out like they do on paper. I'd be glad to hear more about those and pitfalls and unexpected expenses you have encountered.

Bill, a lot of those sound like tenant pitfalls. Can those be prevented by more careful screening or buying in different areas? For example, I'm sure I'd have most of those issues buying in Detroit, but in the family populated suburbs 30 minutes away we probably have less meth cooks. Also, if the tenant's dog bites someone, isn't that their problem? I'd think a dog isn't a house fixture.

Steve, initial down payment is hard, but I'd assume later in the game you can start using your properties as equity for loans to secure better rates, no?

Matt, the 8.6% is a conservative on cash return. If you can get a loan, you also get a return from paying off the mortgage, and then any appreciation in the house/rent gets magnified. If you pay 25% down and the house increases 2%, that's an 8% on cash increase. I feel like most analysis include a 1-2% annual appreciation assumption. Although if giving private loans pays 10-12%, that would make an 8% return in RE seem less attractive.

Chris Masons · Answer

I think the biggest risks are the unknowns that can and will pop up and eat away at your cashflow and income.

Also lack of experience, there are just some things that reading and school CANNOT teach you and the only way you learn is my experience.

HOpe I am not scaring anyone but I think most here will agree experience is the BEST teacher here!

good luck,
Chris

Is real estate investment as simple as it seems?

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