All Forum Posts by: Jack B.

Wouldn't 2 leveraged properties be susceptible to the same conditions, for the sake of comparison? In such circumstances, two paid off houses are superior to two leveraged properties, as the paid off properties have far less expenses.

I agree that leverage is really the only real reason I would invest in real estate. I mean don't get me wrong, tax benefits are nice, but you would make far more money over the long run in an index fund with faaar less work, than you would in real estate, unless you are leveraged. Leverage is the main reason real estate is superior to stock investing.

I know a lot of the popular blogs on REI talk about how important cash flow is, but I've seen some investors that talk about equity plays as long as there is SOME positive cash flow, etc.

The reason I ask is because while I paid 64K cash for a old house 5 years ago and make about $700 a month after expenses, not counting appreciation, I make considerably more on a 300K house I bought a year ago, even though it is mortgaged and doesn't have the same amount of cash flow. After ALL expenses (repairs, maintenance, vacancies), there is about $300 in cash flow, but another $350 in principal payment which is still going to my asset column. When you factor that in, it brings me up to $650 in money that goes to my asset column every month.

Furthermore, this doesn't count appreciation or depreciation. I live in a high appreciation area, so I could consider it, but for this example, let's pretend that it's not being taken into account that I get far more appreciation returns on a 300K house than I do on a house that is worth 150K now. For 70K invested, my house went up 35K last year. On the paid off house that is worth about half, I saw about 10K.

However; lets take into account that the depreciation benefit is better on the expensive house, and that more of the income is shielded from taxes due to the tax benefits of the expenses and the depreciation. That brings me up to $819, once I factor in depreciation.

But wait, I'm not done. Although the majority of a monthly rental payment on this house goes to pay the mortgage and expenses, once it is paid off courtesy of my tenants, the profits sky rocket. And I'm still in for 70K (use tenants money from rents to pay for upkeep). And all that time they've been adding money into the savings account called a house for me, but once it is paid off, it is mostly spendable (read that investable) cash rather than money going to principal, etc.

Point is, even if the returns on a property are only 11 or 12 % in my area on a house such as this with the current prices and interest rates, it is still a better return than in the market using a relatively safe index fund, and is not even taking into account depreciation or appreciation, not to mention the fact that over time, more money goes to my asset column, and eventually it will be paid off. It's still a good thing to buy for the long run, even if it doesn't provide AS MUCH benefit to me now as some of those cash flow cities in the Midwest where you can buy a house for the price of a VCR and rent it out for $1,500 dollars...

 I know that they say leverage allows you to increase your returns, however; I've heard a popular investor say that he used to think that many leveraged properties were the way to go, but that now he realizes that one or two paid off properties that cash flow like crazy are the better way to go. But he doesn't say WHY.

The one thing that comes to mind is if you have 50 leveraged houses, you have 50 roofs to deal with, 50 kitchens, etc. That's a lot of money spent on upkeep, but if it is factored into the rents and budgeted for, then I don't see why this still isn't a better way to go. Perhaps it's the way to go when building wealth, but paid off properties are good for when you want to "retire".

Thoughts?

I think with the right quantity of rentals in the right area, even cash flow can make you rich , especially if you have a frugal lifestyle.

I'm considering moving to Florida and buying 10-20 rentals in the next 6 years or so, paid outright. I should see 120-240K a year depending if I have ten or twenty rentals, and since my lifestyle is frugal, (I still have nice things just no Benz or Rolex) I can live on about 15K a year comfortably. As such I would invest that profit into either more rentals, or index funds, REIT's, bonds, and other businesses. Appreciation is nice, and in my case the Seattle area appreciation will help my goal when I 10-31 exchange out of here and into Florida.

I have a few single family homes in the greater Seattle area and am looking at buying another house. It's a large house and has a MIL apartment with separate laundry, entrance, kitchen, and bathroom. It is a studio but setup to be able to convert a section into a bedroom.

I like the house because it is close to Seattle for commuting (though I currently work mostly from home, but planning ahead) and is about a half a million. The house itself is nice, and in an upscale neighborhood with no HOA (hooray!).

Anyways, is it a bad idea to have a MIL apartment rental? One thing I've considered is that if I move out of the main house and convert it into a rental as well, the utilities will not be metered. Perhaps I could give them a $100 discount per month to cover the MIL utilities or something?

Or perhaps I would be better off buying two properties with the money, each worth about 250K? The MIL apartment situation allows me to switch to living in the MIL if I want and slow down a bit if I wanted, while renting out the top two floors (the main house).

@Russell Brazil

Thanks again, that's hugely helpful.

I'm introverted, though my friends say I'm gregarious and out going. I can be, but generally like to spend time by myself, so I get where you're coming from.

Been a landlord for 3 years now, and I know what you mean. Heck, for me dealing with contractors for repairs has been the worst part, but I try not to let it get to me as I'm working toward a goal. Also, compared to the stuff I deal with in my day job (IT), it's not that bad, and ultimately, I'm in charge, so if a tenant or a contractor is not working out, I invite them to leave within the law in my state.

The contractor who recently replaced my doors was invited to leave mid project, as he was not only clearly disorganized, had piss poor communication skills, and incompetent. Literally he had to call in help because he wasted hours trying to figure out hot to install a deadbolt on the new doors, forgot to take the right measurements, had to go back twice, raised his price a little on the job, and I could go on and on. I had him give me bids for some other jobs but after my bad experience with him and a heated argument, I told him to forget about the other projects and just finish up the doors and be on his way.

It was stressful for me, but what helps balance it is to remember that YOU are in charge. You are the CEO of your own company. There is no manager above you, no share holders, and no risk of being fired. Think about that for a minute. I wish I had that kind of power at work, so I could just remove people who are obviously not working out.

This is a really good suggestion. I'd explore the idea of building a payment plan for any rents still owed into said agreement as well, so that they don't ding their credit. This is a good argument for only picking tenants with good credit, so they have something they want to protect. With deadbeat 500 score tenants. I think I'm going to set a threshold and start enforcing it moving forward.

Bump.