first of every month
the power of passiveness
literally, it is clockwork, the first of every month, the rent checks start coming in. of all our revenue streams, rental income is the most reliable and stable. my wife and i live a very modest lifestyle. most of our friends do not know our financial situation. a few of them think i am extremely shortsided by not having any life insurance. especially with a young child, they figure i should have at least term life insurance. little do they know, i am relying on a diverse rental pool of income. with the rental income, i feel if anything happened to me, my wife will be fine to rely on the stream of rental monies. we currently get 33k a month in rental income. unlike our business incomes, which can easily turn south, the rental income has been steady and growing. in fact, there are many times when i considered getting out of business for the very fact that the businesses can be an anchor that brings me down. i need to write about that in a blog ” how my net worth is in danger “
like a potato chip
my first rental wasnt supposed to be a rental. i was looking for a home for a business partner. i found a 3bd, 3bth relatively new townhome. it was built in late 2007 and sold in 2008 for the high 400s to the low 500′s. the bank had taken it back and sold it for 195k. my partner didnt want it so i bought it as an investment. i rented it out quickly and after i got that first rent check, i was hooked and got more rental units. i am up to 17 tenants and would love to keep growing this slice of the investment portfolio. again its the most dependent revenue stream i have. i wish there were more deals like this one. the market is hot right now with low inventories so i will wait till the end of the year. i presently dont have any capital any ways. i have 6m invested on flips and the 2 custom homes that are being built.
my rental criteria
i look for high cap rates, ratio of rent to purchase price
for future appreciation, i try and get units that can be developed in the future, this gives me a second potential multiplier
look for areas that are highly desirable
also, because of my busy schedule, i try and look for units where rental amounts are high. i look at each tenant as a potential nuisance and want to be compensated for the potential trouble
dont forget about the hidden and lurking maintenance costs
What do you mean by looking for units “that can be developed in the future?” I figure you either mean units that can be upgraded to provide more rent or locations where the existing units can be razed and replaced with something potentially more lucrative in the future.
We have 3 rental homes and we analyze it primarily on a cash flow basis – the monthly cash return on the cash put out upfront. The homes aren’t in the nicest regions but are in fairly nice neighborhoods within those regions. And like your townhouse example, they are less than 10 years old and thus shouldn’t have major maintenance problems very soon.
hi jonathan, thanks for stopping by and commenting.
a few years ago, there was no such thing as cash on cash. you were lucky if the rent covered the mortgage.
exactly, i am looking for land that has future development opportunities which will mean either i will have additional upside or i can sell to a developer who wants to take on the project. so for example, finding a duplex which can build 6-8 units later on. the immediate rent is the current cash flow. the future appreciation in rents and investment property is the next kicker and if there are development opportunities, thats icing on the cake.
what has your experience been like with the tenants?
Tenants have been great so far. No turnover…the first property we bought has had the same tenants for 16 months now (though they didn’t sign a new lease after 1 year) and we have had 0 maintenance issues and all we have done is helped install a back lawn. The second property we’ve only had a few months but the tenant seems very happy to be there, and the third we just bought last month and no tenant yet.
There’s no chance for future development at these sites, but we’re buying the homes for less than construction costs and about 40% of their initial sale prices 6 years ago, so there’s potential for both rent increases and good appreciation.
jonathan,
everyone told me not to do residental rentals. they told me i would hate it. its that one bad tenant that is a nightmare that will make me wish i never got into this space. so far, i’ve had it pretty good. only one bad tenant so far. units rent out quickly. tenants pay timely.
so glad to hear your experience is going well. i think the trick is to invest the time to find the right tenant. the one time i didnt do that is the time i have a non-paying problem child. i have a subscription to a rental association so i have their entire library of forms and agreements. let me know if you need anything, and i would be happy to email them to you.
your fellow landlord
Hi One Percent,
Enjoying the blog as per usual here. I have your blog in my RSS blog reader. I would love to see a blog post about your journey from where you came to where you are now. It is an interesting concept to me to see the difference between just going for financial independence and getting to the “one percent”
I read that you seemed to do it all through real estate. I am not partial to real estate myself. I am a much bigger fan of the stock market, but that is just me.
Look forward to hearing from you.
Rocky
hey rocky,
thanks for stopping by again. its funny, with a new blog, there are a lot of topics to cover. i really do manage 4 companies and all the flips and builds so time is limited. i usually blog during my downtime. will address how i got to where i am very shortly. it actually wasnt through real estate. real estate is a long term investment platform or a short term one with a huge capital base. i had neither when i started. i basically bought stuff cheap and sold higher. more to come.
again am interested in hearing how it all began for you…
“a few of them think i am extremely shortsided by not having any life insurance. especially with a young child, they figure i should have at least term life insurnace.”
I couldn’t disagree with your decision more. What if you were to die tomorrow? Then the rental portfolio wouldn’t be where you wanted.
I am new to your blog, but do you believe that your wife could run the empire without you? As efficiently as you could today? without your day job (if there is any – like I said new here) salary to support the machine while you are building?
Even if she can run the empire who is to say the partner doesn’t screw her over? or even if it isn’t a “screwing” maybe it is simply I don’t want to work with you feeling. OR VICE VERSA. Your partner dies tomorrow do you want to be in business with his wife? when she knows nothing about the business?
Let’s say I still haven’t convinced you…lets say you do build your empire, depending on the State you are in or if you are large enough it doesn’t matter (b/c of the Federal gov’t) you are going to owe Estate Taxes. You know what the IRS or your state gov’t doesn’t want? Property they want cash. At the very least it provides liquidity to pay that bill.
Life insurance does all the above for what? PENNIES on the dollar.
penny wise, pound foolish.
my feeble excuses:
only 2 of our rentals have a loan on them, the rest are paid in full. our primary home is paid in full. there is 6M worth of inventory of homes that are coming to the market. i expect this inventory to become liquid in the next 2 months. worst case, they could quickly be sold at a discount to liquidate ~30% off max.
all the business are run by executives/partners so they should continue without me. even if my wife and i lost all the businesses, there are ample assets in real estate to more than take care of my wife. thats why i refered to the real estate portion as the safest and most dependable revenue stream. plus there are no estate taxes if only i were to die. it simply passes to spouse. now if my wife and i die, thats when the estate taxes would kick in. i have laid out a plan for my wife in the event of my death in how she can slowly sell the companies to the executive/partners.
you do bring u a great point, the businesses should buy an insurance policy to “buy me out” upon my death. just didnt want to give partners a reason to x me out. : )
hard to shake the middle class mindset of being frugal. but you are right.
In addition it might make sense to put your assets in trusts.
all great advice. sometimes too busy trying to make the money rather than properly protecting it. one reason why i hope joining ypo will help. also making more friends like you investor
I am in commercial real estate, mainly hotels. But, you are inspiring me to think about the rental investments. It seems to be a decent source of passive income.
shilpan,
i bought residental rentals because housing market was in the tank and i was getting great deals. commercial is easier due to the less stringest tenant laws. do you have an entry about your commercial investments i can read?
ps ..thank you for stopping by the blog
This is the only article I have so far about hotel investment. I hope that you will enjoy it.
http://www.streetsmartfinance.org/2012/04/27/how-to-become-rich-key-finance-lessons-from-asian-american-hoteliers/
Very interesting topic, glad to find your blog and adding you to my blogroll.
Hello from Arizona, a very interesting rental/real estate place right now
hi SM from arizona.
thanks for stopping by. how are the cap rates in arizona?
We haven’t gotten into real estate because we are simply not ready. We want to but we want to be smart about it and make sure we don’t get in over our heads. The patience will pay off.
Personally, I think there’s room in your picture for life insurance, but I appreciate your point about you being self-insured. We can’t wait to get into real estate. I’m sure we’re going to have a quick learning curve, but we’re game.
I would LOVE to get started in Real Estate, but don’t even know where to start. Can you recommend some good resources for learning the ins and outs?
I love the fact that you own the majority of your properties, that’s the way I want to do it!