I have a couple secrets to tell you today, so listen closely. Let’s get right to the first one:
You don’t have to be a genius to be successful.
A great brain is good for a lot of things, but it isn’t a requirement for building an awesome life.
I’m a smart guy, but I’m never going to solve nuclear fusion, create peace in the Middle East or have Buffett riches. Heck, on most days, it’s a struggle to find my wallet and sunglasses. However, my life has exceeded all of my expectations and a big reason for that is my second secret:
Identifying and listening to smart people is incredibly valuable and important.
The great news is that you don’t have to figure much out for yourself. Very smart people have written about how to invest successfully and almost anything else you care to learn. Many of these people share their knowledge for free on the Internet. Your job is to figure out who the good people are and learn from them.
So, most of my learning doesn’t revolve around figuring out new ideas; but finding great people and learning from them.
Earlier this year, I ran into one such person at a conference. His name was Chad Carson and he was being interviewed by the BiggerPockets crew onstage. I chatted with him later in the day and knew quickly that Chad was a person that I should listen to. Despite only being in his mid 30s, Chad owns 50+ properties. He went to college, but skipped the 9-5 job in favor of entrepreneurship. Chad has built an awesome life for himself.
I invited Chad to guest post and was blown away when I read the really great article he wrote. I know you’ll enjoy it as much as I did.
Thanks again Chad!
Early Retirement Using Real Estate (The Real Story)
I’m a big fan of 1500days.com. I regularly look to Mr. and Mrs. 1500 for a good laugh and valuable insights. So it’s an honor to be able to share with you today.
Early retirement has been a goal of mine even before I could clearly articulate it.
Over 13 years ago when I graduated from college I briefly considered conventional careers in medicine or with big Wall Street corporations. But in the end I chose to be an entrepreneur and start my own small business. My entrepreneurial path was in the world of real estate investing.
In this article I’d like to share some ideas about the benefits and challenges of using real estate investing to retire early.
Real estate is clearly not for everyone. But I’ve found many aspiring or current early retirees needlessly discount real estate as a viable strategy. I hope to show you that you can use real estate in a very small or a very big way to accelerate and smooth out your journey towards financial independence.
My Style of Real Estate Investing
I want to say up front that my bias is towards a small, simple, and hands on form of real estate investing. I have never invested in REITS, I don’t control a syndicated empire of real estate, and I run my entire business out of my basement (or from my laptop while traveling in South America).
My primary focus is on the life opportunities that the money from real estate provides. I like being a dad, traveling, creating social businesses and non-profits (the Green Crescent Trail), writing my blog, and teaching.
If you want to get big and take over the world, go for it. But if you just want a small amount of real estate that provides stable, safe, and passive income while you live your life, it’s definitely possible.
The Good – Real Estate is an I.D.E.A.L. Investment
The most common benefits of investing in rental real estate can be described with the acronym: I.D.E.A.L.
I = Income
The right real estate investment can produce consistent income in much better ratios than most other asset classes. An unleveraged return of 4-10% is typical for real estate that I see every day.
For an early retiree, consistent income is the holy grail. This is what you use to live, to play, and to explore. In my world, the 4% rule is a non-factor because there is enough investment income without depleting any of my equity.
D = Depreciation
Like other large capital asset purchases, the IRS requires real estate investors to depreciate the value of the building over time. Residential real estate, for example, has a life of 27.5 years. This paper expense (it’s not actually cash out of your pocket) can shelter your rental income. This means less of your rental profits are exposed to current taxes.
If this depreciation creates a loss for your rental, it can sometimes also be used to shelter other income from tax (with some limitations). In combination with other strategies like Jeremy explains over at GoCurryCracker, I’ve paid much less in income taxes even during my high-earning growth years.
E = Equity Build-up
Even conservative investors like Warren Buffett use smart leverage. Real estate investing gives you access to long-term, fixed, low interest, fully amortizing mortgages.
This leverage can be a powerful and safe growth tool because you build up equity by amortizing your loan. One of my favorite concepts in the real estate has been that my tenants go to work each month, pay me rent, and effectively pay off my mortgage for me. It’s beautiful!
A = Appreciation
I don’t count on appreciation when I evaluate the purchase of a rental, but there is no doubt that in most areas the prices and the rents on real estate tend to keep up with inflation rates over time. This article does a pretty good job summarizing the real estate appreciation statistics.
What average appreciation models do not take into account is forced appreciation. Almost every property I buy has value added potential, like remodeling, increasing sub-market rents, improving cosmetics, adding storage, etc. This form of appreciation is very much within your control.
I also like to buy properties below their market value. A 10-30% discount creates built in appreciation right away. Unlike stocks, cash and patience can pay off with bargain prices on real estate.
L = Leverage:
As mentioned before, safe leverage is available in real estate. This can allow you to take $100,000 and invest in 3-4 properties instead of one. I have certainly used this strategy, but I am also leery of too much leverage. Unwise use of leverage kills more real estate portfolios than any other factor. Debt is like a loaded gun, which can be helpful if you’re an experienced hunter looking for food but extremely dangerous if you’re careless and reckless.
Even More Good Reasons to Invest in Real Estate
The I.D.E.A.L. benefits are the core reasons most people get into real estate investing, but for early retirees there are even more benefits that are not often discussed.
Your Home Can Become an Investment
Despite what I’ve read from smart people like jlcollinsnh who say your home is a terrible investment, I’d like to respectfully disagree for people with an entrepreneurial mindset and a desire to retire earlier.
Here are a couple of specific strategies that can turn that assertion on its head.
First, you can hunt for bargain purchases, move into the bargain, clean or fix it up, and then sell it after two years to receive a tax free gain of up to $250,000 for individuals or $500,000 for couples. This is the best deal in the entire U.S. tax code.
This technique is called a “live in flip,” and you could use it to own a home free and clear within 6 years. You could also just use it to pile up a bunch of cash for investing, and then start renting once you get out of your growth phase.
Second, you could do something called house hacking. This means you live in a house or a small multiunit that allows you to rent other apartments or bedrooms. This rental income allows you to cover some or all of your housing overhead.
I personally house hacked a quadraplex that allowed me to live not only for free but with a positive cash flow for several years. I have since moved two more times, and each time I keep the old residence as a rental property that transitions beautifully into a long-term rental for income and growth.
Timing of Early Retirement
Most early retirees have a target date for their financial independence. After that point they plan to live off their investment portfolio (or at least be able to).
I am personally very confident in the long-term returns of the stock market (especially with low expenses and Vanguard index funds), but sequence of returns, particularly in the first decade (awesome article by The Mad FIentist) would still be a concern for a 4% withdrawal strategy.
Real estate income properties can provide a diversity of income and growth that can smooth out the timing issues of your early retirement. Whereas stock market prices could fluctuate wildly over the short-term, real estate income and loan amortization is very steady and predictable. That is a very useful feature when you want to live off of your assets at a certain time.
Control Over Returns
Once again, I personally have confidence that over time the 3,797 managers of the companies owned by my VTI total stock market index fund will reinvest the retained earnings and grow my net worth. But there is also a part of me that likes more direct control over my returns. Real estate, particularly the hands on type, gives you that control.
Simple, Understandable, and Safe
One of the primary investing tenets of Warren Buffett is to purchase assets that are simple and understandable. I focus on residential real estate, particularly houses and small multi units, because they are the most simple and understandable investment I know.
Ordinary people live in these units. They want things like safety, convenience, comfort, affordability, style, and good school districts. When you shop for a residence, you probably look for the same things. Therefore, you intuitively understand the fundamentals of good real estate.
Real estate is also a “real” asset. It’s tangible. In the right locations, its value is buoyed by construction costs and salaries which keep getting higher over time. Housing doesn’t go out of style or get replaced by the latest technology. People will still be living in homes long after you and I are gone, and this makes it a safe long-term investment.
Debunking 3 Common Objections to Real Estate
Real estate rentals have a bad reputation in the early retirement community. But some of the biggest so-called negatives are actually positives in my book. Here are some objections I’ve seen.
Real Estate Is Illiquid
This just means it’s harder to be stupid and sell at the wrong time. With real estate you’re forced to do what Warren Buffett suggests you do – hold on long term.
This illiquidity also creates opportunities to make even more money in illiquid/down markets when you buy new deals. During hot or liquid real estate periods, I’ve found it fairly easy to sell my bad or less than ideal investments and to restructure my portfolio as needed.
Real Estate Requires Time and Effort
I’m also a fan of passive, index-style investing, but I don’t see a problem mixing in a little elbow grease in order to receive all the benefits I’ve laid out here. To me and others who value more control over investment returns, it sure beats waiting on the broader market to make money.
I have found that most of the time and effort in real estate is on the front end of a purchase. After it’s rented and stable, feel free to travel around the world like I have. The RIGHT real estate can be very passive, and there are plenty of decent management companies to handle it if you don’t want to.
Less Appreciation Than the Stock Market
Really?? Most people spouting this objection ignore overall returns, which include income, tax benefits, amortization of loans, and appreciation. Residential real estate appreciation may average 3%, but if you buy at a discount that number is even higher.
And unleveraged rental income yields can be anywhere from 4% – 10%. In a worst case, income and appreciation from real estate is actually very comparable to stock returns. In the cases I’ve experienced, it’s much better and compensates you very well for your time.
The True Challenges of Real Estate Investing
Real estate, like anything else, has its downsides. I’m not trying to sell you something. You need to be aware of the whole story.
Start-up Phase
Unlike passive investments like index funds, beginning to invest in real estate is more like a start-up. This means you need to learn the fundamentals of your business and act like the CEO.
In one of my articles at real estate website BiggerPockets.com, I shared the 7 best books for beginner real estate investors. This is a good place to start your education.
Overcoming the inertia and overwhelm of this early stage is often the hardest challenge. It does take some time to learn and to get the momentum going. A lot of would-be investors get stuck in this stage.
This is the reason free websites like BiggerPockets are so helpful for new investors. You can learn as much as you want for free, and then you can ask questions and get support from more experienced investors in the forums or comments.
Feel free to look me up at BiggerPockets and ask questions anytime.
High-Priced Markets
Buying good deals in high-priced markets can be a challenge. The rental income of real estate in these areas is not as strong, and that makes it more difficult to justify the extra investment of time and effort.
I have a few suggestions in these cases.
First, don’t just accept defeat without a fight. Research all of your area for yourself. Every town has more expensive areas and less expensive areas. Don’t start in the most expensive. Look for the neighborhoods making positive transitions. This is where the best deals can be found.
Second, look for income properties near single family areas. 2-4 unit buildings in nice areas will typically be easier to cash flow than single family houses. You can still get attractive mortgage financing on these buildings, and they often sell as easily as single family houses when you’re ready to liquidate.
Third, you can still flip houses, do live in flips, or house hack in more expensive markets where income for rentals is not as strong.
Fourth, invest further from home. This is my least favorite because you lose some of the intuitive advantages of your home market. But many people have done it successfully.
Managing People and Systems
Real estate is a people business. Even in its most passive form, you still have a property manager who you’ll want to macro-manage from above.
If you’re completely opposed to any form of people interaction, real estate is probably not for you. This is a reasonable objection that you’ll just need to judge for yourself.
But on the flip side, learning to manage people is not as difficult as it seems. Despite horror stories you might have heard, tenants are MUCH easier to manage than employees. I have been gone for months at a time without huge issues from my tenants. The issues I did have could be handled with a call to a good local contractor.
Rentals in nice locations attract quality, self-sufficient people who can manage their own lives. When you build a few communication and operational systems on the front-end, most of the potential problems can be handled very easily with little stress. A good third party property manager should already have these systems and a good team, so look for those if you’re hiring someone to manage your property.
Is Real Estate Investing For You?
The journey towards early retirement is exciting and worthwhile. The fundamentals of the journey, like a high savings rate, rarely change. But I hope I’ve given you some alternative ideas with real estate that could make your journey smoother and more likely to succeed.
Real estate is certainly not for everyone, but it might be right for you, either as a small or larger part of your early retirement plan.
Best of luck on your journey!
Have you invested in real estate? Are you considering it? Did I miss any positives or negatives in my article? I’d love to get your thoughts or questions in the comments section below.
Thanks so much Chad for this post! I can’t wait to chat more in San Diego, if not before.
Please visit Chad over at Coach Carson. You may also find him on Twitter and facebook.
Finally, listen to Chad over at BiggerPockets:
Join the 10s who have signed up already!
Subscribing will improve your life in incredible ways*.
*Only if your life is pretty bad to begin with.
Great insight on real estate investing Chad. I have never really consider it. You mentioned being a dad, how would one “live in flip” with a family? Seems like a lot of work shuffling children around every few years.
Brian @DebtDiscipline recently posted…Trim the Fat from your Budget
Ha, I’m doing the live-in flip now. Well, sort of. This time, we’re not selling the home after two years. However, I still bought the worst home I could find in the best neighborhood. It was previously a rental that had gone into foreclosure. It had been unloved for many years and was in a sorry state.
Back to your question. Yes, trying to do this with kids is painful at times. The kids deserve my time more than the home, so everything takes much longer. It can also be inconvenient: “Hey kids, I’m gutting your bathroom this week, so we’re down to one toilet again.” “DAD!!!!!!”
However, all of that pain comes with a lot of gain. We bought the home for $176,000 and put about $75,000 into it. We could sell it for close to $400,000 if we were to list it today. Some of that massive gain is due to an incredibly hot real estate market, but at least half of it is attributable to our work on the home.
So painful, yes. However, I’ll take that gain for a little bit of pain any day of the week.
And if you can’t tell, I’m in total agreement with Chad that under the right conditions, a home can be a great investment for a savvy investor.
Thanks for the comment, Brian. I like Mr. 1500’s answer to your question as well. In my case, we did most of our moves pre-children and made our last move 3 years ago when our oldest was 1.
In reality live-in flips don’t have to be a constant work zone. If you choose to do all the work yourself, then yes it will take longer. But I hire everything out, which makes each job go faster. I save money by carefully getting bids, and I search long and hard for materials (like beautiful, old wooden front doors, for example).
I think live-in flips are not a permanent solution. They’re a way to put your growth in hyper-drive for a 5-7 year period of your life when you’re feeling adventurous. After that, settle in with long-term ownership or capture your equity and start renting if it makes more sense in your market.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
“I think live-in flips are not a permanent solution. They’re a way to put your growth in hyper-drive for a 5-7 year period of your life when you’re feeling adventurous.”
This is exactly what we did. After college, we jumped from home to home. The returns were spectacular (remember that tax free part) and are the reason why we are millionaires today. You don’t have to do many of them, especially if you’re young, to really put yourself ahead. My very unscientific guesstimate is that our live-in flips set us ahead by at least a decade, but probably more.
I’ve definitely decided no more homes that need a lot of ongoing updates. We’ve done that with our first home (not near to your level) and I’ve learned it’s not for me.
I want it either updated day 1 with contractors or already updated at purchase. No more construction zones.
Adam @ AdamChudy.com recently posted…The Frugal Christmas Gift Giving Guide
Thanks for the great article/intro Chad, and for sharing with us 1500s. While I don’t want to own/manage anywhere near 50 residential properties, I am looking in this direction. A new year, and a new job, will help spur us on.
-Bryan
Income Surfer recently posted…Long Term Holdings
Thanks, Bryan. 50 properties is certainly not for most people. 1-2 will do just fine to boost growth and retirement income with minimal hassle. Best of luck with the new job and new beginning this year!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
I wish I had invested in more real estate when I was younger, but fear tends to have that paralyzing effect on people. However, I just closed on my second rental property last night (a duplex).
You mentioned that one of the objections that some people have is “Real Estate Requires Time and Effort.” I’ve found that with the exception of the initial work of finding the place and making any necessary repairs, the biggest help to me has been a property management company. I’ve used them from the get-go (2009) on my first rental house and made sure to figure the expense into the new duplex I just bought.
Although a property management company usually charges 5-10% of rent, I think that’s a small price to pay. They find and interview potential tenants, handle all the calls from them while they are living there (I don’t even know my tenants in the rental house), contract out all repairs (calling me if it will be anything over $200), collect the rent, etc. I just sit back and get my check every month from them. That makes it tremendously more passive.
— Jim
RouteToRetire recently posted…I Enjoy My Job… But Not Working
Hey Jim,
Great to hear your real estate story. Better late than never! Are you using your investments more as a growth vehicle, income, or both?
Very good point about property management. If you find a good one, the 5-10% is certainly a good investment if you want it to be a more passive venture. As I said in the article, it still pays to keep your mind involved with the property by way of communication systems and financial reports. But I can tell 99% of what I need to without ever visiting the property. Then I’ll drive by and check on it a couple of times per year, in addition to the property management visits.
– Chad
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Thanks, Chad – I want the properties for cash flow. Right now, as long as the tenants are paying the mortgage and expenses off, I’m content even if I don’t make a lot off of it. The house though will be paid off before I retire at 50 and then I’ll be able to rely more on that income to live off of so I don’t have to start pulling from my investment accounts. The duplex I just acquired will likely still have a number of years on it, but I should make a decent amount of profit on it even with the mortgage payment (if I can keep it filled).
I didn’t mean it to sound like I don’t stay on top of the rental house, but rather that I don’t need to think too much about it with the property mgmt company handling the day-to-day BS that can come up. Like you, I drive by my rental property, probably every couple of months, to see how everything’s looking on it. I also have the property mgmt company do a walk-through on it once a year just to ensure that things are being maintained.
On the flip side, it’s great for the tenants to have someone that’s always there to get things taken care of much quicker than I could probably make things happen.
Thanks for the good post!
— Jim
RouteToRetire recently posted…I Enjoy My Job… But Not Working
Jim, sounds like a great plan. I like it.
I was just making the comment about visiting properties periodically for the greater good. Definitely didn’t mean to imply that you don’t.
Best of luck!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
I agree with this. I bought four duplexes in four years in my 20s and managed them myself for years. I’m glad I had that experience, but I was a terrible (read: lazy) landlord. I didn’t have time or motivation to get multiple bids for every repair or wait for an ideal tenant when I had a borderline one trying to hand me a deposit.
I hired a property management company in January 2012 and have never looked back. My cash flow has actually INCREASED over the last 3 years compared to the previous 3, even after taking into account their fees! On top of that, I don’t shudder anymore when my phone rings.
I still manage two condo properties which are also in my neighborhood. They are newer, higher end and attract well paid tenants who have steady jobs (or rich parents). Over the 4 years I’ve owned those two, no tenant has ever missed a payment, and I’ve had a total of maybe 4 repair calls (very simple “the toilet is running, can you get somebody out here this week” type of stuff). They don’t cash flow as much as the duplexes in working class neighborhoods, but man are they a lot easier to deal with.
Elizabeth recently posted…How to Figure Out What You Really Value
Wow – managing four duplexes yourself – that’s impressive!!
I’m not a real handy guy (although, unfortunately for my wife, I do try!) and to me, time is more important than money, so I knew I’d be getting a property mgmt company involved from the start.
That’s great that your cash flow increased over the past few years even with the fees. Talking with some friends and family who are renters, they actually like having their house managed by the property mgmt company because they say they can get problems resolved quicker.
— Jim
RouteToRetire recently posted…I Enjoy My Job… But Not Working
Elizabeth,
Great points. Thank you for sharing. I took your lessons as:
1. Not only can managers save you time, they can often do a better job – especially if they are competent and have systems set up to do all of those things. They work in bulk, you don’t. So it’s more efficient.
2. Quality properties in quality locations like your condos are MUCH easier to manage. My best properties get passed from tenant to tenant without advertising. No vacancies. No collection hassles. It’s beautiful!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
I have cooled on real estate lately thanks to a deal that, seemingly, will never actually close. But I am sure I will get over it eventually.
Definitely one of the best pieces I’ve ever read on real estate investing.
Done by Forty recently posted…The Upside of Spending
Thanks Done by Forty,
That long, drawn out closing sounds like you’re dealing with a short-sale lender to me. Boy, those are like pulling teeth.
Hopefully you’ll get there soon. Closings of real estate are not always fun and games.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Fantastic and very well balanced article! Thanks for taking the time to interview and post.
Thanks! Happy to share.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Thanks for sharing Chad.
Makes me excited for 2016 when we will try to pick up our 3rd piece of real estate.
Will have to check out those 7 books you mentioned above.
Cheers,
Dom
Dominic @ Gen Y Finance Guy recently posted…Earning Your First Million Dollars – A Stroll Down Memory Lane
Awesome. Go get that 3rd property! Congrats on the other 2.
Hope you enjoy the books. I narrowed down a HUGE library to those 7 choices. Good fundamentals.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Great post as I’ve recently been very interested in real estate investing. I never thought it was possible because I live in NYC. Yes…there are less expensive areas but they’re still expensive compared to other areas of the country, plus they are usually less expensive for a reason: it’s a bad neighborhood. Biggerpockets has been a wonderful resource and I’ve read other articles from Chad. Very informative. Ultimately I decided to invest out of state even though I would use some of the advantages as well as control. I bought my first property less than a year again and I’m hoping to add more. I’m looking into the BRRR strategy…buy, rehab, rent, refinance, repeat.
Andrew@LivingRichCheaply recently posted…Consumers Beware
Thanks for sharing your story, Andrew. I didn’t emphasize investing out of town because it’s not my game, but certainly a lot of people have made it work. So congrats to you for making it happen. I would probably do the same thing if I were in NYC or another big city.
Where did you choose to invest? I’m curious.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Kansas City, MO.
Andrew@LivingRichCheaply recently posted…Consumers Beware
Nice, impressive how you managed to obtain so many places in such a relatively short timeframe. Too bad the mortgage rules here in the Netherlands are so tough at the moment, which makes obtaining financing for rental properties nearly impossible (relatives of ours actually own about the same amount of properties as you, but they were forced to finance all their own properties purchases since the crash of 2008, has not improved since!).
Using leverage is therefore extremely difficult, as you are required to bring a considerable cash pile (which in return will lower the return).
We are working on properties 3 and 4 (well property 3 actually, which we are intending to split into property 3 and 4). But we have to initially own the place ourselves before we can split, thereafter we need to obtain new financing which will be tricky as mentioned.
Thanks for the motivational post 😉
Cheers, Team CF
Team CF recently posted…November 2015 Dividend Update
Hi Team CF,
Interesting to hear a real estate investing perspective from the Netherlands!
I have bought most of my properties using private financing. Originally I did not have a regular job that pleased the banks (entrepreneur since college) so I had to get creative early, and then I just stuck with it because I like it better.
I wrote an article 6 Reasons I Prefer Creative Financing to Banks.
Can you get other individuals to loan you the money? Self directed retirement accounts? Or even better, get seller financing?
Before I resigned myself to always paying cash I’d explore thinking outside the box.
thanks for sharing!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Funny you mention alternative financing arrangements, this is actually one thing we are currently investigating for the new property we have in sight, just trying to figure out if this is legal and how it will be shaped.
The major downside we found in alternative financing arrangements is the generally higher cost of borrowing/financing compared to the current bank rates, which in our expensive housing market makes a big difference.
Thanks for the feedback though!
Team CF recently posted…November 2015 Dividend Update
Ugh. This awesome article makes me want to consider real estate… Sort of. My parents had a rental growing up and we lived all the nightmare tenant stories. We had to hide in our house with the lights off because they threatened to come over with a gun. As a ten year old, that stayed with me! Also, houses are ugly up here. I’m sure the return is actually really high compared to other markets because of our housing shortage… I won’t rule it out completely now, which is saying a lot! 🙂
Maggie @ Northern Expenditure recently posted…Money Buys Color: #PFMessages in A Little Princess
Ha, Ha. That story when you were 10 is no laughing matter, but I just relate to the childhood distaste for real estate. My father had rentals, and I had to clean out refrigerators with maggots, piles of trashes with rats jumping out, etc.
I swore off real estate forever!! Until I took a 2nd look:)
I’m honored that the article will at least inspire you to take a 2nd look! And I can’t wait to read more about life and finances in Alaska.
A real estate author I know named Michael Boyer is an attorney and part-time landlord in Juneau, Alaska. He wrote a book called Every Landlord’s Guide to Managing Property. He may be a good resource for landlording specifically in Alaska.
Best of luck!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Great insight, would you deploy the same strategy at a hot real estate market like Vancouver?
Tawcan recently posted…A Readers Challenge – Christmas Giving
Tawcan,
The different profit levers in real estate (income, amortization, depreciation, appreciation) have to be adjusted from market to market. Rentals in the best locations/cities are kind of like blue chip stocks. They trade at higher multiples of income than less smaller, growth companies.
The money is usually made from adding value somehow to increase income or increase the value. For example, can I add storage units to increase rental income? Can I charge for parking? Charge for a laundry mat? Do short-term rentals? These can help you make the income bearable. But then the big profit is usually the equity you create on the back end as you force appreciation with your improvements.
It’s a big topic, but those are a few thoughts. Thanks for commenting.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Great article; very informative! This answers many questions we’ve had about real estate investing, which is something we’ve been interested in but have yet to get into.
Kalie @ Pretend to Be Poor recently posted…Christmas Gifts That Keep on Saving
Thank you, Kalie. I’m glad the article addressed your questions. Good luck with your first steps getting started!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
First question, How great has it been this year as a Clemson Alumni?
I love hearing about real estate and reinforcing our current plan for FI. We are accelerating the paydown on a rental home and will be bought and paid for late in 2016. I’m a huge fan of the initial house hack as we currently live in a multi-unit, while we essentially live rent free. I’m trying to get my nephew and niece on board to do the same while they are in there 20’s.
Are you always looking to add or have you begun to pay down or invest in different areas (eg stocks, bonds, small business)? What made you decide to go in this direction?
Nice meeting you in person down in NC, hope everything is going great.
Hey Even Steven,
It was great talking to you down in NC as well. I also enjoy the good work you’re doing on your blog. Congrats on the deals you have going with house hacking and your rental pay down.
We have not added a net number of units for about 5 years now. We have sold a bunch of less than perfect properties, paid down debt, and then bought replacement properties in better locations and with better cash flow.
I haven’t completely figured out an ideal portfolio for us, but I’m leaning towards something that has a balance like this:
1. Rentals and private notes free and clear of debt (deflation hedge and max current cash flow)
2. Rentals in high quality location with fixed, long-term mortgages (inflation hedge)
3. A mix of flips (3-6 months) and short-term rentals (sell in 3-5 years) for periodic chunks of cash
4. Cash and low-cost index funds for liquidity and hedged growth.
Growth is becoming less and less a concern for me since we have enough units. It’s more about stability, cash flow, and less personal time and hassle.
I look forward to exchanging ideas and strategies.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Perfect timing! I recently got all of my paperwork in order and am now officially in the market for a duplex. I’ll check out the links you provided!
Gwen recently posted…Monthly Spending Report: November 2015
Awesome, Gwen! Are you planning to house-hack the duplex or just buy as a rental?
Happy deal hunting!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
That was really solid guest posting about real estate investing, Chad. I have been always interested in it but put it on hold due to the bubbles in the current Canadian market, especially Toronto where I live. Will keep renting and hold ETFs and individual stocks for now but I would definitely want to get into predictable/ reliable passive income.
Thanks for sharing!
BSR
BeSmartRich recently posted…November 2015 Dividend income update: $358
Thanks, BSR!
I’ve communicated with someone else in Toronto. It seems there are some challenges in the rent/price ratio up there. I found this article about Toronto housing by MMM very interesting.
You could always build a profile of a good deal in your location, even if it’s not realistic at this point, and just wait to see if a bubble burst and then snap up some properties. I’ve found that once I know what I’m looking for, good deals start appearing.
Best of luck!
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
We bought our first rental property this year. Time will tell if we love it or not. But I do like the tax advantages it brings! I have been looking for ways to keep us in the 15% bracket.
Norm recently posted…Real Christmas Trees Rule
Congrats, Norm. Sheltered rental income vs unsheltered dividend income can be a big deal, so you got it right. After tax returns are always the important number. Good luck with your rental.
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
If we ever move out of our house, I’ll probably look to rent it. Right now we’re paying $1400 total (property tax, insurance, and mortgage) per month. Rent for our house would be $1700. Generally, they get rented out within a week or two of listing also!
I’m not in a rush to get out though. So who knows what we’ll end up doing in the future. If there were foreclosures of our townhomes in our areas, then I’ll think about it.. but we don’t have the cash on hand either. Decisions decisions…
Chris, renting my old residence has been my favorite strategy.
The cash flow could work if you manage your property yourself. If you have any vacancy or major capital expenses, you could get tighter. But if it’s in a good location that spread will get better over time as rents rise.
Good luck!
Chad recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
I have no time for this now, but I have thought about it once I quit the day job. I’m pretty handy with electrical, plumbing and carpentry so I would do a lot of the work myself plus I enjoy it since it’s much different than my job at a desk and computer. Great explanations!
Fervent Finance recently posted…Financial Independence All Around Me
Yeah, the time has to be right. But it does make a good side hustle that you can get more or less involved in if you want. You can save money on the repairs doing them yourself, and like you said it can be a nice change of pace from a day job. Then when you get tired of it, you can go back to calling the plumber or electrician (like I do:).
Thanks for commenting.
Chad,
Great overview of your real estate investing style.
My real estate investing style is a little different and relatively new since P2P real estate marketplace lending has only been around for 3 years.
I have a broker’s license, but my full time gig takes too much time for me to allocate time for buying properties even though that was my intent on getting my brokers license. I digress….. I found it a lot easier to invest in real estate by utilizing crowdfunding sites for debt and equity positions (commercial and residential).
So far …..good returns on over 50 properties and no losses (knock on wood).
Have you looked at these sites either to help you in procuring new properties(borrowing) or investing (lending) to add to your real estate income?
I
Hi Jack,
Thanks for sharing your own real estate experience. That is very interesting to hear you have used crowd funding to get into real estate. I have read some about it, but I must admit ignorance about how it actually works.
I have used a lot of private financing but it was from individuals or their self directed IRAs.
What crowdfunding sites do you recommend?
– Chad
CoachCarson recently posted…Let It Ensue: How Success Comes Without Caring About It
Chad,
I have tried about 10 different sites and follow about 10 more. I believe these are the top 5 based on the amount of investment opportunities filtering through their sites in no particular order:
Realty Shares (Debt/Equity)
Realty Mogul ( Debt/Equity)
Fundrise (Debt/Equity)
Patch of Land (Debt only)
RealCrowd ( Debt/Equity)
Minimum investment on most of the sites is $5k and some require more money depending on the opportunity. Also, in most cases you have to be an accredited investor to utilize these platforms but that is changing with the recent ruling in the JOBS act.
FinTech is causing a paradigm shift on traditional methods of financing and as a result there are more opportunities for both the borrower and the lender.
FYI, Jack
I had the luxury of meeting Chad and Mr 1500 actually at FinCon this past year as well and can say that both of these guys are straight up guys with high upside and know what they are talking about.
Chad, this is a great article and really shows the knowledge and passion you have for real estate. I love that! I am a real estate bug as well and just love it. I plan on using real estate as the main catalyst to reaching financial freedom and have had decent success so far.
I look forward to the day where I can retire early from my real estate empire.
Thanks for writing such an awesome post!
Alexander @ Cash Flow Diaries recently posted…Advantages Of Buying Turnkey Rental Properties
Hey Alexander,
I’ll never forget the moment during the podcast jumping up on stage:). Ha, Ha.
Good to hear from you. Thanks for the kind words.
Yeah, I’m a real estate and personal finance nerd. No doubt. It’s fun to learn about and share. It’s even more fun to use the principles for early retirement:)
See you around!
Chad
Chad,
Thanks so much for this excellent guest post. I’ve been curious about real estate investing because it seems like one of the best fixed-income strategies with the lowest time commitment (making it feasible to do on the side). I’ll have to check out the book you mention above from the lawyer in Alaska—as a full-time lawyer myself, I’m curious to see how Mr. Boyer manages both.
You also mention owning a home free and clear within six years. In your experience, is paying off the mortgage a better financial decision than claiming the benefit of the interest deduction on taxes?
Thanks again for a wonderful article.
—Mortimer
Mortimer recently posted…My $7.82, Million-Volume Collection of Books, Movies, and Music
Hi Mortimer,
Definitely check out Michael Boyer’s management book. I’m currently reading it and think it’s pretty good – particularly since he has a very similar situation to you.
When to pay off the debt on your home is a tough call. It’s personal. Of course you can argue that it makes more sense to invest it at 7-8% or more instead of paying off the loan at 4%. If you’re still in a growth mode, I wouldn’t argue with that.
But at some point as you build your equity base, I find income, simplicity, and safety start becoming more important. It gives you increased peace of mind as you focus on other more important things in your life.
So at some point if you’re choosing to continue owning a home, paying it off for good can also make a lot of sense.
This is one of those fun topics we could all argue about over a big game of Risk as I take on Mr 1500 at FinCon in 2016:)
Chad Carson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Thank you for your article.
I am a strong believer in real estate. I live in Montreal. My technique is to buy regular properties for an agent and renting it out via airbnb. I am working hard, but my cash flow per property is 5 to 10 higher than regular rentals.
I love real estate. <3
Alain Guillot recently posted…Save taxes with the Transportation Tax Credit
Thanks Alain,
I hope to use AirBbnB on some rentals in the future. I have heard others have had success with certain type properties. Best of luck with your rentals. Glad to hear it’s working in Montreal.
CoachCarson recently posted…Gratitude: A Scientifically Proven Practice For a Happier Life
Great post on the basics of real estate investing! I’ve done one (commercial) deal in the past, which turned out great, but I also learned my personality struggles with managing/owning property. I’m a worrier by nature and get too caught up in the things that “could” go wrong, even though they probably won’t (at least not all of them at once!). Therefore I’ve stuck with REIT’s instead. But your post certainly includes a lot of great info.
Thanks for sharing it.
John
John recently posted…How to create your own debit card
Hi John,
You make a great point about knowing your own personality. To each his or her own. I’m not as knowledgeable about REITS, but I think the principles are the same and if you do your homework, I’m sure it can payoff. Thanks for sharing.
CoachCarson recently posted…The Best of 2015: My 10 Most Popular Articles of the Year
Great article….thanks for sharing. Sparking interest in real estate.
Glad to provide the spark:) Thanks Janie.
CoachCarson recently posted…Gratitude: A Scientifically Proven Practice For a Happier Life
Great post and very interesting to read how it’s done in other countries. Our biggest challenge has been finding the right property managers – as we have houses in three different cities and need three managers. The right management makes all the difference – I personally don’t like dealing with tenants – having good PM’s means I can travel and leave all the hard stuff to them!
Emma | Money Can Buy Me Happiness recently posted…10 Ways I’m Treating My Financial Insecurity
Emma,
Agree on the management piece. That’s the key to the whole deal. I like to group my properties in similar locations so that I can get some efficiency with one management system that works well. But it seems like you’ve been able to make it work for you. Congrats. And I’ve bookmarked your blog. Love what you’re doing.
CoachCarson recently posted…Gratitude: A Scientifically Proven Practice For a Happier Life
Thanks Coach. It took a while to get to this stage – we’ve had one manager run off with two months of rent. Then another who didn’t run the correct background checks so the tenant didn’t pay rent and had to be evicted – and manager subsequently fired. I can look back on it and laugh now but it was very stressful at the time.
Great article! We are currently house hacking by renting out the other unit in our duplex and are currently under contract to buy another duplex which should close in mid January. Both of these properties are a very important piece to our early retirement plans.
I also am a member of Bigger Pockets and they are certainly a great resource. I love having a knowledgeable community who is able to answer questions as we enter this next phase of real estate investment. I look forward to checking out your blog.
Mrs. SimplyFinanciallyFree recently posted…I Haven’t Shampooed My Hair for a Year
Congrats on the house hacking success and the new duplex under contract. Exciting!
Biggerpockets.com is the best in my opinion. I’ve gotten to know the owners and some employees this year, and they do it right and keep their users first. And because of that it attracts a great mix of investors – new and experienced.
Thanks for checking out my blog.
CoachCarson recently posted…Gratitude: A Scientifically Proven Practice For a Happier Life
Enjoyed the piece, Chad! And thanks for the mention.
I was also a real stock fan and later index fund adherent (and still am a bogle head)… I did the classic Peter lynch (like when it came out, to date myself) as a gateway drug into stocks…..then on to everything by and about Buffett and Berkshire and eventually to mostly index funds and efts, very low fee, broad based bogle like…
But how about real estate and where the heck does it come in… That did come from a few sources.. For me it was about so many things, some practical and some deeper. Like, for example., I realized all my summer property maintenance and construction labor jobs (even an odd job business as a teen) left me some pretty good experience, and then I had the capital and credit; plus reading the classics in that canon (Leigh Robinson, jay p decima, Robert Irwin, etc), I realized I had the ability to take on that asset class with more than a REIT, and my job was flexible and rentals tight in my city. So, yes, the Tara’s aligned for me.. But I meet a new small time landlord about every few days now…so the conditions are ripe for many I suspect.. A couple of sources online have put mom and pop rentals at record numbers I recall..
I think that is key–lifestyle and abilities. And if it fits, you can get some strong returns, and have a real hand in the business, something I don’t get in stocks…heck, I even like the exercise from working on rentals… So if it works for you, you get real checks every month, which increase like dividend aristocrats as rents for up, and appreciation that can be powerful…meanwhile the tenant pays down the debt.. A great formula, so I like real estate as part of anyone’s retirement plan if it fits their career, lifestyle, and they are willing to study and learn a it about housing others (which I also think has a major benefit to society when done well )… Great topic I could go in forever..thanks again
Good Post…. I like it Thanks for Sharing
Great Post and Nice Article.Its Very Informative Post.I like it.Thanks for Sharing.
Am in Africa Particulary Uganda, I own 10 duplex units, But down here in africa the real estates systems are not well established, Mgmt companies are not well established, still hustling to manage, What i have resorted to is raising my own team to manage these properties for me, as i focus on buying more, I loved this post for its good to hear from people of like mind, uganda is stilla third world country but realestate still is the best , am currently working but am planning to retire at age 28years, for currently am building more 20 units using the rent that comes from the 10 i have, slow but sure will get there.
Hopefully one time i will own properties arround the world thats my dream Guys. am first building a foundation at home. the money i get doubles that of my manager, if i quadripple my managers salary then i will retire, 28years is my target.
I might be off topic but real estates is fun. thanks for the testimonies am fully charged to continue after knowing that you guys are there on that side of the world doing the same
Awesome article! We are right now house hacking by leasing the other unit in our duplex and are as of now under contract to purchase another duplex which ought to shut in mid January. Both of these properties are an essential piece to our initial retirement arranges.
Thinking about the future would definitely be smart when considering which property to select.Great Post and Nice Article.I love how much thought you have put into this post!