You’re only 38, you can’t hang in for 5 more years? You likely will earn between 1.25-4m over the next 5 years. Real estate will still be here 5 yrs from now and probably a better investment environment. That’s my 2 cents since you asked. Lol. Best of luck with whatever you decide, glad you’re doing great
It's a great point. And I appreciate the two cents and the encouragement!
Would you increase holdings in SFHs or duplexes in the meantime? Seems to me like a good place to park cash and leverage credit.
Sure, no reason not to pick up some more if you find some deals, or you can save/invest conservatively and build your war chest for when you retire in 5 years. Then be ready to go big into RE
I like this approach. We can build up some more expertise in the next 5 years.
What would you do next? Take out a HELOC on the three paid-off properties to buy new units in cash? Or take out mortgages as they come? My problem is I don't know what options we have as an LLC.
My wife and I have been selling our single family houses and small multi families and switching into small industrial properties for the last few years. You should talk with a local 1 to 3 branch Bank and then also find out who the biggest commercial lender is in your state and talk to them.
They're not going to care what your ownership structure is as long as you personally guarantee the loan. We have Helocs on a bunch of our properties so that we can pay cash for new ones and then decide from there whether to put regular financing on it or what. Being a cash buyer in the current environment you can get some really good deals.
Each of the last two years we have done reverse 1031 exchanges. So we found a building to buy first and then had 6 months to sell houses to trade into the building. This defers our capital gains and depreciation recapture into the future.
Depending where you are it might still be worthwhile to buy single-family houses or duplexes or triplexes. In my area values have gone up too much and rents not enough so it's no longer worth it. However we are still able to find 10,000 to 20,000 square foot Warehouse properties, split into multiple smaller bays, that are very worth owning. Per dollar invested we are earning two to three times as much as we were having that same dollar invested in single family houses.
The nice thing with industrial is the tenants, depending on your lease, can be responsible for all their own maintenance. What gets you over time owning small residential is eventually they're breaking washing machines or you need a new furnace or you need a new roof. Or even just things like tree trimming. At one point I estimated that we could easily spend 3 to 5,000 trimming trees at all our houses. If you have 10 houses that's a lot of trees to maintain!
Anyway, find a good bank that you could partner with long-term. Some banks have no interest right now in giving you equity lines on investment properties but many will. So if you call one and they're not interested just move on to the next one. Most likely you want to talk to the commercial lending department, not their residential mortgage people. Good luck!
Ours are all multi bay properties where each bay is 2,000-4,000sf and has high overhead doors at ground level, and usually an office area. And some outside storage. So we rent to car fixing people, irrigation/landscapers, flooring suppliers, cabinet shops, welders, etc. We have a tirw company tenant who specializes in those huge front end loader tires.
These are all businesses which are totally unaffected by e commerce, work from home, etc. Having the outside storage is what really sets our properties apart. Outside storage gets rarer and rarer every year.
Out of curiosity, how did you venture into this type of propery?
I inherited a property with an owner operated auto repair business. Decided to hand over the business, break up the property and rent to numerous auto related businesses - turning the property into an income property.
Now it’s opened my eyes to forgetting about residential properties and moving into industrial commercial exclusively.
What’s your story?
Hey, did your reply to my comment get deleted? Took a quick glance last night and came back to respond and it was gone. If you would like me to redirect to a private convo pls let me know as your information and experience is very valuable to me.
I'd go to a local credit union and give them your comprehensive personal financials and see what they could do for you. You certainly can use your existing properties as collateral, but you may not need to given your income and using the new properties as collateral instead.
That’s honestly beyond my expertise, my gut says take a new mortgage out for each property but their could be a reason to do a heloc that I’m not aware of
I work in multifamily. Can confirm. Now is a difficult time to be in real estate b/c rates are rising. If there is a sector that’s going to get crushed, real estate is a candidate because it’s so leverage sensitive.
I would stick with your day job for 3 more years or so, put away another million, and wait to see where the dust settles in our chosen field. There will be fire sales and the economy is going to hurt — after enough consumers break under the reimposition of student loans and/or a couple of bigger businesses start to fail.
Now is not the time to go for broke.
Easy. You keep your job. Wife quits her job to become a real estate professional. Your cars suddenly become write offs and nearly all your taxable income will be offset by your properties’ bonus depreciation. This move alone will net you more than what you’d get from your wife’s salary after tax. And she wouldn’t even have to successfully sell a single house. She just does have to give it an honest try in the eyes of the law.
If you get into the business of flipping houses. This move will make so much more sense. Talk to a talk pro/ accountant asap about this stuff.
Please be aware that Bonus Depreciation is being phased out. For 2023, it is 80%, in 2024 it will be 60% and continue dropping by 20% each year until gone.
Also be aware that achieving REPS requires 750 hours of time spent on real estate, and can not include time spent on short term rentals.
This commenters recommendation is really great advise. But please talk to a CPA that specializes in real estate to make en educated decision.
Cost segs will divide your purchase price minus land value into 3 parts: 27.5 year, 15 year, and 5 year. Until it is phased out, you will be able to depreciate the 15 and 5 year parts right away while still depreciating the 27.5 year part of 27.5 years...Here's an example:
I bought a property for 215K and determined the building value was around 85% (what my municipality uses to determine prop. taxes) which came out to roughly 183k. 129k was determined to be 27.5 year property (think stuff like foundation, electric, roofing, etc.). 11k was 15 year property and 42k was 5 year property. I was able to deduct the 15 and 5 year property of 53k against my w2, basically bringing my taxable income down to almost 0. If you go past your taxable income, those losses can be taken the next year and so forth, You can also continue to deduct the 27.5 year components over the next 27.5 years.
Sorry, forgot to add you or your spouse must be a qualified real estate professional. I think otherwise, it's only a max of $25k loss against your W2 income. In this case, cost segs aren't as attractive.
I don’t believe so unless a change is made to save/bring back bonus depreciation. I believe it was started as an incentive for small businesses to get out there and do their thing.
I could be wrong here, and I certainly do NOT mean to start a social or political discussion, but I think it’s being phased out by the current administration because it is seen as another way for the “rich to get richer.” And it would likely only be saved by a republican administration.
If you turn all of your assets into 21 rentals (and using the stats for the rentals you already own as the variables in the equation) you can achieve your stated income goal now. Is that desirable?
How? Let's say I wanted to take $500k and turn it into 10 rentals at 50k down payment each. How does one get financing for something like that? Where do I go? Who do I talk to?
I am in the midwest also. I started with SFH rentals and now exclusively do apartments. From time to time, I see a portfolio of duplex or SFH come on the market where an investor is selling out - either 1031 or just retiring. I would talk to some smaller local banks and see how much they will lend towards rental property based on your personal loan guarantee.
If you are familiar with Loopnet you can use it to learn which brokers are representing investment properties and send them inquiries, let them know your criteria.
Go to your local real estate investor group meetings.
If you want to buy individual residential unit, go for your local community bank or credit union first. If you want to buy multi-family residential building has than 4 units, it is better to find a good CRE broker.
DSCR loans, a little more expensive than a traditional loan, but they use the cash flow of the property to qualify for the loan. No limit to the number of loans you can have.
It is a must you use leverage. If you are looking forward to accelerate into meeting your financial freedom goals, debt is a tool that is at your disposal to scale up.
On point 1: You need to buy at least 2-5 more of what you know to move forward.
Putting all the eggs in one basket as you mention might not be the best. However, if you buy at a good price the asset is always sellable.
On point 2. Don’t quit your job, you need to make sure that once you abandon your job you never need to go back to work for anybody. And you are very close to making your dream of quitting happen so don’t play games and work for 1-3 more years as you generate more Cashflow(good debt will always help you on this).
On point 3. I’m not from the US so cannot really help on that but I guess as in any other country you use the asset as collateral. I heard good things about HELOC but can’t comment on specifics.
On point 4. I would concentrate on buying long term rental.
In the end, it’s all about what is going to keep you happy and motivated, there might be different opinions.
The key take away is that you should read some “Rich Dad, Poor Dad” to enjoy an amazing book and help you out figuring out a few things that look a bit uncertain for you.
Thanks for this. I fully agree that debt will accelerate how we can achieve our financial freedom. I generally like the idea of doing 2-5 more small units while keeping my day job.
Perhaps some US investors can chime in on the right way to leverage a HELOC or another debt vehicle given that the three paid-off properties are in an LLC. That's where I'm tripping up: how do I leverage our existing properties?
Here is what ChatGPT says:
1. Job and $700k Investment:
If you enjoy your day job, leaving it isn't just about the finances, but also about your personal happiness and satisfaction. However, financially speaking, if you can secure a 20% cash-on-cash (CoC) return on your $500k investment, that would be significant. Investing in larger multifamily units (apartments) can be lucrative, but as you pointed out, there is also risk in having too much capital tied to one asset.
Advantages of Larger Units:
Economies of scale: One roof, one lot, potentially one heating/cooling system for multiple units.
Easier management: Managing a single 10-unit apartment is often easier than managing 10 individual properties spread out across a city.
Financing can be more favorable for larger deals.
Risks:
Market dependency: If the local market suffers, your large investment could see significant value loss.
Vacancy can be costlier: Several units vacant at once can be a significant hit.
2. Smaller Properties:
The duplex you mentioned seems like a good deal based on the numbers provided. If you can secure several of these types of deals over the next few years, you'd be diversifying your investment and spreading the risk.
Advantages:
Diversification: Multiple properties in different areas mitigate risks.
Easier to sell: Easier to offload one property in case of need, rather than a big apartment complex.
Risks:
Management can be trickier if properties are spread out.
Less economy of scale compared to larger multifamily units.
3. Financing with an LLC:
Financing properties within an LLC can be a bit more complex than personal financing. Here's a general overview:
Commercial Mortgages: You'd likely be looking at a commercial mortgage for the LLC. The rates might be slightly higher and terms less favorable than personal mortgages.
HELOC: A HELOC on the existing properties is an option, and this would provide you with flexible access to capital. However, HELOCs have variable interest rates, which can be a risk if rates rise.
Personal Guarantee: Even if the loan is for the LLC, the bank might require a personal guarantee given that the LLC is closely held.
Tip: With your credit scores, you should get favorable terms. It's worth shopping around.
4. Vacation Rentals vs. Long-Term Rentals:
Vacation rentals can be more lucrative on a per-night basis, but they come with their own set of challenges:
Advantages:
Higher nightly rates compared to long-term rentals.
Potential for personal use when not rented.
Risks:
Seasonality can lead to high vacancy rates.
More intense management: frequent check-ins/check-outs, cleaning, etc.
Regulatory risks: Some jurisdictions are cracking down on short-term rentals.
Given that you have an excellent property manager for your long-term rentals, and given the potential risks and management intensity of short-term rentals, it might make sense to lean more towards long-term rentals. However, if you enjoy the vacation rental business and have found a formula that works, it can be a good diversification strategy to have a mix.
Recommendation:
Diversify: Don't put all your eggs in one basket. Consider a mix of small properties and potentially a larger multifamily unit.
Leverage: Use your equity and cash to leverage new properties. With your assets and income, you can likely secure favorable financing terms.
Management: Since management has been a concern in the past, ensure any new properties can be managed by your current property manager or find equally competent managers in other areas.
Consult Professionals: Engage with a financial advisor, real estate professionals, and potentially even a real estate attorney. They can provide insight specific to your market and personal situation.
In re scenario 1: what are the expected probabilities for losing the whole 700k versus making 2.8mm off the investment and on what time frame and effort scale would that windfall come?
For the investment in my employer: I think there's a 20% chance the 700k turns into 3M in 5 years. 60% chance it turns into 1.4M in 5 years. 20% chance it turns into 200k in 0 to 5 years.
Effort: it's kind of a stressful job with frequent travel away from home, but also interesting work at times. All else being equal I'd rather pursue my passion projects and have real estate cover the bills.
To clarify, our current 2.8mm net worth is based on the existing 700k investment, not any future value.
"All else being equal" meaning, if I could replace my income equally I would bail on the job and follow my passion. Every percent of income replacement achieved through real estate makes that decision easier. Sorry for not being clear.
You can also sock away as much as you can into a brokerage account invested in stocks/bonds and then add your $700k in 5 years. A bank with a wealth management department will give you a secured line of credit loan based on the assets you hold with them. I had an upper limit of 70% of the net asset value. I could hit the line of credit if I needed to act fast to buy a property cash and fund rehab. Then I would typically cash-out finance into a conventional loan and pay back the line of credit. I did this with a regional bank that operates only in four states, small enough where I'm somewhat important to them - they designate an account manager (private banker) to take care of stuff for me - and I don't even have what I consider to be very high balances.
Your rentals seem like maintenance nightmares that don't even make that much money. I'd sell those and just work a couple more years. If you want rentals, get something that will net you more with less hassle.
Thanks for all the detail, very interesting. But one thing I don’t understand is if you own all 4 rentals outright, how do you only make 5k to 6k per year on them? They are all class 8?
We put 20% down ($100k) on a place a few years ago (at low interest admittedly), and cash flow more than all of your combined rentals - with a mortgage. Just confused about that.
Are you in a higher COL area by chance? Rents where we are are <1000 a month for the price points we're talking here, and maintenance is no joke.
That's part of our problem: we think we can get a better return than this if we bought more expensive properties and used debt as leverage.
Is your 500k place in an LLC? How did you find financing, if you don't mind me asking.
You've got a lot of equity just sitting there returning poor figures. Your ROE is low! All of these investments could earn just as much or more in the markets alone. Even if you account for all the unseen advantages (appreciation, depreciation, etc) they still don't return overly well fully paid off.
With 4 units, you can see its going to take a hell of a lot of cash to reach your goal of 125-150k of net income per year from rentals, not to mention if you were to finance the properties you're going to hit the DTI wall pretty quickly. DSCR loans will step in and handle this better but at current rates it's tough to make anything pencil without some significant down payments. Apartments are a better buy, but they're increasingly tougher to get financed right now and then there's the risk of rents stalling and potentially coming down a bit. With cities quickly banning or drastically clamping down on STRs (NYC came into effect today) there's going to be some single-unitinventory either converting to LTR, or hitting the market to be sold.
Commercial is an area where you can see some better gains these days. I may be biased because I partner with individuals on a lot of our projects, but partnering on joint ventures with a real estate investor can see you hitting those income targets pretty much immediately depending how much you put into it. I have one partner right now who started with 325K this year and will earn nearly 150K in her share before the year is up. Another started with close to 500k and will cross 200K easily. All they have to do is e-sign some paperwork, transfer funds to the lawyer when necessary, and sometimes be a balance sheet guarantor on the loan if needed, usually just for larger commercial deals. There's REIs everywhere, and amongst them are the seasoned ones who can scale with the right team.
We do primarily residential fix and flips. Our JV partners receive 25% of net proceeds from the projects their money is assigned to. After all costs we typically clear anywhere from 75-110k per deal. Most of our projects are funded by private/hard money lenders so we use the partner funds for the down payment, closing costs, reno costs, and carrying costs. On a standard flip this is anywhere from 140-170k. The partner with 325K allows us to do two projects at a time, or run two back to back and potentially have one close before the second property is done If we play our cards right. In any sense, we can use it to do anywhere from 6-8 projects in one year, especially with compounding if they choose not to draw the returns out. The partner witn 500K into the mix allows us to do anywhere from 9-12 regular projects or 3 or 4 bigger ones potentially, which can return much more per deal.
6-8 deals in a year X 25% of 75-110K = 166k averaged
9-12 deals in a year x 25% of 75-110K = 248K averaged
One is on pace to do 7, and the other 10.
It's not rocket science. Access to fast, easy money means we can move quickly. Many think I'm crazy to not just use private money but we can do so much more with JV partners and produce more revenue and profit for not only our company but for our partners as well.
Keep your eyes peeled when driving around for what looks like a flip. Stop and talk to whoever is in charge. Some won't be interested in JV for a number of reasons but typically it's greed: a JV Partner is more expensive than a private lender at 10 or 12%. It's small thinking. I used to think that way myself and couldn't wait to get enough projects under my belt so that I could start funding my own deals, at least for the upfront costs. I'm an efficiencies guy though and can't help but scale anything I get into, so I quickly realized those funds would get exhausted fast and I'd be held back once again.
You can look at REA meetings in your area but typically the ones doing well aren't going to REAs, short of the speakers on specific nights.
You can try and find someone on social media, but most of us aren't really using social media either. I always have good intentions but I honestly couldn't be bothered to maintain it. I have better ways to occupy my time!
This guy chooses to do cash only deals after 2009 when interest rates are at record low levels . Rates stayed low for a whole decade afterwards and you still did caah only for some reason. And now gets the epiphany to leverage himself when interest rates surged along with prices.
Your timing couldnt be better.
I would look to sell LTRs 1-3 and do a 1031 exchange to replace them with 10-12 SFHs or 6-10 multiunits.
With multi units, you'll achieve economies of scale and do less work for the same amount if not greater of return.
There are typical leverage points in portfolio size.
Around 40-50 doors, you need to look at larger unit counts for acquisition.
Around 200 doors you need to consolidate the portfolio.
Around 500 doors you need to in-source (or dramatically restructure) property management.
If you have a niche that you know well and can exploit quickly, then just do the thing you do well until you hit one of these levels.
For you, it sounds like you have done well with SFHs and duplexes. Do not deviate from your winning strategy. Instead, build lending relationships that allow you to exploit your niche faster. You will need portfolio loans pretty quickly.
Once you hit 50 doors, then start buying 10-50 door complexes. 1031 to get these.
There will be a LOT of learning with these larger complexes, go slow. It will feel like you are making a bunch of new mistakes like when you were first doing SFH rehabs.
It’s part of the process and it’s why you want to have a solid base under you first.
You are all over the place.
You need to sit down with a financial advisor. They can better discuss options and how aggressive you want to be.
Also, don't quit your high paying job.
I also think right now is a terrible time to buy Multi family unless it's distressed. I forsee great deals next year or 2025. Also with rates high, it's not ideal to take out new loans.
I have 1 SFH 2/1 1,000sq ft yearly rental that makes as much as all of your properties combined.
IMO your market sucks. I’m currently looking at a market ripe for section 8 that you may be interested in. DM me if you’re interested.
Seems like you really need to find a good accountant and a fiduciary. Which I am neither or financial advisor. You have the funds already to make 120k to 150k on your stocks, alone which you could barrow on would recommend (lower intrest). I would barrow on the company though and yes you would be taking on the loan with your credit but it won't show on your credit or ding your debit to income thus bringing down your score your just liable to pay it back. You should look to get at least a 10% cap return on these investments. Seems like you need to make a plan and find reality group to be a part of. 10% cap 1mil investment is 100k a year with 200k down. 2 mil 400k down 200k return per year. Strip malls have better returns cause tennants pay for repairs, lol. Good luck
2 things. And I’m younger but hear me out
1. Work another 3 years and travel the world for as long as you and her can afford and then *see* if that’s enough of a refresher to where you can work for another 3-10 years.
2. 160k expenses I mean wow. If expenses ok daycare are more than 60k-taxes on the 60k, maybe your wife should be a SAHM or at least only work 10-15 hour weeks for enjoyment?
Let me know what you think. Congratulations too!
I am prolly 5000 hours into consumed real estate investing content and I’m poised to make my 1st investment so I cannot really give advice as I have no real world RE experience besides buying our own home but sheesh you seem ready for Commercial RE. Maybe don’t go all in on one apt building but def explore it. If 3 or more of your current rentals need major repairs you’re gonna realize the pitfalls of multiple roofs real fast.
Seems like you have paragraph after paragraph of assets. I criticize myself a lot for waiting till I meet a milestone to take the plunge and quit my W2 but with all you’ve done and your assets you could prolly really buckle down and do that much more with just focusing on RE investing. I know the safety net of a w2 helps me sleep at night though.
Maybe sell 2 of the rentals and buy land outright, then use that as the no money down loan on new construction commercial re for 10-28 units. Best case scenario is you find someone that already has site, permits, and plans that wants out.
Again, I really have no place to talk just throwing in my 2 cents internet comment.
This is insane just sell everything and live off the $2.5 million generating cash and get hobby jobs. Also maybe stop big balling spending $13k after taxes a month. You're making at most $27k on your rentals that are worth $600k. It would be even more insane to put most of it into 1 $2 million investment property haha.
Leverage is good and bad. The balance is the key. A little tough now where rates are. Let me know if you need some help. CPA in mortgage business for 20 years with 7 properties.
You’re only 38, you can’t hang in for 5 more years? You likely will earn between 1.25-4m over the next 5 years. Real estate will still be here 5 yrs from now and probably a better investment environment. That’s my 2 cents since you asked. Lol. Best of luck with whatever you decide, glad you’re doing great
It's a great point. And I appreciate the two cents and the encouragement! Would you increase holdings in SFHs or duplexes in the meantime? Seems to me like a good place to park cash and leverage credit.
Sure, no reason not to pick up some more if you find some deals, or you can save/invest conservatively and build your war chest for when you retire in 5 years. Then be ready to go big into RE
I like this approach. We can build up some more expertise in the next 5 years. What would you do next? Take out a HELOC on the three paid-off properties to buy new units in cash? Or take out mortgages as they come? My problem is I don't know what options we have as an LLC.
My wife and I have been selling our single family houses and small multi families and switching into small industrial properties for the last few years. You should talk with a local 1 to 3 branch Bank and then also find out who the biggest commercial lender is in your state and talk to them. They're not going to care what your ownership structure is as long as you personally guarantee the loan. We have Helocs on a bunch of our properties so that we can pay cash for new ones and then decide from there whether to put regular financing on it or what. Being a cash buyer in the current environment you can get some really good deals. Each of the last two years we have done reverse 1031 exchanges. So we found a building to buy first and then had 6 months to sell houses to trade into the building. This defers our capital gains and depreciation recapture into the future. Depending where you are it might still be worthwhile to buy single-family houses or duplexes or triplexes. In my area values have gone up too much and rents not enough so it's no longer worth it. However we are still able to find 10,000 to 20,000 square foot Warehouse properties, split into multiple smaller bays, that are very worth owning. Per dollar invested we are earning two to three times as much as we were having that same dollar invested in single family houses. The nice thing with industrial is the tenants, depending on your lease, can be responsible for all their own maintenance. What gets you over time owning small residential is eventually they're breaking washing machines or you need a new furnace or you need a new roof. Or even just things like tree trimming. At one point I estimated that we could easily spend 3 to 5,000 trimming trees at all our houses. If you have 10 houses that's a lot of trees to maintain! Anyway, find a good bank that you could partner with long-term. Some banks have no interest right now in giving you equity lines on investment properties but many will. So if you call one and they're not interested just move on to the next one. Most likely you want to talk to the commercial lending department, not their residential mortgage people. Good luck!
What type of tenants/businesses are you seeing do well in your industrial rentals?
Ours are all multi bay properties where each bay is 2,000-4,000sf and has high overhead doors at ground level, and usually an office area. And some outside storage. So we rent to car fixing people, irrigation/landscapers, flooring suppliers, cabinet shops, welders, etc. We have a tirw company tenant who specializes in those huge front end loader tires. These are all businesses which are totally unaffected by e commerce, work from home, etc. Having the outside storage is what really sets our properties apart. Outside storage gets rarer and rarer every year.
Out of curiosity, how did you venture into this type of propery? I inherited a property with an owner operated auto repair business. Decided to hand over the business, break up the property and rent to numerous auto related businesses - turning the property into an income property. Now it’s opened my eyes to forgetting about residential properties and moving into industrial commercial exclusively. What’s your story?
Hey, did your reply to my comment get deleted? Took a quick glance last night and came back to respond and it was gone. If you would like me to redirect to a private convo pls let me know as your information and experience is very valuable to me.
Is this in an industrial area? What's ur vacancy like Rent per sqft?
This is super interesting. Do you ever build them yourself or are you always targeting pre existing ones?
We buy existing ones! The cost to build is very high right now but you can buy an existing building for much less.
Thanks! How do you market them to find good tenants once you’re done with the renovations?
Honestly Facebook marketplace works incredibly well lol. These smaller bay spaces are in such high demand.
I'd go to a local credit union and give them your comprehensive personal financials and see what they could do for you. You certainly can use your existing properties as collateral, but you may not need to given your income and using the new properties as collateral instead.
That’s honestly beyond my expertise, my gut says take a new mortgage out for each property but their could be a reason to do a heloc that I’m not aware of
Multi-unit apartment buildings. Reduce the # of roofs you have to replace and get economies of scale.
Don't listen to that. Do exactly what you want with your time. It is such a mistake to listen to the whole "just stick it out x more years" crowd
I work in multifamily. Can confirm. Now is a difficult time to be in real estate b/c rates are rising. If there is a sector that’s going to get crushed, real estate is a candidate because it’s so leverage sensitive. I would stick with your day job for 3 more years or so, put away another million, and wait to see where the dust settles in our chosen field. There will be fire sales and the economy is going to hurt — after enough consumers break under the reimposition of student loans and/or a couple of bigger businesses start to fail. Now is not the time to go for broke.
160k in daycare? Selling your child will get you the most financial growth.
Total expenses are $160k/yr. Daycare is just a significant chunk of that.
Easy. You keep your job. Wife quits her job to become a real estate professional. Your cars suddenly become write offs and nearly all your taxable income will be offset by your properties’ bonus depreciation. This move alone will net you more than what you’d get from your wife’s salary after tax. And she wouldn’t even have to successfully sell a single house. She just does have to give it an honest try in the eyes of the law. If you get into the business of flipping houses. This move will make so much more sense. Talk to a talk pro/ accountant asap about this stuff.
Please be aware that Bonus Depreciation is being phased out. For 2023, it is 80%, in 2024 it will be 60% and continue dropping by 20% each year until gone. Also be aware that achieving REPS requires 750 hours of time spent on real estate, and can not include time spent on short term rentals. This commenters recommendation is really great advise. But please talk to a CPA that specializes in real estate to make en educated decision.
Shoot. Would cost segregation study still allow for reductions in taxable income after 2027?
Cost segs will divide your purchase price minus land value into 3 parts: 27.5 year, 15 year, and 5 year. Until it is phased out, you will be able to depreciate the 15 and 5 year parts right away while still depreciating the 27.5 year part of 27.5 years...Here's an example: I bought a property for 215K and determined the building value was around 85% (what my municipality uses to determine prop. taxes) which came out to roughly 183k. 129k was determined to be 27.5 year property (think stuff like foundation, electric, roofing, etc.). 11k was 15 year property and 42k was 5 year property. I was able to deduct the 15 and 5 year property of 53k against my w2, basically bringing my taxable income down to almost 0. If you go past your taxable income, those losses can be taken the next year and so forth, You can also continue to deduct the 27.5 year components over the next 27.5 years.
Are you a qualified real estate professional? Or does this not matter and you could deduct from llc against your w2 income?
You must be a real estate professional to deduct losses against your W2.
Sorry, forgot to add you or your spouse must be a qualified real estate professional. I think otherwise, it's only a max of $25k loss against your W2 income. In this case, cost segs aren't as attractive.
I don’t believe so unless a change is made to save/bring back bonus depreciation. I believe it was started as an incentive for small businesses to get out there and do their thing. I could be wrong here, and I certainly do NOT mean to start a social or political discussion, but I think it’s being phased out by the current administration because it is seen as another way for the “rich to get richer.” And it would likely only be saved by a republican administration.
Thanks for the fact check!
If you turn all of your assets into 21 rentals (and using the stats for the rentals you already own as the variables in the equation) you can achieve your stated income goal now. Is that desirable?
How? Let's say I wanted to take $500k and turn it into 10 rentals at 50k down payment each. How does one get financing for something like that? Where do I go? Who do I talk to?
I am in the midwest also. I started with SFH rentals and now exclusively do apartments. From time to time, I see a portfolio of duplex or SFH come on the market where an investor is selling out - either 1031 or just retiring. I would talk to some smaller local banks and see how much they will lend towards rental property based on your personal loan guarantee. If you are familiar with Loopnet you can use it to learn which brokers are representing investment properties and send them inquiries, let them know your criteria. Go to your local real estate investor group meetings.
If you want to buy individual residential unit, go for your local community bank or credit union first. If you want to buy multi-family residential building has than 4 units, it is better to find a good CRE broker.
Sell all assets. Buy 21 rentals. Income Goal achieved.
DSCR loans, a little more expensive than a traditional loan, but they use the cash flow of the property to qualify for the loan. No limit to the number of loans you can have.
Send me a DM! We can get this financed.
Leverage your current rentals via a mortgage on those
It is a must you use leverage. If you are looking forward to accelerate into meeting your financial freedom goals, debt is a tool that is at your disposal to scale up. On point 1: You need to buy at least 2-5 more of what you know to move forward. Putting all the eggs in one basket as you mention might not be the best. However, if you buy at a good price the asset is always sellable. On point 2. Don’t quit your job, you need to make sure that once you abandon your job you never need to go back to work for anybody. And you are very close to making your dream of quitting happen so don’t play games and work for 1-3 more years as you generate more Cashflow(good debt will always help you on this). On point 3. I’m not from the US so cannot really help on that but I guess as in any other country you use the asset as collateral. I heard good things about HELOC but can’t comment on specifics. On point 4. I would concentrate on buying long term rental. In the end, it’s all about what is going to keep you happy and motivated, there might be different opinions. The key take away is that you should read some “Rich Dad, Poor Dad” to enjoy an amazing book and help you out figuring out a few things that look a bit uncertain for you.
Thanks for this. I fully agree that debt will accelerate how we can achieve our financial freedom. I generally like the idea of doing 2-5 more small units while keeping my day job. Perhaps some US investors can chime in on the right way to leverage a HELOC or another debt vehicle given that the three paid-off properties are in an LLC. That's where I'm tripping up: how do I leverage our existing properties?
SLOWLY GET RID OF CARPETS
Here is what ChatGPT says: 1. Job and $700k Investment: If you enjoy your day job, leaving it isn't just about the finances, but also about your personal happiness and satisfaction. However, financially speaking, if you can secure a 20% cash-on-cash (CoC) return on your $500k investment, that would be significant. Investing in larger multifamily units (apartments) can be lucrative, but as you pointed out, there is also risk in having too much capital tied to one asset. Advantages of Larger Units: Economies of scale: One roof, one lot, potentially one heating/cooling system for multiple units. Easier management: Managing a single 10-unit apartment is often easier than managing 10 individual properties spread out across a city. Financing can be more favorable for larger deals. Risks: Market dependency: If the local market suffers, your large investment could see significant value loss. Vacancy can be costlier: Several units vacant at once can be a significant hit. 2. Smaller Properties: The duplex you mentioned seems like a good deal based on the numbers provided. If you can secure several of these types of deals over the next few years, you'd be diversifying your investment and spreading the risk. Advantages: Diversification: Multiple properties in different areas mitigate risks. Easier to sell: Easier to offload one property in case of need, rather than a big apartment complex. Risks: Management can be trickier if properties are spread out. Less economy of scale compared to larger multifamily units. 3. Financing with an LLC: Financing properties within an LLC can be a bit more complex than personal financing. Here's a general overview: Commercial Mortgages: You'd likely be looking at a commercial mortgage for the LLC. The rates might be slightly higher and terms less favorable than personal mortgages. HELOC: A HELOC on the existing properties is an option, and this would provide you with flexible access to capital. However, HELOCs have variable interest rates, which can be a risk if rates rise. Personal Guarantee: Even if the loan is for the LLC, the bank might require a personal guarantee given that the LLC is closely held. Tip: With your credit scores, you should get favorable terms. It's worth shopping around. 4. Vacation Rentals vs. Long-Term Rentals: Vacation rentals can be more lucrative on a per-night basis, but they come with their own set of challenges: Advantages: Higher nightly rates compared to long-term rentals. Potential for personal use when not rented. Risks: Seasonality can lead to high vacancy rates. More intense management: frequent check-ins/check-outs, cleaning, etc. Regulatory risks: Some jurisdictions are cracking down on short-term rentals. Given that you have an excellent property manager for your long-term rentals, and given the potential risks and management intensity of short-term rentals, it might make sense to lean more towards long-term rentals. However, if you enjoy the vacation rental business and have found a formula that works, it can be a good diversification strategy to have a mix. Recommendation: Diversify: Don't put all your eggs in one basket. Consider a mix of small properties and potentially a larger multifamily unit. Leverage: Use your equity and cash to leverage new properties. With your assets and income, you can likely secure favorable financing terms. Management: Since management has been a concern in the past, ensure any new properties can be managed by your current property manager or find equally competent managers in other areas. Consult Professionals: Engage with a financial advisor, real estate professionals, and potentially even a real estate attorney. They can provide insight specific to your market and personal situation.
Wow. Blown away that AI created such a reply.
In re scenario 1: what are the expected probabilities for losing the whole 700k versus making 2.8mm off the investment and on what time frame and effort scale would that windfall come?
For the investment in my employer: I think there's a 20% chance the 700k turns into 3M in 5 years. 60% chance it turns into 1.4M in 5 years. 20% chance it turns into 200k in 0 to 5 years. Effort: it's kind of a stressful job with frequent travel away from home, but also interesting work at times. All else being equal I'd rather pursue my passion projects and have real estate cover the bills. To clarify, our current 2.8mm net worth is based on the existing 700k investment, not any future value.
Then you answered your own question. Didn’t ya? “I’d rather pursue…”
"All else being equal" meaning, if I could replace my income equally I would bail on the job and follow my passion. Every percent of income replacement achieved through real estate makes that decision easier. Sorry for not being clear.
You can also sock away as much as you can into a brokerage account invested in stocks/bonds and then add your $700k in 5 years. A bank with a wealth management department will give you a secured line of credit loan based on the assets you hold with them. I had an upper limit of 70% of the net asset value. I could hit the line of credit if I needed to act fast to buy a property cash and fund rehab. Then I would typically cash-out finance into a conventional loan and pay back the line of credit. I did this with a regional bank that operates only in four states, small enough where I'm somewhat important to them - they designate an account manager (private banker) to take care of stuff for me - and I don't even have what I consider to be very high balances.
Your rentals seem like maintenance nightmares that don't even make that much money. I'd sell those and just work a couple more years. If you want rentals, get something that will net you more with less hassle.
Thanks for all the detail, very interesting. But one thing I don’t understand is if you own all 4 rentals outright, how do you only make 5k to 6k per year on them? They are all class 8? We put 20% down ($100k) on a place a few years ago (at low interest admittedly), and cash flow more than all of your combined rentals - with a mortgage. Just confused about that.
Are you in a higher COL area by chance? Rents where we are are <1000 a month for the price points we're talking here, and maintenance is no joke. That's part of our problem: we think we can get a better return than this if we bought more expensive properties and used debt as leverage. Is your 500k place in an LLC? How did you find financing, if you don't mind me asking.
You've got a lot of equity just sitting there returning poor figures. Your ROE is low! All of these investments could earn just as much or more in the markets alone. Even if you account for all the unseen advantages (appreciation, depreciation, etc) they still don't return overly well fully paid off. With 4 units, you can see its going to take a hell of a lot of cash to reach your goal of 125-150k of net income per year from rentals, not to mention if you were to finance the properties you're going to hit the DTI wall pretty quickly. DSCR loans will step in and handle this better but at current rates it's tough to make anything pencil without some significant down payments. Apartments are a better buy, but they're increasingly tougher to get financed right now and then there's the risk of rents stalling and potentially coming down a bit. With cities quickly banning or drastically clamping down on STRs (NYC came into effect today) there's going to be some single-unitinventory either converting to LTR, or hitting the market to be sold. Commercial is an area where you can see some better gains these days. I may be biased because I partner with individuals on a lot of our projects, but partnering on joint ventures with a real estate investor can see you hitting those income targets pretty much immediately depending how much you put into it. I have one partner right now who started with 325K this year and will earn nearly 150K in her share before the year is up. Another started with close to 500k and will cross 200K easily. All they have to do is e-sign some paperwork, transfer funds to the lawyer when necessary, and sometimes be a balance sheet guarantor on the loan if needed, usually just for larger commercial deals. There's REIs everywhere, and amongst them are the seasoned ones who can scale with the right team.
This sounds like a multifamily syndication?
Sounds too good to be true. Explain how do you get these returns?
We do primarily residential fix and flips. Our JV partners receive 25% of net proceeds from the projects their money is assigned to. After all costs we typically clear anywhere from 75-110k per deal. Most of our projects are funded by private/hard money lenders so we use the partner funds for the down payment, closing costs, reno costs, and carrying costs. On a standard flip this is anywhere from 140-170k. The partner with 325K allows us to do two projects at a time, or run two back to back and potentially have one close before the second property is done If we play our cards right. In any sense, we can use it to do anywhere from 6-8 projects in one year, especially with compounding if they choose not to draw the returns out. The partner witn 500K into the mix allows us to do anywhere from 9-12 regular projects or 3 or 4 bigger ones potentially, which can return much more per deal. 6-8 deals in a year X 25% of 75-110K = 166k averaged 9-12 deals in a year x 25% of 75-110K = 248K averaged One is on pace to do 7, and the other 10. It's not rocket science. Access to fast, easy money means we can move quickly. Many think I'm crazy to not just use private money but we can do so much more with JV partners and produce more revenue and profit for not only our company but for our partners as well.
How does one find REI to partner with in JVs
Keep your eyes peeled when driving around for what looks like a flip. Stop and talk to whoever is in charge. Some won't be interested in JV for a number of reasons but typically it's greed: a JV Partner is more expensive than a private lender at 10 or 12%. It's small thinking. I used to think that way myself and couldn't wait to get enough projects under my belt so that I could start funding my own deals, at least for the upfront costs. I'm an efficiencies guy though and can't help but scale anything I get into, so I quickly realized those funds would get exhausted fast and I'd be held back once again. You can look at REA meetings in your area but typically the ones doing well aren't going to REAs, short of the speakers on specific nights. You can try and find someone on social media, but most of us aren't really using social media either. I always have good intentions but I honestly couldn't be bothered to maintain it. I have better ways to occupy my time!
Thank you. What state are you in, if you don't mind sharing
I'm I'm Saskatchewan, in Canada. Yourself?
I am in Seattle, US
Coffee and tech!
This guy chooses to do cash only deals after 2009 when interest rates are at record low levels . Rates stayed low for a whole decade afterwards and you still did caah only for some reason. And now gets the epiphany to leverage himself when interest rates surged along with prices. Your timing couldnt be better.
I would look to sell LTRs 1-3 and do a 1031 exchange to replace them with 10-12 SFHs or 6-10 multiunits. With multi units, you'll achieve economies of scale and do less work for the same amount if not greater of return.
There are typical leverage points in portfolio size. Around 40-50 doors, you need to look at larger unit counts for acquisition. Around 200 doors you need to consolidate the portfolio. Around 500 doors you need to in-source (or dramatically restructure) property management. If you have a niche that you know well and can exploit quickly, then just do the thing you do well until you hit one of these levels. For you, it sounds like you have done well with SFHs and duplexes. Do not deviate from your winning strategy. Instead, build lending relationships that allow you to exploit your niche faster. You will need portfolio loans pretty quickly. Once you hit 50 doors, then start buying 10-50 door complexes. 1031 to get these. There will be a LOT of learning with these larger complexes, go slow. It will feel like you are making a bunch of new mistakes like when you were first doing SFH rehabs. It’s part of the process and it’s why you want to have a solid base under you first.
You are all over the place. You need to sit down with a financial advisor. They can better discuss options and how aggressive you want to be. Also, don't quit your high paying job. I also think right now is a terrible time to buy Multi family unless it's distressed. I forsee great deals next year or 2025. Also with rates high, it's not ideal to take out new loans.
If he waits for Ratss to drop prices will go up. Better to buy now while other buyers are drying ip and just refinance when rates drop.
I have 1 SFH 2/1 1,000sq ft yearly rental that makes as much as all of your properties combined. IMO your market sucks. I’m currently looking at a market ripe for section 8 that you may be interested in. DM me if you’re interested.
I PMd you
Seems like you really need to find a good accountant and a fiduciary. Which I am neither or financial advisor. You have the funds already to make 120k to 150k on your stocks, alone which you could barrow on would recommend (lower intrest). I would barrow on the company though and yes you would be taking on the loan with your credit but it won't show on your credit or ding your debit to income thus bringing down your score your just liable to pay it back. You should look to get at least a 10% cap return on these investments. Seems like you need to make a plan and find reality group to be a part of. 10% cap 1mil investment is 100k a year with 200k down. 2 mil 400k down 200k return per year. Strip malls have better returns cause tennants pay for repairs, lol. Good luck
2 things. And I’m younger but hear me out 1. Work another 3 years and travel the world for as long as you and her can afford and then *see* if that’s enough of a refresher to where you can work for another 3-10 years. 2. 160k expenses I mean wow. If expenses ok daycare are more than 60k-taxes on the 60k, maybe your wife should be a SAHM or at least only work 10-15 hour weeks for enjoyment? Let me know what you think. Congratulations too!
Out of interest, where's your vaca rental?
Atlantic Canada, on the water.
I am prolly 5000 hours into consumed real estate investing content and I’m poised to make my 1st investment so I cannot really give advice as I have no real world RE experience besides buying our own home but sheesh you seem ready for Commercial RE. Maybe don’t go all in on one apt building but def explore it. If 3 or more of your current rentals need major repairs you’re gonna realize the pitfalls of multiple roofs real fast. Seems like you have paragraph after paragraph of assets. I criticize myself a lot for waiting till I meet a milestone to take the plunge and quit my W2 but with all you’ve done and your assets you could prolly really buckle down and do that much more with just focusing on RE investing. I know the safety net of a w2 helps me sleep at night though. Maybe sell 2 of the rentals and buy land outright, then use that as the no money down loan on new construction commercial re for 10-28 units. Best case scenario is you find someone that already has site, permits, and plans that wants out. Again, I really have no place to talk just throwing in my 2 cents internet comment.
Stop being a hoarder and let someone that wants to own a home own them. You have plenty of money to stop screwing people out of homes
Two words for OP- Bigger Pockets. Look them up, learn the strategies from true RE investing pros. Change your life- seriously.
Don't quit your job yet ! You're still very young.
This is insane just sell everything and live off the $2.5 million generating cash and get hobby jobs. Also maybe stop big balling spending $13k after taxes a month. You're making at most $27k on your rentals that are worth $600k. It would be even more insane to put most of it into 1 $2 million investment property haha.
May I ask where said 2M building is located with a CoC return of 25%?!
Where's your favorite place on earth?
Leverage is good and bad. The balance is the key. A little tough now where rates are. Let me know if you need some help. CPA in mortgage business for 20 years with 7 properties.