How much?


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If you're looking at 15-20 units then a property manager is pretty much a given. Otherwise you'll be spending a lot(nearly all) of your spare time taking care of little piddly repairs or screening/showing prospective tenants. PITA if you ask me. A good manager is very much worth it and not that much of an expense overall.

 

+1 Freezingflyboy

A good manager is essential as you grow your portfolio beyond just a few units/homes. I'm a big fan of specialization and division of labor. Focus on your profession and pay others for the skills in their profession. You may be able to show units, screen tenants, make minor repairs or even remodel a bathroom and put on a new roof, but it's a waste of your time. Pay experts for their skills at market rate and then go use your skills at your market rate. If you are doing all the work yourself, you just spent 300k on a second job.

 

Around $185 It is in a defacto over 55 complex. It's a nice place really, but I have zero intention of ever stepping foot in Shelby County once I sell it. Out by Bellvue Baptist Church.

 

Are you really that much better off by putting down 300k on some apartments then you would be if you kept that money in the market? I genuinely don’t know.

Seems like a whole lot of effort and a big gamble for potentially not much more gain than if you just let that money work for you. Plus you have it liquid in case you really need it.

I’m lazy. Which is probably why you guys who do real estate will be much better off than me lol.

 

The short answer is "YES!".

Long Answer is also "YES!", especially if you are lazy due to long term passive income.

A leveraged piece of income property has several unique characteristics that are not found in the market.

1) Property appreciation - Typically tied to inflation over the long term, let's use 3% in this example.
2) Principle reduction - Each monthly mortgage payment reduces the principle balance and increases equity in the property.
3) Cash flow - After paying the mortgage and management fees, accounting for replacement reserves and vacancy cost, there is money left over (in a typical investment).
4) Tax advantages - A residential property is depreciated over 27.5 years (commercial is 39). This reduces the taxable income while the asset is actually increasing in value.

The math.

$1,000,000 commercial property (780,000 improvements, 220,000 land)
$250,000 down payment
$750,000 loan 30 yrs @ 5% fully amortizing

$108,000 annual rents ($9000 monthly or .9% per month)
$27,000 annual operating expenses (management, vacancy, maintenance, insurance)
$14,000 property taxes
$37,250 interest expense
$11,050 principle payments

Profit
108,000
-27,000
-14,000
-37,250
=29,750 or 11.9% return

Cash Flow = 18,700 (29,750 Profit minus 11,050 principle) 7.5% cash on cash return
Appreciation = $30,000 (assuming 3% of 1,000,000)
Total return $59,750 or 23.9%

Depreciation = $20,000 You just made nearly 30K, but only paid taxes on 10K.

The appreciation is taxed at the capital gains rate when you sell the asset, the same as any market investment. The advantages of real estate are the 1031 exchange and the option for equity stripping via a cash out refi.

In year 2, the rents increase by $3,000 (3% inflation) and expenses increase $1,200 (3% inflation), which results in a $1,800 increase to the cash flow. Carry this out 5 years, the cash flow increases by 50% principle payments increase by $3,000 and interest reduces by $3,000.

The example above is purely hypothetical, but easily attainable with reasonable effort. It takes more work than buying shares of a mutual fund, but the returns are far better. After a decade of quietly investing in income property, you will magically appear to be an overnight success to those watching from the sidelines. Once you get established as a real estate investor, your real estate friends will start asking questions about your "Side Hustle" as an airline pilot.


DYODD, YMMV, JVSCOPE, etc...

 

I was wondering the same thing. My main interest would be diversification and cash flow in retirement. Leverage has always been one of the big draws in real estate investing. I've never been a fan of debt so I'd rather pay cash which makes it less attractive from a return stand point. If I didn't include leverage and possible appreciation what rate of return could be expected owning residential property, specifically single family homes?

Edit: Just saw Gunfighter's post above. Thanks

 

I do wet work....

https://youtube.com/watch?v=vh0yLaWv6Fs

 

6-9% annual return indexed for inflation. It beats the heck out of any annuity you can find. Factor in the tax favored treatment of the asset (depreciation) and you are miles ahead of the market, even without leverage.

On a side note, you can find non-recourse financing for certain properties. It takes away the personal liability for the debt and changes the personal risk:reward ratio.

 

Stocks take into account inflation too because companies have to raise prices.

Real estate is high risk because if there is a market downturn in real estate you can get hosed, especially if you're leveraged.

Owning tens of thousands of stocks properly diversified across multiple asset categories is the safest investment (lowest risk) for the highest amount of return. Portfolio should double ever 8 years if done right.



But you might be right about the tax advantages making it even more profitable.