^ Honestly I’ll probably consider doing the same thing, as much as I hate the idea of being a landlord. I fully realize that if/when I get married, the future Mrs. Krazykanuck will likely hate my current house. But… with a fixed rate 30 yr note <4% and it’s already appreciated a decent amount in the 3 years since I bought it, I’m not too keen to sell it since I genuinely think the neighborhood is on the upswing. Which is why I bought where I did to begin with.
Be picky with your tenants. Buy quality properties that rent to quality people. I have a friend that is doing the slumlord thing and he regularly has to deal with the police, stolen appliances, missed rent. And his cap rate isn’t that much better than mine. My tenant has been in place for four years, pays rent early each month via e-transfer and only calls when he wants to do some kind of upgrade and wants me to cover materials. But I have a premium property that rents to professionals. Slumlording is a full time job on the other hand. But if you have no conscience, you can do well craming dozens into a borderline fire hazard and breaking kneecaps when people don’t pay up.
yo greenie help me out. I’ve been debating how to handle my car as a business expense. Would you recommend company purchased, company leased, or owned by me with mileage reimbursement? My accountant said go w mileage reimbursement because the $0.55 or so rate is advantageous now. Thoughts? I was leaning towards a company lease.
Depends on what kind of car you have and your car-buying habits.
If you have a Ford F-250 and plan to trade it in a 100k miles, then I’d go with actual expenses (because you get to depreciate the $60k vehicle and your fuel costs will be outrageous.) If you have a Honda Civic and plan to drive it until the wheels fall off, then I’d go with actual mileage (since you get 57.5 cents per mile for 500,000 miles, even though you’ll get 50 miles per gallon).
Generally speaking, if you’re not working out of your truck (like a lot of people here in the oil patch), then I’d go with Option #3 - Mileage reimbursement.
First, if you have a corporation, then the corporation doesn’t have the mileage option available to it. They can only take actual expenses. However, the corporation can still pay you 57.5 cents per mile for your POV, which is a reimbursement to you, not income. So the corp gets the deduction and you recognize no income. Everybody wins!!!
Second, remember that you actually get the option of taking actual expenses or mileage. (Most accountants don’t know this. They think you have to “pick and stick”, which is not true.) However, if you take any kind of accelerated depreciation (like bonus depreciation or Section 179), then you lose the option of taking the mileage deduction for ever and ever. 3
Third (and I could be way off base about this), you strike me as a sensible person who drives a sensible, economical car. That means you would probably benefit more from a mileage deduction anyway, because of how much cheaper it is to drive a Civic is than a Ford F-250 (or Suburban or Hummer).
RE is good if you can find a good deal but doing so is becoming harder and harder. The only places I’d consider buying you’re lucky to break a 4 cap. Even better, when you dig into the numbers you realize based on their asking price they’re almost always applying the cap rate to gross revs instead of NOI. Not sure if they’re hoping to find someone who has no idea what they’re doing or what the deal is there, but it works out to a difference of 100s of k’s even on duplex size investments. Even if they did apply the cap correctly, at a 4 cap outsourcing the property management is out of the question. So on top of an already iffy return, you’ll also have to run it. I also wouldn’t be banking on any price appreciation through cap rate compression (how low can they go?) or rental growth (rents can only grow so much without wage growth). All in all, it’s a hard pass for me. To each their own. I’m sure there’s deals to be found in questionable markets.
Edit: One more thing. Unless you’re looking in the 10+ unit universe, you’re also in a world of hurt when the inevitable vacancies roll in. Most small investments need literally full occupancy just to positive cash flow. Anyway, just my $.02.
^ 4% cap rate? So assuming 25% expenses (my experience, probably high), you’re seeing $500k places rent for only $1,600-$1,700? If so, no thanks. In my market a house that price will rent for $2,400-2,700 per month and I felt we had a tough market here! A 4% cap rate probably isn’t worth your time, I agree. Vacancies do hurt. I wouldn’t recommend RE investing to people that don’t have substantial free cash flow to deal with vacancies. Mind you with low interest rates it doesn’t cost a ton for a place to sit empty, but the cash flow crunch could hurt.
Small time real estate is extremely mispriced. Too many folks buying who don’t understand (or maybe don’t care about) the risk reward trade off. They see that they can amortize the mortgage to zero and have a nice check at the end when they retire, basically a retirement savings plan. There is however a niche above the reach of these players but below the institutional radar screen. If you want to do multi family this is where you need to be if you want a reasonable risk/reward. Also even fewer people understand the industrial market. I think that’s a great place to put money if you understand that market.
^ Industrial requires a bigger capital commitment and you could be stuck with much longer vacancies that you can’t price yourself out of. I like industrial too, but it’s a much more complex game. Multi-family has scale advantages but you’re dealing with a lower end client… More likely to walk, more likely to be a pain to collect from. Sure, better cap rates but you have to earn them.
I’m talking multi tenant industrial and its normal to price vacancy into a deal. But yes you’re looking at $2-5 million total cap.
Edit: I wouldn’t recommend people with no experience do these type deals directly. But that doesn’t mean you can’t get into these. Typically you can partner with an experienced operator. You pay asset management fees and give up some of the upside, but it’s still a great investment if you find a good operator. I know a couple developers who get all their equity for deals from a handful of ex wall st guys. after working for an institutional real estate manager, this is what I’ve gone out I my own to do.
^ Multi-tenant industrial? How’s that work? Is that like a warehouse with several bays? If so, I like that model (though I always viewed that more as a segment of commercial). Curious to see what kind of leverage I get can in that sort of thing. Might end up doing something similar to you, but I was looking at more multi-family res to take advantage of my general contracting skills (or what I perceive them to be, I’ve only done a few jobs now). My understanding is that most industrial is just provided empty and the tenant does leasehold improvements? I think taking the margin of the GC work and charging it back to your investors is a nice add on. And you can source your next deals while supervising trades, etc.
I save about 21 pretax (including match). Other than that, some pseudo-investments include:
- Assisting parents pay off real estate assets so they can acquire more properties quicker
- Occasional =< 1k deposits to wealthfront/robinhood/TD for fun-investing. Wealthfront is more for exess cash, Robinhood/TD is to invest in improving my own abilities at company valuation with skin in the game
- I consider my gym membership an investment in my health
- Probably 10% of my takehome goes to social-professional outings where I “invest” in developing relationships
- “invested” like 6% of my takehome last year in a good mattress and have been getting the best sleep in years
Multi tenant industrial is very prevalent around urban cores and densely populated areas. They provide last mile supply logistics. Think box trucks making daily supply runs to a downtown store. The tenant credit is usually crap but that’s offset by the fact that there are million potential small tenents. Generally they are always leased but really really old and functionally obsolete. The reason is their location is irreplaceable. These types of buildings are gold mines. Cash cows with downside protection in high land value for redevelopment. Institutions don’t chase them too hard unless redevelopment is imminent.
edit: it takes some balls to make this type of play because the real estate is downright ugly. but the cash flow is anything but.
so you eat ramen everyday, have no social life, no girl, don’t travel at all, and are excited for retirement? I mean really what do you eat
I bet they aren’t lending it to an O&G company right now. BTW, your local community banks are likely too small to be doing any real O&G lending. Regardless, now is your time Greenie! Take that CD money and build an empire
I used to look at a lot of loan files. I’ve seen lots of guys with rentals. Some make a ton of money, some don’t. Sounds more like a biased sample than the economic reality.
they key to making money off rental is being a slumlord
what exactly is a slumlord
It’s funny reading everyone’s uninformed opinions on real estate as an investment. Look if you have $50-100k and are thinking direct investment in rental property is a good place to park it, you’re most likely going to under perform your alternatives. There are too many people like you with the same idea thinking “I can be a landlord and build wealth”. The returns on the deals you’re competing for against all the other wannabes are very unfavorably compressed and are a bad place to put your money. The smart money for non real estate people who want exposure to the asset class finds an experienced operator and pays them to find good deals (and scales off of commingled investments where returns are much better). Unless you have $500k of your own money to put into a SINGLE deal and know what makes a good real estate deal you’re playing a losers game. You’re way better off investing with someone who knows what they’re doing. I happen to be one of those people so do yourself a favor and PM me if you want to put some money to work in this asset class.
^ I disagree that you need to invest with a pro or have $500k. My first property is one off (for now), earns a great risk adjusted return and provides diversification with my overall portfolio. I do have more real estate knowledge and ability than the average person, but I don’t think you need to be a pro to do it. But, there are headaches that don’t come with alternatives. If you don’t want to do any work, then by all means hire a professional and lose the margin he takes.
real estate transactions and operations of any scale can be somewhat complex. you can learn as you go, but you risk making painful and costly missteps. it’s also difficult to find hidden gems when you have no experience. Even if you know the basics of how to underwrite a deal, only experience can tell you in what respects you can be aggressive or need to be conservative.
another layer is you need to be a good negotiator to make good deals – both with sellers/buyers and the city you’re operating in. lots of people don’t have the stamina to grind out a deal. after a couple months they get deal fatigue and throw up their hands and walk away. in my experience some of the absolute best deals I’ve done were ones that took up to a year to close. basically you get your hooks in a seller on a deal that has issues that can be corrected before closing and you keep grinding them until you get to a structure that tilts the risk/reward in your favor. in an improving market it’s like securing a really cheap call option. when you finally get to closing, you’re so far in the money, you could flip it the next day at a substantial profit. those are the best deals.