10 yr rental plan please comment

[jose96857]

HI there,
 My wife and I are physicians and make pretty good money about $380k. I wanted to know if you can comment on my investment model.
My goal is to own and rent 15 rental properties. I am committed to investing $3k a month or  36k a yr in rental properties. I live in medium size city with a large state university which has all of the professional schools ie. Medical schools and residencies, law, dental schools and major grad programs…in addition we live within 2 miles of a large university base hospital. I only plan on renting to professional students or professional families. There is a market for this. The condos that I am interested sell  for about 70k-80k and rent for about $750-$1150.

10 yr plan
First 5 yrs
Buy 1 house the first yr.
2 houses the second yr
4 houses the 3rd yr
4 houses the 4thyr
4 house the 5th yr.

Next 5 yrs
I will use the $36k and additional cashflow each month and pay it towards the next mortgage, Keep in mind that because my initial down payment for a $70k condo is $36k my monthly cashflow for the first house will be $400-$600, cash flow for the 2nd and 3rd will be around $300-$500 and so om.

Are there any flaws with this strategy? Feel free to rip it a good ONE.

My future goal is to retire in the next 10-15 years and teach part time and do some charity work. Wife and I are in our early 30’s.

[davewindsor]

HI there,
 My wife and I are physicians and make pretty good money about $380k. I wanted to know if you can comment on my investment model.
My goal is to own and rent 15 rental properties. I am committed to investing $3k a month or  36k a yr in rental properties. I live in medium size city with a large state university which has all of the professional schools ie. Medical schools and residencies, law, dental schools and major grad programs…in addition we live within 2 miles of a large university base hospital.

Residential rentals is really a hands on business.  If you're making $360K/yr as physicians, you should invest in retail plazas where you can get triple net leases signed and have the tenants do the work.  You're not gonna make anywhere near what you're gonna make per hour as a physician.  Why don't you talk the person you rent your office from if he's willing to sell it to you and make an offer with some vendor financing.

[jose96857]

Thank you Dave-
I don’t mind getting my hands dirty and I “only work” 40 hrs a week and so I am committed to being a hands on landlord. I am not familiar with triple net leases or retail plazas. I work for a hospital not an office. Keep in mind that my wife is also a physician and really don’t depend on both incomes and thus, I am not concern if I will be making what I am currently making now. What I am concern is with making a steady cashflow for the future.
Any more thoughts Dave? I welcome any further insights.

[davewindsor]

Thank you Dave-
I don’t mind getting my hands dirty and I “only work” 40 hrs a week and so I am committed to being a hands on landlord.

My thoughts are that if you really want to get into residential with your income level and don't mind getting your hands dirty, you would probably qualify for a 50-100 unit apartment building loan and that's what you should be looking at buying.  Houses are the muddy trenches guys like me had to start at because we didn't have the income levels or financials to qualify for apartment building loans when we started.  As soon as we had the income levels, we got out of it and moved onto apartment buildings.  It doesn't matter how good you are at screening people, you're still gonna get headaches.  I don't touch houses anymore.  Personally, if I were in your shoes, that's what I would do.  You need to think bigger and leverage your money if you're looking to retire early.

[jose96857]

Thank you Dave,
Can you point me to the right direction on how/where to get more information about aquiring apts complexes etc.

regards

[davewindsor]

Thank you Dave,
Can you point me to the right direction on how/where to get more information about aquiring apts complexes etc.

regards

I would first look on one of those real estate websites like Trulia to find apartment listings.  Call the broker and ask for financials.  Then ask the broker to add you on as a prospect to get other apartment building listings.  Don't sign any buyer agency agreement for him to send you listings, just have him send you listings as a prospect so you can still work with other agents.  Take those financials and talk to half a dozen mortgage brokers on what kind financing you could get on one of the buildings you have financials for.  Ask them about the different LTVs and loan insurance programs and grants  Not all brokers are the same.  Some have private money contacts that others don't, so if one says you can't do something, another may say you can.

Once you know what kind of financing you can get and you have idea of how much profit you'll be making after paying off the mortgage and operating expenses, set up an appointment with one of the owners of the buildings that are for sale and see if you could work out some kind of deal in the offer where the vendor can stay on for half a year as a consultant to train you to run the building efficiently, how to fix stoves, broken pipes, deal with tenants, etc.  You're also going to be doing a lot of mandatory inspections on the building before you buy because the banks don't want to see their money at ask.  Don't try to negotiate yourself out of the inspections.  They may be expensive, but there's a good reason why a lot banks want them.

Now, you're all set.

[justin0419]

Jose,
Thanks for your PM.  I like Dave's idea, but I don't think it would necessarily be a mistake to pick up a couple single units first to get your feet wet...either SFHs or condos.  Just realize the nuances of owning a condo like maintenance fees, how many people can rent out units in the building, assessments for building repairs, etc.  You have great income that could get you into something bigger, but you could always start with a couple single units to see if you like it.  Even six months would at least give you an idea of how it works.  There's nothing terribly difficult about this business, but plenty of people find ways to screw it up.  If you start with a complex, your buyer options are fewer if you want to get rid of it. 
You're in a great position with your income.  It's good that you don't need money from the rentals immediately.  I think that's where a lot of people get into trouble.  They need money now and think owning a house or two will fix that problem. 
Since you live in a college town, you might consider building condos and selling them off.  There are some high dollar condos in a college town not far from me.  you would definitely have an audience for that.
 

[jose96857]

Thank you for your information Justin-
I am struggling with the fact of taking out a $1,000,000 loan. Putting away $3K month and  putting $36k for 70K condo, but what do I know best. I guess what Dave is trying to say is the more I invest the more ROI?
Indeed, I don’t need the money right away. I have always been a hard worker and I am not afraid to go after them. I am the type of person that needs road map before moving forward  and  thus I will look to research more information about apartments or follow my 10 yr plan…

[Ashon]

I believe what Dave is trying to get at it, is why make pennies, when you can make dollar bills?  The risk also declines with the more units that you acquire under one roof.  Most investors are trying to get to the point that you can start at.  (I know I AM!)  So why start at the very bottom?

[motivatedceo]

You and I are similar in age and household income levels, but we have totally different "day jobs". You're a doctor, and I own a couple small businesses.

One thing starkly different between you and I, based on what you described, is that I have a lot more money to put back into my investments than you. I have spent $36k in a month on investments - granted I did save for a couple months. LOL. But spending about 9% of your gross income per year is way to LITTLE in my opinion. I probably reinvest at minimum 50% of my gross income into new assets...albeit spent on my small business to increase income or on a rental property. I purchased a nice collection of short term assets, and long term assets, this calendar year.

One reason I can do that is the fact I own my own businesses...the tax advantages such as the same-year 100% writeoff of certain short term income producing assets (section 179 accelerated depreciation) or the ability to writeoff (defer income technically) $45-$50k in contributions to my self-directed IRA which in turn NOW gets invested into real estate...makes a big difference. I could live in a millon dollar home and drive a Ferrari, and also be in debt up to my ears, but I actually choose not to live that way...for now anyway. I do live in a very nice house, and do have 3 late model cars (one being a luxury car)...but I spend most of my extra money investing in passive and semi-passive income producing assets that are making me wealthy. By the time I am 40 I should have over 100 properties, all debt free, and by the time I am 60 or 70...<insert a friendly expletive of your choice>...with compound interest I will probably be worth $30mm to $50mm.

ANYWAY...my point is...I would focus on putting yourself in a position so that you have more capital to invest on a monthly or annualized basis. You can do that by investing wisely so that you get a higher yield on your money, and you can just reinvest it. Or you can find (legal) ways to reduce your tax burden and also your cost of living by cutting back on the luxuries and extras...and that should free up your capital too.

I call it my "bathtub theory of economics". You can either find ways to get more income coming in through your faucet, or plug up your drain slightly more so less income goes down the tube. Either way, you have more money in your pocket and therefore more money to invest.

THEN after that look at your current plan, or a similar plan. That plan is not a bad one but it does not generate you a large enough yield to really get you where you want to go comfortably in 10 or 15 years.

Good luck

HI there,
 My wife and I are physicians and make pretty good money about $380k. I wanted to know if you can comment on my investment model.
My goal is to own and rent 15 rental properties. I am committed to investing $3k a month or  36k a yr in rental properties. I live in medium size city with a large state university which has all of the professional schools ie. Medical schools and residencies, law, dental schools and major grad programs…in addition we live within 2 miles of a large university base hospital. I only plan on renting to professional students or professional families. There is a market for this. The condos that I am interested sell  for about 70k-80k and rent for about $750-$1150.

10 yr plan
First 5 yrs
Buy 1 house the first yr.
2 houses the second yr
4 houses the 3rd yr
4 houses the 4thyr
4 house the 5th yr.

Next 5 yrs
I will use the $36k and additional cashflow each month and pay it towards the next mortgage, Keep in mind that because my initial down payment for a $70k condo is $36k my monthly cashflow for the first house will be $400-$600, cash flow for the 2nd and 3rd will be around $300-$500 and so om.

Are there any flaws with this strategy? Feel free to rip it a good ONE.

My future goal is to retire in the next 10-15 years and teach part time and do some charity work. Wife and I are in our early 30’s.

[jose96857]

Motivatedceo,
Thank you so much for your insights. I have more money to put down each month, I just choose to invest the $3k (that’s why I am here; I am doing something wrong).

If you don’t mind asking what type of long and short term assets are you investing? Also what are semi-passive producing income? What kind of business do you own?

I am also interested in knowing how you can transfer contributions from your self-directed IRA and invested in real estate. I mean, if I can do that, lower my taxes by contributing to my wife IRA and then channel that money into a rental property that would make my life easier.
 
Indeed, you said “You can do that by investing wisely so that you get a higher yield on your money, and you can just reinvest it.” This is my goal….i just don’t know how to do it yet. I spent all of my 20’s in medical/residency school and I don’t know crap about investing and obiously, I am behind on retirement, compared to the regular joe who started saving at 22.
I would appreciated a better plan any suggestion for a better paln….if it means opening a business to shelter income, so be it.

Again, I appreciate your information.

You and I are similar in age and household income levels, but we have totally different "day jobs". You're a doctor, and I own a couple small businesses.

One thing starkly different between you and I, based on what you described, is that I have a lot more money to put back into my investments than you. I have spent $36k in a month on investments - granted I did save for a couple months. LOL. But spending about 9% of your gross income per year is way to LITTLE in my opinion. I probably reinvest at minimum 50% of my gross income into new assets...albeit spent on my small business to increase income or on a rental property. I purchased a nice collection of short term assets, and long term assets, this calendar year.

One reason I can do that is the fact I own my own businesses...the tax advantages such as the same-year 100% writeoff of certain short term income producing assets (section 179 accelerated depreciation) or the ability to writeoff (defer income technically) $45-$50k in contributions to my self-directed IRA which in turn NOW gets invested into real estate...makes a big difference. I could live in a millon dollar home and drive a Ferrari, and also be in debt up to my ears, but I actually choose not to live that way...for now anyway. I do live in a very nice house, and do have 3 late model cars (one being a luxury car)...but I spend most of my extra money investing in passive and semi-passive income producing assets that are making me wealthy. By the time I am 40 I should have over 100 properties, all debt free, and by the time I am 60 or 70...<insert a friendly expletive of your choice>...with compound interest I will probably be worth $30mm to $50mm.

ANYWAY...my point is...I would focus on putting yourself in a position so that you have more capital to invest on a monthly or annualized basis. You can do that by investing wisely so that you get a higher yield on your money, and you can just reinvest it. Or you can find (legal) ways to reduce your tax burden and also your cost of living by cutting back on the luxuries and extras...and that should free up your capital too.

I call it my "bathtub theory of economics". You can either find ways to get more income coming in through your faucet, or plug up your drain slightly more so less income goes down the tube. Either way, you have more money in your pocket and therefore more money to invest.

THEN after that look at your current plan, or a similar plan. That plan is not a bad one but it does not generate you a large enough yield to really get you where you want to go comfortably in 10 or 15 years.

Good luck

HI there,
 My wife and I are physicians and make pretty good money about $380k. I wanted to know if you can comment on my investment model.
My goal is to own and rent 15 rental properties. I am committed to investing $3k a month or  36k a yr in rental properties. I live in medium size city with a large state university which has all of the professional schools ie. Medical schools and residencies, law, dental schools and major grad programs…in addition we live within 2 miles of a large university base hospital. I only plan on renting to professional students or professional families. There is a market for this. The condos that I am interested sell  for about 70k-80k and rent for about $750-$1150.

10 yr plan
First 5 yrs
Buy 1 house the first yr.
2 houses the second yr
4 houses the 3rd yr
4 houses the 4thyr
4 house the 5th yr.

Next 5 yrs
I will use the $36k and additional cashflow each month and pay it towards the next mortgage, Keep in mind that because my initial down payment for a $70k condo is $36k my monthly cashflow for the first house will be $400-$600, cash flow for the 2nd and 3rd will be around $300-$500 and so om.

Are there any flaws with this strategy? Feel free to rip it a good ONE.

My future goal is to retire in the next 10-15 years and teach part time and do some charity work. Wife and I are in our early 30’s.

[motivatedceo]

You asked me about my two small businesses - I will PM (send you a private message) regarding those.

Passive income, is income received on a regular basis, with little effort required to maintain it. Examples would be a stock dividend, bond income, rental property income from a property that is managed & maintained by someone else, a royalty, limited partnership revenue, or a small business (say a chain of Metro PCS cell phone stores) that has morphed into a larger business that has its own management in place - but you still own it and derive income from it - and you don't have to be involved with it's day to day operations any longer for it to grow or succeed.

Semi-passive income, is income that requires slightly more effort to maintain it...but not so much that is becomes earned income, though it may or not be viewed so in the eyes of the IRS. It is semi-passive because you do not have to be there all the time, just once in a while, to earn income. Examples include a rental property that is managed or maintained by you, a coke or snack vending machine route, an online business, a car wash, a laundromat, or a small business (say a chain of Metro PCS cell phone stores) that may or may not have it's own management in place - yet you DO have to be involved with it's day to day operations for it to grow or succeed PERIODICALLY (not a full 8 hours a day, but say 8 hours a week).

Your only problem when it comes to a self-directed IRA, is that you are working for someone else - so it sounds like it is not an option. Most companies would never let you invest in such a plan. However if you own your own small business, the sky is the limit. You are the boss. If you have NO employees, contributing up to 25% of your net profit or ~$45-50k per your to your self directed IRA is a cinch. If you have employees, you have to do the employment matching...or if you have a creative tax lawyer he can set you up multiple C-corps, each with their own retirement plan, and let you be the only employee of one C-corp (it has to legitimately be a separate business, and there can be catches, so use a tax lawyer...not an EA or CPA!) and it can have the more generous (hence 25% matching, or $45-50k per year max contribution, whichever is bigger) retirement plan for YOU and you alone. As long as you work for someone else, it probably is not an option, UNLESS you have an old IRA from a previous employer or something like a ROTH IRA which is so limited I wouldn't touch one of those with a 10 foot pole, myself. Some people do, but they're not for me. But anyway, for now you are probably stuck with your company's 401k. But if not...checkout http://en.wikipedia.org/wiki/Self-Directed_IRA and PM me and I will refer you to a couple good companies that will help you out.

Yes, when I said “You can do that by investing wisely so that you get a higher yield on your money, and you can just reinvest it.” ... a small business is definitely a good option. You need to be careful, you can flush money down a toilet investing in many small businesses...so you need to do research on one first. I view real estate as almost a no lose business, but you have to know what you're doing.

However, I saw on your followup post that you CAN come up with more than $3000 to invest per month. That changes things. What is the maximum you could invest per month, say if your wife was on board and you both were committed to an investment? I will recommend some options for you at that point. $3000 vs $6000 vs $12000 vs $24000 in investable income per month makes a huge difference on what sort of asset class you should be looking at.

[jose96857]

Motivatedceo,
Thank you for the clarification on passive and semi-passive income. Although I am currently employed, my wife is a private contractor physician and I think she might qualify for self-direct IRA. Again, we both are new physicians coming out of training with no wealth creation training- they don’t teach you this in medical school.
After subtracting all of our expenses, we are left with $10k a month. We can realistically invest $6K a month with no problems.

[motivatedceo]

Everyone's investment strategy is different. By having $6k per month in investable income, that will give you a lot more options than say $3k.

I have picked a personal strategy, after reading several books, of buying lower and middle income properties around Dallas that are in "up and coming" neighborhoods. My rentals have retail values of $50k to $150k each, roughly, and of course I paid FAR less than retail value for each of them. I am paying cash for them, because I get incredible deals, and I get incredible returns. I have a maintenance guy do most of the work, and I have plenty of free time to manage them, etc, as I only have to work 20 hours a week IF I choose to on my businesses since they produce me semi-passive income...granted I do usually work 30-40 hours a week, but do not need to. And most people don't realize in Texas you can make a tenant do most of the maintenance work on the property - it's 100% legal - you just need to know how to do it.

Over time, I will be able to cash out my properties for millions of dollars (when I am done buying 50 or 100 of them), or hold them for a lifetime of cashflow. I don't know exactly what I will do with them over the next 30 years...but we will see. For right now, my strategy works well for me.

Anyway, since you already work 40 hours per week working for someone else (certain hours, certain days per week), you probably will not have much time to spend on management. So you probably should focus on buying properties that are managed, or at least partially managed, by someone else.

And since you have $6k per month in investable income (+$4k per month say for emergencies only), and with a larger amount of W2 income which will be to your advantage when talking with a bank, I definitely would find yourself a CCIM and consider purchasing a multifamily property or self storage unit complex. Those types of properties can be managed on a part-time or full-time basis by a 3rd party manager, or a manger that works directly for you, fairly easily. I would definitely stay at $1mm or less in any sort of loan you get for now - start small and don't go too big on your first deal.

$1mm will get you a nice commercial property in a suburb of Dallas, but in San Francisco it would probably get you a cardboard box. If you are in a very pricey area, don't be afraid to look within a 30-mile radius of your home if you can buy a nice commercial property that has management already in place.

Also, be sure it generates a decent profit. I would not personally touch a property that generates me less than 20% annual percentage yield each year. But that's up to you. Some people are fine with a 10% return, but I think that's too little.

The #1 place to browse commercial properties is http://www.loopnet.com/  - you should check it out and see if there is anything you like there in your area. However sometimes you see deals in classifieds, on Craigslist, through your own advertising methods or through a pocket deal from a CCIM.

Good luck

Motivatedceo,
Thank you for the clarification on passive and semi-passive income. Although I am currently employed, my wife is a private contractor physician and I think she might qualify for self-direct IRA. Again, we both are new physicians coming out of training with no wealth creation training- they don’t teach you this in medical school.
After subtracting all of our expenses, we are left with $10k a month. We can realistically invest $6K a month with no problems.

[sbgradinnb]

Thought that I heard someone else say that all the good deals have already been found prior to loopnet, and if you are finding a property on there, it's probably not such a "good deal".

Did I misunderstand this?