Real Estate as Passive Income

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VTSE0910
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Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 9:42 am

I am in a position where my partner is being relocated for work. We own a house in a good market and have about $200k in equity. However we are both employed with no kids and have about $200k in retirement accounts and $50k in cash/money markets. We will not be buying a home immediately after the move. We max out our tax deferred options each year with some left over cash. We are 32 years old and established, but early, in our careers.

The question is, should we sell and have excess cash, or hold and get some passive income? This will be deferred income since the home is on a 15 year loan with 12 years to go and won't be cash flow positive immediately. I estimate it will take about $500 per month to rent in the short term although the principal payment is $1500 per month and rising. The market is cooling, but it's near downtown in a popular city and this area weathered 2008 pretty well. I've been told to never consider renting if it is not cash flow positive immediately. I understand the concept, but my 401k happens to be $19k cash flow negative each year and I continue to contribute, so there is that.

Any input or cautions from past experiences would be appreciated.

tibbitts
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Re: Real Estate as Passive Income

Post by tibbitts » Sun Jan 27, 2019 9:49 am

VTSE0910 wrote:
Sun Jan 27, 2019 9:42 am
I am in a position where my partner is being relocated for work. We own a house in a good market and have about $200k in equity. However we are both employed with no kids and have about $200k in retirement accounts and $50k in cash/money markets. We will not be buying a home immediately after the move. We max out our tax deferred options each year with some left over cash. We are 32 years old and established, but early, in our careers.

The question is, should we sell and have excess cash, or hold and get some passive income? This will be deferred income since the home is on a 15 year loan with 12 years to go and won't be cash flow positive immediately. I estimate it will take about $500 per month to rent in the short term although the principal payment is $1500 per month and rising. The market is cooling, but it's near downtown in a popular city and this area weathered 2008 pretty well. I've been told to never consider renting if it is not cash flow positive immediately. I understand the concept, but my 401k happens to be $19k cash flow negative each year and I continue to contribute, so there is that.

Any input or cautions from past experiences would be appreciated.
Owning a home can be many things but passive income is not one of them.

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whodidntante
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Re: Real Estate as Passive Income

Post by whodidntante » Sun Jan 27, 2019 9:50 am

Welcome to the forum.

I would say "sell sell sell" like Cramer but after the first sell you wouldn't have anything to sell or to sell. So just sell.

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Re: Real Estate as Passive Income

Post by riverguy » Sun Jan 27, 2019 9:52 am

You’ve gotta have a strong rental property to cashflow a 15 year loan. Run some numbers and see how much cashflow it does with a 30 year loan. If it’s reasonable, I would just ask yourself if you ever plan on coming back to that area and would you want to live in that house. And what you think the future for the area is. If positive, keep it, if not sell. If it doesn’t cashflow on a 30, maybe sell it as you have a lot of equity in it that could be deployed elsewhere.
Last edited by riverguy on Sun Jan 27, 2019 9:53 am, edited 1 time in total.

onourway
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Re: Real Estate as Passive Income

Post by onourway » Sun Jan 27, 2019 9:52 am

Single-family home. Negative monthly cash-flow. You would be moving out of the area.

No question I would sell.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 2:36 pm

riverguy wrote:
Sun Jan 27, 2019 9:52 am
You’ve gotta have a strong rental property to cashflow a 15 year loan. Run some numbers and see how much cashflow it does with a 30 year loan. If it’s reasonable, I would just ask yourself if you ever plan on coming back to that area and would you want to live in that house. And what you think the future for the area is. If positive, keep it, if not sell. If it doesn’t cashflow on a 30, maybe sell it as you have a lot of equity in it that could be deployed elsewhere.
Thanks for the suggestion. I have done this and it would be positive with a 30 year loan, about $500 monthly. Certainly not worth refinancing for since my current loan rate is 3%. I really don't understand the need for positive cash flow while mortgaged. If viewed as a retirement account, nearly all accounts are negative during the saving phase, which I expect to last another 30 years for me. My IRA, 401k, and HSA will 'cost' me $28,500 this year. There is plenty of time to pay off the home and save for a major remodel before retirement, then have positive income for 30 years of retirement. I'm hoping to be financially independent earlier, but have no interest in early retirement.

The area may not appreciate as it has the last 5 years, but the city is still growing and this is an affordable single family close to downtown. This wouldn't be our forever home, but we would be willing to live in it a while if we returned although that is unlikely in the near future. The market has cooled so the sale price now is likely $50k lower than it would have been last spring so that is part of my hesitation to sell now.

All that said. I'm leaning toward selling based on these responses and other discussions I have had, but feel I'm missing something in the math, particularly when viewed as a long term investment and not a fix/flip.

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Davinci
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Re: Real Estate as Passive Income

Post by Davinci » Sun Jan 27, 2019 2:47 pm

Real Estate as Passive Income
Unless you have a landlord is not passive income, it is active income. If no landlord, it can become like a part time job where you can be called anytime if you have a lot of properties.

DW and myself analyzed this question recently as we were considering RE for income. However, both have busy professional careers, family and we came to the conclusion that it was better for us to focus on our human capital and invest in low cost passive index funds.

At this time in our lives we do not need a second job owning RE, we did not like the idea of a landlord as the returns go down significantly.

Best of luck on your decision, RE can be very profitable but it requires time/commitment to do so. Many folks here have done very well in RE but there is consensus that is active and not passive income.
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

phxjcc
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Re: Real Estate as Passive Income

Post by phxjcc » Sun Jan 27, 2019 4:16 pm

The question is impossible to answer without knowing the zip. Downtown...Manhattan Beach, keep it. Downtown...Buffalo, sell.

I know you want to remain anonymous, bur all real estate is dependent upon local market conditions.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 4:42 pm

It's in Denver in a strong neighborhood near transportation routes and a university. The house is also a great starter or rental. It's in solid condition with updates, but not a complete remodel so some furniture dings and scratches are no issue. There will be typical ongoing repairs required, but likely few big disruptions. The price is under $600k for 3 bedrooms, pretty decent here. Rent would be around $2500.

dbr
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Re: Real Estate as Passive Income

Post by dbr » Sun Jan 27, 2019 5:05 pm

Real estate cash flow may be defined as passive income but owning and renting out a house hundreds(?) of miles away is hardly a passive event in your daily life. How do you plan to manage and maintain the property?

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Re: Real Estate as Passive Income

Post by KyleAAA » Sun Jan 27, 2019 5:22 pm

Sounds like a poor investment. Accidental landlords rarely do well. I do not understand the analogy with your 401k being cash flow negative, as that seems unlikely.

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Nate79
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Re: Real Estate as Passive Income

Post by Nate79 » Sun Jan 27, 2019 5:30 pm

At those numbers (monthly rental rate and value) it sounds like a horrible rental. Sell, sell, sell.

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rocket354
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Re: Real Estate as Passive Income

Post by rocket354 » Sun Jan 27, 2019 5:35 pm

1) Being a landlord is not passive. It is active, especially early on for a first-timer as there's a lot you'll need to learn.

2) Your 401k, IRA, etc are not cash-flow negative. If you pay $19,000 into your 401k then you have $19,000 in your account, plus all expected future growth. If your mortgage is $1500 and you collect $1000 in rent then you have lost $500, and it isn't anywhere on your asset sheet like a 401k is. That is cash-flow negative. And did I read correctly that you're paying $1500 but would only get $500 in rent? That is a huge liability.

3) Being a landlord can be a good side job (I am one, myself) but being a long-distance landlord is tough (I am that, too) and being a long-distance landlord for a cash-flow negative property is an awful decision. If you decide to do that you will be giving yourself lots of stress and costing yourself lots of money. Please don't.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 5:58 pm

1) Being a landlord is not passive. It is active, especially early on for a first-timer as there's a lot you'll need to learn.

I do have an out of state property. I bought a house in college when I was 20. It's turned out to be a good investment, but the risk the first few years was arguably not worth it, to your point 3. It's professionally managed and I get 13 statements a year. I couldn't fly back once for the management fee. But, I see that as a near miss rather than a great decision. I am in a better financial place now and want to make an educated decision.

2) Your 401k, IRA, etc are not cash-flow negative. If you pay $19,000 into your 401k then you have $19,000 in your account, plus all expected future growth. If your mortgage is $1500 and you collect $1000 in rent then you have lost $500, and it isn't anywhere on your asset sheet like a 401k is. That is cash-flow negative. And did I read correctly that you're paying $1500 but would only get $500 in rent? That is a huge liability.

No, it's a $2500 mortgage + $500 expenses with $2500 rent. So it would cost me $500 per month out of pocket. This is estimated of course and a large emergency fund would be imperative. The $1500 is the principal portion of the payment. So, based on your explanation above, that IS cash flow positive. I pay $500 to have a $1500 increase equity in an appreciating asset. Similarly, I send money to my 401k so the investment grows.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 6:03 pm

Thank you all for your input. The consensus is clear and I will consider it very strongly. Thanks!

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rocket354
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Re: Real Estate as Passive Income

Post by rocket354 » Sun Jan 27, 2019 6:17 pm

VTSE0910 wrote:
Sun Jan 27, 2019 2:36 pm

Thanks for the suggestion. I have done this and it would be positive with a 30 year loan, about $500 monthly. Certainly not worth refinancing for since my current loan rate is 3%. I really don't understand the need for positive cash flow while mortgaged. If viewed as a retirement account, nearly all accounts are negative during the saving phase, which I expect to last another 30 years for me. My IRA, 401k, and HSA will 'cost' me $28,500 this year. There is plenty of time to pay off the home and save for a major remodel before retirement, then have positive income for 30 years of retirement. I'm hoping to be financially independent earlier, but have no interest in early retirement.

The area may not appreciate as it has the last 5 years, but the city is still growing and this is an affordable single family close to downtown. This wouldn't be our forever home, but we would be willing to live in it a while if we returned although that is unlikely in the near future. The market has cooled so the sale price now is likely $50k lower than it would have been last spring so that is part of my hesitation to sell now.

All that said. I'm leaning toward selling based on these responses and other discussions I have had, but feel I'm missing something in the math, particularly when viewed as a long term investment and not a fix/flip.
It's in Denver in a strong neighborhood near transportation routes and a university. The house is also a great starter or rental. It's in solid condition with updates, but not a complete remodel so some furniture dings and scratches are no issue. There will be typical ongoing repairs required, but likely few big disruptions. The price is under $600k for 3 bedrooms, pretty decent here. Rent would be around $2500.
Edit: I see you clarified some numbers while I typed all this. It's not quite as bad as the below illustrates, but I think it's still bad. You can still match or exceed your returns with much less stress through passive investing. And this is coming from someone with three rental properties.

________

Replying to some of these in more detail...

Repairs and maintenance are a cost whether you pay for them or not. All houses at some point need replacement roofs, HVAC, water heaters, appliances, and eventually, updated style (flooring, paint, even layout). Even if you don't pay for these maintenance items, they are depreciating and it will be reflected in your eventual selling price. Therefore, it is vital that you account for them at a standard rate when evaluating a property's viability as a rental. Typically, that allocation is 1% of home value per year. If that is not a correct number to use, then the correct number is probably higher.

All this is to answer your question about the math. I think based on these posts I've figured out what you are saying. It would rent for $2500 and you pay $3000/mo on your mortgage, but would pay $2000/mo if you went to a 30-year mortgage. You haven't told us your equity, but given you're three years into a 15-year mortage and that you pay $3000/mo it looks like you may already have 50% equity. So you have a $600k house that you owe $300k on.

Your options are:

A) Sell now. Agent fees + immediate repairs + other costs are maybe 10%, so you would get $540k after all transaction costs, repay $300k and have $240k which you could immediately invest.

B) Rent keeping same mortage. You pay $3000/mo. But you also pay $500/mo in maintenance/repairs (whether you actually cut the check or not, remember, since it's 1% of $600k or $6000/yr then divided by 12). You also need to allocate for vacancy (typically 10% of gross rents, so knock $250 off your $2500 rent price) and if you're out of town are you going to manage remotely? Or pay a property manager? A property manager is often 10%, and doing it remotely can be difficult. So that's another $250/mo.

But, you also get $1500 in principal per month per your first post, and the house may appreciate at about 2% per year which is another $1000/mo. However, you have to give 10% of that back in transaction costs if you sell, so really, appreciation is $900/mo (and highly variable at that, as you've seen). So add it all up and you pay $3000 (PITI) + $500 (maintenance) + $250 (vacancy) + $250 (manager) = $4000/mo. You receive $2500 + $1500 + $900 = $4900/mo. So you are +$900 where 100% of that value is locked in an illiquid asset.

C) Switch to a 30-yr mortgage. $2500 rent + $450 (paydown) + $900 (appreciation) - $2000 (payment) - $500 (maintenance) - $250 (vacancy) - $250 (manager) = $3850 - $3000 = $850/mo, which, despite the rent higher than the PITI, is still cash-flow negative and now nets you less per month in value. All, like part (B), in an illiquid asset.

So you can actively and with a lot of stress keep the house and get $10,800 illiquid per year (4.5% ROE, after transaction costs) with option (B), keep the house and with a lot of stress get $10,300 illiquid per year (<4.3% ROE, after transaction costs) with option (C), or passively invest $240k in an index fund and get market returns of likely greater than 4.5% perfectly liquid per year.

All options involve risk: stocks can drop, but, as you've seen, so can real estate. All involve taxes: for rentals (after you've rented it three years if you lived in it the prior two, which is the case here) you have to pay capital gains tax, and will have to pay depreciation recapture (which is why I ignored it from analysis, although it is an element); while for stocks you have to pay cap gains, anyways. So option (A) gives you a higher expected return, with likely less variance since all your real estate gains are through equity, and with significantly less work.

I think it's an easy decision.
Last edited by rocket354 on Sun Jan 27, 2019 6:21 pm, edited 2 times in total.

bltn
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Re: Real Estate as Passive Income

Post by bltn » Sun Jan 27, 2019 6:19 pm

Davinci wrote:
Sun Jan 27, 2019 2:47 pm
Real Estate as Passive Income
Unless you have a landlord is not passive income, it is active income. If no landlord, it can become like a part time job where you can be called anytime if you have a lot of properties.

DW and myself analyzed this question recently as we were considering RE for income. However, both have busy professional careers, family and we came to the conclusion that it was better for us to focus on our human capital and invest in low cost passive index funds.

At this time in our lives we do not need a second job owning RE, we did not like the idea of a landlord as the returns go down significantly.

Best of luck on your decision, RE can be very profitable but it requires time/commitment to do so. Many folks here have done very well in RE but there is consensus that is active and not passive income.
After getting involved in several rental real estate parcels early in my investing life, I also came to this same conclusion for the same reasons. I now wish I d made that decision 10 years earlier.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 6:34 pm

All this is to answer your question about the math. I think based on these posts I've figured out what you are saying. It would rent for $2500 and you pay $3000/mo on your mortgage, but would pay $2000/mo if you went to a 30-year mortgage. You haven't told us your equity, but given you're three years into a 15-year mortage and that you pay $3000/mo it looks like you may already have 50% equity. So you have a $600k house that you owe $300k on.
Thank you very much. The capital gains could potentially be avoided if we sell in 3 years, or are offset by tax deductions, or eliminated in a 1031 transfer, but are something to consider.

If it's a $600k home, it's an easy sell. If it's actually $500k, it seems better to hold since I have the cash to ride it out and we're not buying immediately. The market's been a bit unpredictable the last few months so we'll see what the spring brings.

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Re: Real Estate as Passive Income

Post by yogithor » Sun Jan 27, 2019 6:43 pm

I strongly recommend you find a way to keep the property. Find the best 30 year mortgage and property manager you can and go for it. You won't be disappointed. A good property manager will find you a good, multi-year tenant at that price point. I like rocket354's analysis; however, in my experience, some of those estimates: $500 maintenance and $250 vacancy are high. Set aside $5000 in a maintenance account and make sure all of the appliances, HVAC, etc are solid before you leave. Denver is a strong market. Try it for 5 years and see how it goes. I have 2 rentals, one for 18 years and the other for 4 years. I gross $1900/mo total on the two and net about $1400. The first I manage myself, and the second is with a property manager (at 10%). The first has tripled in value, and the other has doubled. Maybe it's not completely passive but damned close. I spend a grand total of about 20 hrs/year on the two units. Make it work. If you set it up right from the getgo, in 10 years, you will be very glad you didn't sell. I've gotten some great info from bigger pockets. The founder of that site is based in Denver so there is a lot of Denver info on there, as well. Buena suerte !!!

MarkNYC
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Re: Real Estate as Passive Income

Post by MarkNYC » Sun Jan 27, 2019 6:50 pm

It is understandable why many consider interest and dividend income to be "passive income" and income from rental real estate to not be passive income since it usually takes some amount of work to derive the rental income. For income tax purposes, however, the opposite is actually true.

Income from interest, dividends, cap gains, and royalties from investments is considered "portfolio income" not passive income. And income from rental real estate, except in the hands of a RE professional, is considered passive income, subject to the passive activity rules of Code Sec 469. The reason the distinction matters is that "passive" losses (with certain exceptions) cannot be used to offset other types of income. Passive losses, can however, be used to offset income from other passive activities, which can include activities other than rental properties.

When the question is simply whether to obtain or keep a rental property, the distinction probably doesn't matter. But many questions pertaining to interest, dividends, cap gains, and rental income/losses center around tax issues, in which case using the correct terminology can help avoid misunderstandings, and can be useful in obtaining an accurate answer to a specific tax-related question.

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Re: Real Estate as Passive Income

Post by beachteen » Sun Jan 27, 2019 8:40 pm

To decide whether to sell or rent you should look at a few things, what is your best alternative, how this fits into your overall portfolio, and what kind of returns you expect from renting.

If you sell the home, what will you do with the money? Leaving it in a checking account will have different returns than putting into a total market fund, or using the money to start a business, or buying another home with better cashflow.

Owning an individual property has a lot of risk, poor liquidity, and you are leveraged with a mortgage. Depending on where your other investments are, and your overall tolerance for risk, you may be better off selling the home to diversify and reduce your exposure to certain types of risk.

In the mind of many real estate investors you can't count on appreciation, or raising the rent, just returns from cashflow. You can't realize or reinvest appreciation the same way you can with returns from rent, or dividends. Past performance is not indicative of future results, in part because the market now is very different from what it was in the past. Between 1991 and now average mortgage interest rates went from ~10%, to less than half of that. At the same time median home prices went from $120k, to $250k. Inflation adjusted wages for middle income families are stagnant in most of the US, and have been since before 91. I would not expect the same type of appreciation over the next 25 years with the new tax changes, and rising interest rates. But real estate is a complex, and local market, and your home will likely not follow the average. Additionally, many homes do not make for good investment properties, just looking at 100 homes for sale, and probably 85 of them would either have poor returns compared to what you could get with a CD at the asking price or have other reasons they are not great options. It can be surprisingly expensive to find a property manager for a single property. Even with a property manager it is not really a passive investment. Make sure you factor in vacancy, long term repairs, and turnover costs.

You can work out the annualized return if you start with a specific timeline like 5 or 10 years once you get the net income from your expected expenses and gross income.Then compare the annualized return to the returns you expect from other investments like stocks or bonds.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 9:28 pm

yogithor wrote:
Sun Jan 27, 2019 6:43 pm
I strongly recommend you find a way to keep the property. Find the best 30 year mortgage and property manager you can and go for it. You won't be disappointed. A good property manager will find you a good, multi-year tenant at that price point. I like rocket354's analysis; however, in my experience, some of those estimates: $500 maintenance and $250 vacancy are high. Set aside $5000 in a maintenance account and make sure all of the appliances, HVAC, etc are solid before you leave. Denver is a strong market. Try it for 5 years and see how it goes. I have 2 rentals, one for 18 years and the other for 4 years. I gross $1900/mo total on the two and net about $1400. The first I manage myself, and the second is with a property manager (at 10%). The first has tripled in value, and the other has doubled. Maybe it's not completely passive but damned close. I spend a grand total of about 20 hrs/year on the two units. Make it work. If you set it up right from the getgo, in 10 years, you will be very glad you didn't sell. I've gotten some great info from bigger pockets. The founder of that site is based in Denver so there is a lot of Denver info on there, as well. Buena suerte !!!
Thanks, this has generally been my opinion, but I have been in the minority. My current rental property is in a similar situation. It hasn't doubled, but the income has been steady (although illiquid) and it is definitely what I would consider passive. That property will also be paid off in 5 years and could then relieve the monthly drag on this one. It's the next 5 years that will be tough.

I agree the market is strong and likely to remain that way although there will be dips and spikes.

I feel I must be naive somehow, but I'm just not worried about the monthly cost. Even if it costs $1000 every month for the next 10 years, I could swing it. I have no debt except the mortgages, partially because we were fortunate enough to buy used cars from the in-laws and because I let George W buy me college. Just using the payment saved from a financed car would allow me to buy a few roofs, furnaces, water heaters, etc over the life of the house.

I think there is no doubt that keeping and renting the house for 40 years will pay off, even with limited appreciation. I think it is also very possible that the annoyance of the rentals in the first 10 years may cause some financial stress and strain. I think we will discuss a price at which we will sell, list the home, and see what happens.

Thanks again!

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Re: Real Estate as Passive Income

Post by knpstr » Sun Jan 27, 2019 9:35 pm

Not sure how much it has appreciated but you need to have lived in the house 2 out of the last 5 years to get the "tax free profit" of the sale of a primary residence.

If you rent it out for a number of years and exclude yourself from that you'll have capital gains tax and depreciation recapture whenever you do sell.

I should say that I have 2.5 rental properties (one is 50/50 ownership) but all were purchased as investments, not converted to investments, all are local properties. I'm a few years older than you, but just started year 6 as a landlord.

All of my properties are very much cash flow positive.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Real Estate as Passive Income

Post by k3vb0t » Sun Jan 27, 2019 9:50 pm

Look at it another way. If someone offered you the opportunity to invest $200k in a -1k per month rental property in a different city/state from where you were at, would you take it?

The reason I think you get a lot of negative responses on BH for rental property is it is highly focused risk. A single property. A single tenant at a time. A single roof. Generally not passive unless you get lucky and/or screen well for tenants.

I’d note the positive response you got also says he nets $1,400/month in cash flow. That’s $2400 different from your situation.

With negative cash flow you are just speculating on home appreciation and have nothing to pay for repairs except out of your own pocket.

And re: your 401k having negative returns over the last year but you still contribute — a bit of a stretch to compare owning the entire market (spreading your risk to the whole economy/world economy) vs a single property. And even owning the market would pay you a dividend — it’s only losses if you sell, right? — unlike the negative cash flow property. $200k at 1.9% dividend is $3,800 in dividends for the year. Looks better than -6k and hopeful for price appreciation over coming decade.

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Nate79
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Re: Real Estate as Passive Income

Post by Nate79 » Sun Jan 27, 2019 10:04 pm

At a minimum start with the 1% rule and go from there. The point isn't whether you think this rental will pay off in 40 years but whether it is the best use of your capital. If it is a horrible rental then sell and put towards a good rental. A horrible rental is a bad investment because you are taking high risk for low return.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 10:27 pm

And re: your 401k having negative returns over the last year but you still contribute — a bit of a stretch to compare owning the entire market (spreading your risk to the whole economy/world economy) vs a single property. And even owning the market would pay you a dividend — it’s only losses if you sell, right? — unlike the negative cash flow property. $200k at 1.9% dividend is $3,800 in dividends for the year. Looks better than -6k and hopeful for price appreciation over coming decade.


My point about the 401k had nothing to do with last year's returns. I'm simply saying that we all put money into an investment that will pay off later, but does not pay off now. My 401k didn't buy my groceries last year, and it won't buy me groceries in a year the market goes up 20%. It costs me $19,000 in cash per year every year, i.e. cash flow negative.

My point about the need for a real estate investment to cash flow is similar. If it's on a 60 year loan, it's probably going to cash flow each month from the beginning, but it will cost so much to pay off that it till not be a viable source of retirement income. If it's on a 10 year loan, the next 10 years will be tough, but then, the rental income will continue with no mortgage payment and at a much lower total cost of interest. At that point, it needs to be cash flow positive, i.e. rent-tax-repairs-O&M has to generate income, but the appreciation can be nothing. I just don't understand why the rate at which I choose to pay off the loan is a good metric to judge the investment if I'm not in a hurry and have the cash to swing it in the short term.

I'm not saying that this means my property is a great rental opportunity. A lot of data has been presented that makes it seem that it is not. I just think there is more to the equation than the immediate cash flow while I'm employed and the home is mortgaged.

onourway
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Re: Real Estate as Passive Income

Post by onourway » Sun Jan 27, 2019 10:44 pm

VTSE0910 wrote:
Sun Jan 27, 2019 10:27 pm
And re: your 401k having negative returns over the last year but you still contribute — a bit of a stretch to compare owning the entire market (spreading your risk to the whole economy/world economy) vs a single property. And even owning the market would pay you a dividend — it’s only losses if you sell, right? — unlike the negative cash flow property. $200k at 1.9% dividend is $3,800 in dividends for the year. Looks better than -6k and hopeful for price appreciation over coming decade.


My point about the 401k had nothing to do with last year's returns. I'm simply saying that we all put money into an investment that will pay off later, but does not pay off now. My 401k didn't buy my groceries last year, and it won't buy me groceries in a year the market goes up 20%. It costs me $19,000 in cash per year every year, i.e. cash flow negative.

My point about the need for a real estate investment to cash flow is similar. If it's on a 60 year loan, it's probably going to cash flow each month from the beginning, but it will cost so much to pay off that it till not be a viable source of retirement income. If it's on a 10 year loan, the next 10 years will be tough, but then, the rental income will continue with no mortgage payment and at a much lower total cost of interest. At that point, it needs to be cash flow positive, i.e. rent-tax-repairs-O&M has to generate income, but the appreciation can be nothing. I just don't understand why the rate at which I choose to pay off the loan is a good metric to judge the investment if I'm not in a hurry and have the cash to swing it in the short term.

I'm not saying that this means my property is a great rental opportunity. A lot of data has been presented that makes it seem that it is not. I just think there is more to the equation than the immediate cash flow while I'm employed and the home is mortgaged.
I think you have a faulty understanding of cash flow. Your 401k does not “cost” you $19k per year. That is savings that goes directly into your net worth. Your argument appears to be that any monthly out-lay you put into this property should be thought of the same way. It goes out of your pocket but into your net worth. The problem is that leaves you with nothing but potential appreciation of the property value to count on, which is an extremely risky proposition. It’s effectively like buying a single stock where you have to pay out of pocket every month to own the shares, and if something goes wrong in the company, you have to cough up more cash still.

Maybe you’ll get lucky and property appreciation will make up for all this short term cost, maybe you won’t. That’s a big risk, and it’s risk you are not well compensated for taking on. People who do real estate seriously pretty well agree that positive cash flow is a must, and that the only thing that makes real estate better than other investments is the cheap, relatively safe leverage available through long mortgages. You want to break both of those rules. What makes you think you know better than them?

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 11:11 pm

onourway wrote:
Sun Jan 27, 2019 10:44 pm
VTSE0910 wrote:
Sun Jan 27, 2019 10:27 pm
And re: your 401k having negative returns over the last year but you still contribute — a bit of a stretch to compare owning the entire market (spreading your risk to the whole economy/world economy) vs a single property. And even owning the market would pay you a dividend — it’s only losses if you sell, right? — unlike the negative cash flow property. $200k at 1.9% dividend is $3,800 in dividends for the year. Looks better than -6k and hopeful for price appreciation over coming decade.


My point about the 401k had nothing to do with last year's returns. I'm simply saying that we all put money into an investment that will pay off later, but does not pay off now. My 401k didn't buy my groceries last year, and it won't buy me groceries in a year the market goes up 20%. It costs me $19,000 in cash per year every year, i.e. cash flow negative.

My point about the need for a real estate investment to cash flow is similar. If it's on a 60 year loan, it's probably going to cash flow each month from the beginning, but it will cost so much to pay off that it till not be a viable source of retirement income. If it's on a 10 year loan, the next 10 years will be tough, but then, the rental income will continue with no mortgage payment and at a much lower total cost of interest. At that point, it needs to be cash flow positive, i.e. rent-tax-repairs-O&M has to generate income, but the appreciation can be nothing. I just don't understand why the rate at which I choose to pay off the loan is a good metric to judge the investment if I'm not in a hurry and have the cash to swing it in the short term.

I'm not saying that this means my property is a great rental opportunity. A lot of data has been presented that makes it seem that it is not. I just think there is more to the equation than the immediate cash flow while I'm employed and the home is mortgaged.
I think you have a faulty understanding of cash flow. Your 401k does not “cost” you $19k per year. That is savings that goes directly into your net worth. Your argument appears to be that any monthly out-lay you put into this property should be thought of the same way. It goes out of your pocket but into your net worth. The problem is that leaves you with nothing but potential appreciation of the property value to count on, which is an extremely risky proposition. It’s effectively like buying a single stock where you have to pay out of pocket every month to own the shares, and if something goes wrong in the company, you have to cough up more cash still.

Maybe you’ll get lucky and property appreciation will make up for all this short term cost, maybe you won’t. That’s a big risk, and it’s risk you are not well compensated for taking on. People who do real estate seriously pretty well agree that positive cash flow is a must, and that the only thing that makes real estate better than other investments is the cheap, relatively safe leverage available through long mortgages. You want to break both of those rules. What makes you think you know better than them?
I don't think I know better, which is why I posted. I do know that I see it differently though, so I'll ask a few questions to this response to see if I can understand.

"I think you have a faulty understanding of cash flow. Your 401k does not “cost” you $19k per year."

Sure, but a mortgage doesn't "cost" the full value either, right? It seems that it costs the interest+fees. The principal is a similar contribution toward equity/net worth. That's my point. To treat the entire mortgage payment as an expense seems to be missing the critical consideration of how much is invested and how much is lost cost. In a retirement investment scenario, it's the gain over 40 years that matters, not the cash flow next month.

"The problem is that leaves you with nothing but potential appreciation of the property value to count on, which is an extremely risky proposition."

Does it not also leave a property that can be rented? So even if it stays the same value forever, someone literally pays me to sit in it. When I'm 90, I can give the house away, but have had 50 years of income for having owned the house that I would not have gotten if I had not owned the house.

"Maybe you’ll get lucky and property appreciation will make up for all this short term cost, maybe you won’t. That’s a big risk, and it’s risk you are not well compensated for taking on."

In terms of a mortgage, the higher the short term cost, the lower the total cost, right? The principal portion of the payment is significantly more on a 15 year loan than a 30 year loan. The principal portion of the payment goes toward net worth just like a 401k. The total earnings on a home rented for 10 years financed under a 15 year loan will be more than the total earnings on the same property financed under a 30 year loan. Again, I'm not sure that the property even needs to appreciate if it allows for steady income after it is paid off.

Can a personal real estate investment not be looked at as a small business? It's not uncommon to expect startup losses in a small business with the anticipation of future returns. Then, it comes down to the other factors mentioned today. Is it worth the stress and energy? Is it that much better than selling and buying VTI?

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Re: Real Estate as Passive Income

Post by JGoneRiding » Sun Jan 27, 2019 11:17 pm

onourway wrote:
Sun Jan 27, 2019 9:52 am
Single-family home. Negative monthly cash-flow. You would be moving out of the area.

No question I would sell.
I would advice to sell as well and I am a LL and I believe in buying living in then converting to rentals makes a lot of sense. But it does need to be the right house set up well and it doesn't sound like this house is it.

The only way i would keep is if you have a strong desire to retuen to it one day.

onourway
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Re: Real Estate as Passive Income

Post by onourway » Sun Jan 27, 2019 11:18 pm

VTSE0910 wrote:
Sun Jan 27, 2019 11:11 pm
Can a personal real estate investment not be looked at as a small business? It's not uncommon to expect startup losses in a small business with the anticipation of future returns. Then, it comes down to the other factors mentioned today. Is it worth the stress and energy? Is it that much better than selling and buying VTI?
The point is that minus positive cash flow, and minus the power of leveraging a long-term cheap mortgage, the returns of rentals in the aggregate should not be expected to be better than simply buying VTI, which has none of the hassle. A single rental is much like buying a single stock. You might get lucky and come to believe it’s a sure thing. You might get burned and swear off rentals forever.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Jan 27, 2019 11:22 pm

[/quote]

The point is that minus positive cash flow, and minus the power of leveraging a long-term cheap mortgage, the returns of rentals in the aggregate should not be expected to be better than simply buying VTI, which has none of the hassle. A single rental is much like buying a single stock. You might get lucky and come to believe it’s a sure thing. You might get burned and swear off rentals forever.
[/quote]

Thanks! That's the consensus. It just seems that in passive investing, delayed gratification is the way to go. In real estate, it has to be throwing out cash from the start. I have always struggled with the difference.

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Re: Real Estate as Passive Income

Post by BrentShields » Mon Jan 28, 2019 4:17 am

I have invested in self storage units, mobile home parks, and large apartment buildings that were passive,
With single family homes I have had over 400 and I can't think of one that I would call a passive investment.
And I suppose it works out sometimes to hold a house that is losing money hoping to make it up with appreciation but that is not the way I would bet my money.

k3vb0t
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Re: Real Estate as Passive Income

Post by k3vb0t » Mon Jan 28, 2019 6:48 am

VTSE0910 wrote:
Sun Jan 27, 2019 11:22 pm
Thanks! That's the consensus. It just seems that in passive investing, delayed gratification is the way to go. In real estate, it has to be throwing out cash from the start. I have always struggled with the difference.
Again not a LL myself, but I think that's because my index funds don't need potential repairs nor have vacancy issues. It's all about the return on the risk you're taking. Being a LL is a significant risk in comparison to passive investing, so you should be compensated for that extra risk. As someone else noted if you think you want to move back to that property then it might make sense to keep it, otherwise you aren't being compensated for the risk you're taking.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Mon Jan 28, 2019 7:55 am

k3vb0t wrote:
Mon Jan 28, 2019 6:48 am
VTSE0910 wrote:
Sun Jan 27, 2019 11:22 pm
Thanks! That's the consensus. It just seems that in passive investing, delayed gratification is the way to go. In real estate, it has to be throwing out cash from the start. I have always struggled with the difference.
Again not a LL myself, but I think that's because my index funds don't need potential repairs nor have vacancy issues. It's all about the return on the risk you're taking. Being a LL is a significant risk in comparison to passive investing, so you should be compensated for that extra risk. As someone else noted if you think you want to move back to that property then it might make sense to keep it, otherwise you aren't being compensated for the risk you're taking.
Thanks, this is the explanation that makes sense to me. The explanation that the property needs to appreciate to offset the "lost" principal payment while it's mortgaged does not make sense, but is a common theme. It can depreciate to the price of the lot so long as it stays rentable. The negative cash flow the next 15 years allows for a lot more years of rental in a paid off house; a 30 year loan allows more free cash now, but costs a lot more in total interest and a lot more years of rental to offset. The appreciation is gravy.

But, the risk is real, so point taken. Again, thank you all.

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Mon Jan 28, 2019 8:14 am

So you can actively and with a lot of stress keep the house and get $10,800 illiquid per year (4.5% ROE, after transaction costs) with option (B), keep the house and with a lot of stress get $10,300 illiquid per year (<4.3% ROE, after transaction costs) with option (C), or passively invest $240k in an index fund and get market returns of likely greater than 4.5% perfectly liquid per year.
Thanks for this, it breaks it down well. I agree that the illiquid returns may not be hard to beat while mortgaged, although the next 10 years could be near that 4.3%. However, I hope to have 20 more years after that until retirement, and then another 30. I could put the property in my will and have someone else step it up and sell to avoid capital gains taxes and get a tax write off for the transaction costs.

So I see it as a likely win in the end, but it's a long road. The points about stress and short term cash risk in the next 15 years will be the larger considerations.

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Re: Real Estate as Passive Income

Post by knpstr » Mon Jan 28, 2019 8:35 am

VTSE0910 wrote:
Sun Jan 27, 2019 11:22 pm
Thanks! That's the consensus. It just seems that in passive investing, delayed gratification is the way to go. In real estate, it has to be throwing out cash from the start. I have always struggled with the difference.
Just to be clear:

In stocks your holdings are "throwing out cash from the start" too (most likely), even if the holding doesn't pay a dividend. The company(ies) are just retaining all of the earnings to reinvest for you - that is where a lot (not all) of the growth (price appreciation) comes from. The company is reinvesting it's cash to sell more or new products or sell in new areas.

Investing is delayed gratification. Both index funds and real estate and even in business.
I reinvest all of the cash from my real estate in one form or another: paying down debt, or buying index funds, or buying more real estate.
Eventually I hope to get to a point where I start spending that money, but that will be after I have "enough" for retirement.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

phxjcc
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Re: Real Estate as Passive Income

Post by phxjcc » Mon Jan 28, 2019 8:53 am

No, no, no.

Look at the end state, or NFV for all scenarios.

In 36 (to make the math easy) years @6%, the 600,000 house is now worth 4.8 million.

Take your 300k out @ 6%, 36 years you get to 2.4 mill.

For all the naysayers, please tell us where the additional 2.4 is coming from, because 1,000 per month for 36 years at 6% is nowhere close.

[Deleted -- mod oldcomputerguy]

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Mon Jan 28, 2019 8:57 am

knpstr wrote:
Mon Jan 28, 2019 8:35 am
VTSE0910 wrote:
Sun Jan 27, 2019 11:22 pm
Thanks! That's the consensus. It just seems that in passive investing, delayed gratification is the way to go. In real estate, it has to be throwing out cash from the start. I have always struggled with the difference.
Just to be clear:

In stocks your holdings are "throwing out cash from the start" too (most likely), even if the holding doesn't pay a dividend. The company(ies) are just retaining all of the earnings to reinvest for you - that is where a lot (not all) of the growth (price appreciation) comes from. The company is reinvesting it's cash to sell more or new products or sell in new areas.

Investing is delayed gratification. Both index funds and real estate and even in business.
I reinvest all of the cash from my real estate in one form or another: paying down debt, or buying index funds, or buying more real estate.
Eventually I hope to get to a point where I start spending that money, but that will be after I have "enough" for retirement.
Right, so why is real estate principal considered a cost and subtracted from cash flow, but money invested into a stock considered an investment?

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Re: Real Estate as Passive Income

Post by knpstr » Mon Jan 28, 2019 9:04 am

VTSE0910 wrote:
Mon Jan 28, 2019 8:57 am
Right, so why is real estate principal considered a cost and subtracted from cash flow, but money invested into a stock considered an investment?
Because it is cash expense. Therefore, it is subtracted from cash flow. However, it is included in net income. Thus can be included when considering one's overall return. That is if you are cash flow positive, since the tenants effective pay the principal. If you are cash flow negative you may be contributing outside money to service the debt, therefore it is not included in your return on investment.

This is for the IRS as well, you only deduct the interest portion of your payment, you're taxed on the principal portion.

Say cash flow after all operating expenses is $2,000 and mortgage payment is $1,000 and say $500 is interest.
Your net cash flow is $1,000 ($2,000 - $1,000)
Your net income is $1,500 ($2,000-$500 interest)

Net income and cash flow are different things in accounting.

To be clear: Any money invested into a stock is a "cost" on one's personal cash flow statement. You make say $2,000 in your job and invest $1,000 into stocks your net cash flow is $1,000 the same.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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VTSE0910
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Re: Real Estate as Passive Income

Post by VTSE0910 » Mon Jan 28, 2019 9:15 am

knpstr wrote:
Mon Jan 28, 2019 9:04 am
VTSE0910 wrote:
Mon Jan 28, 2019 8:57 am
Right, so why is real estate principal considered a cost and subtracted from cash flow, but money invested into a stock considered an investment?
Because it is cash expense. Therefore, it is subtracted from cash flow. However, it is included in net income. Thus can be included when considering one's overall return. That is if you are cash flow positive, since the tenants effective pay the principal. If you are cash flow negative you may be contributing outside money to service the debt, therefore it is not included in your return on investment.

This is for the IRS as well, you only deduct the interest portion of your payment, you're taxed on the principal portion.

Say cash flow after all operating expenses is $2,000 and mortgage payment is $1,000 and say $500 is interest.
Your net cash flow is $1,000 ($2,000 - $1,000)
Your net income is $1,500 ($2,000-$500 interest)

Net income and cash flow are different things in accounting.

To be clear: Any money invested into a stock is a "cost" on one's personal cash flow statement. You make say $2,000 in your job and invest $1,000 into stocks your net cash flow is $1,000 the same.
Thanks. That's what I think I've said a few times. I have a lot of accounts that are cash flow negative for positive net income and increased net worth. But, only in real estate is negative cash flow immediately regarded as terrible without further consideration.

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Re: Real Estate as Passive Income

Post by knpstr » Mon Jan 28, 2019 9:21 am

VTSE0910 wrote:
Mon Jan 28, 2019 9:15 am

Thanks. That's what I think I've said a few times. I have a lot of accounts that are cash flow negative for positive net income and increased net worth. But, only in real estate is negative cash flow immediately regarded as terrible without further consideration.
Because it is very dangerous to do that in real estate.
If you can't pay your $1,000 into stock contribution, so what.
If you can't pay your $1,000 into your mortgage payment, you may lose your property and all of your built up equity in it.

A mortgage payment is a obligatory payment, an investment contribution is not.
They are very different things.

Further cash flow is typically a large part of real estate returns.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Real Estate as Passive Income

Post by KyleAAA » Mon Jan 28, 2019 10:38 am

VTSE0910 wrote:
Mon Jan 28, 2019 9:15 am
knpstr wrote:
Mon Jan 28, 2019 9:04 am
VTSE0910 wrote:
Mon Jan 28, 2019 8:57 am
Right, so why is real estate principal considered a cost and subtracted from cash flow, but money invested into a stock considered an investment?
Because it is cash expense. Therefore, it is subtracted from cash flow. However, it is included in net income. Thus can be included when considering one's overall return. That is if you are cash flow positive, since the tenants effective pay the principal. If you are cash flow negative you may be contributing outside money to service the debt, therefore it is not included in your return on investment.

This is for the IRS as well, you only deduct the interest portion of your payment, you're taxed on the principal portion.

Say cash flow after all operating expenses is $2,000 and mortgage payment is $1,000 and say $500 is interest.
Your net cash flow is $1,000 ($2,000 - $1,000)
Your net income is $1,500 ($2,000-$500 interest)

Net income and cash flow are different things in accounting.

To be clear: Any money invested into a stock is a "cost" on one's personal cash flow statement. You make say $2,000 in your job and invest $1,000 into stocks your net cash flow is $1,000 the same.
Thanks. That's what I think I've said a few times. I have a lot of accounts that are cash flow negative for positive net income and increased net worth. But, only in real estate is negative cash flow immediately regarded as terrible without further consideration.
Those other accounts are NOT cash flow negative. When you make a contribution to your 401k, you are contributing principal. When you make a mortgage payment, it is mostly interest expense to maintain the value of the principal you already contributed. Totally different. If you stock contributing to your 401k nothing bad happens. Stop paying your mortgage and you lose the house.

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Re: Real Estate as Passive Income

Post by JGoneRiding » Mon Jan 28, 2019 11:46 am

VTSE0910 wrote:
Sun Jan 27, 2019 11:11 pm
onourway wrote:
Sun Jan 27, 2019 10:44 pm
VTSE0910 wrote:
Sun Jan 27, 2019 10:27 pm
And re: your 401k having negative returns over the last year but you still contribute — a bit of a stretch to compare owning the entire market (spreading your risk to the whole economy/world economy) vs a single property. And even owning the market would pay you a dividend — it’s only losses if you sell, right? — unlike the negative cash flow property. $200k at 1.9% dividend is $3,800 in dividends for the year. Looks better than -6k and hopeful for price appreciation over coming decade.


My point about the 401k had nothing to do with last year's returns. I'm simply saying that we all put money into an investment that will pay off later, but does not pay off now. My 401k didn't buy my groceries last year, and it won't buy me groceries in a year the market goes up 20%. It costs me $19,000 in cash per year every year, i.e. cash flow negative.

My point about the need for a real estate investment to cash flow is similar. If it's on a 60 year loan, it's probably going to cash flow each month from the beginning, but it will cost so much to pay off that it till not be a viable source of retirement income. If it's on a 10 year loan, the next 10 years will be tough, but then, the rental income will continue with no mortgage payment and at a much lower total cost of interest. At that point, it needs to be cash flow positive, i.e. rent-tax-repairs-O&M has to generate income, but the appreciation can be nothing. I just don't understand why the rate at which I choose to pay off the loan is a good metric to judge the investment if I'm not in a hurry and have the cash to swing it in the short term.

I'm not saying that this means my property is a great rental opportunity. A lot of data has been presented that makes it seem that it is not. I just think there is more to the equation than the immediate cash flow while I'm employed and the home is mortgaged.
I think you have a faulty understanding of cash flow. Your 401k does not “cost” you $19k per year. That is savings that goes directly into your net worth. Your argument appears to be that any monthly out-lay you put into this property should be thought of the same way. It goes out of your pocket but into your net worth. The problem is that leaves you with nothing but potential appreciation of the property value to count on, which is an extremely risky proposition. It’s effectively like buying a single stock where you have to pay out of pocket every month to own the shares, and if something goes wrong in the company, you have to cough up more cash still.

Maybe you’ll get lucky and property appreciation will make up for all this short term cost, maybe you won’t. That’s a big risk, and it’s risk you are not well compensated for taking on. People who do real estate seriously pretty well agree that positive cash flow is a must, and that the only thing that makes real estate better than other investments is the cheap, relatively safe leverage available through long mortgages. You want to break both of those rules. What makes you think you know better than them?
I don't think I know better, which is why I posted. I do know that I see it differently though, so I'll ask a few questions to this response to see if I can understand.

"I think you have a faulty understanding of cash flow. Your 401k does not “cost” you $19k per year."

Sure, but a mortgage doesn't "cost" the full value either, right? It seems that it costs the interest+fees. The principal is a similar contribution toward equity/net worth. That's my point. To treat the entire mortgage payment as an expense seems to be missing the critical consideration of how much is invested and how much is lost cost. In a retirement investment scenario, it's the gain over 40 years that matters, not the cash flow next month.

"The problem is that leaves you with nothing but potential appreciation of the property value to count on, which is an extremely risky proposition."

Does it not also leave a property that can be rented? So even if it stays the same value forever, someone literally pays me to sit in it. When I'm 90, I can give the house away, but have had 50 years of income for having owned the house that I would not have gotten if I had not owned the house.

"Maybe you’ll get lucky and property appreciation will make up for all this short term cost, maybe you won’t. That’s a big risk, and it’s risk you are not well compensated for taking on."

In terms of a mortgage, the higher the short term cost, the lower the total cost, right? The principal portion of the payment is significantly more on a 15 year loan than a 30 year loan. The principal portion of the payment goes toward net worth just like a 401k. The total earnings on a home rented for 10 years financed under a 15 year loan will be more than the total earnings on the same property financed under a 30 year loan. Again, I'm not sure that the property even needs to appreciate if it allows for steady income after it is paid off.

Can a personal real estate investment not be looked at as a small business? It's not uncommon to expect startup losses in a small business with the anticipation of future returns. Then, it comes down to the other factors mentioned today. Is it worth the stress and energy? Is it that much better than selling and buying VTI?
Just to give you some numbers. I have a property that I bought low for 160k it's worth 260k now more or less. It rents for 2050/month (though I pay about $100 for water sewer) in addition to the roughly $800 I get in positive cash flow I also get about $300 a month in mortgage principle pay down. This is a decent property but not considered great. But let me tell you if it shot up to 600k in value I would sell! In fact long term I will most likely sell all the rental properties. The point of them is investments. Your house has already retired a good amount. Sell while you can get it out tax free! If you want rentals go out and find 2 decent rentals. I look for older houses they still rent well but value less. Your goal is good cash flow not appreciation which is speculation.

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Re: Real Estate as Passive Income

Post by renue74 » Mon Jan 28, 2019 12:04 pm

JGoneRiding wrote:
Mon Jan 28, 2019 11:46 am

Just to give you some numbers. I have a property that I bought low for 160k it's worth 260k now more or less. It rents for 2050/month (though I pay about $100 for water sewer) in addition to the roughly $800 I get in positive cash flow I also get about $300 a month in mortgage principle pay down. This is a decent property but not considered great. But let me tell you if it shot up to 600k in value I would sell! In fact long term I will most likely sell all the rental properties. The point of them is investments. Your house has already retired a good amount. Sell while you can get it out tax free! If you want rentals go out and find 2 decent rentals. I look for older houses they still rent well but value less. Your goal is good cash flow not appreciation which is speculation.
+1. If you are landlording, cash flow is king. Appreciation not so much.

Sure, rent amounts can go down or you can have months of vacancy loss...but overall cash flow will be king. Appreciation is icing on the cake if you decide to sell in the future.

SandysDad
Posts: 77
Joined: Wed Dec 06, 2017 7:27 am

Re: Real Estate as Passive Income

Post by SandysDad » Tue Jan 29, 2019 4:16 am

I did not see anyone mention for you to calculate the CAP rate. Do you know what the Cap rate is for this property?

Take gross annual income. Subtract vacancy allowance which even in DENVER should be 5-8%. Subtract a Maintenance allowance of 8% of gross rents. Subtract taxes insurance and property management fee.
Subtract any other expenses. Do not subtract the mortgage or principal.
This is your net operating income. Expressed as an annual percentage (divide by current property value) is your CAP RATE.
Your cap rate should atleast 1-2% higher than current mortgage rates for investment property. For investment property mortgages are 5%+

My guess without even adding it all up is your real cap rate is under 5%. At this level you don’t have maneuvering room even with your 3% mortgage.

If you are thinking long term I doubt cap rates will stay where they are. Simply too low.

If somehow you had a cap rate of 7%+ I would consider keeping. But you aren’t even close.

Topic Author
VTSE0910
Posts: 29
Joined: Sat Jan 26, 2019 9:32 pm

Re: Real Estate as Passive Income

Post by VTSE0910 » Tue Jan 29, 2019 7:43 am

SandysDad wrote:
Tue Jan 29, 2019 4:16 am
I did not see anyone mention for you to calculate the CAP rate. Do you know what the Cap rate is for this property?

Take gross annual income. Subtract vacancy allowance which even in DENVER should be 5-8%. Subtract a Maintenance allowance of 8% of gross rents. Subtract taxes insurance and property management fee.
Subtract any other expenses. Do not subtract the mortgage or principal.
This is your net operating income. Expressed as an annual percentage (divide by current property value) is your CAP RATE.
Your cap rate should atleast 1-2% higher than current mortgage rates for investment property. For investment property mortgages are 5%+

My guess without even adding it all up is your real cap rate is under 5%. At this level you don’t have maneuvering room even with your 3% mortgage.

If you are thinking long term I doubt cap rates will stay where they are. Simply too low.

If somehow you had a cap rate of 7%+ I would consider keeping. But you aren’t even close.
I have heard of this, but thanks for the complete explanation.

One thing I don't understand though is dividing by the current property value rather than purchase price, or remaining principal. Is that because it provides a rent vs sell comparison? Otherwise, if the market crashes 50%, it would become a better investment by double, and as the home appreciates and equity increases, it becomes worse.

Also, why the current rate and not my rate? It seems arbitrary to use 10% in 5 years, if that's the case, when it has no bearing on my property.

Thanks

Topic Author
VTSE0910
Posts: 29
Joined: Sat Jan 26, 2019 9:32 pm

Re: Real Estate as Passive Income

Post by VTSE0910 » Sun Oct 20, 2019 11:03 am

As a follow up, we sold the property. Mostly to avoid the headache of an out of state rental, but the comments here were considered.

Thanks again!

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