re: Buying rental property as primary source of retirement income

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House is worth 1.3 mortgage with escrow is 5800 and tenant is paying 4600

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“ It does not look like easy money to me”

I have an old friend from high school whose retirement plan was to own 18 rent houses.When he achieved that he retired (early 60’s).His wife keeps the books,keeps up with insurance,etc.He does maintenance,repairs and collects the rent.
I run into him about once a year and the conversation always goes like this:
“G D rent houses are killing me”,”I work harder in retirement than I ever did before I retired””I don’t know what I was thinking,that rental properties was a good retirement plan”.
I don’t say anything,I don’t understand why he can’t figure out he should just sell them all and be done with it.They’re all paid for,surely he would be able to clear at least a couple million.
Haven’t run into him in 2 years,maybe he did sell them by now.

It's a lot easier to make money owning and renting cheap properties vs. expensive ones.
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Agree.

My rental strategy isn’t far from what you are describing. I’ve bought properties for the purpose of renting in various states over the years. I look for growing markets in places id like to live at some point either full time or part time. The houses we’ve bought are houses we could see ourselves living in someday. They don’t typically fetch a rent much more than their monthly cost, but we’ve experienced a huge growth in market value.
I doubt I could live off the rents alone.

We've owned multiple rental properties over the years. Have sold most at a good profit and just have one unit (2 doors) left. Great tenants. 2.75% loan. Nets a profit of about $1,200/month.

Yeah, that sounds rosy. But here's the "rear view mirror stuff".

That's based on 25+ years. You had to have some capital to purchase. You have to have capital in reserve to fund those never-ending costs (roofs, plumbing). You have to have a "landlord's temperament" dealing with all kinds of shite. (Ever evicted someone that squats? Let me tell you about the time the tenants gave proper notice and our at the time property managed failed to turn the power back on. 2 weeks later, going in, fridge full of putrid meat. Flies all over the inside. Did I tell you about the $15k cost of having to replumb the old sewer pipes from the main connection back to to unit? Won't tell you what it was like during COVID when people couldn't work, you couldn't evict, even if you wanted to, which we didn't, yet the banks still want their money. I could go on and on. )

Is this a solution now? Sure.

I'm not, but starting out, there will always be real estate deals to be made. Someone will make money. But it will depend on a lot of factors like the market, supply, rental trends, the presence of "big players", interest rates, access to capital etc.

Here are the issues to consider...

Capital. "Takes money to make money". You need reserves beyond normal living expenses to buy deals, if they're available, fund improvements and repairs, cover those mortgages month to month etc. Maybe you can HELOC here and there for certain things, but it takes a LOT of cash.

Timeframe. The ones that make money are patient and are willing to accept an extended timeframe. Are you patient?

Competition. There's a "flipper" now on every corner trying to make money in real estate. But the bigger problem is huge organizations like Blackstone that have been involved in acquiring residential properties in growing markets like Nashville. These companies often target growing cities like Nashville due to their strong job markets and population growth. They own thousands of properties. In some markets, like Florida though, they're dumping them in mass, leading to declining prices (see video below).

Reduced Property Value: Landlords may see the value of their properties decrease in certain markets.

If inflation leads to higher interest rates, it could dampen demand.

Supply and Demand. Oversupply can lead to price drops.

I follow this guy's channel and he has a lot of great insights, trends, graphs etc. related to real estate.

LINK

LINK 2

Good luck and keep us posted!

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“G D rent houses are killing me”,”I work harder in retirement than I ever did before I retired””I don’t know what I was thinking,that rental properties was a good retirement plan”.

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As Nole Man notes in his post, having a property manager/management company does not fix everything, but I'll never understand why "retired" individuals want to do their own property management. I'm nowhere near retirement and some of the things my property managers have dealt with (specifically a tenant suicide) make them worth every penny I've ever paid them, beyond the typical dealing with problem tenants, evictions, etc. This is really contingent on having *good* property management.

In your friend's scenario, let's say he has a $2,000,000 portfolio that is rented for $240,000 a year (1% rule). I have no clue what the "net" number would be in this scenario but let's just say that with property management at 10% he is "netting" $120,000 (50%) after paying his property manager $24,000 a year. So he can either make $144,000 a year and deal with managing 18 houses on his own or $120,000 a year and deal with much less day-to-day management? I know which one of those I'm picking, especially if I'm "retired" but that is why I exclusively have properties managed by third parties.

Thanks all for the feedback. Yeah I don’t really know if this is the route. The assumption was after 20 years we sell off all houses and retire but that does put us at a lot of risk.

House maintenance is def expensive and I can see the negative cash flow only working because we have high powered jobs today but uncertain what can be tomorrow. Definitely more for thought.

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Also probably losing more than that. I’m taxed on rental income and that’s a lot of taxes

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How are you possible paying tax on this? Rough math, so feel free to correct me.

$1.17M with 20% down at 5% rate would be about $5,025 on a 30 year mortgage. Since you have only owned it 1.5 years, majority of that payment (75%) is going to interest.

$45,225 annual interest expense ($5,025 x 12 x 75%)
$9,300 in taxes and insurance ($5,800 pmt - $5,025 P&I = $775 x 12 months = $9,300)
$42,545 depreciation (assuming no cost seg so over 27.5 years)

$97,070 in expenses
$55,200 in revenue ($4,600/month)

$41,870 loss

Even if my math is off on the loan, your depreciation, insurance and taxes offset almost all of the rental income.

How are you possibly paying tax on this? If done correctly you should be offsetting ordinary or at least passive income. If you can offset ordinary income you could probably make up any cash flow losses with tax savings.

You might need a new CPA if you are paying income tax on this property.

This

I think the people that do that have a larger portfolio than one house. My goal in retirement is to have 4 or 5 rental homes at least.