Good that you asked. Part of the problem in buying a rental is that you must buy it right. There are lots of rules of thumb out there. Many times you’ll see property advertised for sale at about 100 months rent. I will almost guarantee that you will not have much positive cash flow at this price. Howver, at 50 months rent, you should have a nice positive cash flow.
Remember that there are three ways to make money on a rental house.
Cash flow difference between rent collected and mortgage payments plus taxes plus insurance, plus maintenance. Many times, when you first buy a rental house, there just won’t be much cash flow. Over time, rents inflate, and the difference grows.
Tax savings. These can be many and varied. Depreciation is one known factor. Tax write offs of tools and materials is another. You and the wife want to take a cruise? Vacation expenses are not deductible. No? Go on the MrLandlord Cruise, and it’s a business expense. The family wants to go to Disney World? Get hold of your favorite guru and find out when he’s having a seminar in Orlando.
The double edged sword. Growing equity in the property. The tenants buy the house for you, and due to inflation, the house is worth more $ in the future, in most cases.
I am considering getting into REI but would like to clear up my expectations. I would like to know if it would be possible to obtain a six-figure income within a 5-10 year time frame. My plan is to educate my wife and myself in the next several months and plan to buy some property sometime late next year. If so what would be a realistic strategy? Currently I am planning to buy a rental and go from there but I am having a hard time trying to figure out a profit on it. Any thoughts and comments would be welcome.
Re: Realistic expectations - Posted by Ronald * Starr
Posted by Ronald * Starr on October 22, 2001 at 19:58:58:
RebTX------------
You got a couple of good posts from Tom, with his fine summary of the economic benefits of real estate, and Tim.
I have a long post with what I suggest beginners do. Your plan is very similar to my suggestions. Put “beginners success” into the search archive function at the top of this forum. Also, read Todd’s interesting comments about my post. Then, JohnBoy and Paul have some suggestions on the Carleton Sheets forum at messages 22632 and 23304.
Traditional hold and rent is fine if you continue with your other income-producing activities. If so, I would suggest that a real estate income of “six figures” would be difficult to amass in the time frame you suggest. However, if you buy cheap and resell dear, it could be possible to do in the high six figures in that time frame. But it will probably require full-time or greater effort.
The potential in real estate is extremely high. About the only limitation is your own desire, imagination, time available and approach. There aer people who make millions a year because they deal with very expense properties. But usually they have worked up to that point from smaller beginnings.
Like any business, you are going to receive benefit from the amount of work put forth. If you did only 1 deal per year, then you probably won’t get 6 figure income as you would need to be dealing in 7 figure properties.
But if you did 100 deals each year and they were all $999 each; you would still be shy of 6 figures.
It’s going to depend on how much work you put in, the amount of deals you do, and the amount of profit from each one. Some profit will be made going into the property by buying below retail, and later sell in some form to get your money out.
It doesn’t sound impossible as your wife will be helping you and you will most likely be able to do that with REI as your business and you are treating it like that.