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Trade an Online Property For a “Real” Property?

by J. Money on Monday, August 6, 2012

park place monopoly houses

So I’ve been on this MAJOR thought process this month that it would be cool as hell to trade in one of my online websites for an actual PHYSICAL piece of real estate instead :) Like a small condo or studio or something. It’s a far cry from all my bitching and moaning about owning a home for sure, BUT – and here’s where the entrepreneur in me comes out, the idea that I could own a real-life piece of property to make passive income from forever and ever (and ever) just excites the Dickens out of me… I could be the next Donald Trump! ;)

Before you say anything, though, I KNOW there are a ton of downfalls with owning “investment properties” and it’s not as easy as everyone thinks. Things break all the time,  you have to be a landlord, the initial investment takes forever to be recouped – I get all that. But I’ve also been talking to a lot of people who currently do this pretty successfully, as well as digging into a little research myself, and so far I haven’t heard anything that’s *that* different than what I already do with my websites now?  In fact, both entities share some incredibly similar traits:

  1. They both bring home income.  One is a ton more stable than the other (real estate – everyone needs a roof over their head, right?), but overall both entities can give you some sort of cash flow if done properly. And even more so as the yeas go by!
  2. They both require maintenance.  The online stuff a lot less than the real estate side (at least in terms of money), but both still need to be watched carefully in order to keep all the wheels turning. One big oversight and the profit to be made can go kaput.
  3. They can both be sold at some point!  There’s inherent value in both properties, but there’s a much HIGHER demand for real estate buyers and a pool of them to choose from than in the online world ;) 99% of people don’t even know you can make money with blogs to begin with!

But as much as seeing all these comparisons helps reassure me that I’m not too far off of current dealings, it also scares the living POOP out of me too. What do I know about owning a piece of residential real estate I don’t live in myself? What if there’s something else out there that’s huge and glaring that everyone’s afraid to talk about for some reason?  Like a crazy housing monster or something? Haha…. okay, pretty lame joke but you get what I’m saying ;)

I’ve never in a million years considered doing something like this, what, with my disdain for all things home ownership, and now that I’m letting the idea creep to the top of my mind I’m just shocked there’s been nothing that’s made this a deal breaker for me yet. What am I missing?  Have any of you tried this and failed (or succeeded!) miserably? What would you have wanted to known going in to it all for the first time?

The whole idea intrigues me to no end, though… and every time I read an article on how millionaires got to where they did, 50% of the time it had something to do with real estate. That can’t be coincidence, right?  I mean, I don’t know *that* many people that do own more than one home in general, but those I do I’d consider more well off than those who don’t, that’s for sure.  So I think there’s really something pretty telling there.  No matter which way I end up going in the end.

Other Pros to Investment Properties

I’ve also made up a list of why else I want to own an investment property or two (or three? four? a whole complex??):

  1. It’s *different*.  No matter how much I love blogging or building new sites/charities/etc, I’ll always need to be doing something new.  And lately the idea of sitting in front of a computer for X more hours a day with something new doesn’t thoroughly excite me much ;)  But being able to drive somewhere and SEE your property?? Woah…. that would be hot!
  2. I need to diversify! I can’t have all my income and time tied up in one insanely focused area, right? What if you get tired of reading BudgetsAreSexy? (*gasp*) Just like with investing in stocks and funds/etc – you need to have a healthy mix of diversification here too. I LOVE me the blogging game, don’t get me wrong, but at some point I need to spread my wings farther out and grow more into other areas as well.
  3. I need to expand my skill set.  Even though managing online properties and residential real estate is pretty similar, it’s obviously fairly different too. By going down a new path I won’t only be diversifying my investment eggs a lot more, but I’ll also be picking up a totally new site of skills for my mental tool box – which is super important to me.  I can’t stop learning!
  4. Interest rates AND property values are still down in the dumps.  Which means even more opportunities to cash in and grab myself a nice little piece of property out there.
  5. You can write off a lot of the expenses.  This one I didn’t know about until a neighbor told me yesterday, but apparently you can write off a lot of the money that goes into the upkeep: new fridges, plumber calls, new floors – whatever’s needed to maintain the home (though I should probably research this more just to be certain ;))
  6. There’s actual insurance for homes!  If your house burns down, you’re at least covered for the bulk of everything. But with blogs and websites? Shoooot… if those guys get blown up or hacked or if the entire interwebs stop working God forbid, you can kiss your stuff goodbye… it’s scary :(
  7. Someone else would be paying off your mortgage!! I mean, how awesome is that??  Even if you don’t make ANY money off the monthly rent checks, you’d still be dwindling down your main mortgage and after 15-30 years depending on how you set it up you’d own it outright!  And do you know what that means?? You’d have almost 100% pure cash flow coming in after that – crazy! (Minus any expenses and taxes and all that of course) Then you could sell it!
  8. You could hire a property manager to do all the work for you :)  And the stress, rent collections, background checks, etc etc etc… You’d have to be okay with sharing a part of the income with them in exchange for this niceness, but it would be money well spent in my opinion for sure. This alone would nix most of my reservations about owning another home – I wouldn’t be on the hook 24/7! (Another pro to this?  You’re not FORCED to live nearby anymore – which means it doesn’t hinder you from traveling or moving across the country/world anytime you wish)
  9. And lastly, I already have a down payment without touching any of my cash reserves…

That’s the second – and most important – piece to the puzzle here right now :)  Remember that property I told you I sold during my baby break last week?  Well, it netted me a good $20,000 which I could easily just turn around and dump right into a down payment on a small 1 bedroom condo or efficiency in the area.  Or perhaps even farther out considering that can only buy you a door sometimes in our area! Haha…. dumb DC real estate…

I can’t go much further into the details for contractual reasons, but in a nut shell I’ll be getting that huge chunk of money there for selling the ownership rights of the site going forward, but will also be kept on as a consultant for a certain amount of time too – allowing me to still have some decent cash flow going forward. So pretty much a win-win for all parties involved. And again, helping me to improve my skill set! I can now say I sold a website! Woohoo! :)

monopoly houses cash
But back to the idea of dumping the money back into a new condo here.  You can see where my brain is going with all this right?  In essence I’d be trading an online piece of real estate for a PHYSICAL piece of real estate!!  And I don’t know many people that have done that, or at least expressed it in those terms :)  On top of all the advantages I’ve already laid out, the story in itself would be pretty bad ass to tell over the years! And just adds that much more to the whole adventure.

So, after reading all my thoughts here about this sexy little exchange idea, what do you think?  Smart?  Dumb?  Wondering why I even wasted your time today? Haha… I wanna hear it all!  I need to know if I’m overlooking something pretty damn important here, or if I’ve pretty much covered the basics and now just need to grow a set of balls and pull the trigger ;)  The fact that I’m so nervous just THINKING about all this right now is exciting! I feel like I’m living!

I don’t know when I’ll make a final decision really, but when I do you’ll be the first to know.  It’s just good I haven’t rushed into anything like I did when we bought our first house after 48 hours of seeing it!  How you go from looking around for 2 bedroom rentals to BUYING an entire home is beyond me… That old J. Money was straight up cray!

———-
PS: If I don’t end up going through with this, where should I put the money instead? Against my current mortgages?

(1st Photo by my main man, PT Money, and the 2nd one by  Images_of_Money)

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{ 53 comments… read them below or add one }

1 William @ Drop Dead Money August 6, 2012 at 6:08 am

My father always told me: if it works for a million people, don’t knock it, learn it. There is no question that investment real estate can work for you, because it has (as you noted) worked for millions of people. There are a few comments (in no particular order):

Timing is the biggest one. 90% of the time when it doesn’t work is when you pay too much or take on too much debt. The real estate market is recovering from the devastation of the Great Recession. So the time is still OK to good. The biggest risk is overpaying for a property. That usually happens when loans are easy to get, and that’s why 25% of homeowners today are underwater in their mortgages. So, if you’re ever going to do it, don’t wait, do it now. Prices are only going up.

These days the rental market is unusually good, mainly because so many folks either walked from their loans or got foreclosed on. That means they can’t buy for a few years and have to rent. So the “normal” ratio of renters to buyers is tilted to the renters side.

Also keep in mind escalation: since the Great Depression, rents have always gone up. And those rent increases are (by definition almost) compounding. Almost all leases have a small escalation built right in. So if it makes sense to day, it will make a ton more sense ten years from now. Unthinkable today, but looking back, true inevitably.

Owning rental properties is not a totally passive income stream, as you noted. But the time commitment is a lot less than what I imagine the time commitment will be for an online property. A friend of mine did extremely well with income properties, and he has always viewed it as an easy job, rather than passive income.

Investment properties scale well. That means the more you have, the better it works. Said friend went from a house to duplex to a fourplex to serious multi-tenant properties. Per square foot, the purchase price for multi-unit properties apparently work out cheaper and cheaper the more units in a property. Also, an tenant change leaves you 100% without income until the new tenant gets in, but only 50% if you have 2 properties, 25% if you have 4, etc.

You will need a cash reserve for the months the property will be empty between tenants. You can get lucky and get a long term tenant, but the safe thing is to not count on it.

It is a long term commitment, If you get bored with it, you are tied to the economic cycle in that you can only get out when the market is good, and about 30% of the time it isn’t. Housing is cyclical – it is what it is. That’s why buying in a recession is so important – it removes the liquidity risk almost completely. The more you pay, the more your liquidity risk and the smaller your cash-out profit.

If it intrigues you, go for it. Like any new business, don’t expect to get rich in the first five years. But, judging from this site, you’re smart and you’ll pick it up quickly. You’ll find out soon enough if it can keep your attention… :)

Best of luck – keep us posted!

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2 LB August 6, 2012 at 6:34 am

I was actually wondering why you were up so early posting on facebook and then I realized the time difference. :p

Since it is way too early for me to function properly I will admit I didn’t read every detail but love the idea of owning rental property. I got excited a while back when I read of another blogger that owns a tri-plex and lives on one end and rents out of the other 2. Bring on rotting floors and all, because I seriously want to add that to my life plan :)

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3 Downundersugarglider August 6, 2012 at 7:06 am

well – I’ve been following your blog for a while now and suddenly this post seems so out of place. It seems to be a post that is taken over by emotion and the mythology of property investment – which is sooooo out of place for your normally astute advice. So, as an ex-property investor, that is my first piece of advice – put all that emotion and excitement and justifications aside and do the numbers – carefully.

William above has given some really sound comment, and I want to add a few things that I thought of.

Investment property is a looooong term investment and many people sell and just see the big lump of cash and think PROFIT! But it can be a bit like the South Park Underpants Gnomes – a bit false.

Don’t forget to include the effect of inflation on your returns. Esp. if you keep a property for over 10 or 20 years. Being Australian our taxation laws are different, but getting good tax advice about how to handle capital gains tax etc needs to done with care.

Tenants do not look after property as well as a homeowner – the number of times I heard things like “it just fell off the wall”; ” I don’t know how that hole got there”; ” I plugged my dodgy electric kettle in to test it and it blew the electrics – now you have to repair it as a matter of urgency” – I spent FAR more in maintenance on rental properties than on my own home. This also took time – more than you would originally think. To deal with the estate agent, get quotes, arrange with the tenant, follow up, paperwork etc. In Australia, you can “write off” these expenses – but the taxation treatment is simply that your total taxable income is reduced by these amounts so in effect you are spending $1 on an expense and only getting your nominal tax rate (say 30c) back or “written off”. If you get a new (or newish) property you can claim depreciation on the new fixtures (e.g. new carpet can be depreciated over 7 years) This is useful as you have bought the carpet in the purchase price and can claim a tax deduction every year without having actually paid out a repair expense.

You want to track if you are negatively or positively gearing the property. I believe negative gearing is one of the biggests myths. I would much rather be positively geared = make $1 and then give the government 30 cents tax, than LOSE $1 and the govt will refund me back 30c in my tax return. People think that they will make back the difference in increases in the sale price when they sell – but if they do, they forget that they have to pay capital gains tax; and you are stuck selling in the cycle and might not get an increase enough to cover that lose. the net effect is that you are nibbling away your end profit in advance across the years. Why people think it is clever to lose 70c in “writing off expenses” or mortgage interest is beyond me.

There is an argument that you do not want your investment properties in the same location as your home – cause different markets perform differently, and if you need to sell and the market is down, then you can get stuck with everything locked up in the underperforming market. Same goes for your diversification argument. You are actually doing the reverse, you are putting even more money into the real estate market – along with your own home – which I bet is already your largest asset. Diversification would be a completely different type of investments such as shares, or a venture angel investment.

I back up William’s point about it works better with scale. Something like 70% of Australian investment properties are owned 1 off. You miss out on the benefits of scale.

Anyway – after all of this Investment properties are usually not giving a better than 7% average annual return in Australia – and I can stick my money in a bank term deposit for 6%. Please do your sums! I’ll shut up now.

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4 Lance @ Money Life and More August 6, 2012 at 7:07 am

I think you’d do decent at it but just make sure it is something you’d stay interested in and want to hold for many many years. If you just sell it in a year or two you’ll end up losing money. The nice thing is you can hire a property manager but unfortunately no one will look after the property the way you would… if you don’t go for the investment property you could put the money into other investments or go ahead and pay down the mortgage if that is what you want.

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5 Downundersugarglider August 6, 2012 at 7:13 am

OH – and another bloody thing!

It ties up your cash flow! You will become asset rich but cash poor – cause you have service a loan (even when your property is vacant), In Australia the owner has to pay things like the local council rates, government taxes, water/sewerage rates, insurance, property manager agent fees and if your property is in an apartment block there is usually strata fees. Then you have all the repairs that have to be paid, in cash, to the tradie in the moment they happen – but you only “write them off” in your tax return at the end of the financial year. You need to make sure you can service all these if your property is vacant.
Geez I can go on!

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6 DC @ Young Adult Money August 6, 2012 at 7:19 am

I think it’s a great idea and would not only provide you an additional stream of income but you would also probably learn a thing or two in the process.

We are putting an offer on our first home today and it has a studio/efficiency apartment set up in the basement. The studio has a kitchenette set up in it and their own private entrance, so no sharing anything but laundry. I’m thinking the additional ~$500 would be huge. In approximately 10 years I would LOVE to have a separate rental property. I think you should go for it, especially if you have the cash to invest.

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7 Nate St. Pierre August 6, 2012 at 9:19 am

The “crazy housing monster” made me laugh, hahaha. I think we’ve talked about this idea so much that I don’t have a lot to say here, but I loved the post, and I hope you get a ton of great feedback from readers!

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8 m1nts August 6, 2012 at 9:41 am

My MIL does that for living. Have you ever watched this tv show where they buy old properties, fix ‘em up and resell? well, just like that.
the initial investment is really big, but after some years it becomes extremely profitable, she does have some properties for rent, about 2 – 3 buildings, but she hired a company to rent the condos and all she does is collect the check (this company also does the maintenance/fixes of the buildings and charge a small fee for it).

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9 Sense August 6, 2012 at 9:42 am

Do it!!! :) Easy for us voyeurs to say, but we’ll be pulling for you every step of the way. Just don’t sell THIS blog! You can totally do it. Other than that, yeah, I guess throw that $20K against the mortgage?

Also? This: http://www.guardian.co.uk/fashion/fashion-blog/2012/aug/06/bobak-ferdowsi-mohawk-guy

go mohawks (and science)!

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10 Lynn August 6, 2012 at 9:50 am

Remember with Condos you have condo fees. Those fee are subject to change yearly and if there is a major project such as window replacement you could owe a large chunk of change at one time (my new windows were around $3000 several years ago) or your condo fees could jump significantly if the window costs are added monthly to your condo fee. Make sure the condo board is doing what it is suppose to. A poorly managed condo is something you don’t want to get involved in. Also check about foreclosures and see if people are not paying their fee due to foreclosures. A condo without sufficient money is also something you do not want to deal with (google the subject in Florida. This is a nightmare for many condos there) You may also want to check and see if the condo is FHA approved in case you want to sell the condo at some point. First time home buyers now tend to use FHA loans and condos especially in the DC metro area are the first step on the property ladder for most folks. I would google the condo and see if there were comments floating around about the management of the condo. I google one building I was interested in and found out they were broke. I would not want to move into that situation.

Also remember tenants can be hard on a place. Do you have the funds to redo the flooring, put in new appliances etc. if they decide to move and you need to rent the condo again. What about if the airconditional unit goes etc. Reserves are a must.

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11 SMB August 6, 2012 at 10:45 am

I have been thinking about doing this too – except I don’t have the money to do it! I just bought my first house, but I’m already thinking about renting it out when we move on and possibly picking up some other rental properties. I’ve even been scoping out the Fannie Mae Homepath website looking at foreclosures that would make good rentals. Oh well, I can dream. I seriously wish I was in your position now though, right now is a great time to pick up property for cheap and more importantly, get a great interest rate.

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12 Jason @ WSL August 6, 2012 at 10:49 am

Buying investment properties is definitely in my long-term plans and I think you should give it a try. I think if you buy intelligently (look for a deal, put quite a bit down, and get it on a 15-year fixed note) then you are less likely to run into problems down the road.

A big issue I see with many people that rent properties is they’re strapped for cash. If you’re in this situation then you HAVE to accept the first renter that shows interest. You can’t be as selective and you’re more likely to find somebody that isn’t going to take care of the place. Sure, I understand that you don’t want the place to go unrented for a long time, but if you have the cash to cash flow the mortgage payment when these times occur, you can be much more selective in who you allow to rent the place. I think that mindset helps offset some of the long-term maintenance/repair expenses that many landlords run into.

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13 so August 6, 2012 at 11:01 am

Move into an owner-occupied 2-4 plex or save up for a multi-unit. A SFH is too much vacancy risk for your first investment.

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14 J. Money August 6, 2012 at 11:08 am

Thanks everyone!! I need all of this stuff to better help me come to a decision, so thank you for it all so far!! I knew I could count on you :)

@William @ Drop Dead Money – Thank you SO MUCH William! Man did you have some good points… specifically the one on rent going up (so true!! Didn’t even think of that!) and also the reminder that it IS a long-term committment – which is a concern of mine as I do get bored easily and tend ot switch gears pretty fast… BUT, all things considered, it’s alot harder to get bored making money than not ;) You rock, my friend – really glad you stopped by today.
@LB – Haha yeah! I think you’re talking about Paual from Afford-Anything.com – great (and smart) girl!
@Downundersugarglider – Haha, all GREAT info though, thank you so much!! I need some more “in your face” insight like that cuz it IS pretty new in thinking right now even thoug I have done some good research over the past few weeks… I’ll admit it is a bit “off” from my normal “stay the sturdy course” type planning, but then again I have massive A.D.H.D. and every now and then you have to shake it up ;) Did you miss my post on opening up a thrift store? Haha… I live off adventure… But yes, all good points to consider for sure – esp the time and maintenance part. But again, if you hire a property manager to do it all for you, it’s just a matter of money at that point right? And if I were to “tie up” say $20,000 in a new property, wouldn’t it be the same if I tied it up paying off debt? I think a lot of this stuff is what scares away most people from jumping in, and I’m just trying to tell if I’m being more scared here or if there’s something really just out of place that I’m completely forgetting… and so far I think I have a good grasp on it.
@Lance @ Money Life and More – Yeah, all true things my man. It’s def. a bigger decision than most I’ve had to make recently, but it’s also why I love it so much :) Completely outside my normal business plans!
@DC @ Young Adult Money – Wowww that’s awesome man!! And TOTALLY the way to go too – do you ever watch Income Properties on HGTV? (I think that’s the channel?) I love that idea of having renters just downstairs like that a lot – nice and concise :) I hope you get it, bro! Wishing you lots of luck!
@Nate St. Pierre – Haha, thanks man :) I think I got in everything we’ve talked about here too, yeah? Tons of pros and cons and I guess at the end of the day it just depends on what my preference is at the time… I just hope it’s not one of those things we ponder about for years and years to come and never make a decision one way or the other! Haha… those are the worst ;)
@m1nts – That’s EXACTLY what I want to do – just hire someone to deal with it all and me just watch the money :) A perfect world for sure, but I know it’s def. possible. Tell your MIL I’m a new fan of hers!
@Sense – Hhahaa… great article!! I love that guy! :) And yeah, you know I’ll be blogging about it ASAP if and when I ever pull the trigger or decide not to! It’s all a game in a way, ya know?
@Lynn – YES!! GOOD POINT!! I totally forgot to include that in my analysis here actually – when I first started looking for condos in the area some were Sooooooo cheap and I couldn’t understand why as they were brand new models? And then when I dug further I saw those condo fees – they were astronomical! Like $500-$600 a mo!! Jeez, no way… a very important thing to consider for sure, thanks for the reminder! (And also on the tips to google the places too, never thought of that :))
@SMB – Good minds think a like ;) Congrats on your new home! That’s exciting. We’re gonna rent ours out too whenever we decide to move so I guess technically I’d become a landlord at that point even if I don’t pull the trigger w/ this other new property, huh?
@Jason @ WSL – AGREED!! You have to have the cash reserves so you can run everything smoothly and not take any flakers on at any point. And honestl it would never even cross my mind unless I was comfortable w/ the amount of $ we had saved for stuff like that. It def. seems to be a cash intensive investment, that’s for sure.
@so – Hmmm… that’s not a bad idea. Only thing is those would cost 3-10x more in our area here which means I couldn’t do it :( Realistically the only way I’d be comfortable getting a place is starting out small w/ a 1 bedroom or efficiency and THEN moving up to those better investment properties out there. But you have to start somewhere, right?

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15 K @ Get Worth August 6, 2012 at 11:22 am

This idea has crossed my mind too. A place across the street recently went up for sale and I was considering it as a rental property investment. Before I could convince myself, it sold at a pretty steep discount to asking price. Now there is another house across the street, so I’m back at convincing myself again. Your post is helping. Looking forward to reading more about your decision.

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16 so August 6, 2012 at 11:27 am

” Realistically the only way I’d be comfortable getting a place is starting out small w/ a 1 bedroom or efficiency and THEN moving up to those better investment properties out there. But you have to start somewhere, right?”

I guess that’s true. That being said, the hassle is not materially greater with 2-4 units versus one. I wouldn’t even get started on a 1BR or an efficiency. Why go through the difficulty of dealing with a tenant, another mortgage, etc. for a few hundred bucks a month? Rather than buy another property, just make sure your next house has an income suite. That’s how we started.

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17 Ornella @ Moneylicious August 6, 2012 at 11:32 am

It definitely is a long-term investment. What’s the purpose of you buying physical real estate? Just to diversify? Diversfiy what? I ask because before you jump in on the idea (which I think is a good idea) you should be able to answer a few simple questions as it pertains to your overral financial health. If you weren’t able to sell the property at the time you wanted, let’s say, could you hold it out for the long term?

Maybe consider outside of the DC area? Like you said people need a roof over their head. Location is important. Have you considered neighborhoods that may not be the “best looking” but people do move in there because they can afford to rent, not necessarily to buy? can you afford a fixer-upper? What about a duplex, triplex? just some ideas to help you out.

I wouldn’t dump your money into your mortgages because you don’t want to tie up your cash into a real estate property. The only way you can get the cash out is if you take out another loan or sell it.

Have you thought about speaking to Paul @AffordAnything? She seems pretty verse in rental properties.

Good luck! ;-)

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18 Jenna, Adaptu Community Manager August 6, 2012 at 11:36 am

I’m a big fan of rental properties. Definitely hoping to get one in the next five years. *fingers crossed*

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19 Brian August 6, 2012 at 11:39 am

I am actually looking into getting some rental properties myself. I am still in my “investigation” stage but I am about ready to take the plunge. I would be doing it as a partnership with my sister and her husband. They live in your neck of the woods and you cannot buy much that is really of value. However, since I live in the Midwest there are plenty of opportunities with more bang for the buck. The other good news is I can let my sister handle most of the legal side since she is one of them fancy lawyers.

If you weren’t going to dump that $20K into a rental property I would probably invest it instead of pay a mortgage off, but that’s easy for me to say in my paid for house world!

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20 William @ Drop Dead Money August 6, 2012 at 11:45 am

J, if you tend to the ADD side, you might consider a different investment vehicle altogether: stocks. The key difference is you can keep looking at a new company each and every single day. It’s a lot like golf: you always learn something new, and there’s always something happening. Quite the opposite of rental properties.

The downside is it’s not as simple to learn as a rental property. Then again, to someone intelligent and in search of challenges, that might be a plus.

I don’t know if anyone has done a comparison, but my guess is you can make a roughly equal amount of money in either stocks or rentals. So, if one offers more fun and challenge, it might be worth looking into it. If you need a road map on how to ease into it, let me know.

Either way, keep us posted! :)

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21 My Money Design August 6, 2012 at 11:58 am

I think you’ve got a lot of really good points in here which would lead me to the same conclusion. Although both are lucrative, there is just something about real estate. Anyone could compete and make a newer, better website. But land is something they aren’t making anymore – so take the opportunity where you can get it!

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22 Taylor August 6, 2012 at 12:14 pm

Okay. Wow. Lots of comments, none from current real estate investors.

I am a 33 y/o single female. I work a full time job (a career that involved a lot of education).

I also own six investment properties. I manage them myself. When something breaks, if I cannot fix it (and most of the time I cannot), I call a plumber, an electrician, an a/c guy, or a handyman, all of which are programmed in my phone. These are contacts that I have established through the years. They probably also have me programmed in their phone.

It is profitable. It is hard work. Tenants tear up things, doors, appliances, floors, you name it. They bring in roaches, scary boyfriends, loud music, annoying habits, oil-leaky cars. They move out in the middle of the night. They don’t always pay rent.

I have a lease that covers all of those items. My rental rate and deposit also covers all of those items.

I am sometimes cash poor, but I am usually not (my tenants will always think I am cash poor, so will my friends and neighbors). I plan to be sort of cash poor this month because I will write a $15K check to pay off my second duplex.

I do not drive a fancy car – in fact, all of my tenants’ cars are nicer than mine. I do not live in a fancy house. I do not wear fancy clothes. But if my job ended tomorrow (because I am writing a post for a blog during work hours!) my properties would support me indefinitely. I wouldn’t be rich, but I would be okay, unlike the other professionals at my workplace who support stay at home parents & private schools & depend on their monthly paycheck.

Note: My nights and weekends are frequently occupied with showings, lease signings, contractor meetings, repairs, or wandering around Home Depot. I would estimate 50% of my weekends include some tenant- or rental-related activity.

Note: J. Money, if you buy a rental property, please make sure that you do not overpay. I fear that you are susceptible to this, based on your house purchase and current interest in a condo or efficiency. The neighborhood where you live is unlikely to be a prime place for a rental property. A condo is also unlikely to be a cash flow positive property unless you buy it very, very, VERY cheaply.

Also, if the Aussie’s comments above are true that he (or she) is getting a 6% return on a bank note, wouldn’t all of Americans’ money be in Australia right now?

If you have questions about investing, please feel free to contact me. There is also a website, mrlandlord.com, that has a Q&A section, that will detail the horrors and successes and questions and suggestions from real life landlords. Many landlords recommend that prospectors read there for a bit, just so you can get an idea of the day to day items that come up and how other landlords have dealt with them (bedbugs, water heaters, types of flooring, rent collections, insurance, etc).

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23 katherine May 19, 2013 at 10:16 pm

wow. great to have a perspective form someone actually doing it.

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24 Jen @ Master the Art of Saving August 6, 2012 at 12:36 pm

I’m a big fan of diversification, but I don’t really know much about investment properties. Haha, I guess I don’t know much about real estate either, we’re buying our first house and everything is brand-new.

Personally, I think if you’re really wanting to do it, just run the numbers and make sure it’s what you really want. It’s better to try and fail (or succeed) than always wonder what if. :-)

Of course this only counts as long as you don’t sell Budgets are Sexy, that just wouldn’t be cool. ;-)

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25 Cassie August 6, 2012 at 12:43 pm

I took one look at the $20,000 and went “OMG, stick that on your mortgage!!!”

I seem to recall something about your home being underwater at the moment, is the proceeds from the website enough to bring you back up again? While buying a rental is a great investment, it can also eat up a lot of time (and income if your tenant doesn’t pay). I’m not sure what housing prices are like in your area right now, but $20,000 would give you a 20% down payment on a $100,000 home. Are there reasonable options in that price range in your area? Just thoughts. I’d love to hear what you end up deciding.

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26 Joe @ Retire By 40 August 6, 2012 at 1:30 pm

See how much the HOA cost for the condo. Usually they are pretty high and that’s why it’s hard to make money with a condo. If you can find a house, it’ll probably turn positive faster.
Actually, I think renting out your old home is the way to go for new investors. You know the property well and know what needs fixing. Maybe you can move to a nicer house and rent out your current one?
You can also look at REIT if you don’t want to deal with the tenants.

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27 Debt Killer August 6, 2012 at 1:30 pm

My home has been on the market since January and it hasn’t sold yet. My soon-to-be-ex-wife and I have given consideration to holding onto the property and renting it out, but I’m leaning against this idea for many reasons. While your situation is obviously different than mine, what scares me most is:
1) Having a difficult time finding suitable renters. You should treat the screening and application process like a job. In today’s economy, it could be tough to find a suitable renter. What scares me is the thought of having a large mortgage payment every month withot rent coming in. What if the renter skips town? What if the renter is laid off and can’t pay? In my situation, I’d be stuck with the mortgage payment on the rental property (my current home) and whatever mortgage I end up with in the future. Swinging two mortgages? Ehh…no thanks.
2) Being a landlord. I really don’t want a call at 2:00 am saying the electricity is out. Or the leak is roofing. Or whatever. As someone mentioned above, renters, generally speaking, don’t necessarily take the same care that a homeowner would. And rightfully so. Aside from the month-to-month rent, there’s no long-term vested interest. A lack of morale.
3) Real estate is risky. Sure, rates are rock bottom and home prices are low, but nobody knows what will happen in 5 years, 10 years or 20 years from now. Will the value increase? Probably. But who knows. Do you think people that bought rental properties in 2005 thought they would be where they are today?

But with that being said, you’ve made several valid points in favor of the idea.

Tough call, brother…

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28 Brent Pittman August 6, 2012 at 2:54 pm

Too bad I don’t have the dough to buy your online property! What does your wife think about this crazy idea? I think mine would rather stick with the known and what’s more stable and proven to bring in money. But if you’re getting burned out…time for a change!

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29 HighOrderGuiltComplex August 6, 2012 at 3:18 pm

There are 2 quick comments I would like to make.
1. Please check out the yearly property taxes on the property first. plug in the numbers for the purchase price and the home owner occupancy rate. For instance, where I live your taxes are basically based on the amount you purchases it for (unless you buy a foreclosed home, then it’s based on the mass appraisal figure) and then owner occupied properties are also a 1/4 the taxes of non-owner occupied properties.
2. I rented out a room in my home and the renter tried to commit suicide in the bathtub. It was never a situation I ever dreamed of happening. I still have some emotional scars from the incident. So is something to think about if you can handle the crazy stuff renters can do on your property. Not something that a lot of people would think about before making an investment but it does happen to people. Needless to say that I have no more renters.

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30 Aloysa @ My Broken Coin August 6, 2012 at 4:37 pm

I am a big fan of diversification but I am not a big fan of investment properties. I always hear horror stories about them. And after all, I would be a horrible landlord. However, if I’d had a down payment that would allow me to try this idea and not touch cash reserves (just like you said) I probably would do it.

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31 Greg@ClubThrifty August 6, 2012 at 4:59 pm

We own two rental properties, and we absolutely love it. It is a great way to build wealth…all while using somebody else’s money to do it. Sure, you have to fix things every once in a while. You may have the occassional bad renter. Just make sure to screen them properly, buy a nice property in a decent location, and watch the money roll in – both while you own it and when you sell. Good luck!

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32 Greg@ClubThrifty August 6, 2012 at 5:01 pm

One quick follow-up…Everybody has a horror story or two, but those shouldn’t dissuade you from buying investment property. Usually, that is a failure on the owner’s part for not doing a better job screening possible tenants.

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33 Evan August 6, 2012 at 5:05 pm

“I need to diversify! I can’t have all my income and time tied up in one insanely focused area, right? What if you get tired of reading BudgetsAreSexy? (*gasp*)”

or big G decides not to send you any more readers…That is the real fear of mine. I have been deciding between an investment property and possibly a hands off B&M business

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34 Taylor August 6, 2012 at 5:50 pm

8 more comments and still no actual investors have chimed in…

More properties for me! (seriously, I am shopping for my next one).

The other nice thing about properties is that, once you get a nice cash flow going from a couple, they pretty much throw off the next down payment, and then the next, and then money for a trip to Europe, and then money for paying down student loans, and the money for paying off the family farm, and then…

Right? So if you put down $20K on a property that free cash flows $400/month, in less than 5 years, that property has generated enough for another down payment (all the while paying down its own mortgage).

What happens if you have 6 properties, each cash flowing $400/month?…

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35 Taylor August 6, 2012 at 6:01 pm

Correction…Greg above has property! It sounds like he enjoys it too.

Other notes: don’t rent to folks likely to try to commit suicide in your bathtub. No bueno!

Don’t be a bad landlord. If you can’t enforce rules, it’s probably not for you. But you don’t have to be mean to enforce the rules – you can be nice all day long while you tell folks that the mortgage has to get paid with the rent you have to get from them, and they can’t stay if they can’t pay…

It’s not a hands off business – and there are many horror stories about rental management companies. Remember – no one cares about your money more than you. Same with rental properties.

Here is another way that I look at it:

I had a tenant stay for 5 years in one of my properties. He paid, without fail, $600 per month, or a total of $36,000. When he moved out, his one bedroom of carpet was trashed. His bathroom was gross. He left furniture behind.

How much work would you do if someone paid you $36K? A lot, right? I certainly did! I had to call the maid AND my handyman AND make two trips to home depot. He did not get his deposit back, plus I was out an additional $200 to improve the type of flooring instead of steam cleaning it (I upgraded from carpet – never, ever put carpet in a rental).

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36 Edward Antrobus III August 6, 2012 at 6:34 pm

There are a bunch of PF bloggers out there that own investment property. It would probably be a good idea to read what they’ve written about the topic. I don’t know the specifics of his rental property circumstances, but Joe from Retire By 40 seems to be only breaking even based on a cursoury glance of his monthly cash flow posts.

One thing I’ve noticed about people who have had the opportunity to be landlords: they never seem to like their tennets that much.

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37 mbhunter August 7, 2012 at 12:22 am

Definitely look into it!

I’ll write a post about it, just for you.

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38 Downundersugarglider August 7, 2012 at 10:28 am

Hi Taylor
remember – some of us commenting have been property investors in the past, and owning your own home is a form of real estate investment. And I agree with everything you wrote – I had very similar experiences!
Even though you think you are paying an agent to manage everything for you, they will not act without your approval. You could trust them to do it all and then accept the bill they will pass on OR you could call quotes/ask for quotes and then the agent will manage it from there. It’s a time/convenience vs money situation.
and Yes US money is flooding into Australia cause we have higher interest rates. The Australian Federal Reserve base cash rate is 3.5% compared to USA 0.25% And the Aussie dollar is running at at 35 year record stronger than the US (today we get USD$1.05 for our $1) and we are all on holiday in the USA!! (I’ll c ya’ll in November, myself!)

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39 brooklyn money August 7, 2012 at 1:52 pm

J-Money. Check out Free Money Finance. He is buying his first investment property.

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40 so August 7, 2012 at 2:51 pm

Been an investor for 5 years now. We’re de-leveraging for a bit, but I stand behind my original comment. My preference is larger properties, and I won’t bother unless there is at least $1,000 / mo cash flow in the deal. There is just too much hassle, and there are a LOT of transaction costs. I’d rather do one deal for $2,000 / month than 6 for $400 / month. Six negotiations / inspections / appraisals / negotiating new leases, etc…UGH!

Either wait and learn until you get enough of a downpayment for a deal that will generate meaningful cash flow, or go owner-occupied and learn from an in-law unit.

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41 ryan August 7, 2012 at 4:00 pm

I have a half-written article in my drafts section about this exact topic – adding a rental property or some other form of income stream as a means of diversification. I love being an entrepreneur, but it does have its risks. I would love to add a few different cash flow streams to further diversify my income.

I can’t say whether real estate is for you or not (I’m not certain it’s for me yet), but it has certainly been on my mind a lot lately.

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42 J. Money August 7, 2012 at 5:49 pm

You guys are awesome! That’s why I continue to blog! :)

@K @ Get Worth – Oh, awesome! I’d be going back and forth with that decision too – esp if it was really discounted like that! It’s much easier for me to jump on things when I KNOW what I want and then something really sweet comes across my path ;) Kinda like when I wanted to blog full-time but was too afraid to quit and then got laid off, haha… nice and easy!
@so – Yeah, I know that makes sense in the long run, but if it means I won’t even get started then there’s not even a point :) I’d be doing it more for the experience and long-term gains than the monthly profits at least for the first 5-10 years, but you’re right in that it’s not optimal.
@Ornella @ Moneylicious – Loving your questions! I’ve considered almost all of them so far :) And my answer to most of them is that I’m okay with losing access to a chunk of my cash since It’s really *extra* outside of all the rest of my stuff, and I’d be investing for the experience and long-term gains over time. I wouldn’t be selling the property until at least 15-30 years out, if that. It would be for the long haul :)
@Jenna, Adaptu Community Manager – Let me know if you do! :)
@Brian – Nice! That’s optimal for sure – I’d MUCH rather partner up with someone starting out than going on my own, and plus it would be a lot more fun :) Unfortunately my biz partner (Nate St. Pierre) isn’t on board all the way with me yet, but I think I can still work on him ;) Our initial idea was to get a bigger cheaper place in Milwaukee where property is WAY less expensive than here in the DC area.
@William @ Drop Dead Money – I’m already invested in stocks! :) That’s partially why I want to go outside and do something new too – I feel like I shouldn’t have all my retirement money in equities and mutual funds/etc. Even REITS doesn’t do much for me cuz it’s still “electronic” and not tangible. It’s that solid “real” property I’m kinda interested in – not more digital stuff, ya know? But if I weren’t in it already I’d say you were on the right track with my personality :) I LOVE watching the market fluctuate every day! For the good and for the worse!
@My Money Design – Oooh I like that! Haven’t thought in terms of “land is something they aren’t making anymore,” that’s so true!
@Taylor – YOU ARE MY HERO! Haha.. YES, this inside stuff is EXACTLY what I was going for – thank you!! I think it’s so damn hot that you have all this going on outside your main job like that too, hardly anyone is doing that and you really NEED to be thinking more of the long-term like that, so way to go! Maybe I’ll be like you in another 5-10 years? :) Also I don’t mind others chiming in who don’t have any “real” experience in real estate either – I like hearing everyone’s opinions! That’s the whole reason I posted it up today – I need as much info as I can get my hands on :)
@Jen @ Master the Art of Saving – I’d never sell BudgetsAreSexy!! Unless someone gives me millions of dollars down the line! Haha… which pretty much is never ;)
@Cassie – I know, that was my first thought too when I decided to sell my site – 10 months off my 10 year No Mortgage plan! :) Then I starte thinking of *other* things I could do with it that was way different, and all of a sudden real estate started popping up into my head… I think right now it’s still too close to call, but if I don’t go the investment property route, I’ll most probably apply it to my mortgages instead… I don’t want to sit on the cash and do nothing with it, that’s for sure.
@Joe @ Retire By 40 – Yeah, that’s something positive in the future too, no matter which route we end up taking here… there’s no way I’m gonna be living here in the next year or two (or SELLING the house for that matter), so odds are pretty high I’d automatically turn into a landlord either way :)
@Debt Killer – Oh man, I hope you guys are able to sell it off soon! I thought one of your reasons for not wanting to rent it out was gonna be having to deal with your ex more, haha… guess not ;) The way I’d solve all those problems you listed though would be to hire a property managment company. I’d still need to front all the money (and even more so to pay them), but it would wipe out most of the hassle from it all, which I like.
@Brent Pittman – That’s a most excellent questin, my friend :) And the answer is she just wants me to be conservative as possible, haha… which is NOT go out and start learning something new that costs that much money ;) Esp with our new baby here and all… but then I tell her I wouldn’t be where I am today if I hadn’t taken the risks, so she knows and appreciates where my mind is. I wouldn’t dare do anything without her approval though, that’s for sure!
@HighOrderGuiltComplex – OMG wow, that is crazy! I’m so sorry, I’d be freaked out forever too :( Really really appreciate this stuff though, I’m totally gonna put it all into consideration! Jeez…
@Aloysa @ My Broken Coin – Want to go in on it with me?? Hehe…
@Greg@ClubThrifty – Nice! I’m glad you guys have found it rewarding, that’s awesome to hear! Congrats :)
@Evan – Yeah, the threat of Google and anything else taking down the site really is the only things that keep me up at night. I just know most of it is out of my control, so I better stick to the stuff that is! Like diversifying and getting into other areas in case a worst case scenario happens.
@Taylor – Oh man, you are full of information! Thank you! And I totally get you on that “one place turns into more and more and more” deal too – that’s one of the main reasons I’d like to get into it all :) Start off small, on the side, and then grow it into a bigger empire with momentum and more cash flow on your side. I can totally see the potential there!
@Edward Antrobus III – Haha, I bet I could find a bunch more horror stories pretty easily too if I Googled more for it ;) I’d like to think I’d be better about it, but you never know!
@mbhunter – Woo! Thanks! Do you own some yourself?
@Downundersugarglider – That’s a good point on the property manager too – you’d have to really trust them and know what’s going on to really make it efficient, and I’d like to think I’d do a good job at least initially. But for me I’d totally pay to keep my time if I were to ever get started with this. The more I can work on my online stuff normally, the more I can grow other aspects of my net worth!
@brooklyn money – Oh yeah? Didn’t know that actually – haven’t been over to his site recently, but it’s one of my fave :) Thanks.
@so – I’ll def. let ya’ll know what I end up doing :)
@ryan – Nice! I’m gonna ask you more about it when we see each other at FINCON :) I probably won’t have my mind made up by then, haha, but ya never know.

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43 mbhunter August 7, 2012 at 9:39 pm

Yes, I have one. Eyes on another.

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44 J. Money August 8, 2012 at 10:18 am

Nice!! Yet another reason to make you my mentor ;)

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45 Zach @ The True Generalist August 9, 2012 at 4:57 pm

I have a couple properties and it can be kind of nerve racking, especially when they don’t cashflow like you were hoping for. I just have to keep reminding myself that I’m getting free houses.
The best advice I could give you when buying a property is one I heard from Paula actually: “The One Percent Rule states that you should look for properties in which the gross monthly rent equals one percent of the purchase price or more.” So if you find a place for $100,000, you should be able to easily rent it out for $1,000/mo otherwise it isn’t worth it.
I don’t think I even knew this rule when I bought properties and although I ended up getting it about right, I cut it close both times so my cashflow is not as great as I’d like. Looking for a third property now for super cheap to do it right!

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46 J. Money August 10, 2012 at 5:21 pm

Oh wow, never heard of that rule before! I do like it though – just cuz it’s so easy :) Not sure how common or researched that one is, but seems to be a nice rule of thumb from first glance… thanks man :) I should probably ping Paula now that I’m interested in this stuff so much!

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47 jen August 14, 2012 at 12:45 pm

My husband and I just purchased our first real estate investment property. Since we’re trying to retire early (in our 40′s) we needed to find cash flow investments that we can easily touch at a pre-retirement age. We purchased a 2/2 house 2 blocks to the sand in Daytona Beach, FL for $95,000. Our total upfront investment was about $37,000 (including 25% down, closing costs and all repairs). We just completed all renovations and have had 8-10 interested people already look at the home. We live in another state and will rent it out through a property manager so that it’s as passive as possible. We did, however take 3 full weeks to make repairs and improvements on the home.

We expect to make an 8-10% annual return (after all expenses including the property manager). This return, along with the amazing tax benefits sound great to us! In fact, as soon as we rent this house out, we will purchase another home asap. The mortgage is at 3.99% and is for about $70k. We can pay this off and make an extra $320/mo on this house if we choose to, as well. We plan to buy and hold for a long time to generate income to live.

We live in an expensive location, but with a property manager, we were able to buy in a good rental location (in another state) with low home costs where returns are quite good. However, the upfront research and travel is time consuming. Make sure to find a great mortgage lender (in the location that you plan to buy), a realtor and property manager. If you have a great team, they will help you decide on locations, homes and generally make the process much easier. Trulia has a “crime” tab to help with researching potential homes and area’s. I also research on Zillow, Realtor and google maps to get a view of the street. You can also search for bank owned properties specifically on separate sites like HomePath, Reo.Chase, HomeSteps, etc. Bank owned properties usually have a waiting period for investors allowing people that want to live in the home the first chance to do so.

I suggest that you read about all tax benefits! You can write off all repairs and expenses specifically for the rental (including travel expenses). Improvements (such as new appliances, and anything that adds value to the house instead of putting it back to its original value) have to be depreciated over years. I try to repair whenever possible to get the best tax benefit quickly.

Losses can be deducted from your other income (depending on your gross annual income).

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48 jen August 14, 2012 at 12:49 pm

Remember, you make money when you buy – so get the best deal possible and you have a greater chance for success. In certain area’s of the country prices are still great right now and mortgages are really cheap. It’s the perfect storm!

I agree with the 1% rule, but personally try for 1.2% if possible. This helps to add a little cushion for any future repair costs.

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49 J. Money August 15, 2012 at 10:18 am

YOU ARE MY NEW HERO!!! :) I’m loving that plan of yours, jeez – well done over there. The idea of traveling and making an adventure of it all makes it even MORE exciting too! I totally agree that it’s all about having a great team in place and doing your homework. It makes me feel like I’m way off from ever doing this after reading all that, BUT it does give me hope and motivation that it’s def. possible. Thanks for all the tips! (Esp the Trulia Crime tab – hadn’t heard of that part before)

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50 Smart Money Manager September 2, 2012 at 10:42 am

Owning a piece of real estate to be used as a source for passive income is one of my future plans. I guess, if you really want it you can try and go for it… You will never really know what in store for you if you don’t try it.

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51 J. Money September 3, 2012 at 8:16 am

I ended up putting this on hold for now, but in a bout 6-10 months I’ll become a default landlord anyways once we move and rent out our house! So I’m def. looking forward to that :) Baby steps, right?

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52 katherine May 19, 2013 at 10:05 pm

Great post. I am just doing this now with some inheritance money. I am an architect and worked for a nonprofit developer for 4 years so I feel like I have some experience doing it on someone else’s dime. It’s still pretty scary but I figure if I do’t like it at least I can sell the property in the future or get a property management company.

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53 J. Money May 20, 2013 at 10:37 pm

Awesome!! Love hearing that :) Keep me updated on how things go – it all fascinates me.

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