That was a difficult title to type. It was just Friday that I mentioned how my tenants won’t leave and it’s leading to a lawsuit. It looks like it is going to get very messy. Anyone else thinking about the State skit, Get a Job: “What am I nuts?!?!” (was that reference too obscure?)
I’ve given full details on our our Real Estate “Empire” previously. It is an accidental empire. We bought properties in places that we expected to live in (and have lived in) and then moved on for one reason or another.
Why more real estate?
It always starts with the numbers. The place that I’ve been looking at seems to be a bargain with purchase prices around $100,000 and rents around $1250. This is an extremely good price to rent ratio. For those new to the game (and I’m with you there) the price to rent ratio is the purchase price divided by the annual rent. Doing the math ($100,000 / 15,000) and the ratio is 6.53. As a potential buyer, you’d want that number as low as possible… cheaper purchase price and more rental income are what you are looking for. According to this article the long-term average in the US is 9.56. At the height of the market it was over 18.
To put that 6.53 ratio in perspective, here are a couple of real world examples. When I rented in Silicon Valley last year our rent was $3200, but the purchase price of the home would be around $888,000 (this number would repeatedly come up in our community. I heard that “8” is lucky in some Asian cultures. True?) That ratio would be an extremely high 23.13! If it hadn’t already been paid off, my landlord would have been losing thousands each month with the mortgage.
Even with a 15-year mortgage, tax, insurance, and condo fees this property would generate around ~250 a month in income. That’s a great thing because that money is going to be needed for usual costs such as maintenance, rental agent fees, etc. If it’s break-even after those expenses, we would own the property outright in 15 years. That would be $11,000 ($15,000 minus condo fees and taxes) of income a year in today’s dollars. Hopefully rents will keep up with inflation and that will stay the same. Also, the property hopefully will appreciate to 2006 levels where it would be worth nearly $150,000. That would help keep rents high and/or give us an opportunity to sell and get out at a big gain.
I know most conventional wisdom says to buy stock and bonds to fund a secure retirement. However, the older I get (I’m 37 now), the more that I start to view things through a cashflow looking glass. I want to build up businesses and assets that are going to bring income. (Some) stocks do through off dividends, but typically the percentages are really small. With real estate, I get to leverage some of my money, a lot of the bank’s money, and tenants’ money to own an asset that I believe is uniquely undervalued right now.
That’s worth the risk of a few bad tenants.