If you had $100,000...

chrisreedrules

chrisreedrules

Master Blaster
Scenario: My mom has about $100,000 to $120,000 she would like to invest. She has plenty of money in stocks already and also money in fixed interest accounts (which actually do really well for her). She is on a fixed income (retired and social security). She is thinking of putting the money into some investment real estate. She isn't wanting to flip houses or anything like that. She is thinking more of an income property. She would like to earn about $1000 to $1200 p/month net. And this way she could generate monthly income and simultaneously build equity in a property. Do any of you have any experience in this realm? I'm not familiar with it personally and didn't know if this sounds like a good idea for her or not. Thanks for any replies and advice!
 
It would be tough to earn $1000/mo on a 120k property. You have to figure in property tax and maintenance into the equation. Possibly property management, as well. If she finances any part of it, that makes it more difficult.
 
mojo6911 said:
It would be tough to earn $1000/mo on a 120k property. You have to figure in property tax and maintenance into the equation. Possibly property management, as well. If she finances any part of it, that makes it more difficult.
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The way I figure it, property tax and insurance is going to run about $3000 p/year. And I'm not familiar with the Mx aspect of it, but I am handy enough to handle anything except for plumbing and electrical. And I would be the person managing it for her. The area that she was thinking about is a historical neighborhood here in Jacksonville and it also has the added benefit of being a more "hip" neighborhood with tons of bars and restaurants and lots of mom and pop style small business. She is hoping to find something that is a dual income property (2 units with 2 bedroom / 1 bath each). When I was younger I rented in the area and it cost about $750 p/month for something like that. And I see these properties normally go for around $120,000 to $150,000 on the low end (they would need some work to bring it back to rentable condition... But again, I can do most of that). So I think if she can find the right opportunity it might be worth it. I think she could net $1200 to $1400 p/month and expect to profit about $900 to $1000 p/month. And that of course is not considering vacancy which isn't a huge issue in the area.

I guess I'm basically trying to figure out if this is a good idea for someone in her position or if she would be smart to put the money elsewhere? I don't do the real estate thing personally so I don't know much about it. I told her it might be a good idea to just buy some property somewhere in a desirable vacation area and do the airbnb thing, but again... Not my field of expertise.
 
mojo6911 said:
It would be tough to earn $1000/mo on a 120k property. You have to figure in property tax and maintenance into the equation. Possibly property management, as well. If she finances any part of it, that makes it more difficult.
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Yes, it may be tough to earn $1000/mo on a 120K property, but that's not the question. She has 100-120k to invest(you can buy a much more expensive property with 120k than one worth 120k), and I don't think that it is unreasonable to say, if I'm going to invest in real estate which is much riskier than a lot of other investments, I want a 10% return.
 
chrisreedrules said:
The way I figure it, property tax and insurance is going to run about $3000 p/year. And I'm not familiar with the Mx aspect of it, but I am handy enough to handle anything except for plumbing and electrical. And I would be the person managing it for her. The area that she was thinking about is a historical neighborhood here in Jacksonville and it also has the added benefit of being a more "hip" neighborhood with tons of bars and restaurants and lots of mom and pop style small business. She is hoping to find something that is a dual income property (2 units with 2 bedroom / 1 bath each). When I was younger I rented in the area and it cost about $750 p/month for something like that. And I see these properties normally go for around $120,000 to $150,000 on the low end (they would need some work to bring it back to rentable condition... But again, I can do most of that). So I think if she can find the right opportunity it might be worth it. I think she could net $1200 to $1400 p/month and expect to profit about $900 to $1000 p/month. And that of course is not considering vacancy which isn't a huge issue in the area.

I guess I'm basically trying to figure out if this is a good idea for someone in her position or if she would be smart to put the money elsewhere? I don't do the real estate thing personally so I don't know much about it. I told her it might be a good idea to just buy some property somewhere in a desirable vacation area and do the airbnb thing, but again... Not my field of expertise.
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3k sounds about right for tax and insurance. I would budget 1-2% of the home's value for maintenance. Even something simple like a hot water heater gets expensive when you have to pull a permit from the city. So you are looking to try to get 12k a year on this property, and we are already at least 4k in the hole before you even start renting out. You have to figure your real estate agent's 6% fee, as well, so there goes a big chunk of change. There will be some tax savings as you depreciate the house, but I doubt it will be enough to get you to the 12k mark annually.

As far as managing the property, have you ever done it? It is a HUGE pain in the ass. I strongly advise that you at least use a real estate attorney to make sure that your lease is ironclad. Are you willing to put in the time it takes to list the property, show the property to multiple looky loos, run background checks, collect rent, and be on call 24/7? What are you going to do when the refrigerator water line breaks when you are about to go on a 4 day trip? If you have ever worked with contractors before, you already know how frustrating they can be, as far as getting them to show up on time and do the job right. Imagine trying to do it over the phone.

Old Pete said:
Yes, it may be tough to earn $1000/mo on a 120K property, but that's not the question. She has 100-120k to invest(you can buy a much more expensive property with 120k than one worth 120k), and I don't think that it is unreasonable to say, if I'm going to invest in real estate which is much riskier than a lot of other investments, I want a 10% return.
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Real estate isn't very risky, at all, if you do your homework. It is a tangible item, and people always need a place to live. Developing neighborhoods speculating can be risky, but buying a house in established neighborhood without overpaying is a pretty safe bet, all things considered.
 
ATN_Pilot said:
This is what I do for a living nowadays, and I would advise her that a 10% cap rate is pretty difficult to come by, and almost impossible if she's not going to manage it herself.
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Hey ATN, would you be okay with me calling you sometime soon to pick your brain about it?
 
If I had $100,000....

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The cap rate is difficult with that limited of funds. I would second what others have said and use REITs if she wants to diversify with real estate.

Not knowing the area if there could be a reasonably priced multi-unit building those seem to pay higher cap rates than just the single family homes in our area.
 
Real estate has had a great run the last 4 or 5 years. Anyway, investment properties consume a lot of time if you manage them yourself. In my mom's case, more than when she worked full time.

I also make a better return on stock index funds that require me to do zero work. Eh, I would dump it all in a dividend-focused stock ETF or just an S&P fund. Right now they are basically the same thing anyway. You'll make about $2,500/year in dividends, and average about 7k/year in growth. Similar to what you are looking for with zero effort.
 
chrisreedrules said:
I'm aware of the laws here in Florida, takes about 4 to 6 weeks legally to evict a tenant.
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It seems easy enough, but you have to be very thorough, or you leave yourself open to liability. Me, personally, if I had 120k to spend, I would probably buy 3-4 properties and finance them and hire a reputable property management company to take care of it. That still leaves you plenty of cash in reserves, and the tenant will essentially be paying your mortgage. The interest on the loans will be deductible.

This may not be possible if your mother is on a fixed income, however.
 
Just an update on this...

We went with a sizable downpayment (about 50% of the home purchase price) on a great home in a desirable historic district of Jacksonville. After looking around for a couple weeks, we decided to go with a property that was in decent shape and wouldn't require much work. Mostly because many of the ones we looked at in the area we were interested in for our initial price range were either in greater disrepair than I have the time or energy to deal with, or were not exactly what we were looking for. So anyway...

Things have been going pretty good so far. We've had to invest a little bit of money into the plumbing and air conditioning ductwork, but all things considered, I have no real complaints. We found tenants in less than a week after showing it for a few days and screening a few applicants. To be honest, we were asking what I thought was a lot for the home ($1695 for 1700 sqft home we purchased for $215,000) but its location is hard to beat for the area (you can literally walk to any amenity you could possibly want from the home in about 5 minutes and its a block away from a nice city park) but we filled it fast.

So far within the first couple of weeks, this is what I've had to deal with:
*Tree removal service
*Plumbing leak
*A/C broke two separate times
*Bad storm caused tree limb to fall on power lines in back yard
*Backyard fence installation
*Sort of "needy" tenants

It has pretty much eaten up almost every single one of my days off in some way, shape, or form. But I'm learning a lot fast and I'm actually really enjoying it. We also have purchased plenty of liability insurance at the behest of ATN and a real estate attorney. Anyway, $1700 /month on a $215,000 is almost an 8% ROI. Not too shabby all things considered. We are thinking of adding a garage apartment or perhaps a duplex onto the back of the property in the next year or two and that will give us the potential to basically double the income (and the headaches) from the property.
 
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