Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Even though I’ve been doing a ton of wholesaling lately, I still consider myself first and foremost a buy and hold investor. Because of that, I tend to keep an eye out for news and information about rental property.
I found an article they did recently at thestreet.com It asked the age old question: Is passive income from real estate a viable retirement strategy:
It was titled "Retiring on Real Estate -- Perfect Passive Income or Pipe Dream?"
I’m nowhere near retirement age, but I believe that my rental portfolio will definitely play a huge part in generating a retirement income sufficient enough to let me have a lot of fun. So I was keenly interested in what they had to say.
The article started by talking about “Mailbox Money.” That’s what investors often call the passive income generated by real estate assets. It could be from rental income, house flipping profits, even dividends. The thought is, buy some property and wait for the checks to start rolling in.
Can that still be done, or are such scenarios a pipe dream from a pre-recession world?
But then, right on cue, it went into a horror story about a “regular guy,” a plumber by trade, who poured just about everything he had into rentals before the crash...
The plumber said that after he went on a major apartment complex purchasing spree in Phoenix during ’04 and ’05, he decided to diversify geographically. So he began buying units in Houston, Texas. A couple of years later, not only was the economy beginning to “drop a bomb” on Arizona, but a hurricane hit Houston.
By 2007, he had amassed more than 1,000 apartment units. The cash flow was very high. But then gross incomes on his properties dropped by more than 50%, and he was lucky to just pay expenses for a while. After a while there was nothing left to give to the lenders.
He continued to fight like crazy for a couple of years and finally got the income back up to where the full payments could be made to the lenders. But by that time he had put all his reserves into his properties and had nothing left to catch up on the arrears that had built up.
So the lenders foreclosed and he was completely wiped out.
I was pleased to see that the article didn’t just go on with a litany of people who had lost their shirts during the crash. I know several people who did, mostly because they had too much leverage. But most of the folks that I know didn’t over-leverage and were able to weather the storm and come out the other side mostly intact.
The piece highlighted an investor who did it right, and talked about how he did it.
The guy is a former financial planner from Ontario, Canada, who now travels the world with his wife -- on his profit from real estate investments. Currently living in Thailand, he says he bought his first rental property at age 21.
He mainly stuck to rentals, but he has owned multi-units, single families and student rentals. He’s also done his share of flips and says that at present, there's little money in commercial real estate in his price range.
He says he "retired" at age 28 with five properties, hired a manager and hit the road. But before jumping into the real estate game, he said that investors should consider three keys to success in using rental properties as a retirement vehicle:
1. Pay off the mortgages
He says that assuming you purchase property that is profitable from the start, not having a mortgage every month can significantly increase your profit. He says that his profit will double in 20 years when all the mortgages are paid off.
2. Hold the real estate for at least 10 years and keep good books
He states that in real estate, as in any other business, you have good years and bad years, just like you will in any retirement investment strategy. And that in a 10-year time frame you should see a) A trend in your real estate -- prices, costs, profit, etc.; B) What your worst year was; and C) From there you should be able to figure out a solid number that you can rely on. This is by far the most important point.
3. Have an exit strategy
This involves planning how the properties will be taken care of when you're still alive, but don't want the bother of making any decisions on them. For this, he says his suggestion is training someone who will eventually inherit them to make the decisions. Bookkeeping and day-to-day management can always be outsourced. There’s no need to be fixing toilets in the middle of the night at 70 years old.
To his list, I’d add two more suggestions:
4. Don’t take on too much debt to buy a property
I’ll admit that with my first couple of properties I took on too much mortgage debt. And when the crash hit and rents fell, I barely broke even on a couple and was upside down by about $40 per month on one of them.
Thankfully on the rest, I only took on a moderate amount of mortgage debt – by that I mean I made sure that I could suffer a 25% decease in rents and still break even on the expenses. Thankfully during the crash, none of my rents dropped that much and those properties helped me fund the expenses on the others that had too much debt, and I exited the crash times with all of my properties intact.
5. Hire a property manager
For most of the past 10 years I’ve been a fierce opponent of letting others manage your rental properties, simply because nobody cares as much about your properties as you do.
But while they may not care as much, I now believe that a good property manager is worth his weight in gold. Even though I pay a good chunk of money each month to my manager, I end up making more at the end of the year with one than I did when I managed them myself.
The reason is that managing properties is their business. It’s their primary focus. For me, my job is my primary focus. So a property manager actually spends more time managing my properties each month now than I did when I did it myself.
So if you’re going to jump into rentals, or you have them already and you have a day job, then just hire someone to manage them for you.
So overall, my view is that rental properties are going to be an excellent vehicle to fund my retirement years. Done right, they really can generate substantial “mailbox money.” And give you a lot of peace of mind along the way.
Chime in
What do you think about Mailbox Money and rental props as retirement income? Share below.