Rental income doesn't need any work if you are just an investor though.
I don't do a single thing. The people who are managing the deal are the ones who do the work and hire the workers to work on site and such. They of course get an even better return during the sale, but I am happy with what I get for doing nothing.
My rental properties are paying me a decent passive income of about 6%, and additionally the total investment about doubles in roughly 5 years. Also the tax advantages are pretty huge with the depreciation and the ability to take the money from a sale and put it into a new property with no tax.
So say you start with an initial $100K investment. That pays back about 6K a year for 5 years and then turns into about 200K after 5 years which you then put into a new property and make 12K a year, and so on and so on.
So if you start with 100K when you are say 25, then when you are 50, you will have around 1.6M in property assets making you about 96K a year in passive income, where the depreciation on the property value and the assets in the property outweigh the tax on the income, so that income is all tax free. And that calculation is assuming you don't put even more capital in from some other source. Of course it's a roughly average return assumption. Some properties will do better and others will do worse, but it's been my experience that it's about right.
Of course this is only one of my investment baskets. I allocate roughly half of the income that I can invest into real-estate like this and the other half into low cost index funds.
> and additionally the total investment about doubles in roughly 5 years
That is a big assumption. What happens during the next real estate bust and your real estate value goes down to 1/4 of its prior worth? You are now set back 10 years.
I think residential real estate is a bad bet long term. As real estate gets more expensive and more and more young people cannot afford to buy there is going to be more political capital to change the situation. You are basically betting that the next generations are going to be fine with being priced out.
I don’t believe we have seen the full repercussions of the housing affordability crisis, it hasn’t even been going on for that long. As gen Z comes to house buying age I think there are going to be changes.
They have insurances for downturns built into the cost of the deal.
Even if the value of the property doesn't increase as much as expected, you are still making a decent amount in income from the rent being paid. 6% maybe doesn't sound like much, but it's tax free income due to being able to deduct from that income the depreciation from the property and appliances and such which in my experience always is more than enough. It makes it pretty competitive with alternatives such as index funds long term IMO and again in my experience so far over the last 11 years.
The worst case scenario is basically you hold onto that property longer and make about nothing on the sale which is more than can be said about the stock market in my experience. At least you still have what you made passively in the meantime.
Sure, I can't predict the farther future, but I still make decisions to continue this or change my holdings based on policy changes like that.
I'm not claiming this is some magic get rich quick scheme, but so far it has been working out well and definitely has given me income without me doing anything, which fits the definition of passive income here, so I just thought I'd share it.
I believe your account, and agree that this investment has turned out well for you. The last 11 years are not normal in my opinion, and I believe the time will come where policy changes will make this investment strategy much less desirable.
Have you looked at the return from S&P 500 in the last 10 years? 1,964 -> 5,823 is about 11.5% per annum, compounded. It is one of the biggest bull markets in 100 years. And you are telling us that your investment properties are sustaining the same returns? Unbelievable. Neither is sustainable.
Yes. I feel like you are not understanding anything about what these investments entail.
A struggling apartment complex property in an up an coming area is purchased and I put money into that deal. I am only say 100 or 200K of an otherwise ~10 million investment. The complex is massively overhauled, new facilities are built, units are completely refurbished, the on-site staff are replaced, bad tenants not paying are evicted, and new vetted tenants are found. The whole place is re-branded and then after all this is complete is sold for a substantial profit. All while making income from rents during the time the property is held.
It's a LOT of work. Not by me as I am just an investor, but by the managing partners who spent months or longer searching or and analyzing the area and working with the bank for the loan and then doing all that work to completely overhaul the place.
When you find and invest with a management partner who has been doing this awhile and has a proven track record yes the returns are as good as I am saying.
Real estate is special because of multiple federal government and state government policies limiting (subsidizing) borrowers’ risk, allowing borrowers to lever without commensurate increases in risk.
The federal government taxpayers (especially future ones) provide enormous subsidies in the way of 30 year fixed rate loans with no prepayment penalty, and no risk of having the loan be called. Many state governments make home mortgages non recourse as well. And then there’s the federal 1031 tax exchange benefit. And there are county/state limits on property tax increases, like California’s famous prop 13.
When I learned how a lot of the government policies worked it just kinda blew my mind. Yes you are effectively 4x leveraging your investment with a way lower risk than doing something like that in the stock market. You are certainly leveraging other people's money in a way. Plus the tax deductions on asset depreciation are wild.
Maybe it won't last forever, but I'll pursue it while it works.
If the social program was designed to keep a roof over people’s head, then it would simply give people cash, or a roof.
The fact that the social program involves extending lines of credit means that the design was not to keep a roof over people’s head, but rather enrich existing asset owners and indebt future ones to get them chained to the treadmill. Similar to cutting funding for higher education and replacing it with student loans.
> If the social program was designed to keep a roof over people’s head, then it would simply give people cash, or a roof.
Except it wouldn't happen, because it would get killed by even louder whining about giving free money to the lazy do-littles. Every social program has to have a layer of appeasing the people who only feel they're part of a society when it benefits them.
I see betting on residential real estate as a bet that power structures have ossified and the CURRENT (not future - that was 20 years ago!) generation will not be able to gain any significant power.
>additionally the total investment about doubles in roughly 5 years
According to data at FRED (https://fred.stlouisfed.org/series/MSPUS), the median US home price has gone from $320k to $420k in the past 5 years (an increase of around 30%).
So, I guess good for you that you happen to have done so much better than the median, but your results are atypical at best, and misleading at worst.
This is not home prices, this is apartment complexes that I am talking about. They are tens of million dollar investment deals and you can join in with usually as little as 75K in what I am referring to.
My results are not atypical for this sector from everything I have seen and all the other investors I know doing similar deals.
You aren't just waiting for the value to go up... They buy sort of struggling properties that are otherwise in good areas and show potential and using the investment capital they improve the property. A ton of research and market analysis goes into picking the right place etc. Like installing a pool, gym, basketball courts, security gates, renovating and refurbishing all the units etc. Renaming and completely rebranding the property. Hiring whole new management team for the on-site stuff to better handle tenant needs.
And yes you raise the rents and also get occupancy up. After all this then you sell the property for significantly more.
Thank you to share this data. 320->240 in 5 years is 5.6% compounded. It is hard for home prices to outpace a combination of inflation and real economic growth rates for very long. As some point, home prices stall out because buyers cannot get enough leverage from mortgages.
This is buying multi-million dollar struggling apartment complexes and completely overhauling them and then selling them, and then repeating at a whole new location.
100K after 5 years became about 230K. 30K of passive income that was essentially tax free because of the offset from the depreciation of the property and the assets within the property that depreciate at a significantly faster rate than the rental property.
And then with all the improvements made to the property and the increase in rent that the substantial improvement could garner, selling the revamped property nets roughly double the initial investment, which if put into a new property within 90 days also incurs no tax for the transaction.
But I am also not even accounting for investing any of that income. Just with the roughly doubling every roughly 5 years, 100K in ownership stake can become 1.6M after 25 years. I started with 100K and already had a property that sold, and then did it again, and it's currently invested as a roughly $400K stake 11 years after I started with a yearly income of around 24K on the 3rd property that I am now invested in and so far things seem on track as normal.
Multi-family, so apartment complexes. The deals are for tens of millions of dollars, and you can usually join in for as little as 75K.
But you either need to be an accredited investor, or know one of the managers of the deal before the deal is set and they let you join. They are typically allowed to bring in a certain percentage of the deal from non-accredited investors that they know.
What's nice is once you go through a full deal cycle usually 5-6 years, and they sell, you become an accredited investor for having gone through that and that makes it much easier to find and join another deal without having to know the managing partners personally beforehand.
Like one of the deals I am in is primarily managed by this guy. And he has a very large personal stake of several million.
He's got way more money on the line than me in the deal, and so he cares very much about making the property successful for himself and selling at the right time etc and I am really just along for the ride essentially.
Here is one of the other main managing partners of another deal I am invested with.
> the total investment about doubles in roughly 5 years
And:
> start with an initial $100K investment. That pays back about 6K a year for 5 years and then turns into about 200K after 5 years
5 years * 6K/year is 30K profit rental income. That leaves 70k in capital gains. ROI calculator tells me that is 11+% per year: 100K->170K in 5 years. Jesus, what market? And, how sustainable is that level of return? And, will this continue for 25+ years. You make it sound so simple. If any of this were true, then (I guess) a miniscule number of people could afford to buy homes after 25+ years!
There are no capital gains taxes, or well any taxes are offset by the depreciation.
For example on a 100K investment in the first year you get about 40-50K of depreciation on your K-1. This is possible because the investment deal managers bring in a firm to account for all the "stuff" in the units like appliances and things and these things depreciate quickly as is coded into laws.
These deprecations offset any taxes that would normally be incurred.
Also when the property is sold, if the money from the sale is invested into a new property within 90 says there is also no tax incurred on that large transaction.
The single deal roughly doubles the return, plus the passive income each year. You are taking that doubled profit and putting that money into a completely new deal and different property and they are doing the same ~5 year complete revamp and sale.
Here are one of the managers of one of the deals I am invested in. I am only 100K out of several million invested, and the mangers have a much larger stake, so they have way more on the line to do well in turning the property around and did their due diligence to find a place to buy that was undervalued.
I don't do a single thing. The people who are managing the deal are the ones who do the work and hire the workers to work on site and such. They of course get an even better return during the sale, but I am happy with what I get for doing nothing.
My rental properties are paying me a decent passive income of about 6%, and additionally the total investment about doubles in roughly 5 years. Also the tax advantages are pretty huge with the depreciation and the ability to take the money from a sale and put it into a new property with no tax.
So say you start with an initial $100K investment. That pays back about 6K a year for 5 years and then turns into about 200K after 5 years which you then put into a new property and make 12K a year, and so on and so on.
So if you start with 100K when you are say 25, then when you are 50, you will have around 1.6M in property assets making you about 96K a year in passive income, where the depreciation on the property value and the assets in the property outweigh the tax on the income, so that income is all tax free. And that calculation is assuming you don't put even more capital in from some other source. Of course it's a roughly average return assumption. Some properties will do better and others will do worse, but it's been my experience that it's about right.
Of course this is only one of my investment baskets. I allocate roughly half of the income that I can invest into real-estate like this and the other half into low cost index funds.