Real Estate and retirement . . .

We now have the mortgages on 5 rental properties, three are in our name and two are with our son.  We have purchased these properties using a variety of methods but now they are all stabilized in 30 yr./fixed interest situations and all profitably rented at just positive cash flow levels.  And all but one are on accelerated payoff plans so that without any additional principal they’ll be done in about 20 yrs.  My wife, whose retirement plan this is, will be 63.

 The question that is driving a wedge into my thoughts right now is, is this the investment we should have made?  I know, shoulda, woulda, coulda.  But it’s more like I’d like to know for my own peace of mind than for any other reason.

So here’s the history:

  • 2003 – purchase 3 bd/2b home – $222K/5K down
  • 2004 – set up a $30K equity line on the property
  • 2004 – purchase 2bd/1b 1/2 dup – $109K/25K down
  • 2005 – sell 3bd/2b for $375K/payoff EOC- $118 avail. for 1031 Ex.
  • 2005 – purchase 2bd/1b 1/2 dup – $134K/25K down
  • 2005 – purchase 2bd/2b home – $200K/60K down
  • 2005 – purchase 2bd/2b home – $122K/18K down
  • 2007 – purchase 2bd/1b home – $133K/33K down
  • 2007 – refinance 2004 purchase for $100K

In the beginning, our plan was to build up a series of rental properties and so we started.  But right away, we hit a snag.  In order to rent the property, we had to enlist a service to manage it and find a renter.  Six months went by before we found a renter.  We were approximately $6K out of pocket.  By then, we had lowered the rent to under the mortgage payment so the cash-flow was negative.  Deciding to sell was an easy choice.  But here was where we got caught up in our own web.

Instead of rethinking our plans and restating our goals,we continued on with the original idea of investing in real estate.  I did lobby for a change with my partner but her previous and ongoing experience with the market plus her belief in the viability of R. Kiyosaki’s ideas was foremost in her mind.  Unfortunately for us, she had somehow confused this strategy with the buy and hold plan she had learned from attending seminars with Marshal Reddick.  At that time neither of us had any information or experience in long term market or money investing.

So on we went, using a 1031 exchange to buy the next three properties.  Again we had to lower our expectations for the rental income, with all three new properties renting just below the monthly mortgage payments.  When we added in the taxes, insurance and improvements, our out of pocket expenditure was around $22K.  Since our income tax write-off limit was $25K, we ended up with a refund of about $1700 so that our net outcome for the year 2005 was negative $20K.   In 2006, experience continued to accrue.  We learned how to evict a renter and how badly a renter could damage a property out of vindictiveness.  We also learned how to increase our rent while still being fair.  And we had by then taught ourselves how to manage our own properties and find our own renters.  The net result was that after expenditures and tax write-offs we were out of pocket only $17K. 

So here we sit at the end of 2007, having added one more property this year, ready to total it all up again.  Of course, other things have occurred to add to the picture but for this discussion I want to stay on the real estate idea.  Three things are going to occur.  The properties are going to age.  Rents for each will follow the economy but over the long term will pattern after the inflation rate.  Given that we don’t refi or add and use a LOC, the principal will continue to decrease.  We can only hope that our yearly out of pocket costs will continue to decrease but this isn’t a surety because right now tax and insurance costs have already increased while remodeling costs also appear to be appreciating.

Seeing it in black and white like this makes me want to jump in my time machine and reappear back in 2002.  But that ain’t happening so on we will go.  One last thing, even though we have invested approximately $75K so far that could have been earning interest in index funds or even CD/money market instruments, we have learned that the real estate market which is down now will recover. 

Meanwhile, the renters are paying the mortgage/tax/insurance costs, so we can hope that maybe the $75K is earning the 6% interest that those loans are costing while we continue to learn and work it all out.


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