My Rental Real Estate Plan

by Evan

There are two huge benefits of this blog (actually the two reasons that keep me coming back and I haven’t sold the site for good).  The first is that I can think through an issue while I write it out.  Sometimes that just leads to a garbled mess and other times it allows for clarity to present itself.  The second is that I get to read my mindset years and years later.  For example, it is always funny to me when I look back and review my first thoughts on starting an investment club (which is still active by the way), and then all the subsequent updates.

Well this feels like one of those pivotal moments in my financial life that could change the trajectory of my finances so I might as well sit down and right down some thoughts!!  I have been talking about owning rental property for years (and years).  For a variety of reasons nothing ever came to fruition, until last month!

Why I Want to Own Rental Real Estate

As part of my main job, I have looked at a lot of balance sheets and have run a lot of retirement runs over the past 12 years, and real estate does something pretty amazing to both of those reports.  Almost every high net worth balance sheet that I have seen has one or two (if not both) line items – Real Estate and a Business.  Trading your time for money is a very slow way to retirement nevertheless building intergenerational wealth.  Since there is no larger than average business in my future real estate is where it is at!

I have always wanted to build multiple streams of uncorrelated income, and rental income seems to be a fantastic addition.  One day I’ll be able to turn on that income which is likely uncorrelated (or a very low correlation) to whether I have a job, or whether the market takes a 2008 like hit.  Similarly, I look at my dividend stream of income as uncorrelated to whether the rental market in my area undergoes a correction.

How I Came to Own my Current Rental Property

When we decided to move, The Wife and I had a very specific semi-lateral move in mind that would keep my housing costs in check.  Keeping our housing costs near what we had was important to both of us as neither of us wanted to be “house poor.”  We enjoy the flexibility in our discretionary spending.  FIRE is not, nor has it ever been, a goal of mine (or more specifically the RE part).

Well as the saying goes, “Men Plan and God Laughs.”  I did not get the number I wanted for my home, but while we were realizing that fact The Wife fell in love with the new house.  As such, my “waiting it out” period became significantly shorter.  Knowing that I always wanted to own rental property, The Wife came up with the idea of leveraging the new house in favor of keeping the old house up and running as a rental.  Whenever rental properties came up she was a little apprehensive, so for her to push it was exciting to me.  Deep down I think she pushed it so I wouldn’t completely freak out on her about the move, rather than her actually loving the idea.  Regardless, I was all in!

How I am Going to Run OUR Rental Real Estate Property

First thing I did was put the idea out to about 8 buddies.  I gave all the facts:

  • Monthly nut was about $3,100 – $3,200 (Mortgage, Taxes, HELOC and Insurance);
  • I already found a renter (newly/nasty divorcee that wanted to keep herself in the school district);
  • Since I was 6.5 years into the mortgage every time a mortgage payment was made there is about $800 or so in equity build up;
  • Roof may go inside the next few years;
  • I am not negotiating on price; and
  • I was willing to sell up to 49%.

These particular buddies showed an interest in investing in real estate and are local.  While I plan on being the face of the operation there may be times where I need someone to lean on.

There were two in particular (JT&Jx2 – put here for my purposes) that I thought would jump at the opportunity, they did not for their own reasons. JT, wanted a bigger project/better cap rate.  In my opinion he is more of a high risk high reward, hit the home run kind of guy rather than slow and steady.  Jx2 is going to have a liquidity need (new, bigger main residence purchase) in the next 4 to 6 years and I obviously couldn’t guarantee a buy out before that.  The two that jumped in were one of my siblings and a life long friend.  I put these two on the deed, so they are true owners (10% each).  We had a joint venture agreement drafted and executed so common speed bumps that may occur have predefined outcomes prior to said speed bump (i.e. a minority partner passes, someone wants out, I want to sell, expense occurs, etc.).

Since I have 2 partners it becomes very important to keep good records.  When discussing how to run the operation for the foreseeable future this is what we came up with is using all current positive cash flow to pay down the HELOC.  This provides two benefits.  The HELOC is going to serve as our “emergency fund” it has a cap that we are near.  The quicker we pay that down the quicker we build that cushion should anything go wrong.  Second, the quicker we pay it down the faster we are growing our equity (with less money going towards interest).

I am not exactly sure where this whole adventure leads us but I am excited to find out!

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