Income Property - How do you define success

[bryantpark]

Hey there - haven't been here in years but I have a question.  We are considering buying another income property.  We have one already, a beach rental, but we also use it, so there's really just a need to cover the expenses b/c we get a big benefit to our family b/c we enjoy it.  I'd say we bring in about $25-$30K annually in rental income which makes it mostly "free" for us to use.  

We are looking to buy another one, cheaper, with more cash down, and really focus on generating cash flow. DH is considering a career change so we need supplemental income.  I can't get the math much beyond $30k profit (we would not have a mortgage beyond year 2 so I am not including it in my analysis) and I am wondering if that is "worth it" for the hassles that come along with owning rentals.  I have a few different options - property values I'm seeing range between low 200s to probably a 350k max. 
1) rental in 4 season vacation area, do a "ski season" house for like $10k then do weeklies in the summer, for about $2500 a week 
2) college town rental $3500 ish a month rent but could be a major headache;
3) or go in with a developer friend for a multifamily in a city that has a lot of depressed house values but the rent potential is low (max $2k a month per unit; but i'd only do this option with our trusted friend b/c they all need work and it's more expensive to buy, he's quite experienced at this so it would be good to learn the ropes).  Bigger numbers but we'd be splitting with friend. Potential option to buy him out once it is renovated and up and running.  

With one other rental and 3 kids, I'd probably need to hire a property manager anyway so I know that will eat into $.  I guess I was just hoping the numbers add up to more than $30k for the vacation rental idea but it just seems silly to base this on a much higher occupancy number since there are so many rentals available.  

Kind of a ramble but curious to hear from other income property owners what you consider a success.  Would love to hear your thoughts. 

[mrsukyankee]

For us, it was covering our mortgage with some leftover to pay for expenses and taxes. In the two years of renting it, the price of the house has increased, so that's our big success. We're currently selling it (and our own house) and will buy something else down the line after we purchase our new house for us.

[sillygoosegirl]

I'm not an income property owner, but I'd consider "success" to mean making a similar or better return to what you'd expect in the stock market.

Your principal is what you'd invest in the market, or pay for the property. The dividend is the annual income after expenses for the property, or growth/dividend beyond inflation for the stock.

In the stock market, you can normally expect to get around 6-7% back annual after adjusting for inflation. Earning $30K profit annually after expenses on a $350K property would be a 8.5% dividend, which seems like a fantastic ROI on that amount of capital. (Of course, you should also consider how much work it will be and how much you consider your time to be worth, when accounting for annual expenses).

[Deleted]

For us, we want the cap rate to be somewhere between 6-8 (higher is better), if we are cash focused. If we are long-term appreciation focused, the cap rate can be a bit lower (say 4-5). Pretty simplistic, but it works.

We own 11 multi family units and some other single family rentals. I’ve learned that cap rates on vacation areas tend to be very low, but appreciation can be greater. We own in suburbia, LCOL, and the cap return rate is very good. (Our goal
Is cash).

So, overall, it depends on what your goals are.

If you are purchasing a property that is an existing rental, ask for a full rental history. That will help you make a judgment on whether it fits your goals.

Read more here: en.wikipedia.org/wiki/Capitalization_rate

If you want cash flow, look for a location that doesn’t have a high upfront cost (ie LCOL). We own in the Madison, WI area. We bought 11 multi family units for $1.5m (cash - no mortgage), and earn about $10-11k/ mo net. Gross is about $14-15k/mo. On the flip side, if we had bought in southern ca (where we live), our gross monthly would
Have been about $5-6k.

[cosmowife]

Unfortunately no advice but I’m shocked that you can get $3500 a month for a property only worth at most $350k. Seems like you picked a good area in which to buy!

[jwright]

We aim for a 10% cash-on-cash return once the property is stabilized.

[kadams767]

I don't know, maybe I am pessimistic or just not that great at this, but I think it is going to be difficult to achieve the kind of net profit you are looking for with one or even two rentals, at least at your price point. There are no economies of scale to take advantage of, and no offset from other units if there is an issue with one or two. We own a two unit property in a MCOL area, purchased low, but it is not something that we could ever generate significant cash flow from. If that were our goal, getting a small portfolio of properties would serve us better.

That all being said, if you have identified a property and could realistically make $30k annually in profit from a max $350k investment, I would classify that as very successful. That is generally more than any market return you would get on that money, and doesn't take into account any appreciation of the property.

[sillygoosegirl]

Feb 12, 2019 0:50:11 GMT -5 @akswartz85 said:

For us, we want the cap rate to be somewhere between 6-8 (higher is better), if we are cash focused. If we are long-term appreciation focused, the cap rate can be a bit lower (say 4-5). Pretty simplistic, but it works.

We own 11 multi family units and some other single family rentals. I’ve learned that cap rates on vacation areas tend to be very low, but appreciation can be greater. We own in suburbia, LCOL, and the cap return rate is very good. (Our goal
Is cash).

So, overall, it depends on what your goals are.

If you are purchasing a property that is an existing rental, ask for a full rental history. That will help you make a judgment on whether it fits your goals.

Read more here: en.wikipedia.org/wiki/Capitalization_rate

If you want cash flow, look for a location that doesn’t have a high upfront cost (ie LCOL). We own in the Madison, WI area. We bought 11 multi family units for $1.5m (cash - no mortgage), and earn about $10-11k/ mo net. Gross is about $14-15k/mo. On the flip side, if we had bought in southern ca (where we live), our gross monthly would
Have been about $5-6k.

If you own in Madison, I'd guess you are seeing more of an Epic effect than a cost of living effect on your investment returns.

[Deleted]

Epic effect? I’m not familiar.

We own in the greater Madison area, not Madison proper.

Feb 12, 2019 11:32:24 GMT -5 sillygoosegirl said:

Feb 12, 2019 0:50:11 GMT -5 @akswartz85 said:

For us, we want the cap rate to be somewhere between 6-8 (higher is better), if we are cash focused. If we are long-term appreciation focused, the cap rate can be a bit lower (say 4-5). Pretty simplistic, but it works.

We own 11 multi family units and some other single family rentals. I’ve learned that cap rates on vacation areas tend to be very low, but appreciation can be greater. We own in suburbia, LCOL, and the cap return rate is very good. (Our goal
Is cash).

So, overall, it depends on what your goals are.

If you are purchasing a property that is an existing rental, ask for a full rental history. That will help you make a judgment on whether it fits your goals.

Read more here: en.wikipedia.org/wiki/Capitalization_rate

If you want cash flow, look for a location that doesn’t have a high upfront cost (ie LCOL). We own in the Madison, WI area. We bought 11 multi family units for $1.5m (cash - no mortgage), and earn about $10-11k/ mo net. Gross is about $14-15k/mo. On the flip side, if we had bought in southern ca (where we live), our gross monthly would
Have been about $5-6k.

If you own in Madison, I'd guess you are seeing more of an Epic effect than a cost of living effect on your investment returns.

[sillygoosegirl]

Feb 12, 2019 15:32:38 GMT -5 @akswartz85 said:

Epic effect? I’m not familiar.

We own in the greater Madison area, not Madison proper.

Feb 12, 2019 11:32:24 GMT -5 sillygoosegirl said:

If you own in Madison, I'd guess you are seeing more of an Epic effect than a cost of living effect on your investment returns.

Epic is a large software company that is a large employer in the Madison area and has been growing at about 30% per year for the last few decades. They draw tons of new college grads in computer science each year from around the world. As I understand, this has had a huge economic impact on Madison, and especially the housing market. I'm just questioning whether Madison is comparible to other small midwestern cities.

[bryantpark]

Feb 12, 2019 8:08:10 GMT -5 cosmowife said:

Unfortunately no advice but I’m shocked that you can get $3500 a month for a property only worth at most $350k. Seems like you picked a good area in which to buy!

College town and the parents are likely paying and they probably cram 6 kids in there! It's currently rented for $3600.  

[bryantpark]

Feb 12, 2019 9:40:53 GMT -5 kadams767 said:

I don't know, maybe I am pessimistic or just not that great at this, but I think it is going to be difficult to achieve the kind of net profit you are looking for with one or even two rentals, at least at your price point. There are no economies of scale to take advantage of, and no offset from other units if there is an issue with one or two. We own a two unit property in a MCOL area, purchased low, but it is not something that we could ever generate significant cash flow from. If that were our goal, getting a small portfolio of properties would serve us better.

That all being said, if you have identified a property and could realistically make $30k annually in profit from a max $350k investment, I would classify that as very successful. That is generally more than any market return you would get on that money, and doesn't take into account any appreciation of the property.

So our first property is in a beach town in southern maine, super popular, more expensive we paid 505, we get $3k a week peak season and it's typically fully rented in June, July August, then probably rented 6-8 more weeks in non peak and that varies depending on the month.  

Ski area prices in NH where I am looking seem to be ranging from $200-400 for a 3 bed, and in certain areas rent 4 seasons due to some kid summer stuff - since they are all accessible from Boston they rent for roughly 2500 a week depending on size.  

[bryantpark]

Feb 12, 2019 0:50:11 GMT -5 @akswartz85 said:

For us, we want the cap rate to be somewhere between 6-8 (higher is better), if we are cash focused. If we are long-term appreciation focused, the cap rate can be a bit lower (say 4-5). Pretty simplistic, but it works.

We own 11 multi family units and some other single family rentals. I’ve learned that cap rates on vacation areas tend to be very low, but appreciation can be greater. We own in suburbia, LCOL, and the cap return rate is very good. (Our goal
Is cash).

So, overall, it depends on what your goals are.

If you are purchasing a property that is an existing rental, ask for a full rental history. That will help you make a judgment on whether it fits your goals.

Read more here: en.wikipedia.org/wiki/Capitalization_rate

If you want cash flow, look for a location that doesn’t have a high upfront cost (ie LCOL). We own in the Madison, WI area. We bought 11 multi family units for $1.5m (cash - no mortgage), and earn about $10-11k/ mo net. Gross is about $14-15k/mo. On the flip side, if we had bought in southern ca (where we live), our gross monthly would
Have been about $5-6k.

This is really helpful thank you

[imojoebunny]

Before you decide what to do, I would recommend talking to a tax person. We have rentals, and a vacation property we choose not to rent. Your regular income, expenses, taxes, mortgage or not, matter a lot in rentals. Our goal is long term equity, though we do have net cash flow that is about like a lot of my mom friend's job at pre-schools, yoga studios, or the like. It is essentially, my SAHM 401K (I have a substantial 401K from working, but this adds to it in a meaningful way).

The people I know who are killing it in rental income, are not paying cash, and they have the volume to be able to hire someone to handle repairs and maintenance, an hourly person, not pay an agency a percentage. They, also, tend to have their real estate license and the capital/inclination to buy the shitville, and fix it up.

[kadams767]

Feb 12, 2019 21:38:43 GMT -5 bryantpark said:

Feb 12, 2019 9:40:53 GMT -5 kadams767 said:

I don't know, maybe I am pessimistic or just not that great at this, but I think it is going to be difficult to achieve the kind of net profit you are looking for with one or even two rentals, at least at your price point. There are no economies of scale to take advantage of, and no offset from other units if there is an issue with one or two. We own a two unit property in a MCOL area, purchased low, but it is not something that we could ever generate significant cash flow from. If that were our goal, getting a small portfolio of properties would serve us better.

That all being said, if you have identified a property and could realistically make $30k annually in profit from a max $350k investment, I would classify that as very successful. That is generally more than any market return you would get on that money, and doesn't take into account any appreciation of the property.

So our first property is in a beach town in southern maine, super popular, more expensive we paid 505, we get $3k a week peak season and it's typically fully rented in June, July August, then probably rented 6-8 more weeks in non peak and that varies depending on the month.  

Ski area prices in NH where I am looking seem to be ranging from $200-400 for a 3 bed, and in certain areas rent 4 seasons due to some kid summer stuff - since they are all accessible from Boston they rent for roughly 2500 a week depending on size.  

Are the places in NH actually rented for that amount and for most weeks?  I’m familiar with that area and have never had a problem finding a last minute rental or a partial week rental outside of the school holiday weeks, which leads be to believe there is a decent chance of vacancy there.  It has been a couple years since I’ve gone, but I’ve also not paid that much.  Perhaps the market has gotten hotter there?  

[bryantpark]

Feb 13, 2019 7:20:03 GMT -5 kadams767 said:

Feb 12, 2019 21:38:43 GMT -5 bryantpark said:

So our first property is in a beach town in southern maine, super popular, more expensive we paid 505, we get $3k a week peak season and it's typically fully rented in June, July August, then probably rented 6-8 more weeks in non peak and that varies depending on the month.  

Ski area prices in NH where I am looking seem to be ranging from $200-400 for a 3 bed, and in certain areas rent 4 seasons due to some kid summer stuff - since they are all accessible from Boston they rent for roughly 2500 a week depending on size.  

Are the places in NH actually rented for that amount and for most weeks?  I’m familiar with that area and have never had a problem finding a last minute rental or a partial week rental outside of the school holiday weeks, which leads be to believe there is a decent chance of vacancy there.  It has been a couple years since I’ve gone, but I’ve also not paid that much.  Perhaps the market has gotten hotter there?  

Yes huge chance of vacancy - that's why I am only estimating 12 - 15 rental weeks to get to the 30k ish.  We'd probably look for a seasonal renter for the winter, the ski season houses typically go for 10k but they also pay all utilities and plowing so it greatly helps with the winter heating.     

Added: and huge risk b/c selfishly I want a house there so I am having a hard time taking our enjoyment out of the equation b/c we are really looking to build up cash flow opportunities.  In my gut I feel like another vacation house is not the way to go but my emotions are making me want to do all the more due diligence to prove my gut wrong .

[imojoebunny]

Unless you get an exceptional deal on a vacation house, I don't see how people really make much money off of them on a cash flow basis, especially, if you have no mortgage, and have to pay income tax at rates on top of your regular income.

If you have $300K in cash and invest it, you could conservatively expect to make $15K a year, most likely taxed at the long term capital gains rate for the most part.

It you have a $300K paid off rental property bringing in $30K a year, your going to pay regular income tax on the profit, at whatever your highest rate is + state income tax. You are going to have property taxes, neighborhood/condo fees, upkeep, which is considerable on a short term rental, cleaning, management, ect. When you back all that out, I doubt you will do better with a property than with stock/passive investment, and you'll have a lot less liquidity and a lot more responsibility.

[bryantpark]

Feb 13, 2019 9:19:58 GMT -5 imojoebunny said:

Unless you get an exceptional deal on a vacation house, I don't see how people really make much money off of them on a cash flow basis, especially, if you have no mortgage, and have to pay income tax at rates on top of your regular income.

If you have $300K in cash and invest it, you could conservatively expect to make $15K a year, most likely taxed at the long term capital gains rate for the most part.

It you have a $300K paid off rental property bringing in $30K a year, your going to pay regular income tax on the profit, at whatever your highest rate is + state income tax. You are going to have property taxes, neighborhood/condo fees, upkeep, which is considerable on a short term rental, cleaning, management, ect. When you back all that out, I doubt you will do better with a property than with stock/passive investment, and you'll have a lot less liquidity and a lot more responsibility.

yeah that's certainly my worry - 30 was after most of those things you mentioned.  For our current one in Maine, tenants pay the cleaning in additional to the $3k weekly rate, I do the management, it's newish so little upkeep, and the taxes and condo fee are thankfully low, but yes all of those things matter a lot in the 2nd property that we pick - there are tons on the mkt with $500 association fees and there is NO WAY i'd go for that.  But there are other benefits, like holding these for the value and selling for say supplemental college funds down the road.  DH is a portfolio manager at a huge inv mgmt company - we are very limited in what we can invest without pre clearance so it's a huge PITA.  You have to pre clear to buy and to sell and so there's almost no point b/c you are almost guaranteed to not be able to sell if the company is selling in same time period.  it's really tricky and very risky.  Also our whole livelihood is market based b/c 75% of his pay is performance based, so it really was also to diversify even though real estate prices are certainly tied to market/economy.  

[bryantpark]

Feb 13, 2019 15:09:12 GMT -5 melmaria said:

Feb 13, 2019 9:19:58 GMT -5 imojoebunny said:

Unless you get an exceptional deal on a vacation house, I don't see how people really make much money off of them on a cash flow basis, especially, if you have no mortgage, and have to pay income tax at rates on top of your regular income.

If you have $300K in cash and invest it, you could conservatively expect to make $15K a year, most likely taxed at the long term capital gains rate for the most part.

It you have a $300K paid off rental property bringing in $30K a year, your going to pay regular income tax on the profit, at whatever your highest rate is + state income tax. You are going to have property taxes, neighborhood/condo fees, upkeep, which is considerable on a short term rental, cleaning, management, ect. When you back all that out, I doubt you will do better with a property than with stock/passive investment, and you'll have a lot less liquidity and a lot more responsibility.

This is all true, but being able to deduct mortgage interest, property taxes, HOA fees, repairs/maintenance, utilities, travel to/from the property, and property depreciation on a rental property can at least offset a good chunk of the income that is subject to tax.  Being able to deduct depreciation, in particular, has been very helpful in reducing the taxable income for our rental property.

Yes to all of this! We offset so much of it quickly for our existing rental - especially since we made some nice-to-have upgrades 

[imojoebunny]

Feb 13, 2019 15:09:12 GMT -5 melmaria said:

Feb 13, 2019 9:19:58 GMT -5 imojoebunny said:

Unless you get an exceptional deal on a vacation house, I don't see how people really make much money off of them on a cash flow basis, especially, if you have no mortgage, and have to pay income tax at rates on top of your regular income.

If you have $300K in cash and invest it, you could conservatively expect to make $15K a year, most likely taxed at the long term capital gains rate for the most part.

It you have a $300K paid off rental property bringing in $30K a year, your going to pay regular income tax on the profit, at whatever your highest rate is + state income tax. You are going to have property taxes, neighborhood/condo fees, upkeep, which is considerable on a short term rental, cleaning, management, ect. When you back all that out, I doubt you will do better with a property than with stock/passive investment, and you'll have a lot less liquidity and a lot more responsibility.

This is all true, but being able to deduct mortgage interest, property taxes, HOA fees, repairs/maintenance, utilities, travel to/from the property, and property depreciation on a rental property can at least offset a good chunk of the income that is subject to tax.  Being able to deduct depreciation, in particular, has been very helpful in reducing the taxable income for our rental property.

We can defer depreciation in some way, but we cannot deduct it.  It is income dependent.  If you can, then it is magic from a tax perspective.  DH used to be able to before we got married, and our joint income exceeded the amount that allowed it. I think it plays some role in the basis, when we sell, but for now depreciation on an annual basis is dead to us.  :-(

[kadams767]

Feb 19, 2019 23:37:53 GMT -5 imojoebunny said:

Feb 13, 2019 15:09:12 GMT -5 melmaria said:

This is all true, but being able to deduct mortgage interest, property taxes, HOA fees, repairs/maintenance, utilities, travel to/from the property, and property depreciation on a rental property can at least offset a good chunk of the income that is subject to tax.  Being able to deduct depreciation, in particular, has been very helpful in reducing the taxable income for our rental property.

We can defer depreciation in some way, but we cannot deduct it.  It is income dependent.  If you can, then it is magic from a tax perspective.  DH used to be able to before we got married, and our joint income exceeded the amount that allowed it. I think it plays some role in the basis, when we sell, but for now depreciation on an annual basis is dead to us.  :-(

Are you talking about total losses from the rentals, generally?  I do not believe there is an income limit for deducting depreciation on Sch. E, but there is one for taking the total losses from Sch. E and deducting those.  I’ve never not been able to deduct my depreciation.

[kadams767]

Feb 20, 2019 7:45:59 GMT -5 melmaria said:

Feb 20, 2019 7:35:35 GMT -5 kadams767 said:

Are you talking about total losses from the rentals, generally?  I do not believe there is an income limit for deducting depreciation on Sch. E, but there is one for taking the total losses from Sch. E and deducting those.  I’ve never not been able to deduct my depreciation.

Yeah, I guess I should have clarified. We are also well over the income limit to deduct rental losses as a whole, but we’ve always been able to deduct depreciation, mortgage interest, property taxes, maintenance/repairs, etc. from rental income on Schedule E (at whatever the automated formulas are - I think it’s different for different categories).

Same, I just wanted to be clear that the limitations are on actual overall losses being deducted from regular taxable income, not depreciation being a deduction on Schedule E.  I've never had a year with a net loss until 2018.  :cries: