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i have a question to the finance savvy how my brother-in-law actually plans to pull this off...

so, he's a engineer making around $90,000 at his 9-to-5 job. they had a house that they paid around $150,000 for with 20% down...but the house is not valued at $100,000. They moved out of that one to buy a shortsale for around $250,000. but they kept their old house to rent out (it is currently rented out). they are now thinking of buy another house, a foreclosure, for $90,000...also to rent out...and they plan to put 20% down.

his plan is to quit his 9-to-5 job in 10 years and live off his rental properties. is this possible? how much credit will banks extend to him to keep buying more and more properties? and wouldn't the rent you charge have to be substantially more than than the mortgage payments owned in order to make actual money? and even then...he's need a lot of properties before he's making enough to replace his $90,000 salary. i can see this being a great idea 20-30 years down the line when everything is paid off. but he thinks he'll be rich in a little over 10 years.

does he have some savvy idea that my non-financial savvy brain can't fathom? or is he fooling himself? how can this work, if at all?

thanks!

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I feel like I am in the 75%. Been doing this since I was 18 (5 yrs now) and am mentally burnt out. I hired a property ma... (more)

lukasrhodes (Mar. 09, 2013 @ 10:30a) |

There isn't anything wrong with having a property management co. if you are at a point where you want to afford yourself... (more)

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Yes, but depreciation does not affect cash flow. And cash flow is what is important here. The only thing depreciation ... (more)

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Are they are on 30 year mortgages or 15 year? What rent is he getting for them? etc etc

don't know length of any of their mortgages except their first house, which is 30 year. don't know how much they're getting in rent off that first house...but his wife said they're only netting a couple hundred a month from it.

my question is...given he's putting 20% or less on their homes (the one they live in was some sort of FHA and they put very little down)...and given that he's only making $90,000 (and has 4 kids)...would a bank lend him enough money to buy enough homes to where he'd actually make any sizeable amount of money? with the given's in place, what sort of likely scenario would allow him to become wealthy in 10 years? the house rentals around around the area...the prices are very low...like $1600 TOPS for a 2000 sq ft home. and their rental is more like 1400. and the third house they're thinking of getting is even smaller. i would guess they're getting less than $1400 for their first home. and they'll probably get $1200 or less for the home they're thinking of getting.

I'm just wondering if I should get on the house buying bandwagon to make myself rich in 10 years!!!!

X=Sum of all mortgages and property taxes
Y=Sum of rents + 10% for additional expenses.

If Y-X is 90,000 he can quit his job.

Rental Income - mortgage cost + management fees + all other expenses = net income before taxes

Would receive credit for interest on mortgage and depreciation of assets

So if total rental income is less than 2500 / say his total expenses from above are 50% (probably more) you are looking at $ 1250 / month income (15K per year assuming rented out 100% which is a bad assumption)

He would need about 12 more similar properties (rental income vs. expenses) to quit his job

Assuming he could qualify for the mortgages, keep rented at 100% occupancy and keep expenses below 50%

svap said:   X=Sum of all mortgages and property taxes
Y=Sum of rents + 10% for additional expenses.

If Y-X is 90,000 he can quit his job.


well, of course. he could quit his job even if y-x < 90,000 and i'm sure he probably would since he doesn't like being a 9-to-5 office type. but around here, unless you're putting a lot down on a house, mortgage payments and rental payments...are very close to each other. so he's not going to make a ton per property. so the question i guess is...how many properties can he buy???? or i suppose the question become...how much total credit would a bank extend to a guy making 90,000?

Given the limit is currently 4 mortgages, without getting creative, its not likely he will be replacing his income anytime soon. Without getting into details...for myself, I calculated the need of 8-9 homes to do so. You need to ask him if he plans on prepaying the mortgages for his 10 yr plan to work. A lot of people tout about their cashflow etc... but dont tell you that they did so with large (20%+) down payment etc....

Bottom line is he would have to scale up to do so in 10yrs, and there is nothing wrong with making an investment in assets.

Fannie / Freddie actually have a 10 unit limit, it's just that most of the banks have stayed at 4.

isobro said:   Fannie / Freddie actually have a 10 unit limit, it's just that most of the banks have stayed at 4.Call call call. Call every bank in your metro area and then some. Ask if they 1) do 10 unit limit 2) allow immediate counting of rental income to qualify you. IE, no seeding. There is now 20 unit limit for homepath properties but you need 30% down ...

Does your sister (your BIL's wife) work? If she has her own income, have them buy rental properties SEPARATELY in one person's name. Now 4/10 unit limit is 8/10 unit limit... That is what I am doing witth my wife.

Your nickname, does your bil also live in Michigan? Detroit metro's ratio of rent to property cost is fantastic! We are about to close on $65k property (non foreclosure), will rent for minimum of $1200, maybe $1400

The 20/25/30% downpayment requirement from conventional lending is the biggest hurdle to expand imo, unless you have a boatload of cash available.

rufflesinc said:   isobro said:   Fannie / Freddie actually have a 10 unit limit, it's just that most of the banks have stayed at 4.Call call call. Call every bank in your metro area and then some. Ask if they 1) do 10 unit limit 2) allow immediate counting of rental income to qualify you. IE, no seeding. There is now 20 unit limit for homepath properties but you need 30% down ...

Does your sister (your BIL's wife) work? If she has her own income, have them buy rental properties SEPARATELY in one person's name. Now 4/10 unit limit is 8/10 unit limit... That is what I am doing witth my wife.

Your nickname, does your bil also live in Michigan? Detroit metro's ratio of rent to property cost is fantastic! We are about to close on $65k property (non foreclosure), will rent for minimum of $1200, maybe $1400


no, she does not work. and yes, we're in michigan. however, they're not evening buying properties in the proper metro area...more like highland, bright, milford area.

michiganitis said:   I'm just wondering if I should get on the house buying bandwagon to make myself rich in 10 years!!!!

Sign of another bubble coming up...

rufruf44 said:   The 20/25/30% downpayment requirement from conventional lending is the biggest hurdle to expand imo, unless you have a boatload of cash available.

I believe some folks put the 20% down and then take out equity lines to finance the next property.

Ignore this post...it does not exist

*Jedi mind trick*

bchshockey said:   Ignore this post...it does not exist

*Jedi mind trick*


That only works for people who know Star Wars.

Any ways, back to topic, I calculate it for myself and it seems to be around 9-10 properties for it to work. Also, have to factor in vacancy and maintenance/repairs. Christmas is hard because MANY households are late on the December/January rent.

There isn't nearly enough info here to do anything but guess.

If a property is $90k and he has 20% down he could feasibly get a 10 year fixed loan and have mortgage payments of about $700. If it rents for $1200 then that should probably cover expenses then in 10 years he'd own it free and clear. Do that a few times and you could live off the rents. But thats probably not the plan.

michiganitis said:   but he thinks he'll be rich in a little over 10 years
I thought he just expects to replace his $90,000 a year job by then ?

Alcibiades said:   michiganitis said:   but he thinks he'll be rich in a little over 10 years
I thought he just expects to replace his $90,000 a year job by then ?


he wants to become rich! he's fully expecting to be able to replace his job by then.

jerosen said:   There isn't nearly enough info here to do anything but guess.

If a property is $90k and he has 20% down he could feasibly get a 10 year fixed loan and have mortgage payments of about $700. If it rents for $1200 then that should probably cover expenses then in 10 years he'd own it free and clear. Do that a few times and you could live off the rents. But thats probably not the plan.


i don't know if that's what he's doing or not...but that sounds like a great idea! though...according to the other guy above, to realistically cover is engineering jobs $90k income, he'd need like 10+ properties. she he's have to do that more than a few times...but rather a bunch of times.

he's my other question though. lets say he needs oh...8 of these $90k properties to get this done. his income is only 90k...will banks lend him enough money to get all these houses when he's not actually making much (if any) money off of them?

michiganitis said:   jerosen said:   There isn't nearly enough info here to do anything but guess.

If a property is $90k and he has 20% down he could feasibly get a 10 year fixed loan and have mortgage payments of about $700. If it rents for $1200 then that should probably cover expenses then in 10 years he'd own it free and clear. Do that a few times and you could live off the rents. But thats probably not the plan.


i don't know if that's what he's doing or not...but that sounds like a great idea! though...according to the other guy above, to realistically cover is engineering jobs $90k income, he'd need like 10+ properties. she he's have to do that more than a few times...but rather a bunch of times.

he's my other question though. lets say he needs oh...8 of these $90k properties to get this done. his income is only 90k...will banks lend him enough money to get all these houses when he's not actually making much (if any) money off of them?


Bank won't lend him any money if his DTI doesn't support it, and with an aggresive 10yr payment plan, it'll be hard to show the properties having positive cash flow for DTI calculation. Not to mention bank also wants at least 6mo reserve for all mortgage payments, which will cut into the available cash for down payment for the next properties.

rufruf44 said:   Bank won't lend him any money if his DTI doesn't support it, and with an aggresive 10yr payment plan, it'll be hard to show the properties having positive cash flow for DTI calculation. Not to mention bank also wants at least 6mo reserve for all mortgage payments, which will cut into the available cash for down payment for the next properties.You can if you find the right bank. The one I'm using now, a local bank, only requires me to show them a signed lease and they will count the rent from that property towards covering the mortgage, no delay, no reserves.

If the properties rent for ~$1200 and the mortgage is ~$700 then it wouldn't be too hard to be cash flow positive. $1200 rent on a $90,000 property beats the 1% rule of thumb.

jerosen said:   If the properties rent for ~$1200 and the mortgage is ~$700 then it wouldn't be too hard to be cash flow positive. $1200 rent on a $90,000 property beats the 1% rule of thumb.

True, but IIRC bank's DTI calculation is 0.7*rent-(mortgage+tax+insurance) if there's no tax returns number available. Depend on tax/insurance, it might be just a tad positive or even negative.

michiganitis said:   i have a question to the finance savvy how my brother-in-law actually plans to pull this off...

so, he's a engineer making around $90,000 at his 9-to-5 job. they had a house that they paid around $150,000 for with 20% down...but the house is not valued at $100,000. They moved out of that one to buy a shortsale for around $250,000. but they kept their old house to rent out (it is currently rented out). they are now thinking of buy another house, a foreclosure, for $90,000...also to rent out...and they plan to put 20% down.

his plan is to quit his 9-to-5 job in 10 years and live off his rental properties. is this possible? how much credit will banks extend to him to keep buying more and more properties? and wouldn't the rent you charge have to be substantially more than than the mortgage payments owned in order to make actual money? and even then...he's need a lot of properties before he's making enough to replace his $90,000 salary. i can see this being a great idea 20-30 years down the line when everything is paid off. but he thinks he'll be rich in a little over 10 years.

does he have some savvy idea that my non-financial savvy brain can't fathom? or is he fooling himself? how can this work, if at all?

thanks!


His plan is solid and quite doable.

Your fallacy is assuming he needs to replace a 90,000 salary.

What is makes now is relevant in only how quickly he can save and buy properties, not what he needs to retire. He could only need 20,000 in living expenses which could mean with careful management of his rental property plan he could retire in 7 years or less.

michiganitis said:   Alcibiades said:   michiganitis said:   but he thinks he'll be rich in a little over 10 years
I thought he just expects to replace his $90,000 a year job by then ?


he wants to become rich! he's fully expecting to be able to replace his job by then.


Sigh, I sense some jealosy here. He just wants to retire. That doesn't mean rich. Just enough income to live off of plus a little extra for security. It is 100% possible if he makes the right moves.

I get the feeling like the conversation went nothing like you are describing.
"I'm going to retire in 10 years, fully replace my 90,000 salary AND be rich!!"
More like...
"I'm going to retire in 10 years. Here's my plan."

okashiraaa said:   michiganitis said:   Alcibiades said:   michiganitis said:   but he thinks he'll be rich in a little over 10 years
I thought he just expects to replace his $90,000 a year job by then ?


he wants to become rich! he's fully expecting to be able to replace his job by then.


Sigh, I sense some jealosy here. He just wants to retire. That doesn't mean rich. Just enough income to live off of plus a little extra for security. It is 100% possible if he makes the right moves.

I get the feeling like the conversation went nothing like you are describing.
"I'm going to retire in 10 years, fully replace my 90,000 salary AND be rich!!"
More like...
"I'm going to retire in 10 years. Here's my plan."


No the conversation went like,

"I hope to retire in 10 years tops."
"What!?!? How?"
"I'm going to buy as many houses as I can to rent out. And my idea is to have them paid off sooner rather than later."
"What?? Is this really doable?"
"Absolutely. And sit a little luck, I think I might be really ranking in income."

rufruf44 said:   jerosen said:   If the properties rent for ~$1200 and the mortgage is ~$700 then it wouldn't be too hard to be cash flow positive. $1200 rent on a $90,000 property beats the 1% rule of thumb.

True, but IIRC bank's DTI calculation is 0.7*rent-(mortgage+tax+insurance) if there's no tax returns number available. Depend on tax/insurance, it might be just a tad positive or even negative.


Its been a year and a half since I went through that - but I want to say either Chase, or Wells Fargo (might have been both) would only count .7*rent - even though I had several years of 100% occupancy with on-time payments (so regardless of tax returns it was still .7). The guy's reasoning was that they use the 0.7 rate to account for the possibility of short payments or repairs that might occur in the future.

michiganitis said:   No the conversation went like,

"I hope to retire in 10 years tops."
"What!?!? How?"
"I'm going to buy as many houses as I can to rent out. And my idea is to have them paid off sooner rather than later."
"What?? Is this really doable?"
"Absolutely. And sit a little luck, I think I might be really ranking in income."


Sounds pretty resonable actually. He isn't going to be rich, but he could definatly retire like that if that is what he wants to do.

Edit: If he has 15 years loans and can rent them out to cover the mortgage, along with throwing some extra in from his current $90k/yr job, he could have them paid off in 10 years. After that time the rent is profit minus expenses.

I'm not an accountant and don't have direct personal experience in successful landlording, but can't you take depreciation on rental properties? If so, I would think OP's BIL could match his take-home pay from current W2 job with substantially less than $90k in net (before depreciation) rental income.

It is achievable. I. Matched my w2 salary in about 3 years on the rental wagon. But now my life style is more expensive so i still work. I've got 15 properties. Its not all glitz and glamour tenants are assholes and can cost u big $$$. This path will probably make wealth for 25% of people who try it. The other 75% will sellout in a few years and swear never to consider it again. If u think u are going to get a property management company to do everything u are in the 75%

michiganitis said:   okashiraaa said:   michiganitis said:   Alcibiades said:   michiganitis said:   but he thinks he'll be rich in a little over 10 years
I thought he just expects to replace his $90,000 a year job by then ?


he wants to become rich! he's fully expecting to be able to replace his job by then.


Sigh, I sense some jealosy here. He just wants to retire. That doesn't mean rich. Just enough income to live off of plus a little extra for security. It is 100% possible if he makes the right moves.

I get the feeling like the conversation went nothing like you are describing.
"I'm going to retire in 10 years, fully replace my 90,000 salary AND be rich!!"
More like...
"I'm going to retire in 10 years. Here's my plan."


No the conversation went like,

"I hope to retire in 10 years tops."
"What!?!? How?"
"I'm going to buy as many houses as I can to rent out. And my idea is to have them paid off sooner rather than later."
"What?? Is this really doable?"
"Absolutely. And sit a little luck, I think I might be really ranking in income."


His mortgage isn't forever...

Mortgage 700 rent 1000. +300.

Paid off in 10 years = +1000/mth. - expenses.

Goal = x number of houses.

ShaftSlinger said:   It is achievable. I. Matched my w2 salary in about 3 years on the rental wagon. But now my life style is more expensive so i still work. I've got 15 properties. Its not all glitz and glamour tenants are assholes and can cost u big $$$. This path will probably make wealth for 25% of people who try it. The other 75% will sellout in a few years and swear never to consider it again. If u think u are going to get a property management company to do everything u are in the 75%

I feel like I am in the 75%. Been doing this since I was 18 (5 yrs now) and am mentally burnt out. I hired a property management company for my last property (#10) and will probably do that for any further ones. I still maintain my day job in real estate, because as you said, I became acquainted to a different lifestyle over the past couple of years.

lukasrhodes said:   ShaftSlinger said:   It is achievable. I. Matched my w2 salary in about 3 years on the rental wagon. But now my life style is more expensive so i still work. I've got 15 properties. Its not all glitz and glamour tenants are assholes and can cost u big $$$. This path will probably make wealth for 25% of people who try it. The other 75% will sellout in a few years and swear never to consider it again. If u think u are going to get a property management company to do everything u are in the 75%

I feel like I am in the 75%. Been doing this since I was 18 (5 yrs now) and am mentally burnt out. I hired a property management company for my last property (#10) and will probably do that for any further ones. I still maintain my day job in real estate, because as you said, I became acquainted to a different lifestyle over the past couple of years.
There isn't anything wrong with having a property management co. if you are at a point where you want to afford yourself of the luxury, so to speak. Whether its something you earned or just want a respite... you can always manage it again, as you know how to.... Congrats on starting out at around the same age as I was.

P.S. Try doing it for 20+ yrs.

dbond79 said:   I'm not an accountant and don't have direct personal experience in successful landlording, but can't you take depreciation on rental properties? If so, I would think OP's BIL could match his take-home pay from current W2 job with substantially less than $90k in net (before depreciation) rental income.

Yes, but depreciation does not affect cash flow. And cash flow is what is important here. The only thing depreciation will affect is the income taxes.



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