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My research suggests Cash Flow is a better investment strategy - Based on personal experience, US$600K can control a residential real estate portfolio that pays

My research suggests Cash Flow is a better investment strategy - Based on personal experience, US$600K can control a residential real estate portfolio that pays $96K annual profit (after property manager, insurance, mortgage, etc.). To get the same at 5%, math suggests a $1.9M principal (minimum) is needed, invested in paper assets.

yathern 7y ago
Do you have sources for that claim? I find shocked that 600k gets you 96k yearly. 16% returns are absolutely ridiculous for real estate, AFAIK
- jcrben 7y ago
  Real estate tends to be leveraged.
- ganitarashid 7y ago
  Not just for real estate. Anyone who can maintain a 16% return for the long run would be one of the best investors in the world.
- jacquesm 7y ago
  He left out the interest payments on the principal he can leverage with $600K. Say your bank allows 3:1 leverage then $600K will get you 1.8 million for 2.4 million total to spend. In some places that's enough to get an 'octoplex', 8 flats in one building. Each of those can be let at $1000 -> 12K * 8 -> 96K. Now you need to pay interest, the current rates are 1.7% or so, say 30K annually, or about 1/3rd of your total income on the property. Of course there is still the maintenance, the cost for managing the property, the inevitable non-paying renters and evictions as well as flats that are empty between tenants. But that's more or less the basics of it. Depending on local conditions this scheme may be more or less profitable. The things to watch out for in a scheme like this is rising interest rates which will likely kill the market so you would not be able to sell. If you want to nail down the interest rate over a longer term then you'd have to expect a higher interest rate.
  - raintrees 7y ago
    Correct in my experience! :) And we rarely sell, instead we retain cash flow. We will "flip" a Single Family door via 1031 (US Tax Code) into our next 5-8 doors (after owning it for 4 or so years). But we expect to hold onto the other building, and those we acquire as we go, as this again is a subscription model - Cash flow. "The market" (i.e. real estate appreciation) does not affect us so much over time, only when we do buy/sell. And right now, US rates are again low...
- raintrees 7y ago
  We have our first 5 doors, we keep $12K a year. Financed with 25% down. We are targeting our next 5-8 doors purchase in the next 3 months. Typical expectation (when we buy right) we keep about $200 per door per month. Buying right is a large caveat - There are many bad deals out there, but still some good ones. Timing can be a large part of it, so patience is required. We will be independently wealthy in roughly 7 more years, if we can continue to get the timing right. So I posted a representative of our plan, we are working that plan. ymmv :)
  - raintrees 7y ago
    This also assumes frequent, aggressive - but still completely legal - tax planning. I live in the US, so I am adhering to the IRS' code. I wish I had studied wealth-building sooner, instead of having my roaring twenties, I would have been aware of the choice to be done accumulating by 35 (independently wealthy) and able to focus even more time on the volunteering, mentoring, and tinkering I do now. It is possible, but it requires discipline, something I continue to work at.
    - yathern 7y ago
      This is very interesting to me, and you sound very familiar with the topic! Is there any particular place I can look into this in greater detail? I've often considered investing in real estate, but never considered using leverage.
      - raintrees 7y ago
        A book I used the actual ideas from (rather than just studied) was The ABC's of Real Estate Investment by Ken McElroy. I also hired mentors that covered different aspects, from The Wealth Factory (A Garrett Gunderson company), Paradigm Life, and Rich Dad Advisors, among others. The last has given me the most help and is the reason we have had the success we have so far experienced; Ironically, it tends to get down-voted with a quickness on HN. The principal (Kiyosaki) is quite controversial, maybe due to his anti-establishment method. That and possibly his crude language/delivery. He also has stretched the truth about his own experiences, another negative. But the basic knowledge is the same that has worked for Real Estate for many, many decades (more?). The leverage is the same used in the USA for home mortgages - We put down 25% and the bank lends 75%. If you can take advantage of assistance programs (i.e. First Time Buyer, Military GI Loan, etc.) you may find even better terms for non-commercial residential (less than 5 doors). Some of my mentors have recommended buying a duplex or triplex to get started, and living in one of the units. It can mess with the tax advantages, so work carefully with a CPA, but it can almost seem that financially, the tenants are paying your mortgage and basically buying the property for you. I prefer always using a Property Manager - Less profit, but also no calls at 2:00am about plumbing issues, lost keys, etc.
defen 7y ago
How much leverage? You can’t compare an unlevered equities portfolio against a 5x (or more) levered real estate portfolio.
- raintrees 7y ago
  75% leverage, typical for the US. And in paper assets I would pursue options for the same ability. It is possible to earn cash flow in that market, but I have not had much success taking my emotion out of it, so I focus on real estate.

yathern 7y ago

Do you have sources for that claim? I find shocked that 600k gets you 96k yearly. 16% returns are absolutely ridiculous for real estate, AFAIK

jcrben 7y ago
Real estate tends to be leveraged.
ganitarashid 7y ago
Not just for real estate. Anyone who can maintain a 16% return for the long run would be one of the best investors in the world.
jacquesm 7y ago
He left out the interest payments on the principal he can leverage with $600K. Say your bank allows 3:1 leverage then $600K will get you 1.8 million for 2.4 million total to spend. In some places that's enough to get an 'octoplex', 8 flats in one building. Each of those can be let at $1000 -> 12K * 8 -> 96K. Now you need to pay interest, the current rates are 1.7% or so, say 30K annually, or about 1/3rd of your total income on the property. Of course there is still the maintenance, the cost for managing the property, the inevitable non-paying renters and evictions as well as flats that are empty between tenants. But that's more or less the basics of it. Depending on local conditions this scheme may be more or less profitable. The things to watch out for in a scheme like this is rising interest rates which will likely kill the market so you would not be able to sell. If you want to nail down the interest rate over a longer term then you'd have to expect a higher interest rate.
- raintrees 7y ago
  Correct in my experience! :) And we rarely sell, instead we retain cash flow. We will "flip" a Single Family door via 1031 (US Tax Code) into our next 5-8 doors (after owning it for 4 or so years). But we expect to hold onto the other building, and those we acquire as we go, as this again is a subscription model - Cash flow. "The market" (i.e. real estate appreciation) does not affect us so much over time, only when we do buy/sell. And right now, US rates are again low...
raintrees 7y ago
We have our first 5 doors, we keep $12K a year. Financed with 25% down. We are targeting our next 5-8 doors purchase in the next 3 months. Typical expectation (when we buy right) we keep about $200 per door per month. Buying right is a large caveat - There are many bad deals out there, but still some good ones. Timing can be a large part of it, so patience is required. We will be independently wealthy in roughly 7 more years, if we can continue to get the timing right. So I posted a representative of our plan, we are working that plan. ymmv :)
- raintrees 7y ago
  This also assumes frequent, aggressive - but still completely legal - tax planning. I live in the US, so I am adhering to the IRS' code. I wish I had studied wealth-building sooner, instead of having my roaring twenties, I would have been aware of the choice to be done accumulating by 35 (independently wealthy) and able to focus even more time on the volunteering, mentoring, and tinkering I do now. It is possible, but it requires discipline, something I continue to work at.
  - yathern 7y ago
    This is very interesting to me, and you sound very familiar with the topic! Is there any particular place I can look into this in greater detail? I've often considered investing in real estate, but never considered using leverage.
    - raintrees 7y ago
      A book I used the actual ideas from (rather than just studied) was The ABC's of Real Estate Investment by Ken McElroy. I also hired mentors that covered different aspects, from The Wealth Factory (A Garrett Gunderson company), Paradigm Life, and Rich Dad Advisors, among others. The last has given me the most help and is the reason we have had the success we have so far experienced; Ironically, it tends to get down-voted with a quickness on HN. The principal (Kiyosaki) is quite controversial, maybe due to his anti-establishment method. That and possibly his crude language/delivery. He also has stretched the truth about his own experiences, another negative. But the basic knowledge is the same that has worked for Real Estate for many, many decades (more?). The leverage is the same used in the USA for home mortgages - We put down 25% and the bank lends 75%. If you can take advantage of assistance programs (i.e. First Time Buyer, Military GI Loan, etc.) you may find even better terms for non-commercial residential (less than 5 doors). Some of my mentors have recommended buying a duplex or triplex to get started, and living in one of the units. It can mess with the tax advantages, so work carefully with a CPA, but it can almost seem that financially, the tenants are paying your mortgage and basically buying the property for you. I prefer always using a Property Manager - Less profit, but also no calls at 2:00am about plumbing issues, lost keys, etc.

defen 7y ago

How much leverage? You can’t compare an unlevered equities portfolio against a 5x (or more) levered real estate portfolio.

raintrees 7y ago
75% leverage, typical for the US. And in paper assets I would pursue options for the same ability. It is possible to earn cash flow in that market, but I have not had much success taking my emotion out of it, so I focus on real estate.