Rental Property Asset Allocation

Saving-MoneyAre you holding the proper rental property asset allocation?

My investment account has finally recovered from 2007.  That’s right.  My investment account has finally surpassed my account balance record set way back in October 2007, over eight years ago.  (It actually passed the mark a few months ago, and I just got around to writing this post.)  It was only just about $50K higher in 2007 that it was back in 2000 or so.  My current 401K, which is nearly as high as my investment account is today, was at $0 in 2003 when I started at my current mega-corp, as I have always converted my previous employer 401Ks to an IRA, and a Roth wen i could afford to pay the tax hit.

If you do not have the proper investment allocation, you could be in for a large surprise in your quest for financial independence.  Being financially independent is not just about having a large amount of money.  It is about multiple income streams and redundant sources of passive income.  And living below your means.  Here are a few insights into what I have done to become financially independent.

If you are going to invest in rental property, remember, it is risky.  Max out your HSA first, but do not spend it until you retire.  Then your 401K second.  Then your Roth or after tax IRA.  And some additional after tax savings account money.  Build up your capital before you even THINK about real estate investing.  I have been maxing out my 401K for 13+ years, and have been maxing out any IRAs and HSAs that are available to me.  I have also nearly maxed out the 401Ks (or SEPs) for all of my working career.  Save early and often, you will be glad you did.

I had been mostly in cash in my investment account after 2000, as I was a bit gun shy from the  market crash in 2000.  Looking back, being in mainly cash was not a smart move.  Back then, I had a risky portfolio of tech stocks, and they came down as fast as they went up.  Making $40K a day was great in a small portfolio, losing it was painful.

So I started saving, saving a large amount and spending less.  2007 was a great year for saving.  That was the first year I was able to save almost $100K, which was a huge percentage of what I was making, well over what I made at my main job.  Living below my means, and doing much of my own chores rather than hire them out, and some side hustles, helped immensely.

The stock market has since taken off; so how is that possible, having such as high savings rate and a stock market has been on a rocket ship since 2009 or so, to only be where I left off?

Real Estate Purchases

It takes a lot of capital to get a solid cash flow from Real Estate.  Some investors mistake deferred maintenance for profit, and they suffer when a major repair comes along.  Or several repair in a row.  Or when one bad tenant crushes them, they go broke.

In 2008 I purchased my first 4-plex.  The price paid was $318,000.  Investment properties require at least 20% down, most mortgage companies require even more.  So chalk up ~80K for a down payment, plus another $20K+ in appliances, carpet, paint, etc. and you have an easy $100K spent.

My mortgage on this property has also been paid since 2008, so the equity has increased from a shear payoff perspective.  Add on some additional equity, based on property sales in the neighborhood, and the equity adds up just a bit more.

Since we are talking about investment performance, I will stick to what I have paid off, which can be considered investment capital.  I will not count property appreciation, income generation, depreciation or other gimmicks.   I can sell it in about 30 seconds for what I paid.

Price Paid:  $318,000
Approximate Remaining Mortgage: $217,000
Equity Portion: $101,000

Once I got that first building rented, my investment account started to recover.  In 2009, I purchased another 4-plex, right next door to my first one.  The price had come down a bit, and it sold for $269,000.  Once again, a ~25% down stroke was required.  I also had to evict two tenants right away, give a third a warning, and do some remodeling.  Today, it is actually worth as much, or more, as any of the properties I purchased.   Just looking at the raw numbers again, no counting property appreciation since then.

Price Paid:  $269,900
Approximate Remaining Mortgage: $179,000
Equity Portion: $91,000

In 2010, I made another investment.  My third 4-plex.  Once again, 25% down, plus some minor work.  This was a great deal, and I had all the units rented before the first mortgage payment.

Price Paid:  $269,900
Remaining Mortgage: $0
Equity Portion: $269,900

Again, in 2011, I was ready to go again.  My fourth 4-plex.  It was another deal that was pre-MLS, as was most of my previous deals.  This mortgage is now my target to pay off.

Price Paid:  $245,000
Approximate Remaining Mortgage: $139,000
Equity Portion: $106,000

In 2012, I purchased a mortgage that lead to another 4-plex, my fifth one.  I had to continue the foreclosure, and take on some foreclosure risk.  There was no down payment, it was a cash deal – I bought the defaulting mortgage, not the property.  Taxes were behind, the water bill was delinquent, and the property was in shambles.  I tried to get friends to buy it, but after several attempts, I purchased it myself.  No guts, no glory.

Price Paid:  $205,000
Remaining Mortgage: $0
Equity Portion: $205,000

My two duplexes have been without a mortgage since I acquired them.  I put a large mortgage on my home in 2001 to pay them off.  Now that mortgage has also been paid off.

If you have been counting, that is about $775,000 invested in my properties since 2008.  So that is where my money has gone rather than any investment. If you want a 6-figure semi-passive rental income, you can look to that number as a guide.  And you still need other  sources of income.

If you count my personal residence that I refinanced to buy my first properties, the mortgage balance was about $100K back then and is now $0, so that makes it at least $875,000 worth of mortgage payments and property investments since 2008.  Factor in appreciation, and you have a nice sum of equity that I cannot even buy a loaf of bread with.  Or travel.

Other Investments and Income Streams Are Needed

You will also need some of your investments in the stock market, bonds, IRAs, etc. to help you through bad times in the rental market.  Remember, rental property is just one leg of your financial independence chair.  You will also need investments, pensions, annuities, Social Security, and maybe even a part time job to live in a low-stress lifestyle.  You may not have all of these income streams, but acquire as many as you can.

If all I had were my rentals, it would be like walking across a shaky bridge.  One misstep, and I may suffer.  No one is perfect with tenant selection, I make mistakes too.  Trying to get a higher price and being vacant hurts too.

I have paid a lot of mortgage debt since 2007.  No wonder it feels like I am always broke…!

What have you planned on investing to become financially independent?  Do you have the time to wait for investment growth, or plan on a large lump sum coming your way?  Or will you risk it all on one investment and hope for the best?




9 Replies to “Rental Property Asset Allocation”

  1. It’s fun watching the number to your goal change on the sidebar! Do you think you will hit the number goal before your date goal?

    I’m mostly investing in US and international stock index funds via Vanguard and Fidelity. I don’t want to spend the time and energy with rental properties. I do like having my primary residence though as I have a feeling we will be here for a long time.

    1. Thank you for the comment Leigh!

      I should be able to hit my number, assuming I get some help from the market. So far, in 2015, it’s been a bit lame… I generally have IVW, IVV, QQQ, IWM, and DVY in my portfolio.

  2. Wow, you’ve made a lot of progress in a short amount of time!

    I’m planning on a blend of assets that weighs heavily toward real estate. Right now I’ve got about $1.25 million in net worth, $325,000 of which is equity in my house, about $100,000 in brokerage, Roth IRA, solo 401(k) and Prosper notes, and the remaining $825,000 is all rental real estate (about $300,000 in an apartment building and $525,000 as a fractional ownership interest in a few mobile home parks). I am planning to grow my brokerage investments, but my primary focus will probably stay with real estate.

    My family has been invested in Southern California real estate for about 60 years now, so it’s familiar and comfortable to me, but it’s also proven to be such a great return on investment that it’s hard for me to say no to it. The real estate market may go up and down a bit over the short run, it’s not as herky jerky as the stock market, and over the long run the rent increases and property appreciation have led to a return of 8% or more. The stock market may get about the same return over a long period of time, but it’s a lot more volatile and harder to trust in the short to medium term and I tend to trust it a little less after my experience living through the 2000 tech crash and the 2008 crash.

    I still have a long way to go in growing my investments, but I’ve got about 20-25 years to do it before I plan to retire (between age 55 and 60, hopefully). I’m hoping to continue my investing strategy similar to the way you did it: a combo of acquiring new properties and paying down the mortgages.

    1. Thank you for the comment Amy!

      Great job on building your net worth! I wish I made the same money when I was younger as when I see others making a decent salary. I started my mega-corp career at 28, and managed quite a bit in a period of almost 30 years. It can be done faster though, as you are proving. Real Estate has definitely made my net worth soar. It has provided a higher amount of capital to invest.

  3. Impressive list of real-estate acquisitions in the last few years!
    I currently have limited exposure to real-estate as an asset class and I’d like to bring some diversification to my portfolio, so reading all this is very interesting.
    It seems that real-estate can generate really good returns. Do you have a limit on the expected return for you to invest in a rental?

  4. Wow, very impressive growth in real estate investment. I applauded you for having 3 properties paid off. That’s an insane amount of cash. When are you going to create your own REITs? I’d like to buy some share from you! 😛

    One of the things people often warn me about is if the landlord get sued, they could potentially go after the property. The only thing is exempted is the primary residence. It is fortunate and unfortunate that we are living in a country where someone, mailman, tenant’s friend, your own friends come to the property slip and fall and they could sue the landlord for “negligence”. When people have ill intention, you’ll never know what is going to happen.

    Before I discovered your website, I saw some landlord website where another person was saying he/she created an LLC for each property that they own. And don’t pay their mortgage off. That way tenants can only go after a little bit of money in the property.

    What are your thoughts on this? Are you the sole proprietor (with a huge liability umbrella insurance) or LLCs?

    1. Thank you for the comment!

      Actually, if you count my home, it’s five properties paid off… Heading towards six.

      The best way to avoid getting sued is to do things right. All my properties are in a separate LLC. I have a business liability policy. A business umbrella, and a personal umbrella policy. I am not a sole proprietor.

      1. You’re lucky that LLCs are so cheap in your state. In California, they cost at least $800 per year each. If it’s a big property, like our 22-unit apartment building, $800 isn’t so bad (although the gross rents in that case actually bump our LLC fee/tax up to $1700 per year), but for a four-plex or smaller, it’s really expensive when considering the net rent/cash flow.

Leave a Reply