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Author: mazske Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5084  
Subject: Something for me to think about Date: 8/8/2003 2:09 PM
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I love the idea of purchasing a rental property. I have toyed with the idea before and my spouse likes the idea as well. When I bought my first house back in '93, I rented for the next 3 years so I do have some experience with being a landlord.

Here lies one of the issues. I'm using a lot of assumptions with this scenerio as well.

Let's say I want to buy a rental property such as this one.

http://tinyurl.com/jfkq

I hope that link works. I'll try to remember and preview it to make sure.

If this house was purchased at asking price and I wanted to put a 20% down payment on it, I would need to save up $9,400. That's not figuring in any closing costs, but it's also not figuring in that I would offer less than this to buy the house.

For me to save up that downpayment, I would have to divert my current contributions to IRA's and 457 plan to another, taxable type account. I'm thinking I could go with saving $400 a month at this day in time towards this goal. That amount should increase slightly over the next year to two years.

Let's say I saved $400 a month for 12 months and then $450 a month for 12 months. That would give me $10,200, not figuring in any interest.

That would put me pretty close to the 20% downpayment and the amount needed for closing costs. There's a good chance, IMHO, that interest rates may be higher in 2 years so let's raise the estimated monthly payment for a mortgage in 2 years to an 8% rate which works out a $276/month and that's not figuring in insurance or taxes.

If this property, and this is just an example and not a real one I'm considering to buy, could rent immediately for $350/month, I should be cash positive by a little bit.

Now, I would have to keep up my savings into a taxable account for another year or so to get another $5400 saved to have as an emergency fund for this house.

Now, this is just a plan that I've thought about while typing this post. I'm guessing on the rent, but I'm thinking it may be conservative at $350/month and could possibly go to $400-450/month.

Looking at this "plan", I would have to curtail my investments into equities for the next 3 years or possibly longer. However, I would gain another house out of the deal with the possible rental income that should more than cover a mortgage.

Currently, with my savings they are relatively painless. I no longer buy individual stocks, even though I still own quite a few of them. I have money going into both the S&P 500 index fund and the Vanguard Total Stock Market Index fund. No stress, no phone calls for broken pipes etc. The only concern is what if the market tanks for the next 20 years, while housing prices keep rising for the next 20 years. That's the unknown factor.

Now, I've posted before about my possible pensions. In less than 15 years, I am eligible for an early retirment. I think a conservative figure is a pension of about $1k/month and the supplement of about $800/month. This would give me a bit over 21K a year, which if my house was paid off and the kids were grown, would be liveable, although we'd have to scrimp a little bit.

Now, let's say I only bought this one rental property and let's say in 15 years I was making $100 gross a month on the rents. That's a little bit more gravy, even though my rough guess is that in 15 years, rents would go up much more than $100/month.

I would also have my stock investments that I could tap into if necessary. I would also have my Navy pension that would kick in 10 years from my retirement from the Police. Knowing this could allow me to withdraw more from my stock accounts as when that pension kicks in it should be another 1K a month.

Like I said, this is something to think about. If I survive the next 3 years and purchase one rental property and build up an e-fund for it, then I could look at getting another one and then 3 years later another one.

I really want to FIRE in less than 15 years from the police department as I'll be 50 by then and that's getting old to be a cop. Too many young'uns now that can outrun me, much less in another 15 years.

I am not against working some sort of PT job if necessary to cover the bills, but I don't want to have to work FT.

I have not discussed how much I'll have in equities as that's another unknown factor. $400/month is $4800/year. Figure over the next 15 years I slowly increase savings each year, plus figure I'm making something on the stocks I own.

If I could maintain positive cash flows of $100 each, that's $300 more each month on the rental property. If rents go up by more than $100/month on the properties and/or I pay the mortgage off, the gross for me would be much more.

Wow, this post rambles quite a bit and I don't know if anyone will read the whole thing, but I'll be curious as to any comments. No one can answer for me, but if I stick with stocks and the market doesn't completely tank, I'm Firing at age 50. If I buy rental property I am still Firing at age 50. The big question is, does anyone who is smarter than I, all of you, think I'll make more money by buying some rental properties than I would if I stuck with stocks?



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