Getting into some financial geek talk, be forewarned, this isn’t for everyone but could provide value for those interested in self-investing. I had a good comment on this post (AMD working toward retirement…one day) about the potential crock that 401k could be for the government (no comment, no knowledge or research on the subject) and how being a landlord for an individual property shouldn’t be discounted especially as a long-term passive income vehicle. Since writing that, I’ve done a little more research on owning investment property. Sounds like you need at least 20% down to get a rental property mortgage. We don’t have that kind of scratch lying around for any sort of property in my neighborhood, but maybe it could happen in a few years. So what do we do until then? I looked at REIT’s vs. investment properties and found a number of good articles:
This was a pretty good, non-scientific analysis: Direct Real Estate Investment Vs. REITs.
One rule of thumb I read is that you should be able to charge 1% of your purchase price in rent, so if you buy a $200,000 duplex, you should be able to charge $2,000 for total rent between the two units. A hypothetical investor of this property, with a 20% downpayment and a 5.5% mortgage with good credit would have a (rough estimate) mortgage plus property tax payment of $1,120 per month. Now that doesn’t count for insurance or vacancy rate or maintenance, which could all vary, but if you’re able to rent for that $2,000 you have $880 to pay for those aspects, plus “profit” or Return on Investment. Furthermore, you have the ability to deduct mortgage interest, home office expenses, insurance and maintenance costs from your income.
So for now, like most of you, there’s no way we can invest in a single real estate property. There may be opportunity to own a part of one of our companies (offered to me this year, declined, will likely be offered to Holly in a smaller company with bigger upside), so may need the capital. In the meantime, though we have a very small percentage in retirement accounts, I’m considering REITs (specifically Vanguard’s mutual fund VGSIX, which I own in retirement accounts) as a first start in taxable account. Maybe one day we can roll that up into an individual property.
Now an individual property does seem like an option. I’m somewhat handy, but have a full time, very busy job. What I do have though is two handy father-in-laws who are both retired and both live within about 20 minutes who I can probably “hire” as handy men in situations where I would need one.