Thursday, June 23, 2016

Back to the Rentals Plan

Looking at rentals to create long term passive income.
Roughly ten years ago I was in a very stressful job (like I am now) and climbing the corporate ladder.  It was a tough time as the company had just gone through another mega-corporate merger.  Life was full of "synergies", best practices and lots of meetings.  In one particular meeting my boss gave a short speech and gave me an award for ten years of service to the company.  It caught me off guard a little as I had forgotten just how quickly time had gone by and that it was ten years already.  I thanked him and accepted the small token company gift.  While I was thanking him one thought jumped into my mind, I better have a plan to replace my current income as there is no way I'm making twenty years.  You see as mergers came, people left.  Hundreds of them through the years.  Reorganizations and politics got everybody eventually and expecting to last forever untouched was not very likely.

Later that night I relayed the days event and my feeling on income replacement with my wife.  We spoke for quite some time and agreed that while life was good we were corporate slaves and expecting another ten years of continuous employment in my line of work was unrealistic.  I am very good at playing politics but given the state of that company, twenty years would be pushing my skills. So we embarked on our Rentals Plan.  I read everything I could and put together a great Excel tool to help me analyze rental properties and their returns.  We researched houses and I ran the numbers. Tons of numbers.  We knew what we needed to have positive cash flow, visited some properties and even made a couple of offers.  None were accepted.  We kept running into the same problem, all of these properties seemed overpriced.  What it would take to buy one would not cash flow.  Rejected we stepped away from this plan for awhile thoroughly confused and disgusted figuring I was missing some big financial secret.  Well that was around 2007.  Yes right before the 2008 crash.

Post crash everything made sense.  The housing market was overpriced and thankfully we stuck to our numbers and walked away.  As the years have gone by I have often thought of restarting this plan now that the market has normalized more.  Life however has gotten in the way.  I didn't make 20 years with that company.  I made 17+ and restarted at another company.  Additionally along the way complacency set in and while we would discuss this plan from time to time, inertia ruled the day.

As we have jumped into the pursuit of FIRE I keep looking for ways to help move us along.  We are at a crossroads in our planning.  We could take a step back from our current lifestyle and probably retire in a year or so.  To keep our current lifestyle I need a lot more passive income.  That's where the rental plan comes back into play.  If we are going to keep working another 5-10 years we need to build up as much in investments and passive income as we possibly can.  Rentals can help provide this income stream over time.  So we are on the verge of getting back into this mode.  I have brushed off the Excel spreadsheet and we are running numbers on properties and starting to set appointments. The good news is that they seem more reasonable now.  The bad news is the profitable properties are selling as fast as they list.  We are working with a realtor to get an early jump on some of these.

Are we 100% sure we are going to jump into being landlords?  No, but we are pursuing this and are going to see where it takes us.  I will keep all of you posted on how it goes.  My question for any of you is this; are rentals worth it?  I can prove it probably has a higher return on our down-payment.  I can also show in time how we can build passive income.  There are risks however and the thought of spending down some of my taxable investments is a little scary.  It would commit us to a longer time frame but with possibly higher rewards.

Time will tell whether we do this or not but we are cautiously moving forward right now.

Photo credit:  Cathy Yeulet

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