Real Estate Done Simply

Whenever possible, simple is better. I try to keep things in my life as simple as possible. I include my life at home, my job and my work at our fire department.

With fewer moving parts there is less that can go wrong.

This can be applied to real estate. I know various people that have different levels of involvement with real estate. Some of these folks are stretched very thin by the work that is needed to maintain a real estate portfolio. They may own a lot real estate by other people's standards or not, that is subjective but if managing your real estate is a full time job and you don't want it to be, you probably have too much.

The idea coming in this post is not mine nor is it unique but that does not diminish the extent to which it is a good idea. Also keep in mind the primary theme is simplicity, it would be easy for someone knowledgeable in real estate to find better ways to skin this cat.

In the next couple of years my wife and I plan to buy a duplex ( but a three-unit building is not out of the question nor does it increase the hassle factor by much). I'm not sure exactly where we will buy but it will be somewhere where we could enjoy living, as we do now in Walker, maybe Juneau.

The basic idea behind a duplex is you have two renters, which reduces vacancy risk. This is probably not new to anyone. The way we plan to integrate it into our financial plan might be a little different, though.

I will probably be 42 when we buy. Our plan is to pay down the mortgage very quickly with rent and by making extra payments from our income. I think we can have it paid off when I am 52.

Here are some numbers to help explain the thought process. Rents where we live are kind of low. If we owned a duplex in Prescott, we could probably charge $650 per unit per month, $1300 total. $1300 free and clear, in today's dollars, covers about half of our total expenses, we live quite modestly. Even if that was only 20% of your monthly expenses it would still be compelling.

If your monthly expenses are high (this calls for introspection), then a duplex could be 20-25% of your retirement income, a stock portfolio could be 25-30% of your income and the rest could be split from some sort of part time work mentioned in previous posts and social security. Four different streams of income is not a bad way to go.

Where I think my thoughts might start to go off the beaten path have to do with people that don't do a good job saving money but can do a good job paying the mortgage.

Someone in this position could sell their home upon retirement (this idea assumes the house is paid off) for $250,000 (in today's dollars), close to the average home price today, and move into one side of the duplex (which, presumably has also been paid off). The proceeds could then be put into a diversified portfolio to comfortably generate $1000 per month.

In this scenario, $650 rent is coming from the other unit, there is no mortgage to pay, $1000 in portfolio income plus the part time job and social security. Also note that I have made the assumption that this person did not save anything during their working lives.

The numbers may seem small but the person that saved nothing is going to have to deal with a very modest lifestyle in retirement. Things look much better with a modest bit of savings accumulated, say $200,000 in an IRA.

There are a couple of logistical issues with any type of rental property. My own preference would be to hire a management company, for my money they are worth their 10-15%. You need to maintain some sort of slush fund to pay for various little fix-its that come up and more importantly to cover any vacancies.

The other issue is negative cash flow on the property when you first buy. Rent usually goes up at the rate of inflation. A small negative cash flow in the first few years is not a big deal to me but this is very subjective and there is no wrong answer. I would add that $1500 in rent versus a $3000 mortgage would be a turnoff for me.

The primary purpose of this post is to start thinking about real estate in a simple manner. One piece of investment property is not an unreasonable burden and regardless of the end game, moving in or selling, some exposure makes sense. A real estate bubble, if there is one, will not hurt investors that are not overleveraged.