Jodi and Neal, friends who I helped buy a duplex in Echo Park a few months ago, are writing an awesome blog documenting their experiences as first time landlords: soweboughtaduplex.blogspot.com.
The most recent entry describes their first landlord emergency, involving a clogged pipe and a weekend call to the plumber. It’s a great reminder that landlording is a business and businesses sometimes have unexpected costs / problems / etc. All you can do is just try to make sane, rational decisions, fix the problems, and move on.
Over time, you get better at it and the problems seem much less scary.
Definitely check out the blog.
We spent the last 3-4 years on the front lines of gentrification in East Hollywood, Silver Lake and Echo Park. We’ve paid around 65 tenants to move out of rent controlled apartments so that I could renovate and raise the rents. When I tell some people this, I can see from their facial expressions that this bothers them.
Well, here’s the net result of our efforts over the past few years:
- Gave a bunch of relatively poor people serious nest-eggs of between $10-35,000 each, some of whom blew the money but others of whom used it to buy homes of their own, pay for colleges for their kids, etc.
- Employed the equivalent of probably 10 construction workers through the worst construction bust in living memory, all of whom were supporting families who would have been in big trouble without that money coming in;
- Employed several other independent contractors in maintenance, book-keeping and property management;
- Bought probably a million of dollars worth of appliances, flooring, paints, etc. from suppliers big and small, helping them survive the construction melt-down;
- Gave more than 100 tenants (some of the buildings were vacant when we bought them) new, wonderful apartments to live in;
- Supplied neighborhood bars, restaurants, boutiques, etc. with new customers to patronize their establishments (believe me, the prior tenants weren’t drinking $4 ice teas at Intelligentsia);
- Generated hundreds of thousands of dollars in commissions for local real estate brokers who helped us buy and sell assets (yes, I often work with other brokers!);
- Increased the city’s property tax base, since property taxes go up when values go up;
- Paid a bunch of income and capital gains taxes and fees to the state and federal governments;
- Made money for our investors;
- Made money for ourselves.
I’m very happy and proud of what we’ve done for the people and communities we’ve worked in these last few years. We’ve created a lot of positive change. And we’re going to keep moving forward, because we see nothing but opportunity in Northeast LA.
So far on this blog, we’ve spent most of our time talking about buying your first building. But what does the end-game look like?
One thing to understand about real estate is that there’s literally no limit to how big you can get. If you’re disciplined about saving money and re-investing, you can keep growing your asset base for your entire life. Since the market is so large (trillions of $$$s), there is nothing stopping you from accumulating hundreds of millions of assets… again, if you’re ambitious and disciplined.
But what about a normal person or couple who just wants to ensure financial security in retirement? Maybe a pair of teachers. What does success look like for them?
Well, imagine they spent their 30s and early 40s saving up the dough to buy four fourplexes. Assume they ran the buildings competently and never missed mortgage payments. Assume also they never refinanced.
What will their financial life be like at 65-70? Obviously, the value of the dollar will have changed. So let’s just assume that inflation effects everything equally (revenue and costs), so that we can think about things in terms of today’s dollars (not 2045 dollars):
- They own 16 units
- Mortgages have been paid off
- Each fourplex generates the equivalent in 2012 dollars of $4,000 / month gross, or $3,000 / month net.
- So they have the equivalent of $12,000 per month or $144,000 / year net coming in
- The assets themselves are worth, say 10x gross, or $480,000 each
- So the total asset base is worth $1.92MM
Even if these people didn’t save a penny after buying the apartment buildings, they are going to retire comfortably. If they did the smart thing, and contributed to their IRAs, etc., then they are going to be worth well into the $2MMs (in 2012 dollars), maybe more. They’ll also have some money coming in from social security plus any pensions from their jobs. So their income is probably going to be around $200,000 total.
Can they charter jets to Tahiti? No. Do they have servants? No. But do they have a wonderful, care-free retirement plus the ability to leave something valuable to their children? Yes they do. The seeds they planted in their 30s and 40s grew into a stable financial base for the rest of their lives and allowed them to leave something valuable to their children. And that’s not so bad…