Managing Real Estate: Feasible?

[ChristopherMD20]

I am posting this to get some unbiased advice to settle a friendly debate my wife and I are having about our financial plans for the future.

 

I am finishing up my fellowship and our current house income is ~$180k. We max out her 403b and both Roth IRAs. By the time my training ends we will be DEBT FREE except for our mortgage. What my wife and I disagree on is what to do next year with our income over expenses next year when I start making attending money.

 

Our minimum household income will be ~$400k (I am considering doing moonlighting through locums or telestroke which would boost the income). We have approximately ~$110k left on our mortgage for our condo (interest 3.99%) and it is valued at approximately $165k. The monthly payments including mortgage, taxes, HOA fee, insurance are $1k. After we max out our 403b x2, 457, HSA, backdoor Roth IRAs and emergency fund I anticipate that we will still have a fair amount of "extra money" to use for other investments or savings. This is where the debate starts.

 

My goal is to continue to "live like a resident" for the duration of my first contract (2 years). This means we would continue to live in our condo and not "upgrade" to a better house until I figure out if I want to stay at my employer long term. My wife wants to move out fairly soon after my training (but she is pragmatic so this is something she is willing to compromise on).

 

Option #1: Focus on paying off the mortgage quickly increasing the monthly payments to $3k. Use the rest of the money that is "left over" to place in a savings account to save for down payment for next house. (Note: Not cost effective to refinance as we would only be saving 0.4% with fairly hefty closing fees)

Option #2: Continue to pay minimum payment on mortgage and save all the money that is "left over" to place in a savings account to save for down payment for next house. The logic being that we will eventually rent it out so "other people pay for our mortgage."

Question for after we buy another home: How challenging is it to manage a rental property as a physician? Our tenative plan regardless of what option we go with above is to use our current condo as a source of income by renting it out. The current rental market suggests we could get paid $1200-1600 per month in rent. I fear that this could become cumbersome and costly if we get tangled up with unreliable renters. I have many friends who are skilled in the trades (HVAC, plumbers, carpenters, etc.) and would take care of the issues at a nominal fee.

 

Questions overall:

1. What have people's experience been being a landlord with such a busy profession?

2. Are there any good resources so that we can adequately prepare financially and mentally to become a landlord?

3. Has anyone used the route of collecting properties as your family grows? For instance, our condo currently fits our needs and we can reasonably pay it off in a short amount of time. Our next upgrade could include a modestly priced townhome that would be perfect for us + future 1-2 kids $400-550k that we could do a 15 year fixed mortgage but pay it off quicker than that. The next step could be a more expensive single family home that is bigger and in a great school district ($800k range) for when the future kids start school. This would be our "forever home" while making money on the 2 rental properties.

4. When saving for a home, do you suggest using mutual funds that would potentially offer better returns than a savings or CD acounty getting only 1%?

[Kamban]

ChristopherMD20 wrote:

1. What have people’s experience been being a landlord with such a busy profession? 2. Are there any good resources so that we can adequately prepare financially and mentally to become a landlord? 3. Has anyone used the route of collecting properties as your family grows? For instance, our condo currently fits our needs and we can reasonably pay it off in a short amount of time. Our next upgrade could include a modestly priced townhome that would be perfect for us + future 1-2 kids $400-550k that we could do a 15 year fixed mortgage but pay it off quicker than that. The next step could be a more expensive single family home that is bigger and in a great school district ($800k range) for when the future kids start school. This would be our “forever home” while making money on the 2 rental properties. 4. When saving for a home, do you suggest using mutual funds that would potentially offer better returns than a savings or CD acounty getting only 1%?

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In the first two years when you are trying to become a partner you might be busy building up your clientele. This is not a time to be distracted buying rental properties and managing them.

You can have a management company to manage and rent it out but they charge month's rent or 10% and no guarantee that they will be able to rent it out all year round. And things like repair, painting and maintenance eats into your returns.

The third idea is not bad, provided your wife can get aboard on it and not want a huge doctor home in 2 years. In 15 years you can have three or more rental properties. But they have the same risks I outlined above.

If you want the money to be available for down payment in 2 years then CD or money market is your best bet. You cannot afford to take a risk placing that in index mutual funds.

 

 

[ChristopherMD20]

Kamban wrote:

ChristopherMD20 wrote:

1. What have people’s experience been being a landlord with such a busy profession? 2. Are there any good resources so that we can adequately prepare financially and mentally to become a landlord? 3. Has anyone used the route of collecting properties as your family grows? For instance, our condo currently fits our needs and we can reasonably pay it off in a short amount of time. Our next upgrade could include a modestly priced townhome that would be perfect for us + future 1-2 kids $400-550k that we could do a 15 year fixed mortgage but pay it off quicker than that. The next step could be a more expensive single family home that is bigger and in a great school district ($800k range) for when the future kids start school. This would be our “forever home” while making money on the 2 rental properties. 4. When saving for a home, do you suggest using mutual funds that would potentially offer better returns than a savings or CD acounty getting only 1%? 

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In the first two years when you are trying to become a partner you might be busy building up your clientele. This is not a time to be distracted buying rental properties and managing them.

You can have a management company to manage and rent it out but they charge month’s rent or 10% and no guarantee that they will be able to rent it out all year round. And things like repair, painting and maintenance eats into your returns.

The third idea is not bad, provided your wife can get aboard on it and not want a huge doctor home in 2 years. In 15 years you can have three or more rental properties. But they have the same risks I outlined above.

If you want the money to be available for down payment in 2 years then CD or money market is your best bet. You cannot afford to take a risk placing that in index mutual funds.

 

 

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Thank you for the insight it is very helpful!

I will be a W2 employee working 50/50 hospitalist/clinic so there will not be as much pressure to become a "partner" but it will have its inherent stressors so I appreciate your comment.

My wife is very practical, so she will not want the "doctor house". Her main focus is having our kids in an excellent public school district (even though they aren't even born yet...).

[Kamban]

ChristopherMD20 wrote:

My wife is very practical, so she will not want the “doctor house”. Her main focus is having our kids in an excellent public school district (even though they aren’t even born yet…).

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This is another reason to delay buying a house. School district becomes important at age 5 or 6 or even later. What might be a good school district now may not be the one you want when your kid is ready to hit 1st grade. So you next house should be geared to a modest town home in a place more suitable for long term rental than one with a school district in mind ( though it can overlap, as one of our rental homes is "hot" due to a great high school within its zoning).

[Lithium]

The best resource I've read on landlording is this:  https://www.bogleheads.org/forum/viewtopic.php?t=226980

It's enough to talk me out of ever trying it.

If you're serious, I'd also pick up one of John T. Reed's books.  Unfortunately, they're expensive and hard to find.

While you might make decent returns renting out your old residences, the flaw with your plan is that you haven't purchased them as investment properties.  You need to know what their cap rate is, etc.  Selecting a home is a very different process than selecting an investment property.... you may get better returns in the long run if you sell the condo you have now and buy a place where the numbers are more favorable.

[CM]

Owning rental properties is a business. It involves financial risk, liability, and ongoing headaches. If you want to go that route, I recommend investing significant effort into research beforehand.

There are many resources you might investigate including: https://www.biggerpockets.com/.

Here is a quick but helpful forum post by an experienced landlord at bogleheads.org that you might find helpful: https://www.bogleheads.org/forum/viewtopic.php?t=226980

Personally, I don't have the time or the energy. My practice is much too demanding. If you have the time, energy, and interest, you might do better with rentals than index investing, but at the cost of higher risk and effort/time/work.

In your position, I would max any available tax-sheltered retirement accounts first, then accelerate mortgage payments with excess funds. I'd work as an attending for at least one year before deciding on any major decisions that would require more of my time and energy.

Edit: I see the poster above also linked to the same bogleheads forum post. Didn't realize it was a famous post.  

[StarTrekDoc]

Congrats on having your financial house in order and the world is your oyster now.

IMHO - Option 4.

Earnings:  you'll have plenty of $$; not so sure why the need for moonlighting.  Your financial house is clearly in order.  Consider work/life balance and life before kids.  It changes dramatically once the little ones arrive.  You'll miss an entire decade of adult level movies in the theatres and travel.

Savings:  Since you're not sure about final destination, you may actually stay pat in your current location and job since the financials don't appear to be driving the conversation but more location, location, location. --  If you have relative confidence on staying in the condo for next 3-5 years before kids/moving.  Split the savings to something you're comfortable about in future down payment and future earnings (ie.  save enough for 20% downpayment [cash/cd/paying down current mortgage if you sell] on future home and the rest for retirement/slush fund savings [index stocks])

Real Estate:  this is in a state of flux with the proposed tax reforms.  If any sizable appreciation, you may want to sell this when moving since the exception is going to become much more stringent.  Also, the deductions is going to be harder on scheduled, so that entails LLC for the properties (which you should do anyways).  2nd home deductions are going to get slaughtered with the reform cap of $10k.   Also, read up on landlording and state/local ordinances.  It's a good shelter and income stream, but it's not passive by any means.  The returns are great, but there's effort to it.  Less with a management company, but it's still yours to contend with.  I good management company can be found 6% is typical in our area.   Experienced real estate agents are usually a good reliable source of these companies.--look for the independent realtor who appears to sell their homes quickly or even lists them sold when it hits Zillow/Redfin.  Those are good indicators of pocket listings that they sold internally from their rental properties.

Forever home:  doesn't exist at your stage- new attending and pre-kids.  Life changes way too often.  0-5 and 5-10 year plans are much better dynamics for these.

[ChristopherMD20]

Thank you all for very helpful advice. Much appreciated!

[adventure]

ChristopherMD20 wrote:

(Note: Not cost effective to refinance as we would only be saving 0.4% with fairly hefty closing fees)

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I'd suggest a better measure of effectiveness to refinance would be # of months/payments until you "break even".

[mobilehomegurl]

Owning and managing real estate is definitely a business. It has its ups and downs. If you're a busy professional, it will leave little time to deal with the day to day aspect. Yes, you can bring in a property management company. Though, you will also have to manage the property manager.

I knew a physician who did this while overseas. Unfortunately, things didn't go so well after an eviction. The property management company did very little to try to fill the home. The physician was very stressed out. Ended up firing the property management company while trying to find a replacement company to work with.

If you or your wife is up to taking on the management involved (whether you self manage or hire it out), owning real estate is an option. Though, if you don't want to deal with the management aspect you may want to look at other avenues.

Hope that helps!

[Sajimone]

1.  My wife does the landlording and she's part time pediatrician.  Im full time doc with heavy practice.  Not too bad if all goes well... a monthly rent check is fun.   But can be stressful if you have a bad tenant or significant repairs.   Last month, we had a bad tenant that we had to evict, who ultimately stole all the appliances, etc.  You can imagine my wife was a bit stressed out initially.. but I told her... its going to happen.   You hire the lawyer to evict and you buy some new appliances.  Its part of the business.   We knew that going into it and we had emergency reserves in place to handle these things.  Take the emotions out of the equation and you should be ok.  Otherwise don't it.

2. Biggerpockets is very good.. lots of good resources to learn the trade well.  Good forums like WCI.

3. Our initial goals was once property a year.   Now Im more interested in commercial properties... multifamily housing?

4. We saved directly 30% for our primary house.   We did that first before buying rentals and we bought a doctor home 3-4 years after finishing fellowship but we were also good savers even during my fellowship and while my wife worked full time pediatrician.

[The White Coat Investor]

Personally, I've opted to put my time into my practice and WCI, LLC. So I've outsourced my real estate management by buying syndicated properties (directly and via crowdsourcing websites), using funds, and owning publicly traded REITs. I don't own a single property other than the house we live in by myself, but I own pieces of dozens (and if you include the REITs, thousands) of properties.

[White.Beard.Doc]

I own properties directly and manage them myself.  I own a handful of expensive condo townhouses in HCOL premium school districts.  As condos I am only responsible for the inside of the units.  A typical property will be only marginally cash flow positive upon acquisition.  Over time, however, the rents go way up, the tenants pay down the mortgage, and the properties appreciate substantially as job growth and competition for the premium schools intensifies.  I have slowly added properties to my real estate portfolio over time.  It has been a very good way to build substantial wealth slowly.

It is easy for me to manage a modest number of expensive properties with professional class tenants.  If something needs fixing I make a phone call and send a handyman or a plumber over to take care of it, or if it is something minor I may fix it myself as I enjoy being handy.  If an appliance breaks, I may just go online and order a replacement appliance, very low hassle.  Given the substantial positive cash flow, occasionally spending money for a new appliance is a drop in the bucket, and the tenants love it when you address their needs efficiently and responsibly.  When turnover of tenants occurs there is more work needed, but these days I get my young adult kids or my business employees to help handle the turnover.  In the old days I would do it all myself.  It is helpful to know reasonably priced and responsible painters and handymen.

Over time, my real estate investment properties are worth millions and the annual rent roll is substantial.  The depreciation deductions (paper losses) make the rental income tax free (quite valuable with a combined marginal income tax rate of 50%).  This has been a winning strategy for me.  Currently roughly one third of my net worth is in securities, one third in real estate, and another third in the value of another business that I started (not counting about 10% of net worth in cash equivalents).

In part because of the success of these real estate investments I am broadly diversified and don't need to work for income, but I still love taking care of patients and teaching the next generation of doctors.  I like keeping busy.  I suspect others might not like the responsibility of managing real estate rental properties.  Personally, I enjoy interacting with the 98% of my tenants who over the years have been very nice families.  I invested in residential real estate because it was easy for me to study and learn the local real estate market and to make what turned out to be wise investments.

[ChristopherMD20]

White.Beard.Doc my phone is not allowing me to properly quote/reply so I'll reply this way instead.

We also live in a HCOL closer to Baltimore but may be looking in between Baltimore and DC (my wife works in DC and her parents live closer to DC). The place I live (which will potentially become a rental) is in a working class area possibly susceptible to undesireable tenants but it is where I am from so I may be able to rent it out to people I know/trust. Also, if my Alma mater let's me solicit to their med students and residents I could have a pipeline of trustworthy renters. Also great area for military personnel which I would consider trustworthy tenants. We could also use my wife's connections with the Chinese community to help immigrants get on their feet with a relatively cheap home. There are options but I am a bit gun shy. I know a lot of people in the trades so I could minimize costs that way. I think you've convinced me to give it a trial run with the condo in a few years once we move out and if it works out start investing in condos/townhomes in these areas with great school districts (there are 2 counties around me that are prime locations). I have a few years to educate myself.

Do you have the rental properties in an LLC?

THANKS!!

[White.Beard.Doc]

ChristopherMD20 wrote:

White.Beard.Doc my phone is not allowing me to properly quote/reply so I’ll reply this way instead.

We also live in a HCOL closer to Baltimore but may be looking in between Baltimore and DC (my wife works in DC and her parents live closer to DC). The place I live (which will potentially become a rental) is in a working class area possibly susceptible to undesireable tenants but it is where I am from so I may be able to rent it out to people I know/trust. Also, if my Alma mater let’s me solicit to their med students and residents I could have a pipeline of trustworthy renters. Also great area for military personnel which I would consider trustworthy tenants. We could also use my wife’s connections with the Chinese community to help immigrants get on their feet with a relatively cheap home. There are options but I am a bit gun shy. I know a lot of people in the trades so I could minimize costs that way. I think you’ve convinced me to give it a trial run with the condo in a few years once we move out and if it works out start investing in condos/townhomes in these areas with great school districts (there are 2 counties around me that are prime locations). I have a few years to educate myself.

Do you have the rental properties in an LLC?

THANKS!!

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I do not have an LLC for my rental properties.  Instead I have a multi-million dollar umbrella liability policy that includes coverage for all of my owned real estate.  Either of these options, an LLC plus insurance for each individual property or sufficient umbrella liability coverage should protect you.

I recommend the biggerpockets.com web site as a good place to begin to educate yourself.  Any investment real estate purchase has to be analyzed for cash flow and overall investment returns before pulling the trigger.  And many HCOL areas are challenging in terms of finding cash flowing properties.  You have to analyze each purchase carefully before pulling the trigger.