{ "media_type": "text", "post_content": "Why don’t more people put 20% down on a property and rent it out so the other 80% is paid for by someone else while they active equity? Is there something I’m missing?", "post_id": "60832c0605e7d3002ac95244", "reply_count": 127, "vote_count": 14, "bowl_id": "552d1d24dc1c586b09d2d051", "bowl_name": "Consulting" }

Why don’t more people put 20% down on a property and rent it out so the other 80% is paid for by someone else while they active equity? Is there something I’m missing?

funnylikehelpful
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This is a fairly common investment strategy for real estate... However, remember that not everyone has the luxury to afford a 20% down payment on a rental property (some can’t even do it on their residential property). Most lenders prefer that you put down 20% for a rental property to begin with tbh. Also, for house hacking (i.e. living in a home and renting out rooms), some people just aren’t comfortable with having roommates.

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Also in places where there are enough high earners to pay ~2k+ rent for a 1bdrm, there’s almost no chance you’ll get something cash flow positive after taxes, hoa, maintenance, mortgage interest etc. Right now people are buying homes for well over asking in high demand areas, because there’s a lot of first time owners. You have to have the capital to gamble and sit on places that are up-and-coming and hope the area gets popular. For those areas, you’ll also be competing with REPE firms like BlackRock and foreign investors. Not easy when everyone is trying to make a buck these days. Maybe there’s opportunities in niche places like Montana or Colorado, but you’ll probably need to live there to keep an eye out on your places as well

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Have you ever managed property before? It’s a nightmare. Why deal with that hassle when I can just buy an index fund?

likesmarthelpful

Net, net-net, and triple-net actually have specific meanings in the real estate industry. Look them up.

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-Rent doesn't always cover the mortgage -Very unlikely you'll have the home rented 100% of the time so you will end up paying out of pocket for months it's on the market -you have to deal with tenants -you have to deal with maintenance -mortgage rates are higher if you are not purchasing for a primary residence

likehelpful

P1 “it’s not hard to find a property that has a market rent to cover P&I /taxes/insurance/HOA”?? Can you elaborate on that? Where and how?

Because of the 80/20 rule

likefunnysmart

80/20 rule comes from the concept of the “long tail” of revenue generation. 80% of your revenue probably comes from 20% of your products. The other 80% of your products, make money in the long run. Content is a good example of this... like older shows on Netflix, Amazon, etc that aren’t as popular, but the rights are cheap to have and people watch at a slow burn, but in the long run- lots of $$ to be made from old shows like Full House, Gossip Girl etc... while in the present, most money is made from hit shows like Mrs. Maisel, The Crown etc... 80% revenue from new/hit shows which there’s fewer of. 20% residual revenue from older shows as long as they’re out there.

So many homes for rent yet there’s fewer and fewer homes to buy.. I wonder why

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Blackstone and similar institutional own <5%. Majority are still owned by private landlords

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This is called leverage. A lot of people have gone bankrupt from over leverage. Try having 3 properties and no tenants...

likehelpful

I follow a 1:1 D/E rule. Fairly conservative for real estate, but it’s enough for my risk appetite

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Debt to income ratio. Banks won’t just keep lending you money to overexposure yourself in the real estate market.

likefunny

Back in the day I could take out 5 mortgages per home with no stated income! If you let the banks. They will do it.

It’s a common strategy. Just not available to everyone due to barrier of entry, willingness to do the work, and access to markets where you can be at least cash flow neutral.

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Because I bought Bitcoin instead of some slum

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Leverage = risk, really as simple as that. People there got wealthy doing it because in the time period property values typically went up. If you got into that game in 2005 like I did, well you took a beating for a while. As others have said it really isn’t as easy as just having tenants pay you. The amount of problems you have to deal with can be a lot, even with a property manager that takes 10-12% off the top.

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From Long Island NY and everyone I know that’s wealthy and retired did real estate on the side of their corporate gig, not sure why it’s not more common?

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If looking to invest in NYC, 20% down won’t cut it when people are offering all cash. Been wanting to invest in real estate since my parents have multiple properties, but even they’ve said it’s a lot harder to buy now than it was back then...you know...before the housing bubble burst 🙃

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Startup capital is too much for a lot of people

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My friend does something similar with duplexes. He bought a duplex and lives in one unit and rents out the other. He makes enough from the rented unit to cover his mortgage and makes a little money too, basically living for free.

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We own and rent a property. It is not the easy guaranteed gain you make it out to be. We are currently losing money renting it out because the market can’t support a higher rent. I’d rather sell and invest in the market.

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Same. Couple that with my aging condo has to compete with shiny new high rises.

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How about during the pandemic when people stopped paying rent and you are not allowed to evict them? This is a possibility. It is why real estate is a risky but sometimes profitable investment.

likehelpful

Ah ok. Makes sense

https://www.instagram.com/p/CMuqN-5HKfs/?igshid=142x2r6xk001b check out this post. It’s a comparison of 20% down for investment property and S&P trajectory over 30 years

likehelpful

@ba2 the first chart is a comparison of owning primary home and renting the same home out. The second chart is a comparison of renting out an investment property with S&P return

It’s a great strategy until things go wrong. Which is true of most strategies...

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Many people in 2004-2005 said the same thing. A new neighborhood by me had many starter homes. Many people invested in those homes and rented them out. After the crash almost every one of those homes was in some form of foreclosure and being sold at a loss. Many people investing in real estate are not thinking about the risks too.

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If you are really a data scientist, you should collect the data and analyze it. - What is median household income in the us? - Idiosyncrantic risks with homes means you can have the HVAC break and be out of pocket $$$ for repairs - Given the risks, only folks with high risk tolerance will do this - Many people are better of diversifying, like a stock index

funnylike

It worked in the past where properties were relatively cheap. If you own a home recently you’ll see that the cash flow is tricky

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OP how many properties do you own?

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