*
I wanted to see if I could get some discussion going about how other remodelers/builders/contractors are saving for their future. I am almost 40 and have saved a little and do have some investments but feel like I have some catching up to do if I want to completely retire someday…although I’ll probably always do something part time. I am mostly a one man show and not really interested in ever having full time employees, so I have to think about getting older and not being able to be as productive.
I know there has been some discussion of real estate investing, which I have done a little of….With a little success, but I’m looking at getting some basic information such as, do you setup a separate investment account and deposit regularly to it monthly and what can a one man remodeling business expect to achieve financially.
Discussion Forum
Discussion Forum
Up Next
Video Shorts
Featured Story
Newer pressure treatments don't offer the same rot and decay resistance. Follow these simple strategies to give outdoor lumber its best chance of survival.
Featured Video
Related Stories
Highlights
"I have learned so much thanks to the searchable articles on the FHB website. I can confidently say that I expect to be a life-long subscriber." - M.K.
Replies
*
Contractor I work for set up what's called an SRA for us help. The Custodian is Merrill Lynch. There are Fees. Maybe you don't need employees to do this.
Along with that you can do an IRA.
*Jeff:I was in the same position you are a few years ago, I began researching my options. There are several things you can do, I ended up doing a Money Purchase Pension Plan. I would suggest you use a plan protected by ERISA (Employee Retirement Income Security Act). A great free source of information are the major brokerage companies: Vanguard, Fidelity, Schwab. They all have 1-800 numbers you can call and get free information, they will help you set up the accounts and tell you your options.These are great plans because the amount you contribute through some of these plans can be deducted on your tax return. You can contribute as much as $40,000 this year.Allan
*Jeff,Here's my take on this. You can put $5,000 in the stock market ( or 401k or SEP or mutual fund) and get $5,000 worth of something. You can use the same $5,000 to put a down-payment on a fixer-upper rental house - I prefer duplexes, and instead of $5,000 worth, you may have something worth $60,000. You're young, interest rates are good. The young man that you are today is trying to take care of the older man that you will become.You can buy something now, do all of the work yourself initially, and the income should make the payments for 15 years. You won't make much at all for 15 years, but all of a sudden, it will be paid for ! ! !. Go for it - and if it works, do it again. I'm 45, and have three paid-for rentals. The stock market has tanked, but you know what ?Those tenants are still paying me the same thins as they were a year ago.Greg.
*That's good advice Greg just gave. The equity you can build with real estate, especially rentals, is pretty impressive. And, there are some eyepopping "on paper" gains you can make if you ever decide to take the equity out of those properties to reinvest in something else. You can easilly gain 25-30% per year on your initial investment. Check out "Nothing Down for the 90's" a book by Robert G. Allen. You'll wonder why you didn't get started sooner.We have invested in the stock market for the past 20 years, just to diversify our entire package, but it always seems like I'm trusting someone else to look after my money to me. If you're a carpenter, you gotta take a look at rentals. Unreal returns. Another book that helped us immensley is "How to Buy & Manage Rental Properties" by Irene & Mike Milin. We adopted many of their management policies, and it's been smooth sailing with stable tennants for the past 5 years. Wish I'd have started sooner.Here's another thing to look into - HUD 203K rehab loans. Many bankers will poo-poo them as "too hard to set up", but keep asking around until you find a lender who is enthusiastic about them (Continental Mortgage wrote ours) and you'll be amazed at how easy it is to not only aquire the property in the first place, but pay yourself to rehab it and let the rent pay the mortgage. Unreal opportunity, especially with the new capital gains exemptions for your primary residence. Check it out.And diversify. You might not hit as many home runs, but you won't strike out as much either. Compound interest is a beautiful thing.
*Thanks Guys, great suggestions!I have done 3 fixer uppers, but I sold them when I got done with them. I made a great profit on the first one , but on the last two I didn't do so well. If I figured my hourly wage on those, It would probably make me sick.I've thought about renting them out after fixing them up, but then I think about getting called to fix this or that, or dealing with tenants in general and it scares me away. Do you guys have much trouble with tenants? I'm already so busy I hate to add more too my plate.Thanks again...Jeff
*Roth IRA's are another great retirement saving option. You put after-tax dollars in, the principal grows tax-free, and qualified withdrawals are also tax free. The max contribution was raised to $3,000 this year, and I think you can make catch-up payments if you're over 55. They're ideal for younger folks but have plenty of advantages for any age level.One thing I should point out about real estate is that while it is relatively easy to do well in, and it's a way of investing that comes a little easier than the markets to many people in the trades, there is significant risk involved. You really have to know your market and understand what you're getting into regarding tenants. In my area, the only way you can make any money unless you have at least 30-40K to put down is to buy rentals in the ghetto. Doing that, you can count on spending your free time chasing tenants for the rent, kicking people out who are disordlery, and cleaning up some of the most god-awful messes humans can make. A friend of mine did this for many years, and finally sold them after he got sick of the hassles and having to carry a .45 with him to work.... Makes sending a check every month to a broker a little more interesting. Just my opinion.Andy
*We haven't had too many problems with tenants, or maintanance headaches. Guess we've been lucky. The downside I see to real estate is that it's not very liquid. If you're willing to take the loss, you can sell whatever you have in the market pretty much anytime you want. The same can not be said for real estate. Diversify. I'm pretty sure there are annuities into which you put after tax dollars and you never pay tax on any gains those investments earn. They have them tied into life insurance policies nowdays that you can put pretty much as much as you want in there per year, even making up this year if you didn't fill it last year. But now we're getting way above what I understand.
*Jeff, Ditto what Jim said. We have done rentals for 16 years. Great tax advantages and done right you have minimal problems with tenant. Pre screening and good maintenance keep calls to a minimum. We average less than a call a month with 9 units. When they come vacant we go through them and check/repair everything. Cost a little more but better than repair calls when I can't schedule it. I disagree with Andy. Most of my units are in good middle class neighborhoods. All have been bought cheap and I rehab them. All no money down in one way or another. You can keep your expenses lower by finacing your improvements on your own. Deals are in any area of town, you have to look avidly. Andy is correct that knowing your market is key. Jim made another good point in that real estate is not the end-all investment. It is not liquid and you should have some other areas developed over time. DanT
*Andy, I do have a Roth IRA setup and try to contribute as much as I can every year. I think I'll setup a automatic deposit monthly, so that I reach the max allowed each year.Jim,Dan, Sounds like you guys have had pretty good luck with your tenants. I'm always keeping my eyes open for good deals, but have not been real serious about it. I have a real estate agent who looks for me also, but he's not real aggressive, He'll let me know when he runs across something that needs work but he dos'nt really go out of his way to search for me.I have an uncle who's in his late sixties, and has been in real estate since he was about 20 years old. Hes now a multi millionaire. He did exactly what you guys are saying, he bought fixer uppers, remodeled them and rented them out. At one time I think he had over 20 single family houses. Later he sold most of those and got into apartments. Now he's sold everything except 2 or 3 four families.I think I better start looking at real estate more seriously.Thanks...Jeff
*JeffMy CPA has given me several good books on investing toward retirement. In my opinion the best was "Making the Most of Your Money" by Jane Bryant Quinn. Owning and being the landlord of rental property never appealed to me and in order to do it well it needs to be it's own profession. I'm not saying that you can't make a good living at it, but I already make a good living doing what I enjoy. Furthermore, all of the books I've read on investing, list real estate as a minimum performer compared to the long term gains of the stock market. I know this will irritate people here, but they need to look at the facts. Historically; betting on the business acumen of this capitalist society beats all other venues. Check for yourself.Terry
*Jeff, you might think about transferring your Roth IRA to a self directed status. YOu could then use those funds for real estate investments. Check out Midoh.comYour flips will then earn profits tax free. If you lost money on a rehab, you either did to much, (probably) or didn't understand your market. Basically, you lost money on the purchase...not the sale.blue
*> list real estate as a minimum performer compared to the long term gains of the stock marketDoesn't it depend on how you figure it? I suppose that more often than not $50,000 in the stock market is worth more ten years later than a $50,000 property will be.But if you buy the $50,000 property with just $5,000 of your own money, then pay the rest with the rental income your original $5,000 is almost certainly going to go up in value a lot more than it probably would have in the market. Yes, you have to put time in to manage the property, but some people put quite a bit of time into managing their stock investments, too.Rich Beckman
*You got the idea, Rich.
*Terry, While I whole heartedly agree that not all investments are for everyone I do disagree with your statement that real estate is out performed by the stock market on a regular basis. As Jim and Rich have pointed out it depends on the formula used. If you buy a 50k property for 5k down and it double in value over 10 years, all the while paying for itself, what is the rate of return? In order to double your money on 50k in the stock market you must invest 50k. In my case I am able to buy, rehab and rent property with none of my own money involved. I do conceed my time is of some value. But if I have no cash in it what do you think my rate of return would be? 100% 1000% Really any number I would like to assign. Maybe you can do that in the stock market but I haven't had that success there so far. DanT
*Jeff:I started building new homes with no money and no experience and no partners when I was 24. I am now 51. I build spec’s and customs, 1-2 million each. I have made a lot of money. I have also lost a lost of money. The market I build in has been good for the last 6 years, I feel like I am getting a second chance.. As the old saying goes in Texas, “Lord give me a second chance and I promise not to piss it away again”. I used to own a fair amount of rental property, I have invested in the stock market, held cash, carried notes on property, built office buildings, you name it I have done it. I would not give investment advice except for this: I have never had a problem making money, but I have had a problem holding on to it. There is always the next spec, the next investment property, that I buy that I shouldn’t. I have now become very conservative, I finance my own building program with very little help from banks, loan money to my company at prime + 2. I wish when I started building homes that I would have put my money into a creditor protected investment where I could not touch it without penalty. That’s my advice, put your money into either a state creditor protected investment or better yet an ERISA protected account. What I did liked about rental properties was that in some cases they were excellent investments, good leverage, added to the balance sheet which helped to borrow more money to do more building. What I didn’t like is that is that rental properties are not passive investments and they are not creditor protected. I would advice everyone to start an ERISA protected retirement account, and use the standard investment advice of diversification and proper asset mix, invest the max each year, 2002 now is $40,000, Uncle Sam will pay 40% of that for you (you don’t get that with real estate by the way). Do this every year for 20 years. These accounts are creditor protected, the older you get , the more you accumulate this becomes an important issue especially in the building business.
*allen... doesn't ERISA have to offer equal coverage to ALL employees..?. did you set up special corporations with only 1 employee?How did you go about transfering assets into ERISA protected accounts that covered only you ?
*GentlemenI did not suggest that you can't make money in real estate. All I said is that in order to do so, it had to be run as a business, which takes time away from other business pursuits. This is fine if you enjoy it and have the inclination to do it. I'm just trying to make Jeff aware of his other options. He or any of you can read the books out there which clarify how your investment dollars work in different venues. Stocks, bonds, real estate, insurance, there is so much out there and so much to learn. All I'm suggesting is what the professional investment gurus say, and that is diversify. I know it's far more comfortable for most, to have there assets in a form they can see, but is it really the best long term performer. I can't speak to anyone else's comfort or give specifics in the debate over investment options. Investment options are far to complex to cover in a one page post. I'm just suggesting that we owe it to ourselves as businessmen to educate ourselves on the best tools available to build a retirement portfolio.Terry
*Mike:Certain types of retirement accounts (SIMPLE, 401K, Money Purchase Pension Plans) have certain requirements whereby all employees have to be covered. In my company, I have set up the rquirement that you have to be an employee for 2 years before you are covered. Fidelity help me set this up. You don't transfer assets into these accounts, but make annual contributions based on the limits and regulations of each plan. Fidelity, Vanguard, Schwab will all give you free information and send you literature that describes all of these plans and their respective benefits, requirements, and regulations. Of course there is also information on the internet.Mine is set up so that my Corp contributes 25% of each employees salary to their own account. Of course I do this for myself also. This year the max amount for each employee was increased to $40,000. I love it, my employees love it, their entry level compensation is low, but if they last 2 years they get a tax free 25% raise!Allan
*thanks , allen, a lot of stuff falls thru the cracks and that was one of them..the old.... hard to concentrate on draining the swamp when you're up to your keester in alligators
*Thanks guys, this discussion is exactly what I was hoping for. The bottom line is to do something, the earlier you start the better, and diversify.I definitely think real estate is an excellent investment, when done right. In my case Blue was exactly right on both counts...I paid too much for my properties and I fixed them up too much.I think a good strategy might be to invest monthly, using dollar cost averaging into the stock market or mutual funds in an IRA, (Roth or regular) and to try acquire good properties as they become available for either rental or flipping, whichever exit strategy makes the most sense at the time...finding the good deals is the most time consuming and hardest part of real estate IMO.Thanks for all the good advice and keep em coming!
*Jeff,Most of my properties were originally owner-financed.You can pitch the deal to landlords that are burned-out from dealing with tenants. I bought my first duplex at age 23. I lived in one side and rented the other. When I moved to a larger home, I was able to keep the duplex. That worked, so I did it again. And again. And again.All the while, I was into IRA's, 401k, then after I incorporated and became self-employed, a SEP. None of these plans excludes the other . . . you can do a little of each - a way to diversify. Sure, in '95, and '96 I would rather have been into Mutual Funds since they don't need to be painted or lawns mowed, but in 2000 and 2001, my residential rentals did a LOT better than my market investments.Know going into it that there will be tenant headaches. The water heater will go out just like the one at your house eventually will. Know that it's going to happen, or you'll be one of those bitter old guys that says, "I had some rental property once, I'll never make that mistake again !"THAT, my friend, is the seller that you need to find ! ! !Good luck. Greg.
*> list real estate as a minimum performer compared to the long term gains of the stock market.I'm not sure the employees of Enron would agree with you...(-:
*Give me a break.......you gotta be diversified in the stock market. I know Enron employees didn't have a choice as to where their retirement was invested; but they certainly weren't forced to work there. I'm sorry, but there is no way I would have had all my retirement eggs in one basket. It's not all real estate and it's not all the stock market. You've gotta be s-p-r-e-a-d o-u-t!
*A dollar made is worth 51 cents, after self employment tax and social security. Dollar saved is still worth a dollar. Being conservative in your investments, and your spending might get you to the finish line taking vacations in one of these big cars.I dont know a lot about investments. But I know that in the rental market I call my own shots. If I thought a storm was coming,[I think I would know]I would sell off before the losses came to harsh. I dont read the paper in a suit and tie, and I dont play their games. I think it has been said many times over that real estate is a solid investment if done wisely. I have sit across the table from brokers that have proved me wrong , but it takes money to play their game and they will get some of it. The president made a speech yesterday telling us to save money through investments. Wonder why he said that ????????? Social security is in trouble for one thing. I have always found that the guy that runs the bar has the best chance of winning the bets.Same with a remodeler running a rental business. WE have all the skills and information to work with.For a lawyer to have rentals???? For me to invest in a market that can crash and I dont have a clue ?I like the advice to have investments that cant be touched. I think we should be diversified, but it takes conservative business to save the money and that is the first step,and then building exellent credit starting out.