Rental Properties.. Lets talk

The Coffee Shop
1

Ok, been watching to me TV, listening to co-workers, then I get on the 2015 goals and again bam, somebody buying rental property.

So many questions, not even sure where to start. How much work is it? is it less work / less money for out of state property? And how much $$ are we talking about.

Yeah very noob questions. and very vague.

Educate me. I do know I am late to the party as most property costs have gone way up from a few years ago. Just can’t believe all these people I hear of buying rental properties make money at it.

2

I’ve bought them to for a number of reasons:
Diversify portfolioCapital gainRental yield
I do not make any money month to month from these properties in income - I have shortened mortgages and want them paid off as quickly as possible as these are pension supplements. I’m 40, and would aim to have all of them paid off in the next 5-10 years.

Rental yields vary significantly. So, for example, I bought a property for 150k in 2006 and currently get 1k / month. A yield of 8%. Its also experienced close to 100k of growth since 2006, so yield on current value is 4.8%, yield on mortgaged rate is 8%, capital growth is over 20% / annum. It lost nothing in 2008-2010 during the crash, it merely stagnated and then took off again.

Another purchased 2010, 500k, 2.2 / month, yield of 5.2%, current value 900k (they aint building any more land in city centers), yield at current value 2.9%

Both these properties are capital repayment, both on 3 year fixed interest rates, both have only ever sat empty for 1 day at handover between tenants. I pay no management fee’s, I pay a realtor to find tenants and complete credit checks.

I’ve only bought properties in prime area’s. I’d rather have one in a prime area than many in a non-prime.

I look at location - transport links, value of surrounding property, percent of rentals, capital gain, desirability, gentrification (all are city properties).

I am only interested in owning these for the prospective income and capital growth, whilst they are not inflation proof, they’re pretty close and we’ve done reasonably well.

We’ve never bought a property where our overall loan to value across the portfolio has been below 50%. We keep enough cash to continue to pay all mortgages for a year in the worst case scenario - in that case though we’d have much bigger problems.

I could take a different strategy - stretch all my mortgage terms to the max, 20-25 years, move to interest only mortgages and I’d probably be making 2.5-3k or more per month in cash income, but there’s no point at this stage. I don’t need it and I’d have to pay tax on it, as opposed to deducting mortgage interest and other expenses, keeping my income below the minimal level saves me money and I don’t need to pay tax unnecessarily if all I’d do is save the cash anyway.

It also would still leave me with the problem of determining how to pay for the properties at the end of the mortgage terms.

I think you need to have a strategy, you need to determine whether you are investing in the short, medium or long term, you need to determine where you want to enter the market and your goal (cash to live or capital appreciation and a paid off asset?) etc etc

3

My father does this in Columbus, OH. He started at 53 after getting out of the housing industry, he’s now 72. I say that to show that he knows the industry well (he built up to 5 years ago as well).

It’s not a lot of turnkey easy money like the real estate infomercials make it sound. You have to get a good price on the home, and understand that you won’t make a lot of profit the first 5 years. As your mortgage stays static and rental rates rise, then you get some income. Deduct EVERYTHING, you win the game on deducting expenses and depreciation. Renters themselves often suck- they lie and damage homes, or are morons who are renting for a reason. When you replace things, prioritize durability. All of Dad’s properties but 2 are paid off, and NOW they generate significant income.

I rented our home out for 2 years while I was in school a few years back. My rent was below PITI, but I deducted everything, and showed a fair size loss for those 2 years, which made it worth it. My renters were decent people, but the second year crew let all my landscaping die. You have to accept that it’s part of the business and not let it get to you personally.

4

Its one of those things that people think is easy money and don’t foresee how big of a PITA it really is.

We own three out of state properties. I am amazed at how little we actually make each year especially considering that two of them are paid off. Two are in Florida so property taxes cut way deep into our profit. The other one has a mortgage and it is covered by the rent. On the third we are just waiting out the market a bit longer.

The best thing we have ever done was hire property managers to deal with them. But agian this cost money. We tried to do it ourselves but unless you have a personal relationship with a handyman, then it is a nightmare. Being a landlord wasn’t fun. It was stress.

In the end, it all depends on the tenants you get. We had one couple who couldn’t do anything basic themselves. Always called for minor things. Lately we have been lucky and all three units have solid, long term tenants. So things are nice and stable.

All that being said, we are putting our two Florida homes up for sale in the spring. We want to cash out. We plan to reinvest the money into another home that is closer to us. One that we will actually use over the next few years and consider moving to when the kids graduate. We will likely dabble in airbnb to make a little extra revenue throughout the year. But not enough to really stress us.

5

Ok, been watching to me TV, listening to co-workers, then I get on the 2015 goals and again bam, somebody buying rental property.

So many questions, not even sure where to start. How much work is it? is it less work / less money for out of state property? And how much $$ are we talking about.

Yeah very noob questions. and very vague.

Educate me. I do know I am late to the party as most property costs have gone way up from a few years ago. Just can’t believe all these people I hear of buying rental properties make money at it.

Wifey and I were cash heavy when the bottom fell out of the Florida Housing market. We bought houses at auction, short sales, bank foreclosures, ext…

We currently have 9 properties, with a total of 11 rental units. WE LOVE IT.

We manage them ourselves and own them outright.

The deals that were so plentiful in 2008-2012 are gone. But, with some market and local knowledge there is still some money to be made. Drop me a PM.

FULL DISCLOSURE (and backdoor brag) – It is very easy for me to speak highly about our properties because we are making WAY MORE ROI than most. Our best property we purchased for $38K, put another $10K into, and have collected $1200 months rent each and every month since we have owned it… Our WORST property we purchased for $99K, put another $12K into, and have collected rent of $995 each and every month since we purchased it.

FULL DISCLOSURE #2 - Owning and managing rental properties is a JOB… The income is great if you do it right. But the income is not PASSIVE.

6

Things they don’t tell you on the infomercials…
I’d agree, renters are pretty much animals. Rent the movie Pacific Heights w/ Michael Keaton and after watching that tell me if you still want to be a landlord.
One aspect to consider is maintenance - either you do it yourself or you pay through the nose for it. Remember renters are animals - they will do things to a house that you won’t do in a million years. I had a tenant lock up the disposer in the kitchen sink 3 times by putting chicken legs down it. I have a $600 gold colored golf ball - someone stuck a golf ball in the furnace vent and it restricted the exhaust enough to burn out the furnace.
I cut the grass myself rather than getting a service so I could at least go look at the properties and the tenants would see me around.
Get to know a good attorney - filing notices to quit can get expensive if they aren’t done by a relative or friend (I had both)
Find out about the eviction process in your locale and your state laws governing evictions and security deposits. FYI, our security deposits cannot be co-mingled with other funds.
Make sure you have an iron-clad lease - I rented to a law student who decided to go toe-to-toe w/ my FIL - needless to say he lost.
Figure out a way to prevent your building/unit from becoming a flop house. Limit the number of people staying there or you will have a mess.
Move out/turnover - this is when you get to see how people really live. Now its your turn to clean/fix/paint/replace everything. We used to hire a maid service to take the 1st rough cut. We did everything else ourselves.
Good luck!

7

Just can’t believe all these people I hear of buying rental properties make money at it.

I’d bet that a lot of these people do not keep good enough records to really have any clue how much they are making/losing with their rentals, they just look at mortgage and rent and see income. Are you capable and willing to do some work yourself? Do you have significant cash set aside in case something major goes wrong (our landlords had to redo the entire electrical system in the duplex, replace washer & dryer, and fridge in our home all within a few weeks…think it was ~15K)?

I was in real estate development in my early-mid 20’s; overall we made money on our rentals, but we bought really low and had a maintenance/handyman crew on staff. But we had plenty of issues with tenants. It’s like anything else, if you buy at a good tme you can make really good money, but don’t be disillusioned into thinking it is passive income. At this point in my life, with a career and young family, there is no way I’d take it on again.

8

2 properties. One got us black the other drew red and by the time we sold them we made a few bucks. Know your local market intimately, but one topic already covered here is the ever present factor of tenant headaches. Whether it be non payment, destruction of property or any other number of things on a long list of ‘wtf’? It took us 7 months from the first missed rent payment to the forcible eviction. Yet another example of how the laws in this country are so many times built to protect the guilty. They were smart enough to not be there, but not before they did $20k worth of damage and stole all the applicances and the water heater. First/last/deposit can be eaten up in a matter of 10 minutes worth of ‘bad tenant behavior’.

9

Ask yourself what you want. Just for investment purposes? Lots of easier ways to get great returns for no work. When we sold our first house, a modest 1200 sqft place, I pondered being a landlord. Didn’t want to deal with the hassle for minimal income. I’ve got a co-worker who has a small multi-family apartment (perhaps 6-8 unit building). Something like that gives a good return - consolidated, some of the maintenance issues are shared (e.g., siding, roof, foundation), but even that is the slow boat to China. His cash flow on that isn’t significant enough to quickly pay down the mortgage. And then of course there’s the mortgage. So yes, you may be getting a modest cash flow/yield, but if you are paying off a loan on the property, that yield has dropped quite a bit.

Personally I see it no different than investing in index funds. Historical returns on total market funds are ~8%, if you pick a good fund the fees are an order of magnitude or two lower than interest on a mortgage loan (IOW, pay cash for rentals…), and it’s totally passive. Yes you can have down years in the stock market, but you can also go weeks/months without a renter as well as still deal with maintenance issues.

My advice, type this into your browser: rental properties site:bogleheads.org

10

Ask yourself what you want. Just for investment purposes? Lots of easier ways to get great returns for no work. When we sold our first house, a modest 1200 sqft place, I pondered being a landlord. Didn’t want to deal with the hassle for minimal income. I’ve got a co-worker who has a small multi-family apartment (perhaps 6-8 unit building). Something like that gives a good return - consolidated, some of the maintenance issues are shared (e.g., siding, roof, foundation), but even that is the slow boat to China. His cash flow on that isn’t significant enough to quickly pay down the mortgage. And then of course there’s the mortgage. So yes, you may be getting a modest cash flow/yield, but if you are paying off a loan on the property, that yield has dropped quite a bit.

Personally I see it no different than investing in index funds. Historical returns on total market funds are ~8%, if you pick a good fund the fees are an order of magnitude or two lower than interest on a mortgage loan (IOW, pay cash for rentals…), and it’s totally passive. Yes you can have down years in the stock market, but you can also go weeks/months without a renter as well as still deal with maintenance issues.

My advice, type this into your browser: rental properties site:bogleheads.org

That’s funny b/c I took the money from my rentals and put it into VDIGX and said to myself ‘why the heck didn’t I just do this to begin with?’. Sigh. Always easy to armchair QB it the day after.

11

I have a couple of them. I paid some money and made a corporation with different sub-corporations - one for each property. I have all of these under a self directed IRA. I do the corporations because they are all seperate corps and if somebody wants to sue you for falling off a porch or something like that they can only sue that individual corp and nothing else. That way they can not take everything you own.

12

I have a couple of rentals and have been very fortunate, so far. One renter is always 15-20 days late but always pays and has been in there for 6 years. The other pays on time. No damage to either, so far.

My inlaws have had a different story. 4 renters in a row trashed the place and left it a mess. Some left in the middle of the night and just stopped paying rent. They spent thousands each time rehabbing it.

Be prepared for the worst and be happy when you get the best. You have to look at it like a business.

I’ve been looking for some clients out here in Phoenix this past week. Although the deals aren’t as good as they were, there are still some to be found. Rentals can be bought for $130-150k that’ll rent for around $1000. With such low interest rates, that puts most cash flow positive.which is a good first step. But, most true investors want a higher return than that due to maintenance and vacancies.

I’ve also seen some 8-plexes that’ll bring in (theoretically) $3900 a month that are selling for $250ish. But, do you want to deal with multiple tenants, repairs, and issues?

13

Dickens’ “Tale of Two Cities” (best of times, worst of times) - My dad bought an apartment complex decades ago. Biggest mistake ever - terrible tenants, declining neighborhood, endless repairs, squatters… Sold it at a considerable loss. Recently renting out my mom’s home in Seattle, rental income is double the residual mortgage, property has long-term appreciation potential, good stream of money for her retirement, good property manager. You can do well IF you manage it well, and/or get your properties at an extreme discount (Like Aust1227 did, congrats). That was much easier 4 years ago. You are probably a bit late to the party at this point (it seems a housing bubble has reinflated in many areas). It still might work, but there are easier ways to make money.

14

I have had pretty good luck being a landlord in the last five years. I wanted for a five year or less return for the first place due to job and market uncertainity. Brought a small house for $67500 in a very disrtressed part of Los Angeles. Put $2500 into it because someone stole the pipes and heater. I did a lot of work myself because the house was sound from top to bottom. Had the same tenants for just over four years. They paid late fees often which was paid for a few vacations. With rents fairly high in that area, my return was 4 years.
When they moved, the house was a mess so no deposit was returned and a lot of work needed which cost $13k but it should have been done many years ago, with the exception of new walls that cost $3100. My new tenants will have it all paid for by June so I will get back to making money. Comps in the area are over $200k but I do not plan on selling because people are always going to need a place to live, it is easy to rent out and it keeps me from having to work.
The condo I own was not as easy as the house. I paid cash for both. Since I am picky and don’t deal well with asshole neighbors, I did not rent the place for months yet paid dues. Whenever I went there to clean or do something right for everyone, one of the trashy renters would dump on it. I had a family evicted and got into many arguments with a few animals. I do not play with stupid. Things quickly changed, more units were purchased and I finally felt comfortable having tenants. Condo rent is much lower than the house, my return will be in ten years due to having no tenants and dues paid so it will be sold so long as I can make at least $125k. Not a lot but no longer a headache for me.
I am looking for a third house or duplex in another distressed area to start round one over again. Price amd taxes have to be low enough so that I do now lose on rehan expenses. I am going in with the same 5 year or less mentality so that I make money quickly And pay myself back.
Being a landlord is not for everyone, especially the weak. If you are passive aggressive and do not know how to handle all folks, it is not a good business to be in. Always be in charge.

15

My experience results from my parents owning 6 properties with 11 units (in town: quad, 3 du, 1/2 du, 1 single. beach: 1 single):

  • Until they are paid, you aren’t generating much, if any, income. Residual income goes to slush fund for maintenance/repair.
  • Quality of tenants has immense impact on experience. Unfortunately, finding the right tenant takes time…and an open unit doesn’t pay rent.
  • You need a lot of friends/people you can have on call and trust: Landscaping, A/C, appliances, roofer, painter, plumber, etc.
  • or an offspring you can teach, who can take care of most maintenance/small repair (what I did growing up. saved my parents money, made money for myself, win win).
    ** this is separate from a lawyer. You’ll probably be sued. You might have to sue someone. You’ll probably have to evict someone, eventually.

I’m steering clear of rental properties. My parents (long divorced now) are selling the properties off little by little (tax reasons). Some people have better experiences…but it’s the type of thing that when it’s good, it’s great - and when it’s bad, it’s awful.

16

I have been too lazy to research the finances behind being a residential landlord, but assuming the rent covers all the costs each month, then once the house is paid off, it seems like the owner just got a free house. That seems far better than putting one’s downpayment into the market and reinvesting passive income each year. Am I wrong? I am sure some body must have done this analysis.

17

Dave, your yield on the investment is made up of two things - return on the investment (rent) and return of the investment (appreciation/depreciation in value). If you are not in an area that is projected to appreciate strongly in value, and you are planning to manage the units passively, then I would skip this investment or keep it a minimal part of your whole portfolio.

18

I’m curious how many people here have done commercial properties as investments.

We have a small apartment complex and the return is squat. It would be a HUGE gasser if we had a mortgage on it. Maintenance is pretty high and tenant turn over, thus lack of income, is also very high. Now granted this is not the best property but if I were out searching for rental property you’d have to have a pretty damn good deal in order to cover the risk.

OTOH last year we purchased commercial, the building my business is in. For the most part you’re looking at far less up keep and maintenance. No one lives there, you’re not getting the 3AM, “Toilet is plugged” calls etc etc. Tenant turn over seems to be less and best of all if they don’t pay rent the system is way easier to get them out.

My wife and I have been toying with looking at another property over the years and it seems to me like the way to go would be commercial rather then residential, but that is merely been my experience. Also for those that are “Behind the times” commercial property tends to lag residential by a couple years. Still a whole lot of good commercial property deals out there right now.

Just wondering what others experience with commercial may be.

~Matt

19

Oh and to your original question. Rental property is like any other investment except with more directly involved work. Just like stock you want to buy low, sell high and make sure you buy low enough to make money off it. But rather then just buying and waiting to sell you have to keep dumping time and money into it, fixing crap, finding tenants, etc etc.

I would not ever buy a property if you can’t fix a whole lot of minor things yourself.

I would never buy a property if you are not generally available. I had a friend that rented from a guy that went to Texas for the winter. His garage door froze and wouldn’t open or close. The guy didn’t want to hire someone to come fix it because it was too expensive and told my friend to wait till spring when he got home. That doesn’t fly and that is how you lose tenants.

You CAN make great money IF you get a GREAT buy, find GREAT tenants and keep on top of everything. You CAN lose your ass if you make a poor purchases, get crappy tenants and let things get away from you. I would bet most people make a bit of cash and in the long run if you’re paying the mortgage with the rent your income is long term asset growth by paying the place off.

~Matt

20

The best advice I ever received concerning rental property is that you should be able to see your properties from your front porch. Time and again, my friends with rental property out of town or across town are moaning about driving in the middle of the night to fix this or that, and often don’t have the supplies or tools they need. I walk across the street to my rental and if I need a tool, just walk back across the street to the workshop. Remember, your renter won’t call about a clogged toilet on Saturday at noon when you have nothing to do; rather, they’ll call at 10:30pm on Friday night when you’re having dinner with your family on the other side of town…