Becoming a Landlord
Becoming a Landlord
My kids are all in school and my wife is going back to work after 10 years. We decided that we will just ank her paychecks until we have enough to make 25% down payment on a rental property.
Does anyone know a good forum or other resource for people new to becoming a landlord? I have a friend that owns a lot ofproperties but I would also like to find other sources of information. Thanks
Does anyone know a good forum or other resource for people new to becoming a landlord? I have a friend that owns a lot ofproperties but I would also like to find other sources of information. Thanks
Larry Swedroe doesn't recommend to become a landlord. Instead, invest in broadly diversified REIT ETFs.
Do You Really Want to Be a Landlord? part I
Do You Really Want to Be a Landlord? part II
Do You Really Want to Be a Landlord? part I
Do You Really Want to Be a Landlord? part II
- Noobvestor
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My brother is a part-time landlord and seems to do alright with it. That said, he is only doing it because he is 'stuck' with an extra property for the time being - and hoping to sell it when the market rebounds on real estate. In other words: it is an accidental investment of sorts. The Bogleheads Wiki has a good page on owning/renting and real estate as an investment tool: http://www.bogleheads.org/wiki/Owning_vs_Renting
My take (built on Bogleheads info and other experience) is that specific real estate holdings are highly-focused and risky investments. REITs let you own a large part of the market - owning a specific house is kind of like owning a stock insofar as you're very much stuck with that particular region/location - and if you own your *own* house on top of that, you're doubly invested in that particular market. So the question becomes: do you want to be that tied to that market, or would you rather make a broader bet on real estate as a whole? For me, it's the latter - to the point that I rent instead of owning.
So, for me, TIPS + REITS = better than owning a home, and definitely better than owning and renting a second one. It's like a whole other job to take care of that stuff, and a whole other category of high risk.
My take (built on Bogleheads info and other experience) is that specific real estate holdings are highly-focused and risky investments. REITs let you own a large part of the market - owning a specific house is kind of like owning a stock insofar as you're very much stuck with that particular region/location - and if you own your *own* house on top of that, you're doubly invested in that particular market. So the question becomes: do you want to be that tied to that market, or would you rather make a broader bet on real estate as a whole? For me, it's the latter - to the point that I rent instead of owning.
So, for me, TIPS + REITS = better than owning a home, and definitely better than owning and renting a second one. It's like a whole other job to take care of that stuff, and a whole other category of high risk.
I also agree with Larry Swedroe. Tenants can cause grief.Charybdis wrote:Larry Swedroe doesn't recommend to become a landlord. Instead, invest in broadly diversified REIT ETFs.
Do You Really Want to Be a Landlord? part I
Do You Really Want to Be a Landlord? part II
Chaz |
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http://www.bogleheads.org/wiki/index.php/Main_Page
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Once you have that 25% down, would you take that money - leverage it - and then give the resulting dollars to a relative stranger to watch for long periods of time w/o you around? That is essentially what you are doing when you are a landlord. If you wouldn't do it with the money, why would you do it with the exact comparable asset?
Also, do a search on this forum, you will find the topic discussed many times covering the pros and cons thoroughly.
Also, do a search on this forum, you will find the topic discussed many times covering the pros and cons thoroughly.
Leonard |
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Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? |
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If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
Being a landlord combines aspects of investment with aspects of a part-time (or, perhaps, full-time) job.
The exact amount of work required depends of course on the type of property you acquire.
If you start small (one not overly difficult property), you may get a better feel for whether you enjoy being a landlord and are reasonably good at it. You'll also learn stuff that could be useful if you decide to acquire more properties.
The exact amount of work required depends of course on the type of property you acquire.
If you start small (one not overly difficult property), you may get a better feel for whether you enjoy being a landlord and are reasonably good at it. You'll also learn stuff that could be useful if you decide to acquire more properties.
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Huge difference. Distributions from reits are taxed as ordinary income. Rental income, on the other hand, is generally "tax exempt" because it is offset by the depreciation of the building. Be aware the tax advantages of rentals phase out quickly as your income grows... I think the cuttoff is around $150k. And if you sell the place you'll have to exchange for another one or pay the tax on that depreciation.mtbouchard wrote:A question about going the REIT route: if this is with post-tax dollars would you say this is still the best way? Arent there tax advantages to owning property that dont exist in REITS and in REITS you are subject to high dividend income?
Matt
Rentals are correlated with your local market which might be good or bad. Personally, I want to be as separated as possible from those idiot speculators in the big cities! The reit index RWR dropped to 1/4 of its high value. My rentals fared much better. My rental income and property values are in line with the expenses I'll face locally, and I don't think that is such a bad thing since I hope I'll never have to move.
But Larry S. probably thinks I'm nuts and he's right about market things more often than I am.
rg
There are tons of great books on the subject. I recommend Landlording by Leigh Robinson
http://www.amazon.com/Landlording-Handy ... 533&sr=8-1
Ignore the naysayers. Landlording can be both rewarding and profitable and, in general, offer higher profit potential than REITs.
http://www.amazon.com/Landlording-Handy ... 533&sr=8-1
Ignore the naysayers. Landlording can be both rewarding and profitable and, in general, offer higher profit potential than REITs.
- Noobvestor
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Sorry, I didn't really mean to come off as such a naysayer Really, it all depends upon your goals. The fact that you are asking on this particularly forum makes me think your goals are monetary. If that is true, it strikes me that investing more heavily in your location might not be the best in terms of diversification.
I was an article in the Economist recently where they discussed the strong possibility that a major reason jobs are not recovering along with the rest of the economy is that people are tied to houses in areas where jobs were lost. Consider Detroit and places like it - the job market tanks, you lose your job (or your spouse does) and property values go down as well ... now you are stuck. Of course, any homeowner who works near where they live takes this risk to some extent, but ... to me it seems like *extending* that risk isn't worthwhile unless you have a good reason to.
My parents advised me to get a cheap home and fix it up. I told them: no way. Why? Because I'd rather spend my time doing something else. If you want to spend some time being a landlord, by all means go for it. I'm a little surprised, though, to see other folks on this forum be quite so encouraging - it strikes me as a good way to spread oneself thin. That said, there are tax advantages as these other folks are mentioning too.
@RobG: just looking at this from a pure investment standpoint, though, do you have specialized knowledge or reason to believe your local market will out-pace the national market in either the short or long term? Not saying you need to in order to justify being a landlord there, but it seems like local != better necessarily in terms of real estate investing.
I was an article in the Economist recently where they discussed the strong possibility that a major reason jobs are not recovering along with the rest of the economy is that people are tied to houses in areas where jobs were lost. Consider Detroit and places like it - the job market tanks, you lose your job (or your spouse does) and property values go down as well ... now you are stuck. Of course, any homeowner who works near where they live takes this risk to some extent, but ... to me it seems like *extending* that risk isn't worthwhile unless you have a good reason to.
My parents advised me to get a cheap home and fix it up. I told them: no way. Why? Because I'd rather spend my time doing something else. If you want to spend some time being a landlord, by all means go for it. I'm a little surprised, though, to see other folks on this forum be quite so encouraging - it strikes me as a good way to spread oneself thin. That said, there are tax advantages as these other folks are mentioning too.
@RobG: just looking at this from a pure investment standpoint, though, do you have specialized knowledge or reason to believe your local market will out-pace the national market in either the short or long term? Not saying you need to in order to justify being a landlord there, but it seems like local != better necessarily in terms of real estate investing.
Landlording can be a pain, it really depends on your personality and how you deal with curveballs.
If the property cashflows, you can consider a property management company.
If you are handy or want to learn to be handy, investment property can be an option. If you hire out all the property needs, it will be difficult to positive cashflow. Home warranty can help offset repairs or limit out of pocket expense.
People are correct, it's a part time job, but most times, it's flexible unless there is an emergency.
If you are new to landlording or considering, it may be a good idea to stay away from handyman specials, fixer uppers, etc. Some short sales are in good shape.
Good luck.
If the property cashflows, you can consider a property management company.
If you are handy or want to learn to be handy, investment property can be an option. If you hire out all the property needs, it will be difficult to positive cashflow. Home warranty can help offset repairs or limit out of pocket expense.
People are correct, it's a part time job, but most times, it's flexible unless there is an emergency.
If you are new to landlording or considering, it may be a good idea to stay away from handyman specials, fixer uppers, etc. Some short sales are in good shape.
Good luck.
Please check your facts. REITS account for a small fraction of investable real estate.noobvester wrote:
My take (built on Bogleheads info and other experience) is that specific real estate holdings are highly-focused and risky investments. REITs let you own a large part of the market....
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Through the years have had, and do hold presently hold both residential and commercial properties and have done well. I do definately favor the commercial side as private housing is more market fickle and the babysitting factor is decidedly higher.
Surprised no small business owners have stepped up and mentioned that maybe the sweetest deal is when your both landlord and tenant. You hold the land and building in a Partnership LLC with say a parent, wife, or child and your sole proprietorship separate business pays rent on the facility.
This has the tax advantage of the rental income not being FICA taxed and is eligible for some depreciation and expense deductions. It has a second advantage of reducing overall liability by splitting out assets in the event of lawsuit either to the real estate partnership or the business itself.
Surprised no small business owners have stepped up and mentioned that maybe the sweetest deal is when your both landlord and tenant. You hold the land and building in a Partnership LLC with say a parent, wife, or child and your sole proprietorship separate business pays rent on the facility.
This has the tax advantage of the rental income not being FICA taxed and is eligible for some depreciation and expense deductions. It has a second advantage of reducing overall liability by splitting out assets in the event of lawsuit either to the real estate partnership or the business itself.
Thank you for all the replies
I understand that it is a pain to have to deal with tenants and repairs but at the same time I am not seeing and big gains in the stock market. I feel it is one big casino. The value of the stock market has nothing to do with the value of the companies it is just a big game. It makes me nervous I am betting my retiremnt on this. I have a 401K with 100K in Vanguard 2025 Target fund. I am almost 40 with no pension to look forward to.
I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
Re: Thank you for all the replies
There is nothing in principle wrong with investing in rental property and building wealth that way.lesstjm wrote:I understand that it is a pain to have to deal with tenants and repairs but at the same time I am not seeing and big gains in the stock market. I feel it is one big casino. The value of the stock market has nothing to do with the value of the companies it is just a big game. It makes me nervous I am betting my retiremnt on this. I have a 401K with 100K in Vanguard 2025 Target fund. I am almost 40 with no pension to look forward to.
I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
The one statement I would make is that if the decision to do so is driven by not wanting to take risk investing in stocks and bonds (note I say both stocks and bonds), then you should be very sure you understand the risks involved in real estate investment. In particular you should be able to clearly understand how you would expect to fund your retirement by investing this way. Do you?
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Re: Thank you for all the replies
It has worked for many a person including my father who started a business 40 years ago and has never owned a stock in his life. Real estate and bank CD's is all he's ever believed in and it's hard to argue with his success.lesstjm wrote:I understand that it is a pain to have to deal with tenants and repairs but at the same time I am not seeing and big gains in the stock market. I feel it is one big casino. The value of the stock market has nothing to do with the value of the companies it is just a big game. It makes me nervous I am betting my retiremnt on this. I have a 401K with 100K in Vanguard 2025 Target fund. I am almost 40 with no pension to look forward to.
I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
He's 76 years old and has three commercial rental properties remaining that after taxes and expenses seem to leave him and mom enough to take 2 cruises a year and go to Vegas every other month.
Income for retirement
My thought is that once the house is paid for (hopefully when I am 55). I would have Social Security, 401K (not sure how much) and then the rent from the appartment to live on for my retirement
No, but it correlates well with my goals, which are local. Say I want to use it as an investment which will be used to buy a different place in the same area when I retire. The appreciation of that rental will match the appreciation of the place I'm trying to own. Does that make sense?noobvester wrote: @RobG: just looking at this from a pure investment standpoint, though, do you have specialized knowledge or reason to believe your local market will out-pace the national market in either the short or long term? Not saying you need to in order to justify being a landlord there, but it seems like local != better necessarily in terms of real estate investing.
The real estate in the big cities is far more volatile than my local market so if prices go down they go way down. Like I mentioned, reits went down by a factor of 4. That is an incredible loss for an investment that is supposed to be safer than my rentals. I have no control in how much REITs are leveraged.
One more thing. Larry claimed that you are taking uncompensated risk by owning a rental. I was going to comment on the blog but didn't want to create another account. You are compensated for the risk: You aren't paying management fees, you get tax write-off instead of a tax liability, and you can control the amount of leverage. And like I mentioned, you might be taking less risk if your goals are correlated with the appreciation of the property. Of course these items aren't true for everyone, but you can't make a blanket statement saying the risk is uncompensated.
rg
It just occurred to me that this would be possible by checking the rent-to-price ratio in the local area compared to the ones in the reits, which I assume are based mostly in the big cities. In many places, especially the big cities, it makes more sense to rent than buy, and in those markets one shouldn't expect rentals to do as well as in markets with higher rent-to-price ratios.noobvester wrote: @RobG: just looking at this from a pure investment standpoint, though, do you have specialized knowledge or reason to believe your local market will out-pace the national market in either the short or long term? Not saying you need to in order to justify being a landlord there, but it seems like local != better necessarily in terms of real estate investing.
- Noobvestor
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Or ... a huge gigantic super slice compared to one house in one town, no? all relative here. By 'large' I meant 'way bigger than a rental property'Beagler wrote:Please check your facts. REITS account for a small fraction of investable real estate.noobvester wrote:
My take (built on Bogleheads info and other experience) is that specific real estate holdings are highly-focused and risky investments. REITs let you own a large part of the market....
- Noobvestor
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Re: Thank you for all the replies
While I agree with what others are saying about there being 'nothing wrong' with investing in a property this way, and there being other significant advantages in terms of taxes, I still can't understand why no one else is noting the bigger issues here. The OP has stated he feels like the 'stock market' has nothing to do with the value of companies - no one going to take issue with this claim? Or that he is in a target retirement fund that many Bogleheads have said time and time again is probably too aggressive for the age group it targets, and possibly not diversified enough to deal with risk? Can others at least agree that we should know how much he has invested in the bond and stock markets before advocating the landlord approach? Do people really think a more stable source of retirement income is likely to be rent vs. a balanced portfolio?lesstjm wrote:I understand that it is a pain to have to deal with tenants and repairs but at the same time I am not seeing and big gains in the stock market. I feel it is one big casino. The value of the stock market has nothing to do with the value of the companies it is just a big game. It makes me nervous I am betting my retiremnt on this. I have a 401K with 100K in Vanguard 2025 Target fund. I am almost 40 with no pension to look forward to.
I'm sure people felt that way in Detroit, too, until the rental market dried up, housing values went down and they were stuck with two properties that were essentially worthless. OK, to be fair, that's an extreme example, but my point remains: if you're looking for a 'safer' investment I just don't see how overbalancing your portfolio into real estate accomplishes your goals. In the same manner, you are already invested in local real estate, and while you seem quite knowledgeable about it your keenness does not match up (in my view) to your investment goals (stability/growth).lesstjm wrote:I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
Personally, in your shoes, I'd look around at some slice-and-dice attentions to get more inverse correlation with your current holdings, rather than get another holding that is essentially exactly like a current holding. Think of it this way (and Bogleheads: feel free to object): Bogleheads don't recommend buying more company stock than you 'have to' [i.e. buy it if there is a matching employer contribution, then sell as soon as possible]. Why? Because you are *already* 'invested' in your job - if the company tanks it takes not only your paycheck but your invested stock with it.
dbr summed it up much better than I could. So far I have been the voice of dissent, but now that folks see he is fully invested in the 2025 Target fund I hope some others will help illustrate alternative options for preserving/building money via stocks/bonds going forward, whether or not he pursues a landlord path. From Bogleheads, I hav einferred that the idea was to balance entire portfolios with considerations of real estate ownership and human capital in the mix. Not so?dbr wrote:The one statement I would make is that if the decision to do so is driven by not wanting to take risk investing in stocks and bonds (note I say both stocks and bonds), then you should be very sure you understand the risks involved in real estate investment. In particular you should be able to clearly understand how you would expect to fund your retirement by investing this way. Do you?
Interesting
It scares me that myou say Target 2025 is not a good investment. I picked it based on the books I have read. I thought it was a good coice. All index funds 75% and 25% bond.
These are the reasons I am looking at being a landlord. I feel clueless with investing no matter how much I read. Everyone sounds so right but how do you know? It seems I would need to get a finance degree just to make simple decisions. People talk about different ratio comparisons and allocations. ETF vs Mutaul Funds. Gold vs TIPS. It makes mu head spin.
I am worried about retiring. I do not have a pension. I am willing to make a sacrifice and save and live below my means but I do not know what to do with the money to make it grow.
Does the boglehead community recommend and financial services? I would want someone who is not trying to sell me something but has the knowledge of this community.
These are the reasons I am looking at being a landlord. I feel clueless with investing no matter how much I read. Everyone sounds so right but how do you know? It seems I would need to get a finance degree just to make simple decisions. People talk about different ratio comparisons and allocations. ETF vs Mutaul Funds. Gold vs TIPS. It makes mu head spin.
I am worried about retiring. I do not have a pension. I am willing to make a sacrifice and save and live below my means but I do not know what to do with the money to make it grow.
Does the boglehead community recommend and financial services? I would want someone who is not trying to sell me something but has the knowledge of this community.
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Are you maxing out 401k and IRA contributions while saving up for the 25% downpayment? If you're not comfortable with holding lots of stocks, don't hold lots of stocks. Don't feel pressured into holding lots of stocks if you're not comfortable holding them. You can hold more bonds if you want to, but make sure you but don't stop saving in the tax advantaged accounts just because you're afraid of stocks. The most conservative Target Retirement fund is 30% stocks and 70% bonds. Alternatively, you can pick individual bond funds if you really don't want any stocks at all. Your IRA accounts may have the option to buy CDs, individual treasurys.
Traditional 401k contributions give you a tax deduction at your marginal tax rate but if you will not have pension income, your withdrawals from Traditional 401k may be subject to a lower tax rate in retirement maybe close to 0%. I won't receive a pension and I received a 33% tax break for my 401k contributions but I expect to be able to withdraw at close to 0% tax rate. For my situation, maxing out Trad 401k is a great deal.
Traditional 401k contributions give you a tax deduction at your marginal tax rate but if you will not have pension income, your withdrawals from Traditional 401k may be subject to a lower tax rate in retirement maybe close to 0%. I won't receive a pension and I received a 33% tax break for my 401k contributions but I expect to be able to withdraw at close to 0% tax rate. For my situation, maxing out Trad 401k is a great deal.
Last edited by DSInvestor on Fri Sep 24, 2010 4:40 pm, edited 2 times in total.
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Vanguard Target Retirement funds are good funds but each investor needs think carefully about the asset allocation for their portfolio. An investor who isn't comfortable holding lots of stocks may not be comfortable with a TR fund that is 75% stocks, 25% bonds. Maybe another TR fund that holds less stocks would be a better choice.SteveB3005 wrote:Now we have fine mess! Guy just wanted a little information on rental properties and maybe some personal experiences and now have him doubting what was a perfectly good investment product in his 401k, a Vanguard Target Fund.
The key is to spend the most time on deciding what stock/bond mix to hold (AA) then find funds that fit that AA. OP may have picked funds first before thinking about what AA he'd be comfortable holding through good markets and bad. If OP has a high savings rate and low living expenses, there may not be much need to take much risk to achieve their financial goals.
too true... target fund contains the same funds we bogleheads recommend. Just keep an eye on the allocations since they don't seem to be constant.SteveB3005 wrote:Now we have fine mess! Guy just wanted a little information on rental properties and maybe some personal experiences and now have him doubting what was a perfectly good investment product in his 401k, a Vanguard Target Fund.
I've been positive on rentals in this thread, but one VERY IMPORTANT thing I forgot to mention to the OP: Make sure you have a pile of money available to make repairs or sit out the bad times. If you miss a few payments you could lose everything. It is very likely that a market crash will 1) cause you to lose your job, 2) depress the housing market and 3) put a glut of rentals on the market since everyone had to leave town to find work. This isn't a perfect storm, it is just how the phrase "sh!t happens" came about .
So don't get into them unless you have a really good base to fall back on... probably much more than just 25% down.
rg
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Becoming a landlord
My husband and I have owned single family rentals for 19 years and it is very hard on the marriage at times. You DO NOT want to bet your retirement income on the behavior of other individuals, namely tenants. If they don't pay their rent, or due to tenant damage your property is vacant for one to two months, you lose that "income" as well as having to pay the mortgage payments that you were counting on the renters to pay for you. You also need to be a tough manager and say "no" to many unreasonable tenant requests or expenses will nickle and dime you to death. Do you have the motivation and tenacity to make frequent site visits to check on the condition of your rental property or to go through the eviction process due to non payment of rent or damage to your property? My suggestion is to save and invest in a diversified portfolio of stock and bond index funds. Being a landlord can be hard on your wallet as well as your health. The variables involved in being a competent landlord become harder as you grow older, just due to the aging process. Have we made money on rentals? Yes, but if we had it to do over again, we would have invested in VGSIX or VNQ and been further ahead without having to invest all the hard work and risk that is required with being a landlord. Property management companies are not always the answer as most are mediocre at best and the money you pay them is less money in your pocket. No company will ever be as diligent about caring for your assets as you will. For real life stories, visit the Landlord Protection Agency's free Q & A forum at www.thelpa.com. I have no connection to the website, but the forum can be helpful as well as eye opening.
As a former co-owner of rental property who experienced one of these tenants (in the business, they're known as "tenants from hell"), I know they can singlehandedly ruin your business. There are many ways to avoid them - and you will need every one of those ways to do it.chaz wrote:
I also agree with Larry Swedroe. Tenants can cause grief.
Good luck.
- Adrian Nenu
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Another issue is liquidity - you can buy and sell REIT funds instantly but physical real estate can be very illiquid. Have to figure out if the additional return compensates for the illiquidity. After observing my parents manage properties for 30 years and friends who own two local motels, I'd rather invest in REITs and use the spare time fishing rather than fighting with the renters and doing maintenance and repairs.
Adrian
anenu@tampabay.rr.com
Adrian
anenu@tampabay.rr.com
Last edited by Adrian Nenu on Fri Sep 24, 2010 4:24 pm, edited 1 time in total.
I am sort of an accidental landlord and I make a little bit of money each year, but I own the property 100% outright. I know that might not be a good market where the property is located at and luckily I have good renters who take great care of the property.
My wife and I rent a larger condo in downtown Miami and if we could buy it at 1/3 the asking price of the same unit downstairs we couldn't rent it out and break even (assuming 20% down) The reality is the costs of insurance, taxes and HOA dues eat up the majority of the profits.
If you get lucky enough to have good renters and manage the property yourself, then you most likely will profit and enjoy it.
My wife and I rent a larger condo in downtown Miami and if we could buy it at 1/3 the asking price of the same unit downstairs we couldn't rent it out and break even (assuming 20% down) The reality is the costs of insurance, taxes and HOA dues eat up the majority of the profits.
If you get lucky enough to have good renters and manage the property yourself, then you most likely will profit and enjoy it.
Target 2025 is not a good investment.
Chaz |
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“Money is better than poverty, if only for financial reasons." Woody Allen |
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http://www.bogleheads.org/wiki/index.php/Main_Page
Target 2025 is not a good investment.
Chaz |
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“Money is better than poverty, if only for financial reasons." Woody Allen |
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http://www.bogleheads.org/wiki/index.php/Main_Page
Target 2025 is a good investment IMO if it has the right allocation for you.
Chaz |
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“Money is better than poverty, if only for financial reasons." Woody Allen |
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http://www.bogleheads.org/wiki/index.php/Main_Page
Re: Thank you for all the replies
A single rental property is even worse. Your overall return is determined by your ability to judge one person/family. All it takes is selecting one person that absolutely trashes the place, doesn't pay rent for months that you must evict, or any number of other very expensive things. Just one bad tenant could make the net return on your investment negative for years. Again, you have to be a perfect judge of character and credit worthiness. I don't know about you, but I don't think it that easy to make that call.lesstjm wrote:I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
Also, a single rental in your area will likely have a worth correlated to the value of your own home, lessening the amount of diversification.
And, again, if you would not put the comparable amount of cash in a strangers hand and trust them with it, why would you do it with property? They may not be able to outright steal the real estate, but they can do damage that just as surely takes cash from your pocket.
You have obviously decided to do this. But, you really should save a link to this thread in your favorites.
Leonard |
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Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? |
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If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
I was an involuntary landlord when I couldn't sell my condo. I rented it out for ~4 years and it was a disaster.chaz wrote:I also agree with Larry Swedroe. Tenants can cause grief.Charybdis wrote:Larry Swedroe doesn't recommend to become a landlord. Instead, invest in broadly diversified REIT ETFs.
Do You Really Want to Be a Landlord? part I
Do You Really Want to Be a Landlord? part II
I had three tenants:
Couple "A" called me several times in the middle of the night (and wanted me to come by the condo immediately) for problems that I couldn't do anything about until I could call a contractor in the morning. He lost his job ~ 6 month into the 12-mo lease so they broke the lease and moved in with her mom.
Single mom "B" lost her day job and started working nights leaving her two sons (one teen, one pre-teen) unsupervised. My former neighbors contacted me because the younger son was a fire bug and almost burned the building down. I kicked them out and the kids trashed the unit in retaliation. In addition, the last rent check bounced putting me in a major hole for the repairs, since I had only collected 2 months security deposit.
Tenant "C" also had money problems and tended to make rent payments late, but did pay the late charges. Since she otherwise didn't cause any problems, I renewed her lease once and then went month to month. She ended up moving out of town and I decided not to press my luck. I put it up on the market and took the first decent offer. and vowed never to become a landlord again!
One piece of advice - after my experiences I found out about a service that would check references and do a credit check. I don't remember if it was an annual membership + a charge/service, a straight membership fee, or just fee for service. The name was "Tenant Check". I have no idea if they are still in business.
C
Thank you again
This is a lot of great advice and gives me a lot to think about. I appreciate your help
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Well it does have the advantage of being your own boss and can't be fired with no upward age limit on doing it. There are a lot of opportunities out there far beyond what generally comes to mind as rental property, which for most means dwellings. Commercial property like fenced lots with a workshop and small office, warehouses, storage facilities, even bare lots.Jacobkg wrote:Being a landlord is essentially running a business. There are lots of potential business models out there. In my opinion, the rental property is not necessarily the best option out there. I'm not entirely sure why it seems to be so popular.
Here's one, a business acquaintance and in the city I live. Five years ago he buys a strip of undeveloped land along the railroad tracks next to the highway that sat empty for years, it was very visible land but not ideal for development as it was very noisy and an odd shaped long but narrow lot without a water tap or electric service. He buys the land for 30k , lights and fences it for another 20k and puts up a sign, BOAT & RV STORAGE.
I ride by it every day and the lot is full with 60-80 RV's and Boats at $30-$50mo a unit, he tells me he got his original investment back in less than 3 years. My point is for anyone wanting to get into investment property to think about more than houses or apartments. There are other ways to get your feet wet for less initial money and avoid that, "Tenant from Hell" scenario.
Re: Thank you for all the replies
lesstjm,lesstjm wrote:It makes me nervous I am betting my retiremnt on this. I have a 401K with 100K in Vanguard 2025 Target fund. I am almost 40 with no pension to look forward to.
I feel at least with rental property, at least in my area, that I have more control over my money and I have someone else paying the mortgage. Once that is paid off I have a huge asset. I look at this as kind of building my own pension.
Someone mentioned liquidity, that's very important.
You should carefully consider the RISK of owning rental properties. Do you have enough cash flow for periods of unoccupancy, large repair bills ect...
I have rental properties that are cash flowing. With depreciation, the return on these rentals are better than say a bond portfolio - but I feel the risk I'm taking is MUCH higher.
Given a choice, I'd rather have this portion of my portfolio in a muni bond fund.
However, I'm an accidental landlord. All my rentals have been homes we've lived in and are paid off.
It appears you will be taking on a bit of risk by leveraging (mortgage) in hope of a high return. If you can handle the risk, it will work out just fine because once the mortgage is paid off - your rental will generate a nice income.
Not sure if you'll feel more in control - if the tenants don't pay or cause damage. But since you do not trust your stocks/bonds investments, I think you'll enjoy being a landlord - the monthly checks are quite nice.
Good luck with your decision.
Thanks for pointing out that there are other investment opportunities out there besides the binary world of stocks and bonds.SteveB3005 wrote: Here's one, a business acquaintance and in the city I live. Five years ago he buys a strip of undeveloped land along the railroad tracks next to the highway that sat empty for years, it was very visible land but not ideal for development as it was very noisy and an odd shaped long but narrow lot without a water tap or electric service. He buys the land for 30k , lights and fences it for another 20k and puts up a sign, BOAT & RV STORAGE.
I ride by it every day and the lot is full with 60-80 RV's and Boats at $30-$50mo a unit, he tells me he got his original investment back in less than 3 years. My point is for anyone wanting to get into investment property to think about more than houses or apartments. There are other ways to get your feet wet for less initial money and avoid that, "Tenant from Hell" scenario.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Question about rebalancing after becoming Landlord
Here's our situation:
We bought a home two years ago for $500K, out of which $150K was mortgaged. We moved out recently into a less expensive house which we bought for cash ($250K). We had planned on selling the $500K house, but the market isn't good, so we're going to rent it out. Since the mortgage is low and the less expensive house is paid for, this doesn't present a hardship.
The cash to buy our current house came from a taxable Vanguard account. The target allocation was 50% bonds, 50% stocks. The allocation is now off, as I sold stocks to get the cash to buy the house.
Here's the question, should I consider the removal of $250K just like investing in a big REIT, and "balance" it with bonds. Or should I ignore it, and rebalance just considering actual stocks/bonds in Vanguard.
Jill
We bought a home two years ago for $500K, out of which $150K was mortgaged. We moved out recently into a less expensive house which we bought for cash ($250K). We had planned on selling the $500K house, but the market isn't good, so we're going to rent it out. Since the mortgage is low and the less expensive house is paid for, this doesn't present a hardship.
The cash to buy our current house came from a taxable Vanguard account. The target allocation was 50% bonds, 50% stocks. The allocation is now off, as I sold stocks to get the cash to buy the house.
Here's the question, should I consider the removal of $250K just like investing in a big REIT, and "balance" it with bonds. Or should I ignore it, and rebalance just considering actual stocks/bonds in Vanguard.
Jill
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Re: Interesting
My apologies - first, let me say DSInvestor is a good guy to listen to and knows his way around - I'm glad he was here to soften what I said a bit. Second, let me say that I don't think it is a bad choice necessarily - it is just that the target allocation (balance of stocks/bonds) does not necessarily match up with most people's allocation at a certain age. It might be worth reading All About Asset Allocation before deciding either way. And, regardless, if I were going to keep my investments relatively simple I probably *would* buy a target fund, though I would buy it based on first deciding an allocation and ultimately without regard to the date stated on the fund (e.g. it might be that the 2020 or 2030 is better for some folks than the 2025 - all depends). Take me for example: I'm about 30 years old, and for my allocation to stocks is less than 75% - now, I may be conservative for my age, but that means the 2025 would be slightly too aggressive/risky for my own tastes. Thats said, it probably also has more growth potential - the never-ending trade-off of risk v. reward.lesstjm wrote:It scares me that myou say Target 2025 is not a good investment. I picked it based on the books I have read. I thought it was a good coice. All index funds 75% and 25% bond.
I can relate - and this kind of analysis paralysis is hard to overcome, since the more you read the more you worry. I believe most people have hit a similar roadblock at least once. The good news is: you're in the right place. On this forum you'll find seasoned investors who do *not* have any stake in what you do financially, and *do* have a lot of experience, so they can be more objective in giving you advice. Already, you are getting a lot of (great!) different opinions on the subject of being a landlord, which make it clear that this approach has both pros and cons as an investment strategy. The thing to keep in mind (and which some folks have already alluded to) is that deciding an asset allocation is far more important than worrying about the specific holdings. If you want to take it to the next level and gain a bit more safety or potential return, then you can explore further - but this is not 100% essential per se.lesstjm wrote:These are the reasons I am looking at being a landlord. I feel clueless with investing no matter how much I read. Everyone sounds so right but how do you know? It seems I would need to get a finance degree just to make simple decisions. People talk about different ratio comparisons and allocations. ETF vs Mutaul Funds. Gold vs TIPS. It makes mu head spin.
Again it sounds like you really have your head on straight about being frugal and forward-thinking, which is half the battle. I believe everyone here will agree that the single best thing you can do even before you choose a basic asset allocation is to save, save and save some more! Going back to the Target fund: only you can decide if it is the right pick - my only advice is to look at various target allocations, maybe read the aforementioned book and then pick the 'right' Target fund for yourself - or discover you already have it. And back to the worry about retirement income: as someone already pointed out, one potential issue with owning real estate and renting as a source of investment income is that the real estate itself is very illiquid. The other issues of risk (including bad renters or sudden expenses) should be factored in too. It isn't that this is a 'bad' investment decision, just that you should understand the risk/reward potential and how it lines up with your overall goals. My very very very subjective opinion is that it sounds like you want safety over wild growth - and to me index funds are safer (on the whole) than holding real estate. But that, I suspect, others will disagree with.lesstjm wrote:I am worried about retiring. I do not have a pension. I am willing to make a sacrifice and save and live below my means but I do not know what to do with the money to make it grow.
I won't speak for anyone else, but I personally don't think an ongoing advisor is useful for most people - and you are definitely right that someone who wants to sell you anything will not be a good pick. A one-time consultation might be, but even that can be problematic. My parents just went to see someone about their retirement money, and while he seemed to be pretty level-headed overall he ultimately recommended funds that were actively managed (and thus had a much higher expense ratio) even though he garnered no benefit from that recommendation. My suggestion: read up on the typical format for posting an asset allocation to this forum, then start a new thread about that allocation and see what kinds of feedback you get. Who knows - maybe folks will conclude you already *have* a good allocation, but you may feel better about it and sticking to what you've got if you get some more insight from others.lesstjm wrote:Does the boglehead community recommend and financial services? I would want someone who is not trying to sell me something but has the knowledge of this community.
In case you are curious about other simple-but-effective portfolios, I recommend taking a glance at these links:
Basic Lazy Portfolios: http://www.bogleheads.org/wiki/Lazy_Portfolios
Semi-Lazy Slice and Dice: http://assetbuilder.com/couch_potato/co ... kbook.aspx
That said, the target retirement portfolios do offer a great starting point (or, for many, a good end point too!) since they do indeed have mixes of domestic stocks and bonds as well as some international. AS for the core purpose of your post in the first place: it looks to me like a lot of smart folks have weighed in from different angles - the key now is to ask more questions and/or sit down and figure out if it is the investment you feel best about and most comfortable with.