Rental Real Estate vs. Stocks and Bonds

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

There is a rental house in a nearby town that is listed for 55k. Let's say I could get it for 50 and put 20% down.

It currently brings in $800 per month rent. If I were to get a 30 year loan, mortgage/taxes/ins would cost 300 per month. That leaves $500 cash flow per month (minus repairs, time, etc).

Let's assume normal wear and tear, depreciation, etc.

I am somewhat handy but not extremely handy.

I don't see it appreciating too much (it sold for 50k ten years ago and has since been remodeled) so the benefits of owning the property would be the monthly cash flow.

Is this worth looking into as an investment or would be I better off going the bogleheads route? In other words, I would guess that the rental house would likely bring in more dollars in the long run but there is a time and cost factor involved and I'm not if it would be worth it.

I know people who have done well in real estate but most of them started in the 1980s. Is this a business worth getting into? Or does one have to own many units and be extremely handy in order for it to be worthwhile?
WhyNotUs
Posts: 2610
Joined: Sun Apr 14, 2013 11:38 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by WhyNotUs »

Apples and oranges. Comparing a extremely passive approach to investing for retirement to an active investment/leveraged in real estate.
There are countless threads on similar topics.
As for a RE, if you can buy in accord with your terms (rent, monthly expenses, high occupancy area, etc), it has good math. But you become a landlord- it is a verb rather than a noun- and are borrowing money.
I own the next hot stock- VTSAX
mjb
Posts: 189
Joined: Sat Nov 30, 2013 10:43 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by mjb »

Don't forget taxes and paperwork fees.
astrohip
Posts: 569
Joined: Tue Dec 21, 2010 3:29 pm
Location: Houston TX

Re: Rental Real Estate vs. Stocks and Bonds

Post by astrohip »

WhyNotUs wrote:Apples and oranges. Comparing a extremely passive approach to investing for retirement to an active investment/leveraged in real estate.
There are countless threads on similar topics.
As for a RE, if you can buy in accord with your terms (rent, monthly expenses, high occupancy area, etc), it has good math. But you become a landlord- it is a verb rather than a noun- and are borrowing money.
I think this is the key. I have some real estate investments (comm and resid), and they require time. Dealing with tenants, problems, fighting tax appraisals, insurance dealings, yada yada. The return is dramatically more than most of my passive investments, esp in flat times. But I pay the price in my time.
"Happiness is not about doing, it’s about being." - R Branson
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

astrohip wrote:
WhyNotUs wrote:Apples and oranges. Comparing a extremely passive approach to investing for retirement to an active investment/leveraged in real estate.
There are countless threads on similar topics.
As for a RE, if you can buy in accord with your terms (rent, monthly expenses, high occupancy area, etc), it has good math. But you become a landlord- it is a verb rather than a noun- and are borrowing money.
I think this is the key. I have some real estate investments (comm and resid), and they require time. Dealing with tenants, problems, fighting tax appraisals, insurance dealings, yada yada. The return is dramatically more than most of my passive investments, esp in flat times. But I pay the price in my time.
Okay so it is more like a part time job than it is an investment you'd say?
4nursebee
Posts: 2664
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Rental Real Estate vs. Stocks and Bonds

Post by 4nursebee »

I'll buy it for 60K
Pale Blue Dot
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by dbr »

tony5412 wrote:
Okay so it is more like a part time job than it is an investment you'd say?
There is that and in addition the fact that small business ventures are risky. To the extent you might expect a better return than stocks and bonds, you might expect more risk than stocks and bonds. How good a real estate investor and manager do you think you are going to be? I know people who are very good at it, and I know people who aren't so good at it, extending to someone I know who was murdered collecting cash rents from properties in a neighborhood where you just don't do that.
denovo
Posts: 4808
Joined: Sun Oct 13, 2013 1:04 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by denovo »

800 a rent on 60k seems very interesting, if not unbelievable. How long do you expect the place to be vacant? High- crime neighborhood? What class of tenants?
"Don't trust everything you read on the Internet"- Abraham Lincoln
ctarbet
Posts: 3
Joined: Sun Nov 16, 2014 2:13 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by ctarbet »

tony5412 wrote: Let's say I could get it for 50K and put 20% down.

It currently brings in $800 per month rent. If I were to get a 30 year loan, mortgage/taxes/ins would cost 300 per month. That leaves $500 cash flow per month (minus repairs, time, etc).
Capitalization Rate is a good rule of thumb to check the value of a real estate investment.

Take the income after expenses for the year divided by the cost of the property.

$500 * 12 months / $55,000 = 10.9% return
$400 * 12 months / $55,000 = 8.7% return

This doesn't include expenses like repairs, utilities, vacancy, advertising, time, or accident and it's still just barely more profitable than a good portfolio without factoring in risk. Suspiciously high rent-to-value ratio = high risk. One major repair or bad tenant will destroy a year of gains overnight.
User avatar
White Coat Investor
Posts: 17413
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Rental Real Estate vs. Stocks and Bonds

Post by White Coat Investor »

$55K for $800 a month? I'd buy it unless it needed a ton of money poured into it. $800K*12*55%=a net operating income of $5280. $5280/$55K= a cap rate of 9.6%, an awfully attractive proposition where the stuff in the MLS around here is a cap rate of 4 or so.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

dbr wrote:There is that and in addition the fact that small business ventures are risky. To the extent you might expect a better return than stocks and bonds, you might expect more risk than stocks and bonds. How good a real estate investor and manager do you think you are going to be?
Not sure, never done it before.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

denovo wrote:800 a rent on 60k seems very interesting, if not unbelievable. How long do you expect the place to be vacant? High- crime neighborhood? What class of tenants?
Lower middle class
I know the people that used to own it. They bought it 30 years ago (not sure for how much) and sold it 10 years ago for 48. The person that bought it made some improvements (remodeled kitchen, redid floors, etc), and with that taken into consideration, it didn't appreciate much. I doubt there would be much difficulty finding renters, whether they are good renters or not is the question. The person I spoke to is no longer in the business but he told me that one reason he got out was because the quality of renters weren't as good as they used to be.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

ctarbet wrote:Capitalization Rate is a good rule of thumb to check the value of a real estate investment.

Take the income after expenses for the year divided by the cost of the property.

$500 * 12 months / $55,000 = 10.9% return
$400 * 12 months / $55,000 = 8.7% return

This doesn't include expenses like repairs, utilities, vacancy, advertising, time, or accident and it's still just barely more profitable than a good portfolio without factoring in risk. Suspiciously high rent-to-value ratio = high risk. One major repair or bad tenant will destroy a year of gains overnight.
It's a good return if the renters are perfect, nothing breaks, the tenant pays their rent on time every month, there are no vacancies, and there are no other problems. A lot of things (most of which I have no control over) would have to go right....
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

EmergDoc wrote:$55K for $800 a month? I'd buy it unless it needed a ton of money poured into it. $800K*12*55%=a net operating income of $5280. $5280/$55K= a cap rate of 9.6%, an awfully attractive proposition where the stuff in the MLS around here is a cap rate of 4 or so.
I haven't looked at it but they claim it is "move in ready" and doesn't need any work.

4% cap rate? wow...that would definitely not be worth it
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by dbr »

tony5412 wrote:
EmergDoc wrote:$55K for $800 a month? I'd buy it unless it needed a ton of money poured into it. $800K*12*55%=a net operating income of $5280. $5280/$55K= a cap rate of 9.6%, an awfully attractive proposition where the stuff in the MLS around here is a cap rate of 4 or so.
I haven't looked at it but they claim it is "move in ready" and doesn't need any work.

4% cap rate? wow...that would definitely not be worth it
In that case it is definitely time that you do look at it. Do you have the expertise to know what you are seeing?
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

dbr wrote: In that case it is definitely time that you do look at it. Do you have the expertise to know what you are seeing?
No but I know someone who has been in this business and can take this person with.

BTW rent is approx $700. They are charging 800 on craigslist for a rent to own deal.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

tony5412 wrote:Lower middle class
I know the people that used to own it. They bought it 30 years ago (not sure for how much) and sold it 10 years ago for 48. The person that bought it made some improvements (remodeled kitchen, redid floors, etc), and with that taken into consideration, it didn't appreciate much. I doubt there would be much difficulty finding renters, whether they are good renters or not is the question. The person I spoke to is no longer in the business but he told me that one reason he got out was because the quality of renters weren't as good as they used to be.
My personal target market is working class and lower middle class. Essentially people that have solid employment and decent credit but can't afford a house as of yet. Move too much farther down than that and you run into a whole host of problems that I wouldn't want to deal with. There is money in the low end, but too much hassle for my taste. One of the indicators I use is to look at the cars in the neighborhood, they won't be new, but they should all be decent vehicles in good repair. If you see a bunch of poorly maintained, bad looking, semi-wrecks you're in the wrong place.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

Clearly_Irrational wrote:My personal target market is working class and lower middle class. Essentially people that have solid employment and decent credit but can't afford a house as of yet. Move too much farther down than that and you run into a whole host of problems that I wouldn't want to deal with. There is money in the low end, but too much hassle for my taste. One of the indicators I use is to look at the cars in the neighborhood, they won't be new, but they should all be decent vehicles in good repair. If you see a bunch of poorly maintained, bad looking, semi-wrecks you're in the wrong place.
It used to be a solid working class neighborhood. Honestly I'm not sure this is still the case as crime has increased in the town over the last 20 years. Perhaps there is a reason it went down in value. Although I will say that the typical house this size in this area are around 70-80K. I will have to check out the cars, thanks for the tip.

I spoke to the person who owned the house previously (the one who sold it 10 years ago) and I was told that they sold the house for 60. The house has since been remodeled by the current owner (looks nice based on the pics) and the people selling it now are asking 54 so it has depreciated AT LEAST 10% in the last 10 years....or else they are desperate to get rid of it. The person who owned it before encouraged me to make an offer on it since she and her husband made out on it pretty well when they owned it...although that was 10-30 years ago which was a different time. Apparently the people that own it now bought a number of properties at around the same time and need to sell since they bought too much.
desiderium
Posts: 1264
Joined: Sat Jan 04, 2014 10:08 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by desiderium »

RE is an attractive idea, and you may just have to try it out for yourself. I have looked in to this from multiple angles over the years, and had a rental house for the last 4. I learned that I lacked the commitment to be an efficient landlord, which made the experience tedious and burdensome. Selling that house simplified my life.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by Professor Emeritus »

desiderium wrote:RE is an attractive idea, and you may just have to try it out for yourself. I have looked in to this from multiple angles over the years, and had a rental house for the last 4. I learned that I lacked the commitment to be an efficient landlord, which made the experience tedious and burdensome. Selling that house simplified my life.
+1 Been there, done that. All the advantages of being a landlord come with leverage and economies of scale. It's running a business.
poker27
Posts: 1149
Joined: Mon Apr 01, 2013 2:48 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by poker27 »

I think people fall in love with 'income' generating investments (dividends, rentals, peer 2 peer lending, ect) too much. I mean whats not to love? You diversify in something completely different, gain equity every month, and have an income stream. If it was that easy I would sign up as well. You will need to do maintenance, find a new tenant every time someone leaves, may have to chase them down for rent, ect.

Personally, I thought I would love a rental, especially living in a big city like Chicago. Then I was honest with myself... I'm not very handy, I'd feel bad knocking on someones door asking for rent or evicting them, then that awkward moment when you need to take a portion of their security deposit for damages.
User avatar
BrooklynInvest
Posts: 1183
Joined: Sun Jul 28, 2013 9:23 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by BrooklynInvest »

I have a two family house renting out the bottom floor. The setup has, for me, worked out very nicely and I have no regrets. But I treat being a landlord as my part time job. It aint easy, but I've found it pays quite well.

But I live in a part of the country where rents have skyrocketed and property values have done well. I can't - and don't - count on that continuing. Also, while most of my tenants have been great a few have been extremely annoying.

Two things I'd have told my younger self - Don't underestimate the time it takes to manage an investment property and assume that whatever can break will and budget accordingly.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

I crunched all the numbers and whether it's worthwhile or not comes down to the quality of renters, variable costs like repairs, time, and perhaps piece of mind as spending hours worrying about something could be an opportunity cost as well. Most of this depends on variables outside my control. When taking all of that into consideration, I wonder if it wouldn't be better to invest in some type of BG type portfolio and spend a few hours a week working on some type of side job/business.

I know people who have been successful at this business and those who have not. My aunt (who with her husband made decent money owning a few rental houses) has encouraged me to do this but I'm not sure that she realizes that it's a different economic climate than it was 20-30 years ago (higher taxes, lower quality renters, higher prices, more difficult to obtain credit, less appreciation, etc)
Last edited by tony5412 on Fri Nov 28, 2014 12:28 pm, edited 1 time in total.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

BrooklynInvest wrote:I have a two family house renting out the bottom floor. The setup has, for me, worked out very nicely and I have no regrets. But I treat being a landlord as my part time job. It aint easy, but I've found it pays quite well.

But I live in a part of the country where rents have skyrocketed and property values have done well. I can't - and don't - count on that continuing. Also, while most of my tenants have been great a few have been extremely annoying.

Two things I'd have told my younger self - Don't underestimate the time it takes to manage an investment property and assume that whatever can break will and budget accordingly.
Do you get many knocks at the door? I don't think I would want to live so close to a renter. Not only because you might see them often (which would be awkward if they are late or don't pay the rent) but it is so convenient for them to knock on your door which is okay if they are decent people but some are annoying and might be tempted to bother you for every little thing.
harrychan
Posts: 2047
Joined: Sun Nov 14, 2010 8:37 pm
Location: Pasadena

Re: Rental Real Estate vs. Stocks and Bonds

Post by harrychan »

There are ways of getting around having to be bothered all the time. One of my friends require $50 deductible for any repairs regardless if it is regular wear and tear. He neber gets called on things like blown lightbulb. This is Las Vegas btw. One thing that scares me is eviction. People will come under hard times and may not be able to pay rent. The law is very protective if the renters rights. I read a real estate agent who would take advantage of such laws and not pay rent then negotiate a BUY OUT to move out and not impact their credit. Its insane.
This is not legal or certified financial advice but you know that already.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

harrychan wrote:There are ways of getting around having to be bothered all the time. One of my friends require $50 deductible for any repairs regardless if it is regular wear and tear. He neber gets called on things like blown lightbulb. This is Las Vegas btw. One thing that scares me is eviction. People will come under hard times and may not be able to pay rent. The law is very protective if the renters rights. I read a real estate agent who would take advantage of such laws and not pay rent then negotiate a BUY OUT to move out and not impact their credit. Its insane.
Right...all it takes is a few months of "no rent" to wipe out an entire year's worth of gains.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

desiderium wrote:RE is an attractive idea, and you may just have to try it out for yourself. I have looked in to this from multiple angles over the years, and had a rental house for the last 4. I learned that I lacked the commitment to be an efficient landlord, which made the experience tedious and burdensome. Selling that house simplified my life.
What made it tedious and burdensome?

Has anyone else done the same and decided it wasn't for you? Anyone have success getting into this business? Perhaps this is the wrong place to ask this question but I'd be interested in hearing about others experience and whether this is still a good investment in general. I found another possible opportunity (house is about 10K more and closer to home but needs work). Can rentals be a good substitute for 401Ks and IRA's? When is it a good time to buy rentals? Dave Ramsey says that one should have their primary home paid off AND only buy rentals if you can afford to buy them with cash rather than having debt on multiple properties.
User avatar
Hayden
Posts: 1533
Joined: Tue Apr 16, 2013 5:13 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Hayden »

I have owned rental property for over 10 years, and have regretted it. I've been selling them off, and will send the last one next year.
Sure, I made money, but much less than I made at my day job. In my case, it just was not a good use of my time.
I am looking forward to simplifying my life, and not having this to think about.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

Hayden wrote:I have owned rental property for over 10 years, and have regretted it. I've been selling them off, and will send the last one next year.
Sure, I made money, but much less than I made at my day job. In my case, it just was not a good use of my time.
I am looking forward to simplifying my life, and not having this to think about.
Thanks for sharing your experience. It is posts like these that are giving me serious reservations about going through with this.
I know people who purchased property 20-30 years ago who were successful with this (most are no longer in it) and they have encouraged me to do the same. Not too many people who have purchased rentals in the last 10 years are recommending getting into it. What has changed? Higher prices for homes? Lower quality renters? Higher taxes and/or insurance? I can say that higher taxes is one reason that one couple I know decided to sell their rentals. Seems that this was once a sure fire way to build wealth but not so much anymore.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

tony5412 wrote:Not too many people who have purchased rentals in the last 10 years are recommending getting into it.
I've purchased within the last ten years and I still recommend it. It has it's downsides to be sure, but overall the returns seem worth the effort to me. The main problem is that you're asking about real estate on a stock & bond investing forum, so it shouldn't be surprising that most members will tell you they like stocks and bonds better.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

Clearly_Irrational wrote:I've purchased within the last ten years and I still recommend it. It has it's downsides to be sure, but overall the returns seem worth the effort to me. The main problem is that you're asking about real estate on a stock & bond investing forum, so it shouldn't be surprising that most members will tell you they like stocks and bonds better.
Do you take out mortgages or pay cash for your rentals? Do you pay them off ASAP or work toward monthly cash flow? Dave Ramsey doesn't recommend investing in real estate until the primary residence is paid off...and then he recommends only buying if one has enough cash to pay in full. Robert Kiyosaki is a fan of leverage and suggests minimum down payments while taking on a significant debt load.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

tony5412 wrote:Do you take out mortgages or pay cash for your rentals? Do you pay them off ASAP or work toward monthly cash flow? Dave Ramsey doesn't recommend investing in real estate until the primary residence is paid off...and then he recommends only buying if one has enough cash to pay in full. Robert Kiyosaki is a fan of leverage and suggests minimum down payments while taking on a significant debt load.
I take out mortgages, without leverage real estate is too conservative to compete with financial assets. In general my strategy is to buy as many properties as possible with as little cash as possible until I hit my target number of units, at that time I'll switch to paying down mortgages to reduce risk. Obviously you need to manage your cash reserves and be sure that vacancies, repairs, etc. aren't going to put you in a bad spot. I do this in addition to stock and bond investing not instead of. I consider it a form of meta-diversification.
4nursebee
Posts: 2664
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Rental Real Estate vs. Stocks and Bonds

Post by 4nursebee »

+1 to being Clearly Irrational
Pale Blue Dot
Sagenick48
Posts: 376
Joined: Sat Nov 02, 2013 8:22 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by Sagenick48 »

Diversify, diversify, diversify, and not more than 10% in real-estate unless you want to become a "professional."

I see real estate as my high flyer portion of my investment portfolio. I have stayed away from anything other than at least 8 plexes and have used management companies.

My baseline remains stocks, mutual funds, bonds and annuities. Funny money only to real estate.
The market goes up, the market goes down.
User avatar
MossySF
Posts: 2361
Joined: Thu Apr 19, 2007 9:51 pm
Contact:

Re: Rental Real Estate vs. Stocks and Bonds

Post by MossySF »

Not worth the headache for a $50K house / $700mo rent.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

Clearly_Irrational wrote:
tony5412 wrote:Do you take out mortgages or pay cash for your rentals? Do you pay them off ASAP or work toward monthly cash flow? Dave Ramsey doesn't recommend investing in real estate until the primary residence is paid off...and then he recommends only buying if one has enough cash to pay in full. Robert Kiyosaki is a fan of leverage and suggests minimum down payments while taking on a significant debt load.
I take out mortgages, without leverage real estate is too conservative to compete with financial assets. In general my strategy is to buy as many properties as possible with as little cash as possible until I hit my target number of units, at that time I'll switch to paying down mortgages to reduce risk. Obviously you need to manage your cash reserves and be sure that vacancies, repairs, etc. aren't going to put you in a bad spot. I do this in addition to stock and bond investing not instead of. I consider it a form of meta-diversification.
Thanks for your answer and good points about diversification and needing reserves to handle issues with the property.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

MossySF wrote:Not worth the headache for a $50K house / $700mo rent.
I am coming to this conclusion. There are so many things that can go wrong. Chances are the tenants would be financially distressed which would increase the risks.

I am thinking rental property is a bit more risk than I am willing to take on at this time. I live in an area where there are not too many opportunities in my career field so having to move would multiply my headaches.

I have an aunt and uncle who were in this business and did well in a different era, who are encouraging me to buy a property, but there are reasons they are no longer in the business and I am not sure that what was best for them is best for me.
northwoods1
Posts: 30
Joined: Tue Aug 28, 2012 8:21 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by northwoods1 »

That's definitely true, the behavior of renters has changed. My father has owned rentals very similar to what you're considering for 40 years, and never had any trouble with tenants until the last ten or so. Since then, many many problems with tenants - - drugs, non-payment, damage to the rental unit, etc. These were in solid middle to low-middle class neighborhoods. Like others have said, if you lose a month's rent each year or if you have major damage to repair, you lose your year's profit. One renter even wrote him a sob story letter about how mean he was to evict her for several months of non-payment, because her teenage son needed the money for something else!!!
TRC
Posts: 1969
Joined: Sat Dec 20, 2008 4:38 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by TRC »

Here's an anectdotal experience (results vary).

In 2010, we bought a vacation house / rental property for $405K. We put down 150K and then refinanced it 2 years later bringing 50K to the table so the loan was just under 200K for a 15 year note. We rent it during the summer and use it when it's not rented. So far, we've broken even and the loan is now at about 170K. If I had to guess, the place is worth 410K - 420K right now. So for a 200K investment, we've earned 30K in loan paydown (using other people's money) and maybe 5-10K in appreciation. Had we invested 200K in the market, it would likely be worth a lot more than what we have yieled from real estate. Our situation is a bit unique though, because we do get personal enjoyment out of the property and use it quite a bit.
lovejoypeace
Posts: 213
Joined: Mon Jan 20, 2014 2:24 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by lovejoypeace »

Two words for people wanting to own rental property - "Property Manager"

We were not good landlords so turning our duplex over to a property manager made it almost an instant money maker. They charge 10% of our gross rent and take care of finding tenants, credit checks, security deposits, etc. We have no contact with our tenants at all. If repairs are expected to be over $100, they call us, otherwise they have someone do it.

In your shoes, I would jump to buy a 50k property bringing in $700/month that did not need much work initially.

What are your other investments?
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

aprilcpa wrote:Two words for people wanting to own rental property - "Property Manager"
I agree, it makes a huge difference in the involvement level. Choose carefully though, I had a bad property manager and that cost me a bit before I fired them and hired the people I have now.
4nursebee
Posts: 2664
Joined: Sun Apr 01, 2012 7:56 am
Location: US

Re: Rental Real Estate vs. Stocks and Bonds

Post by 4nursebee »

A 50K house with $700 rent is worth it all day long!
Pale Blue Dot
Pizzasteve510
Posts: 635
Joined: Sun Jul 27, 2014 3:32 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Pizzasteve510 »

tony5412 wrote:
astrohip wrote:
WhyNotUs wrote:Apples and oranges. Comparing a extremely passive approach to investing for retirement to an active investment/leveraged in real estate.
There are countless threads on similar topics.
As for a RE, if you can buy in accord with your terms (rent, monthly expenses, high occupancy area, etc), it has good math. But you become a landlord- it is a verb rather than a noun- and are borrowing money.
I think this is the key. I have some real estate investments (comm and resid), and they require time. Dealing with tenants, problems, fighting tax appraisals, insurance dealings, yada yada. The return is dramatically more than most of my passive investments, esp in flat times. But I pay the price in my time.
Okay so it is more like a part time job than it is an investment you'd say?
+1. It is sort of a combination of concentrated, undiversified investment (you carry several risks), possibly some leverage (not in my case, we paid cash), and finally a part time job of highly variable work load.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

northwoods1 wrote:That's definitely true, the behavior of renters has changed. My father has owned rentals very similar to what you're considering for 40 years, and never had any trouble with tenants until the last ten or so. Since then, many many problems with tenants - - drugs, non-payment, damage to the rental unit, etc. These were in solid middle to low-middle class neighborhoods. Like others have said, if you lose a month's rent each year or if you have major damage to repair, you lose your year's profit. One renter even wrote him a sob story letter about how mean he was to evict her for several months of non-payment, because her teenage son needed the money for something else!!!
I read somewhere that a landlord can expect to have one month of no-rent per year on average (let's say someone rents it for a few years then it takes 2-3 months to get everything fixed up and another renter in there.
Topic Author
tony5412
Posts: 604
Joined: Wed Aug 27, 2014 12:09 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by tony5412 »

aprilcpa wrote:Two words for people wanting to own rental property - "Property Manager"

We were not good landlords so turning our duplex over to a property manager made it almost an instant money maker. They charge 10% of our gross rent and take care of finding tenants, credit checks, security deposits, etc. We have no contact with our tenants at all. If repairs are expected to be over $100, they call us, otherwise they have someone do it.
Sounds like a good deal although I heard that paying a property manager cuts into profits.
aprilcpa wrote:In your shoes, I would jump to buy a 50k property bringing in $700/month that did not need much work initially.

What are your other investments?
Just the standard bogleheads deal.
freckles01
Posts: 314
Joined: Sun Aug 10, 2008 4:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by freckles01 »

I live in a high cola so the thought of ANY house for 55K renting for $800 would be a dream. An absolute dream:) Can't even find a bare lot in the city for 55K.

Thats why I am a landlord, occupying 2 of 4 units. This allows me to live in a high cola with just 1 job, max 401k, roth ira and taxable account, pay for a 15 year mortgage + extra principle and allows me to spend and save without stress, though I am not a big loose spender. I have many co workers that work lots of overtime or a second job to afford a single family home in the burbs.

I do simple repairs and generally take a crack ( with youtube holding my hand or help from more experienced others) at larger repairs. But do hire for the big jobs- painting exterior, reroof, etc.

Once the mortgage is paid off, the rental income will allow me to retire early if I want to at that point.

I think its best to have both:)
wojo8625
Posts: 259
Joined: Fri Nov 14, 2014 10:21 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by wojo8625 »

4nursebee wrote:A 50K house with $700 rent is worth it all day long!
The key question here is, why is the seller looking to unload the house, considering that he has amortized all of his expenses (eg, sunk all of his money) in the place and it's got such a good positive cash flow. There HAS to be a catch.

The figures - asking price vs. rental income - does seem like a good deal on paper. For the reason that perpetual renters usually have bad credit and can't qualify for the loan that allows them to purchase the same rental for $300/mo outright. Now, that indicates that most of the renters you're going to get in the place are financially distressed. Hence the risks are huge.

Rental property is a pain. Even when it's in a prime area. Renters can hose you in completely unexpected ways.
wojo8625
Posts: 259
Joined: Fri Nov 14, 2014 10:21 am

Re: Rental Real Estate vs. Stocks and Bonds

Post by wojo8625 »

freckles01 wrote:I live in a high cola so the thought of ANY house for 55K renting for $800 would be a dream. An absolute dream:) Can't even find a bare lot in the city for 55K.
Didn't OP revise it to $700?

Let's say you knock off a couple hundred bucks for (ever increasing) taxes and insurance, plus another $300 for the mortgage payment (more if less than a 30 year mortgage), that leaves a couple hundred bucks (minus repairs, hassles, inconveniences, time, etc). It's a pretty risky move.

Do you think real estate prices will appreciate all that much in the next couple of decades? Judging by the demographics, I'm not so sure.

There are easier ways to make money.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

tony5412 wrote:I read somewhere that a landlord can expect to have one month of no-rent per year on average (let's say someone rents it for a few years then it takes 2-3 months to get everything fixed up and another renter in there.
Generally when you buy a property you figure in the historical vacancy rate for the area you're in. (reminder, yearly rates will vary widely so you're looking at the average) If there is no data then I use a default assumption of 5%. One month a year would be 8.3% which sounds a bit high though maybe if you were in a college town or something like that it could be appropriate. As you said though, it doesn't happen all spread out but is lumped together when you switch tenants.
User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: Rental Real Estate vs. Stocks and Bonds

Post by Clearly_Irrational »

tony5412 wrote:Sounds like a good deal although I heard that paying a property manager cuts into profits.
Yes, but if you're honest you need to build that cost in anyways even if you're going to do it yourself. After all, you don't work for free do you?
Post Reply