Becoming a Landlord: My Experiences

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Iorek
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Re: Becoming a Landlord: My Experiences

Post by Iorek » Tue Sep 05, 2017 7:08 pm

I got chewed out by LL once for calling. Can't remember exactly what was the problem-- either a lack of heat or a lack of hot water and had not gotten any response at all so I tried again and he was not happy to hear from me. Of course realized later that the apt was not up to code bcs it entirely lacked any heat source in the bathroom (cold weather state) and despite having a washing machine that charged a buck a load he intentionally didn't hook up hot water to it.

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Wildebeest
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Re: Becoming a Landlord: My Experiences

Post by Wildebeest » Tue Sep 05, 2017 7:32 pm

denovo what a great post.

Thanks. I learned a lot.
The Golden Rule: One should treat others as one would like others to treat oneself.

novillero
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Re: Becoming a Landlord: My Experiences

Post by novillero » Tue Sep 05, 2017 8:10 pm

I have a condo rental. It was my first marital residence, and when it was time to upgrade there was not much equity that it would have made a difference on our downpayment for our house, so we kept it.

17 years later, it is paid off and has tripled in value. It is a small stream of revenue, and we keep considering whether to roll it over to a larger property. One of the things we like about a condo is that it is essentially no worries. Over time we replaced all the appliances and bathroom - and the steel pipes. But in a small condo, there is only so much that can go wrong that is your problem, and not the entire complex's / HOA's problem. The heat and water are part of the maintenance fees, as well as the upkeep of the premises. So we have been satisfied with this investment. I know that "serious" real estate investors poo-poo condos, but for those of us that are not handymen or make time for the maintenance aspect of owning 2 homes, a condo fits the bill.

I keep contemplate selling it, and wonder if the capital gains tax is worth the small sum we get every month - or if we should trade in for a second home, or a rental where we would like a second home... I'll save this question for another date. lol.

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Re: Becoming a Landlord: My Experiences

Post by boglerdude » Tue Sep 05, 2017 9:05 pm

Regarding LLCs, everything has to be done in the LLC name causing higher mortgage and insurance rates. Plus some hassle with business checking accounts, and maybe you can't manage the property yourself. I suppose the idea is you wouldn't be liable because you were unaware of what was going at the property.

Anyone know of examples where an LLC wasn't "pierced" and saved a small landlord?
Chip wrote:
Mon Sep 04, 2017 1:47 pm
For example, assume a MFJ couple sold a property in 2016 for 120k that had been held for several years. Assume original cost was 100k and total depreciation was 30k. No other income on the return, standard deduction (under age 65) and exemptions. The 50k of profit (120-100+30) is 20k of LTCG and 30k of recapture. If you run this through tax software you can see that the 20k of LTCG fits within the 15% bracket and is therefore taxed at 0%. The 30k of recapture is mostly offset by deductions and exemptions. The remaining 9,300 of the recapture is taxed according to the tax rate schedule. It's in the 10% bracket, so the total tax for the transaction is $933 (should be $930, but it's a "feature" of the tax tables).

That's a far cry from 30k * 25% = $7,500 in taxes, which most of the web sources would have you believe is the case.
Capital gains add to your income for the year, eg 100k in long term capital gains puts you in a high tax bracket, is your depreciation recapture taxed at that high rate? Seems like it would be difficult to get below 25%

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unclescrooge
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Re: Becoming a Landlord: My Experiences

Post by unclescrooge » Tue Sep 05, 2017 11:16 pm

denovo wrote:
Sun Sep 03, 2017 6:05 pm
knpstr wrote:
Sun Sep 03, 2017 6:02 pm
denovo wrote:
Sun Sep 03, 2017 3:58 pm
1. You can't put a rental in an IRA or 401k.
Just to be clear, you CAN have rental real estate in a self-traditional or roth IRA. The "catch" is that you have to buy the property with funds that are already in the IRA, you can't buy it then put it in the IRA.

However, I do not hold any rentals inside my IRA.
I did not know that. I have fixed my post.
Just because your self directed IRA allows it doesn't make it a good idea. You will lose all your tax breaks which is a huge benefit to owning real estate.

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unclescrooge
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Re: Becoming a Landlord: My Experiences

Post by unclescrooge » Tue Sep 05, 2017 11:23 pm

Saving$ wrote:
Mon Sep 04, 2017 10:45 am
This is an excellent post. I would add the following:

15. Learn how to do your own minor & medium repairs. You will spend just as much time calling, scheduling, waiting on, following up with, paying, tracking, deducting, etc. repairs as you would just doing it yourself. You can spend 3 hours total on the above for a clogged drain, or 30 minutes just fixing it yourself.

16. Have an exit strategy.

Many who have kids envision the kids taking over the properties when they get too old to do it, and the kids will then inherit with a stepped up basis. While this is a fine plan, the challenges are a) the kids may not be interested at all; b) the kids may only be interested in the paycheck and not the upkeep/work. However, for tax reasons the rentals need to stay in the parents name until death, so if the kid takes over day to day management for the last 15 years of the parent's life, but the kid is not diligent on how they run it, the parent has a HUGE liability; c) the kid(s)may be interested and diligent, but they move away and are then a long distance LL, which is often less than effective.

If you don't intend for your kids to inherit, you need an exit strategy; if you sell:
- You will pay 25% recapture tax on all depreciation previously written off.
- If you think you are going to move into the property for two years right before you sell and make use of the capital gains exclusion for owner occupied, you can't. You must allocate the gains between qualifying use (any use up through 2008, and any owner occupied use starting in 2009) and non-qualifying use (any non-owner occupied use stating in 2009). The non qualifying use is subject to LTCG Tax. You will pay LTG on the gain. This may exceed the 15% rate and go to the 20% rate, and may also be subject to the 3.8% surcharge.

The ONE possible exit strategy legal tax avoidance path seems to be 1031'ing all rentals into one single property, and renting that property out for at least two years. After two years, you sell your own primary residence, use the owner occupied capital gains exclusion of up to $250k single/$500k couple, and move into the 1031'd rental. Then you die living in the rental, and your heirs inherit it at a stepped up basis...it may not be so easy to find a property you want to live your days out in and that you can rent out for two years before you do that...
I don't expect either my wife out my kids to take over my rentals. So I outsource everything by hiring a property manager. They even direct deposit the checks into my account!

CurlyDave
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Re: Becoming a Landlord: My Experiences

Post by CurlyDave » Wed Sep 06, 2017 1:07 am

cudds wrote:
Tue Sep 05, 2017 2:14 pm
...Another tip: If possible start/end your lease during months of high residential turnover like May/June when schools are getting out. We do a 12 month lease starting June 1...schools are getting out and the weather is nice (cold weather state) which makes for lots of turnover and thus more applicants.
I do not understand why anyone thinks a 12 month lease is desirable from a landlord perspective. In almost every state, a tenant can easily break a lease, either by stopping paying rent or by moving out and stopping paying rent.

The very best case is that the tenant is liable for lost rent, but the landlord is responsible to make a good faith effort to re-rent the unit. A far more common case is that the tenant is judgement proof (not enough money to be worth getting a court order) or a court will just not award a landlord anything for lost rent in a situation like this.

OTOH the tenant is protected from rent increases, and if you want to get him out, you need to go through an eviction. With legal fees and all. The first time you have a couple who argue and have frequent domestic violence police calls, you will regret a year long lease.

I write "Rental Agreements" not leases, of one month duration with the provision that they convert to month-to-month tenancy after expiration. If I want someone to leave I give 30 days notice and do not have to state a cause. This is better for me and better for the tenant who does not get an eviction on his rental record. I had one tenant stay 15 years on this arrangement, and the one before him stayed 8 years and only left because he died. Of course, the average stay is much shorter.

ddurrett896
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Re: Becoming a Landlord: My Experiences

Post by ddurrett896 » Wed Sep 06, 2017 7:19 am

CurlyDave wrote:
Wed Sep 06, 2017 1:07 am
cudds wrote:
Tue Sep 05, 2017 2:14 pm
...Another tip: If possible start/end your lease during months of high residential turnover like May/June when schools are getting out. We do a 12 month lease starting June 1...schools are getting out and the weather is nice (cold weather state) which makes for lots of turnover and thus more applicants.
I do not understand why anyone thinks a 12 month lease is desirable from a landlord perspective. In almost every state, a tenant can easily break a lease, either by stopping paying rent or by moving out and stopping paying rent.

The very best case is that the tenant is liable for lost rent, but the landlord is responsible to make a good faith effort to re-rent the unit. A far more common case is that the tenant is judgement proof (not enough money to be worth getting a court order) or a court will just not award a landlord anything for lost rent in a situation like this.

OTOH the tenant is protected from rent increases, and if you want to get him out, you need to go through an eviction. With legal fees and all. The first time you have a couple who argue and have frequent domestic violence police calls, you will regret a year long lease.

I write "Rental Agreements" not leases, of one month duration with the provision that they convert to month-to-month tenancy after expiration. If I want someone to leave I give 30 days notice and do not have to state a cause. This is better for me and better for the tenant who does not get an eviction on his rental record. I had one tenant stay 15 years on this arrangement, and the one before him stayed 8 years and only left because he died. Of course, the average stay is much shorter.
This x1000!

I don't want someone in my rental that doesn't want to be there. Pissed off tenants are bad for the property and will cost you more money in the long run by intentionally destroying the property in a subtle way (running HVAC with no filter, rocking toilets to break the wax ring, etc.)

I always have tenants sign a lease and once complete, it's their call to resign or go month to month. I always tell them, "I'm one month away from a new tenant, you're one month away from being homeless." The contract protects them, not you.

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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Wed Sep 06, 2017 10:10 pm

Excellent post - denovo

Just the tip of the "reality check" iceberg for future landlords and real estate investors.

When it comes to R/E investments and the landlord profession there's never enough myth busting.

thanks again.

WhyNotUs
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Re: Becoming a Landlord: My Experiences

Post by WhyNotUs » Wed Sep 06, 2017 10:49 pm

I bought one like this several years ago and it has paid for itself a few times over
https://www.harborfreight.com/50-ft-com ... 68284.html
Has a root cutter attachment
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Greatness
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Re: Becoming a Landlord: My Experiences

Post by Greatness » Thu Sep 07, 2017 8:21 am

OP also forgets to mention the numerous tax benefits with investment properties. Also, he wants to do it all himself (renting/leasing/screening/etc). Whereas, you can get a good quality PM firm to handle all of this for 7% - 10%. Could you live well on one or two units? No. If you had 20 + units @ 800 per unit, that's 16000.00 per month in income. Not too shabby. Is it hard and can it be difficult at times? Yes. Anything in life worth doing is hard. Nothing easy is very rewarding.

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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Thu Sep 07, 2017 3:07 pm

ddurrett896 wrote:
Wed Sep 06, 2017 7:19 am
CurlyDave wrote:
Wed Sep 06, 2017 1:07 am
cudds wrote:
Tue Sep 05, 2017 2:14 pm
...Another tip: If possible start/end your lease during months of high residential turnover like May/June when schools are getting out. We do a 12 month lease starting June 1...schools are getting out and the weather is nice (cold weather state) which makes for lots of turnover and thus more applicants.
I do not understand why anyone thinks a 12 month lease is desirable from a landlord perspective. In almost every state, a tenant can easily break a lease, either by stopping paying rent or by moving out and stopping paying rent.

The very best case is that the tenant is liable for lost rent, but the landlord is responsible to make a good faith effort to re-rent the unit. A far more common case is that the tenant is judgement proof (not enough money to be worth getting a court order) or a court will just not award a landlord anything for lost rent in a situation like this.

OTOH the tenant is protected from rent increases, and if you want to get him out, you need to go through an eviction. With legal fees and all. The first time you have a couple who argue and have frequent domestic violence police calls, you will regret a year long lease.

I write "Rental Agreements" not leases, of one month duration with the provision that they convert to month-to-month tenancy after expiration. If I want someone to leave I give 30 days notice and do not have to state a cause. This is better for me and better for the tenant who does not get an eviction on his rental record. I had one tenant stay 15 years on this arrangement, and the one before him stayed 8 years and only left because he died. Of course, the average stay is much shorter.
This x1000!

I don't want someone in my rental that doesn't want to be there. Pissed off tenants are bad for the property and will cost you more money in the long run by intentionally destroying the property in a subtle way (running HVAC with no filter, rocking toilets to break the wax ring, etc.)

I always have tenants sign a lease and once complete, it's their call to resign or go month to month. I always tell them, "I'm one month away from a new tenant, you're one month away from being homeless." The contract protects them, not you.
Raise another 1 million.
Rental Agreements can auto renew monthly. And, depending on the state, a landlord can opt to not renew the lease with a 30 or 45 day, etc, notice to of "non renewal" and "notice to vacate". As the lease is not being renewed the landlord is not obligated to give a reason (just as a tenant does not have to give a reason for not renewing a lease). Thus, no matter what the issue, whether non payment of rent, domestic issues, etc, etc, the landlord is only 45 (depending on state) days away from solving a problem without exacerbating the "real" issue at hand. This keeps things non personal, and avoids conflict and confrontation, and most of the time, preserves the renal unit from retaliatory damage.

With this train of thought one can avoid evictions, and other nasties.
j

denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo » Thu Sep 07, 2017 3:10 pm

Greatness wrote:
Thu Sep 07, 2017 8:21 am
OP also forgets to mention the numerous tax benefits with investment properties.
OP here, I did not forget. In OP's opinion, there are 0 tax advantages associated with investment properties relative to other investments. A lot of real estate gurus and promoters tend to make this argument, but in my opinion, said arguments reflect a misunderstanding of the tax code. I'll go through the commonly listed tax benefits.

1. Step-up basis: Although it's true that investment properties benefit from step-up basis when inherited, so do stocks, bonds, and REIT's. That's strike one.

2. Depreciation: Many landlords and guru's find it a huge benefit that they get to deduct depreciation of the physical buildings they own. Although it's correct that depreciation is a non-cash expense, it is none the less very real. Physical assets degrade and deplete over time which reduces the value of your property. If/when you sell the property for a profit, that depreciation will reduce the basis of your investment and you will be subject to depreciation capture.

A general premise of the business tax code is that the IRS taxes you on your profits, and in the simplest fashion, Profit= Revenue- Expenses. So to reframe it, no one would say , what a great tax benefit, the IRS is letting me deduct my expenses before I pay taxes on my profit. Any business, real estate or not, that owns physical properties like tractors, or airplanes, can use depreciation over the life of the asset. Thus, depreciation is no "benefit" in fact it's not that great since there are no inflation adjustments so you're depreciating the same dollar value in future years when it's actually worth less.

3. Mortgage Interest- If you finance real estate and do not pay cash, as many do, and I am not opposed to leverage in moderation, you will pay interest to the banks. Your property will not appreciate any faster and your tenants won't give you more rent because you have a mortgage. Interest to the banks merely an expense on your ledger. This is just another expense you get to deduct.

Likewise, there is no particular benefit here that accrues to real estate investing. Businesses that purchase assets or issue debt can deduct their interest. If you buy stock on margin, i.e. borrow money to invest, you can also deduct interest.

In fact, in one way, you could argue that real estate investing has a slight tax disadvantage. Income from rents is taxed at your ordinary income rates which go up to 39.6 percent, but stock dividends are taxed no higher than 23.8 percent.

--

denovo
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blue_sky
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Re: Becoming a Landlord: My Experiences

Post by blue_sky » Thu Sep 07, 2017 3:50 pm

denovo, what is your take on below points, please?
blue_sky wrote:
Mon Sep 04, 2017 3:57 pm
Thanks for sharing your experience, devon :beer

Wanted to ask regarding liability concerns, being a landlord :?:
1) Forming LLC in CA is a big income hit- 800$ per LLC, while some recommend holding each property in separate LLC, it becomes pretty hefty annual charge , for owning multiplied properties
2) LLC is not a complete protection against a lawsuit, as court might allow going after entire assets in some circumstances ( example: being involved in active property management)
Having adequate umbrella and landlord policies as well as being cautions can minimize the risk, however the above are major concerns for running rental properties business.

Sec3inMD
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Re: Becoming a Landlord: My Experiences

Post by Sec3inMD » Thu Sep 07, 2017 4:06 pm

Very good post and comments denovo.

About 10 years ago, my wife inherited two small rental condos in Honolulu (not vacation rentals). I wanted to sell them to not deal with being a landlord. But they are my wife's connection to her hometown, so we are landlords. Fortunately, there was no debt with either of the units. We toured the properties with the property manager and I was impressed. And in ten years, we have had only one change of tenant in each unit and reasonable maintenance and repair costs. One former tenant lost his job and we ended up losing a months rent and a good tenant. Otherwise no tenant has missed a payment. The property manager handles tenants and repairs. They also pay state and local taxes and insurance out of rental collections along with their 7.5 percent management fee. Every month net rents are posted to our checking account. Owning property in Hawaii also has some minor benefits like qualifying for "kamaaina" rates (discounts for locals) and writing off reasonable airfare and hotels. All-in-all, however, we could make a better return in a diversified, low-cost mutual fund. But I'm not complaining.

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buccimane
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Re: Becoming a Landlord: My Experiences

Post by buccimane » Thu Sep 07, 2017 4:13 pm

I have a couple questions for my own personal knowledge for you.

1. When selecting a tenant, what percentage of their income do you like to see going to rent? (I've heard Income should be 40x rent. (net or gross?))

1a. If the income is slightly below preference, would you consider renting if they have a sizable amount liquid in their bank account? (1.5x annual rent)?

Thank you in advance.
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furwut
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Re: Becoming a Landlord: My Experiences

Post by furwut » Thu Sep 07, 2017 4:41 pm

Great post!

Maybe this should have a home in the Wiki?

Greatness
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Re: Becoming a Landlord: My Experiences

Post by Greatness » Fri Sep 08, 2017 1:02 am

I respectfully disagree. As a person who owns multiple buildings and complexes, I find the depreciation and other tax benefits a great benefit. I do pay cash and then refinance some of them when I get a good deal or need to replenish the companies reserves. Then again, I am running it as a business across a few states. A bit different when compared to just one or two. I also do not flip and tend to hold the properties until I pass on. Therefore, if I live for another 27.5 years, I get all my money back at tomorrow's inflated (or deflated) value. One cannot do that with margin or the stock market. I can say that as I have a a nice size nest egg in the market as well with some margin use. Margin rates adjust with the Fed; depreciation doesn't.

denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo » Fri Sep 08, 2017 12:07 pm

blue_sky wrote:
Thu Sep 07, 2017 3:50 pm
denovo, what is your take on below points, please?
blue_sky wrote:
Mon Sep 04, 2017 3:57 pm
Thanks for sharing your experience, devon :beer

Wanted to ask regarding liability concerns, being a landlord :?:
1) Forming LLC in CA is a big income hit- 800$ per LLC, while some recommend holding each property in separate LLC, it becomes pretty hefty annual charge , for owning multiplied properties
2) LLC is not a complete protection against a lawsuit, as court might allow going after entire assets in some circumstances ( example: being involved in active property management)
Having adequate umbrella and landlord policies as well as being cautions can minimize the risk, however the above are major concerns for running rental properties business.
I don't find LLC's to be useful and a waste of money, I mentioned what I do in S.12 to protect myself and I feel comfortable with that. Your mileage may vary.
12. Protecting Yourself Legally- I consider knowing landlord-tenant law, having strong liability insurance (landlord's policy), having an umbrella, and only using licensed tradesmen a must.
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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo » Fri Sep 08, 2017 12:09 pm

boglerdude wrote:
Sun Sep 03, 2017 7:08 pm
Sued despite that thorough screening?

What exactly happened

This was an inherited tenant :twisted: and I was not fully in charge when this tenancy went downhill. I became fully in charge after. You can PM for the details if you want. Don't worry, we won. I didn't want the thread to go off-topic with landlord horror stories.
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blue_sky
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Re: Becoming a Landlord: My Experiences

Post by blue_sky » Fri Sep 08, 2017 12:25 pm

denovo wrote:
Fri Sep 08, 2017 12:07 pm
blue_sky wrote:
Thu Sep 07, 2017 3:50 pm
denovo, what is your take on below points, please?
blue_sky wrote:
Mon Sep 04, 2017 3:57 pm
Thanks for sharing your experience, devon :beer

Wanted to ask regarding liability concerns, being a landlord :?:
1) Forming LLC in CA is a big income hit- 800$ per LLC, while some recommend holding each property in separate LLC, it becomes pretty hefty annual charge , for owning multiplied properties
2) LLC is not a complete protection against a lawsuit, as court might allow going after entire assets in some circumstances ( example: being involved in active property management)
Having adequate umbrella and landlord policies as well as being cautions can minimize the risk, however the above are major concerns for running rental properties business.
I don't find LLC's to be useful and a waste of money, I mentioned what I do in S.12 to protect myself and I feel comfortable with that. Your mileage may vary.
12. Protecting Yourself Legally- I consider knowing landlord-tenant law, having strong liability insurance (landlord's policy), having an umbrella, and only using licensed tradesmen a must.

Same here. Thanks

Jillian
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Re: Becoming a Landlord: My Experiences

Post by Jillian » Fri Sep 08, 2017 1:05 pm

My experience was that it was profitable, but not enough to justify the headaches. I think the biggest mistake people make is thinking it just sort of runs on autopilot and you get automatic income like a dividend without any work.

If you have a demanding job where you work late hours, I would recommend steering clear. If you're retired and have a lot of free time to manage them, I can see it being a good investment.

As a non-scientific poll, I'd say 9 out 10 people I know personally that dabbled in rental properties have a negative experience overall and never want to do it again.

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FIREchief
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Re: Becoming a Landlord: My Experiences

Post by FIREchief » Fri Sep 08, 2017 1:51 pm

Interesting thread. Thanks to OP for the education. Before reading this thread, I was 100% certain that I never wanted to be a landlord.

Now, I'm like 200% certain I never want to be a landlord. :twisted:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

fundseeker
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Re: Becoming a Landlord: My Experiences

Post by fundseeker » Sun Sep 17, 2017 8:35 pm

denovo, Very interesting thread! Thanks for the information! For me, it might be something to consider in retirement, but I'm not sure I could deal with all of that while employed. Thanks again!

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Re: Becoming a Landlord: My Experiences

Post by jalbert » Sun Sep 17, 2017 11:44 pm

6. Selecting a Tenant- I consider this to be the second most important part of being a landlord. Like a good plumber, a good tenant is worth their weight in gold. In conjunction with 4, I like to place my rental units at a slight discount to market value to broaden the applicant pool. If I believe the market rate is $2,400 a month, I will place the unit for rent at $2,300. When I show units, I keep notes of who has come to see the unit. While many or most tenants won't know it , I am basically evaluating the tenants to see if they will be a good fit when they check out the unit.
Pretty sure we will have to agree to disagree on this, but that tenant selection process is risky in terms of compliance with Federal and any local fair housing laws.
Risk is not a guarantor of return.

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Re: Becoming a Landlord: My Experiences

Post by abuss368 » Mon Sep 25, 2017 8:45 pm

This is a very beneficial and educational thread.
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NYGiantsFan
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Re: Becoming a Landlord: My Experiences

Post by NYGiantsFan » Tue Sep 26, 2017 2:12 pm

beardsworth wrote:
Mon Sep 04, 2017 1:57 pm
I still remember reading a book about landlording, years ago, in which the writer said that one thing she did when evaluating prospective tenants was to look at the inside of their car. She didn't place much emphasis on whether it was a recent-model car or an old car, but she wanted to see how the prospective tenant treated it, and in particular whether the person kept it clean. (I'm paraphrasing here) "Because if they trash their own car, they're also going to trash your rental property."
This is true. Someone had advised me same. I rejected one potential tenant after glancing at the car.

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Re: Becoming a Landlord: My Experiences

Post by NYGiantsFan » Tue Sep 26, 2017 2:15 pm

Couple of additional points.
-Buy property only in A or A- area. Don't ever buy property in C area. You may get great cap rate with C area but you may get great headache with that. When market improves, A area property will bring you great returns.
-Visit properties when you are in the area (even drive-by). It tells you lot even in drive-by. How well your tenant is treating the property? Is there any garbage/old newspapers lying around? Even neighbors would love to chat with you and keep you abreast with what is happening.

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Re: Becoming a Landlord: My Experiences

Post by NYGiantsFan » Tue Sep 26, 2017 2:21 pm

kehyler wrote:
Mon Sep 04, 2017 8:45 am
denovo wrote:
Sun Sep 03, 2017 3:58 pm
Bogleheads:
Hi,

Can anyone give a ballpark figure (with whatever qualifications necessary to make the figure mean something -- like contracting all repair work out) as the actual profit one can expect from a rental? Perhaps as a fraction of the current-market value of the house? If I rent out a 200,000 house - how much revenue per year could be expected to be generated? I understand that such an estimate will certainly be rough.

If someone asked me for such a figure for the SP 500, then I'd tell them roughly 7% (with a wide variation). Can one make similar revenues with rental properties?

Thanks!
Ideally you should buy properties with minimum 10% cap rate. That is rent before all expenses. In you example, 200k house should generate 20k in rent per year at minimum.

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FelixTheCat
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Re: Becoming a Landlord: My Experiences

Post by FelixTheCat » Tue Sep 26, 2017 2:26 pm

beezquimby wrote:
Sun Sep 03, 2017 4:38 pm
And the reason anyone would want to do this is??

I'll stick to my two mouse button clicks to give mr Dow jones my money.
My mutual funds are funded by me versus my tenants are paying for my rental. In both cases I get to keep the profits.
Felix is a wonderful, wonderful cat.

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Re: Becoming a Landlord: My Experiences

Post by NYGiantsFan » Tue Sep 26, 2017 3:04 pm

Jillian wrote:
Fri Sep 08, 2017 1:05 pm
My experience was that it was profitable, but not enough to justify the headaches. I think the biggest mistake people make is thinking it just sort of runs on autopilot and you get automatic income like a dividend without any work.

If you have a demanding job where you work late hours, I would recommend steering clear. If you're retired and have a lot of free time to manage them, I can see it being a good investment.

As a non-scientific poll, I'd say 9 out 10 people I know personally that dabbled in rental properties have a negative experience overall and never want to do it again.
Couldn't agree more. Ideally, similar to keeping money for emergency, you should keep your time off accrued for emergency. It should be at least one to two working day (not weekend) per property per year at minimum. Most of the items can be taken care by calls to contractors etc. but some of them will require you be in person (or visiting home depot etc) during working weekdays.

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Re: Becoming a Landlord: My Experiences

Post by pennywise » Tue Sep 26, 2017 3:40 pm

Jillian wrote:
Fri Sep 08, 2017 1:05 pm
My experience was that it was profitable, but not enough to justify the headaches. I think the biggest mistake people make is thinking it just sort of runs on autopilot and you get automatic income like a dividend without any work.

If you have a demanding job where you work late hours, I would recommend steering clear. If you're retired and have a lot of free time to manage them, I can see it being a good investment.

As a non-scientific poll, I'd say 9 out 10 people I know personally that dabbled in rental properties have a negative experience overall and never want to do it again.
We inherited a house and are renting it out, and I'm also managing my mother in law's home which is rented (she is in an ALF permanently). Of the 2 properties, neither has been a problem per se. However the tenants in the inherited property, 2 divorced women sharing the space, are annoying. They've been in residence 4 months and every single month so far since they moved in I have had to deal with/pay for something: minor repairs, a fumigation request, etc. Also there was a slight aggravation in getting rent paid on time for 2 months by one woman. So if I was evaluating based on that property I'd have to agree, it's a PITA.

My MIL's property is rented to an older married couple and they have been much less aggravating. Only one repair request and none of the nit picky stuff I'm dealing with in the other house. If I was only renting that house out, I'd insist renting is a great way to make a painless buck.

I'd evaluate being a landlord as exactly what Jillian says. We are empty nesters and I've got a full slate of tradespeople to call. So although I also work, management doesn't take a great deal of my time, however it is annoying to be niggled over and over. Then too, with the MIL house we learned enough to insert a couple of clauses I will put in for the next tenants or renewal of tenants on the inherited house. Repairs under $200 are the tenant's responsibility; I suspect our divorcees somewhat take advantage of us with the same attitude as if we are a 'super', ie that we are on call for every little thing and will provide comprehensive service. If they had to pay for some portion of their frequent requests I suspect many of the minor calls would stop. We also have clauses in the MIL's rental that the tenant is responsible for all utilities, fumigation, and lawn service. I didn't realize fumigation was on my dime with the inherited house till, yep, they needed it fumigated and it cost me $150 (again, a $200 ceiling would have spared me that). When I retire I will probably be less annoyed because landlord-ing will then be my part time job. But I'll still use the <$200-is-your-problem clause!

Anyway, I'm being very specific but hopefully it illustrates some of what landlording can entail. I also want to add that the rent we are earning is paying the mortgage for our dream vacation/retirement home so the annoyance is worth it for us. We may sell eventually if it becomes too irksome but for the foreseeable future it's nice to have an asset that is yielding income while maintaining its market value. I can tolerate a lot of scheduling of plumbers and exterminators to be able to hang out in a gorgeous house in the Florida Keys (much of which was not destroyed or damaged by Irma thank goodness) that someone else is paying for :sharebeer

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Re: Becoming a Landlord: My Experiences

Post by Bogle826 » Tue Sep 26, 2017 3:50 pm

beezquimby wrote:
Sun Sep 03, 2017 4:38 pm
And the reason anyone would want to do this is??

I'll stick to my two mouse button clicks to give mr Dow jones my money.
although it's more arduous to be a landlord but there is more upside as well as downside when you individually select an asset.

looks like there is a good understanding of the downside, but here are some upside/benefit scenarios as a landlord.

1) you can leverage your capital - generally speaking, you can acquire $1MM of assets for every $250k you put down. if asset is cash-flow positive, the tenants are basically paying for your asset.
2) tax benefits thru cash interest / depreciation
3) home run plays - over the long term, the city may rezone and all of a sudden, the land that you bought sitting on 2-family is now able to build 8 stories high in a booming commercial location.
4) 1031 exchange to defer capital gains
5) cash-out refi to pull out original capital and have tenants pay for the asset (simple example: $250k down, $750k loan; $1mm property. 5 years later, your loan balance is $650k thru scheduled amort and your building value is $1.2mm; now you can refi the debt to $900k and take that 900k to pay down the $650k and pocket the rest. Your asset is now on the hook for a $900k loan and you just stripped out your initial cash equity of $250k.

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Re: Becoming a Landlord: My Experiences

Post by CurlyDave » Wed Sep 27, 2017 2:56 am

Another benefit:

Being a landlord is a part time job very suitable for a retired old geezer like me. And I can't be fired.

The idea of working part time to stretch retirement income is on a lot of people's retirement lists, but being a landlord accomplishes this without the problems of having a nitwit boss. Well, OK, I am my own nitwit boss, but I can take that a lot more easily.

And, it is something to do in retirement. I can only play so much golf, etc.

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Re: Becoming a Landlord: My Experiences

Post by itstoomuch » Thu Sep 28, 2017 10:19 am

Anybody placed their rentals into a LLC?
We do have Umbrella Ins.
We have just 1 rental.
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Re: Becoming a Landlord: My Experiences

Post by nova1968 » Thu Sep 28, 2017 11:05 am

CurlyDave wrote:
Wed Sep 27, 2017 2:56 am
Another benefit:

Being a landlord is a part time job very suitable for a retired old geezer like me. And I can't be fired.

The idea of working part time to stretch retirement income is on a lot of people's retirement lists, but being a landlord accomplishes this without the problems of having a nitwit boss. Well, OK, I am my own nitwit boss, but I can take that a lot more easily.

And, it is something to do in retirement. I can only play so much golf, etc.
Having a strange tenant could be worse than a nitwit boss.

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Re: Becoming a Landlord: My Experiences

Post by mervinj7 » Thu Sep 28, 2017 11:46 am

itstoomuch wrote:
Thu Sep 28, 2017 10:19 am
Anybody placed their rentals into a LLC?
We do have Umbrella Ins.
We have just 1 rental.
+1 I'm also wondering what the benefits of using an LLC for rental property is. As I understand it, it's very cumbersome to do so in CA.

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Re: Becoming a Landlord: My Experiences

Post by travellight » Thu Sep 28, 2017 2:31 pm

mervinj7 wrote:
Thu Sep 28, 2017 11:46 am
itstoomuch wrote:
Thu Sep 28, 2017 10:19 am
Anybody placed their rentals into a LLC?
We do have Umbrella Ins.
We have just 1 rental.
+1 I'm also wondering what the benefits of using an LLC for rental property is. As I understand it, it's very cumbersome to do so in CA.
The Llc is for asset protection. I have each house in it's own llc. If I didn't have a high net worth to protect, I would not bother. It's very expensive in California, 800/year.

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Re: Becoming a Landlord: My Experiences

Post by kksmom » Fri Sep 29, 2017 12:49 am

Even if you have good returns(which means profit after accounting for expenses besides PITI), its no where near passive as index investing(managing tenants or managing the property manager)- so we buy properties only when the Return aka cash on cash is worth the trouble(we buy only local , and never in a war zones).

And its not easy, finding properties like that.

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Re: Becoming a Landlord: My Experiences

Post by CurlyDave » Fri Sep 29, 2017 10:24 am

kksmom wrote:
Fri Sep 29, 2017 12:49 am
...And its not easy, finding properties like that.
Most of our properties have been "distressed" in some way when we bought them. Not run-down shacks, but reasonably sound properties that had primarily cosmetic defects which the owners were either incapable or unwilling to remedy. Frequently an owner's strong desire for a quick sale coupled with poor cosmetic condition will lead to a profitable property.

Market timing worked for us in real estate. As a long-term resident in a HCOL area (SF Bay Area) I learned to recognize "unpublished leading economic indicators." Traffic patterns, where a commute gets easier in bad times, and a turnaround is starting when traffic starts to get even slightly worse. Even better for housing is the line to get into the local dump. Contractors and handymen must dispose of construction debris. If there is no line, real estate is depressed. If there is a huge line we are in boom times. When morning traffic gets light, get ready to make a down payment. When morning traffic gets even a slight bit worse, take a drive to the dump. When small lines to get in start to be the norm, it is time to buy. You guys can laugh at this all you want, I smile all the way to the bank.

We got 3 rental houses right at the start of various real estate upturns by paying attention.

We never bought a property we would have refused to live in if we suffered an economic reversal.

We never bought a property where I thought I needed to take a pistol with me to collect rent or make repairs. (Not to threaten tenants, but to prevent being held up.)

Never bought a property where we couldn't make the mortgage even if we had a year long vacancy.

I never insisted that a house be profitable from day one. In the accumulation phase of portfolio management, just having a tenant pay most of the mortgage and costs was good enough. The inevitable inflation will both eventually produce capital gains, and bring monthly cash flow.

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Re: Becoming a Landlord: My Experiences

Post by CurlyDave » Fri Sep 29, 2017 10:39 am

[quote=nova1968 post_id=3551308 time=1506614725 user_id=109632

...Having a strange tenant could be worse than a nitwit boss.
[/quote]

I have had strange things happen.

A resident manager literally went insane once. A young woman thought she needed to compete with the local sperm bank. A guy once fired a shotgun inside a unit, and then intimidated the neighbors into covering it up. Had a SWAT team take fugitive out of a unit, and the best of all:
a tenant's 65 year old mother once drove her car across the lawn, and over the top edge of a retaining wall trying to get into the parking lot. She was drunk, naked, and very obese.

Stuff like this is why rental properties often produce a better return than equities. If you don't have confidence in your ability to handle a fair amount of drama, don't be a landlord.

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Re: Becoming a Landlord: My Experiences

Post by DVMResident » Fri Sep 29, 2017 11:56 am

CurlyDave wrote:
Fri Sep 29, 2017 10:39 am
nova1968 wrote:
Thu Sep 28, 2017 11:05 am

...Having a strange tenant could be worse than a nitwit boss.
I have had strange things happen.

A resident manager literally went insane once. A young woman thought she needed to compete with the local sperm bank. A guy once fired a shotgun inside a unit, and then intimidated the neighbors into covering it up. Had a SWAT team take fugitive out of a unit, and the best of all:
a tenant's 65 year old mother once drove her car across the lawn, and over the top edge of a retaining wall trying to get into the parking lot. She was drunk, naked, and very obese.

Stuff like this is why rental properties often produce a better return than equities. If you don't have confidence in your ability to handle a fair amount of drama, don't be a landlord.
This is why it's great to have a diverse team: I'm the "numbers" guy and DW is a therapist who screened the tenants for mental health. Great team.

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Re: Becoming a Landlord: My Experiences

Post by dahelderman » Fri Sep 29, 2017 1:59 pm

This is great information; thank you!

My parents and an uncle of mine had a rental company (they actually still have one duplex as a rental property). My dad is a concrete finisher and one of the handiest guys you'll ever meet, and my uncle is a master carpenter who has built probably 30 homes as a summer time side job (was a school teacher for 25 years, built houses in the summer). I say all that to say this--I'm really familiar with rentals, landlording, assessing properties, etc. I do have a question, though:

Do you have a rule of thumb when it comes to buying houses as rentals? I know I have seen ratios, etc., that people will use to assess if a property would make a viable rental property given a certain purchase price. I have seen some people use a 2:1 ratio--the rent you collect monthly should be double the mortgage. Any input on this? Thanks!

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Re: Becoming a Landlord: My Experiences

Post by DVMResident » Fri Sep 29, 2017 3:53 pm

dahelderman wrote:
Fri Sep 29, 2017 1:59 pm
Do you have a rule of thumb when it comes to buying houses as rentals? I know I have seen ratios, etc., that people will use to assess if a property would make a viable rental property given a certain purchase price. I have seen some people use a 2:1 ratio--the rent you collect monthly should be double the mortgage. Any input on this? Thanks!
That measure just means you want to be cash-flow positive. Cash-flow positive is just one aspect of RE returns. One only needs to consider cash-flow based on your willingness and ability to take on liquidity risks (i.e. cover repairs and mortgage). But cash-flow is not required to be a successful RE investor. RE returns come in the form of cash-flow, mortgage pay down, appreciation (speculation), and tax deductions. Various combinations can make a winning investment. As an example, we've seen some nice rental numbers on this forum that are cash-flow negative because of 15 year mortgage and the rapid mortgage pay down was the dominate driver of returns. In my own experience with rentals, appreciation has been the primary driver.

I think it's very difficult to come up with a rule of thumb because there are so many variables like building condition, neighborhood (crime, quality of tenant, etc.), local laws, taxes, prevailing interest rates, etc that into the analysis. For quick mental math, I like market-price:rent ratio.

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Re: Becoming a Landlord: My Experiences

Post by abuss368 » Fri Sep 29, 2017 4:02 pm

Bogleheads -

One of the best direct real estate posters to the forum is "Dave55". I have found his real estate experience and stories very educational and interesting.

Perhaps Dave will see this thread and contribute.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Becoming a Landlord: My Experiences

Post by rcjchicity » Fri Sep 29, 2017 4:08 pm

FIREchief wrote:
Fri Sep 08, 2017 1:51 pm
Interesting thread. Thanks to OP for the education. Before reading this thread, I was 100% certain that I never wanted to be a landlord.

Now, I'm like 200% certain I never want to be a landlord. :twisted:
+1,000,000

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Re: Becoming a Landlord: My Experiences

Post by InvestoGuy » Fri Sep 29, 2017 4:29 pm

Excellent post. I am considering owning some rental property, however, I always wonder what the returns are compared to putting it in a simple index fund. How has your investment done, till today right from inception, compared to a simple index fund during the exact same time period?

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Re: Becoming a Landlord: My Experiences

Post by InvestoGuy » Sat Sep 30, 2017 3:48 pm

Sec3inMD wrote:
Thu Sep 07, 2017 4:06 pm
Very good post and comments denovo.

About 10 years ago, my wife inherited two small rental condos in Honolulu (not vacation rentals). I wanted to sell them to not deal with being a landlord. But they are my wife's connection to her hometown, so we are landlords. Fortunately, there was no debt with either of the units. We toured the properties with the property manager and I was impressed. And in ten years, we have had only one change of tenant in each unit and reasonable maintenance and repair costs. One former tenant lost his job and we ended up losing a months rent and a good tenant. Otherwise no tenant has missed a payment. The property manager handles tenants and repairs. They also pay state and local taxes and insurance out of rental collections along with their 7.5 percent management fee. Every month net rents are posted to our checking account. Owning property in Hawaii also has some minor benefits like qualifying for "kamaaina" rates (discounts for locals) and writing off reasonable airfare and hotels. All-in-all, however, we could make a better return in a diversified, low-cost mutual fund. But I'm not complaining.
Sec3inMD, you write you could have made better return in a diversified low cost index fund, I always wondered about that. If you don't mind sharing, since you had the property how much rate of return have you gotten so far on an annualized basis and if you were to sell the property today, what would your annualized rate of return be, after including the appreciation?

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nedsaid
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Re: Becoming a Landlord: My Experiences

Post by nedsaid » Sun Oct 01, 2017 8:55 am

The original post on this thread is excellent. After hearing about how family members have fared doing this, I have no interest in being a landlord. I also serve on the Board of a Home Owner Association and that has reinforced my lack of interest.
A fool and his money are good for business.

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Re: Becoming a Landlord: My Experiences

Post by itstoomuch » Sun Oct 01, 2017 10:12 am

:annoyed builds characters and wins friends in 12 different ways. Wonder Extra Curriculum. 😗
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