Becoming a Landlord: My Experiences

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itstoomuch
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch » Sun Oct 01, 2017 10:31 am

InvestoGuy wrote:
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?
Seattle condo, almost 2 years of ownership. Purchased $ from inheritance. About 5-6% net ROI, 30-50% unrealized appreciation, to be held long-term and to be passed to heirs just as we received inheritance, ~ 15,000 depreciation for taxes, 2 Allowable visitations to consult with PM (son who is also on the condo board and in related occupation) and to visit property. Relatively inflation and deflation proof. Asset diversication.
YpropertyMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Sun Oct 01, 2017 12:51 pm

InvestoGuy wrote:
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?
Given the right locations, most locations, the annual appreciative value of many types of property in Honolulu (also Kailua, Hawaii Kai, Kahala, Lanikai, etc) will often outpace the net annual rate of return from rental income, especially given the high costs of ownership.
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beezquimby
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Re: Becoming a Landlord: My Experiences

Post by beezquimby » Sun Oct 01, 2017 3:21 pm

Sorry that's just mumbo-jumbo to me. I'll stick to stocks, others can worry about fixing toilets and AC units etc.
Bogle826 wrote:
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.

runner540
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Re: Becoming a Landlord: My Experiences

Post by runner540 » Sun Oct 01, 2017 4:12 pm

itstoomuch wrote:
Sun Oct 01, 2017 10:31 am
InvestoGuy wrote:
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?
Seattle condo, almost 2 years of ownership. Purchased $ from inheritance. About 5-6% net ROI, 30-50% unrealized appreciation, to be held long-term and to be passed to heirs just as we received inheritance, ~ 15,000 depreciation for taxes, 2 Allowable visitations to consult with PM (son who is also on the condo board and in related occupation) and to visit property. Relatively inflation and deflation proof. Asset diversication.
YpropertyMV
Thanks for sharing your experience. As you note, "mileage WILL vary": you picked the hottest market in the country. 10%+ annual appreciation in an otherwise low inflation environment is not sustainable in a healthy economy: it means prices are doubling every 7 years, and rent/housig expenses choke off spending and investment in other categories.

For InvestoGuy, real estate has done well the last 8 years since the recession, but the S&P 500 has returned 33% (dividends reinvested) in the last 2 years, with a lot more diversification and no work on your part.

https://dqydj.com/sp-500-return-calculator/

itstoomuch
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch » Sun Oct 01, 2017 9:33 pm

^If we were to buy today, Seattle, we wouldn't get the rent to support the purchase. Our timing was good but a year earlier would have been better.
YMMV is very important
.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Becoming a Landlord: My Experiences

Post by travellight » Sun Oct 01, 2017 10:15 pm

InvestoGuy wrote:
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?
Here is some math I did in 2014 when I was trying to analyze this. I had bought properties from 2007 to 2011.

Rentals net worth in 2014-2,755,936,
net total lifetime additional costs (repairs etc.) as of 2/11/14 is: 41,800, all properties;
net rentals worth is 2,708,136, (subtract net costs from net worth)
subtract 1,846,000 (purchase prices) = 862,136 true net gain.
divide it by assumed 20% down of 369,200,
= 233%, as of 2014, (about 33%/year); 3 years after last acquisition, 7 years after first acquisition.

net cap rate is 7.7%: net annual income divided by net purchase price, 142,000/ 1,846,000.
If one were to divide net annual income by net money down though, it would be about 38%
401K equities: 601,283K, 2/7/14, net in is 371,682. gain is 229,601, 38% but this is over 22 years. 1.72%/yr over 22 yrs.

I think I was somewhat lucky with market timing but I really felt like things were unlikely to be much better for buying properties with historic low mortgage rates and low prices.
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Re: Becoming a Landlord: My Experiences

Post by abuss368 » Wed Oct 04, 2017 9:15 pm

travellight wrote:
Sun Oct 01, 2017 10:15 pm
InvestoGuy wrote:
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?
Here is some math I did in 2014 when I was trying to analyze this. I had bought properties from 2007 to 2011.

Rentals net worth in 2014-2,755,936,
net total lifetime additional costs (repairs etc.) as of 2/11/14 is: 41,800, all properties;
net rentals worth is 2,708,136, (subtract net costs from net worth)
subtract 1,846,000 (purchase prices) = 862,136 true net gain.
divide it by assumed 20% down of 369,200,
= 233%, as of 2014, (about 33%/year); 3 years after last acquisition, 7 years after first acquisition.

net cap rate is 7.7%: net annual income divided by net purchase price, 142,000/ 1,846,000.
If one were to divide net annual income by net money down though, it would be about 38%
401K equities: 601,283K, 2/7/14, net in is 371,682. gain is 229,601, 38% but this is over 22 years. 1.72%/yr over 22 yrs.

I think I was somewhat lucky with market timing but I really felt like things were unlikely to be much better for buying properties with historic low mortgage rates and low prices.
Do you plan to stay invested with the properties? Are you intending to purchase additional investment properties?
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Wed Oct 04, 2017 9:27 pm

Bogle826 wrote:
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.
Absolutely true.
As a full-time business career and a profession, one can indeed get those "home runs" in R/E development. Not looking for the "easy money" or "quick returns" but playing the R/E game over decades and decades.
As for rezoning, a developer can apply for rezoning and also predict with some accuracy the zoning changes ahead of time due to demographic and regional shifts in land use. IE: new planned public transport transfer stations, light rail, industrial zoning shifting to high end residential (repurpose), etc.
But, as others have reiterated, hands-on R/E and landlording is not for everyone.
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travellight
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Re: Becoming a Landlord: My Experiences

Post by travellight » Thu Oct 05, 2017 10:08 am

abuss368 wrote:
Wed Oct 04, 2017 9:15 pm
travellight wrote:
Sun Oct 01, 2017 10:15 pm
InvestoGuy wrote:
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?
Here is some math I did in 2014 when I was trying to analyze this. I had bought properties from 2007 to 2011.

Rentals net worth in 2014-2,755,936,
net total lifetime additional costs (repairs etc.) as of 2/11/14 is: 41,800, all properties;
net rentals worth is 2,708,136, (subtract net costs from net worth)
subtract 1,846,000 (purchase prices) = 862,136 true net gain.
divide it by assumed 20% down of 369,200,
= 233%, as of 2014, (about 33%/year); 3 years after last acquisition, 7 years after first acquisition.

net cap rate is 7.7%: net annual income divided by net purchase price, 142,000/ 1,846,000.
If one were to divide net annual income by net money down though, it would be about 38%
401K equities: 601,283K, 2/7/14, net in is 371,682. gain is 229,601, 38% but this is over 22 years. 1.72%/yr over 22 yrs.

I think I was somewhat lucky with market timing but I really felt like things were unlikely to be much better for buying properties with historic low mortgage rates and low prices.
Do you plan to stay invested with the properties? Are you intending to purchase additional investment properties?
I do plan to stay invested in real estate. I don't plan to buy any more because my net worth is very heavily in real estate, about 2/3. I don't plan to lessen the net amount because I don't want to pay depreciation recapture; I want my heir to inherit with stepped up basis. There are markets I am attracted to investing in if I wanted to grow my net worth more but I have to contain myself. What I have is enough.
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DrGoogle2017
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Re: Becoming a Landlord: My Experiences

Post by DrGoogle2017 » Sun Dec 17, 2017 8:08 pm

I’m glad to find this thread. But I’m been racking my brain, or read everything I can find while googling to see if rental income without LLC is considered pass through income or not.
I know it’s considered passive income.

riverguy
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Re: Becoming a Landlord: My Experiences

Post by riverguy » Sun Dec 17, 2017 11:04 pm

DrGoogle2017 wrote:
Sun Dec 17, 2017 8:08 pm
I’m glad to find this thread. But I’m been racking my brain, or read everything I can find while googling to see if rental income without LLC is considered pass through income or not.
I know it’s considered passive income.
No...why would it be? It’s not passing through anything then

DrGoogle2017
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Re: Becoming a Landlord: My Experiences

Post by DrGoogle2017 » Sun Dec 17, 2017 11:06 pm

riverguy wrote:
Sun Dec 17, 2017 11:04 pm
DrGoogle2017 wrote:
Sun Dec 17, 2017 8:08 pm
I’m glad to find this thread. But I’m been racking my brain, or read everything I can find while googling to see if rental income without LLC is considered pass through income or not.
I know it’s considered passive income.
No...why would it be? It’s not passing through anything then
It’s as sole proprietory, it’s also a pass through.

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Re: Becoming a Landlord: My Experiences

Post by Finridge » Mon Dec 18, 2017 2:52 am

Those of you in the rental business, what do you figure your "return on investment" (ROI) has been, on average, including not just rent, but property appreciation, and the benefits of depreciating for tax purposes? How does that compare to the ROI of your portfolio of stock and bond fund investments?

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Re: Becoming a Landlord: My Experiences

Post by heybro » Mon Dec 18, 2017 3:00 am

denovo wrote:
Sun Sep 03, 2017 3:58 pm
Bogleheads:

Many threads have come up on ...
Wow! Coolest post ever!

What do you think of the current rental boom - huge increase in rents? Is the renting market merely a cycle and therefore soon renting may not be as popular soon? I have heard there is a pendulum swing as to where people want to live. Further, do you need to constantly update things (open floor plan last decade, stainless steel this decade) to meet expectation?

Thank you so much!!!!

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Re: Becoming a Landlord: My Experiences

Post by snackdog » Mon Dec 18, 2017 4:57 am

It is certainly feasible to invest in real estate nearly as passively as stocks but with the huge advantage of inefficient markets in real estate. I say nearly as passively because if you find the right property in the right market (certainly need not be in your home state), you can afford to simply hire a qualified property management company and forget about it. Some of the earliest retirees on MMM (under age 30) have invested ~$100,000 over 5-7 years to build a $1MM+ portfolio outside their home state, managed by others, spinning off $40,000+/yr free cash flow and they don't get involved in repairs, tenants, or any of the rest of the headaches of landlording. The value creation here is by finding the right market where you are achieving the 1% rule or way under. Trying to create value by restricting yourself to your home base and managing it all yourself to save pennies is not only doing it the hard way, but probably missing most of the best rental markets in the US.

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Re: Becoming a Landlord: My Experiences

Post by dbr » Mon Dec 18, 2017 9:26 am

snackdog wrote:
Mon Dec 18, 2017 4:57 am
It is certainly feasible to invest in real estate nearly as passively as stocks but with the huge advantage of inefficient markets in real estate. I say nearly as passively because if you find the right property in the right market (certainly need not be in your home state), you can afford to simply hire a qualified property management company and forget about it. Some of the earliest retirees on MMM (under age 30) have invested ~$100,000 over 5-7 years to build a $1MM+ portfolio outside their home state, managed by others, spinning off $40,000+/yr free cash flow and they don't get involved in repairs, tenants, or any of the rest of the headaches of landlording. The value creation here is by finding the right market where you are achieving the 1% rule or way under. Trying to create value by restricting yourself to your home base and managing it all yourself to save pennies is not only doing it the hard way, but probably missing most of the best rental markets in the US.
This is going to be true, but isn't very good guidance to someone contemplating such an activity because the successes are survivors of an enterprise that contains a much larger population of failures that don't find the right market, don't recognize what isn't going to work, and don't come back to own up to their tale of woe.

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Re: Becoming a Landlord: My Experiences

Post by Finridge » Mon Dec 18, 2017 7:29 pm

Yes, I was asking because I have the vague sense that a lot of people who try to landlord end up with returns that are not better (and often worse) than what they would have made if they'd just invested their money in mutual funds. And often with a big investment of time (for which they are not paid).

I can see how an astute investor could potentially make huge profits by purchasing a property at way below it's value, or by purchasing a property in an area that rapidly appreciates. The people who do this, are happy to talk about it. But I sense that for every success story like that, there are multiple untold stories of people just muddling by. But I don't know if my perception regarding this is correct. It could be that I'm engaging in "sour grapes" or self-rationalizing my own aversion to purchasing rentals.

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Re: Becoming a Landlord: My Experiences

Post by riverguy » Mon Dec 18, 2017 8:46 pm

Finridge wrote:
Mon Dec 18, 2017 7:29 pm
Yes, I was asking because I have the vague sense that a lot of people who try to landlord end up with returns that are not better (and often worse) than what they would have made if they'd just invested their money in mutual funds. And often with a big investment of time (for which they are not paid).

I can see how an astute investor could potentially make huge profits by purchasing a property at way below it's value, or by purchasing a property in an area that rapidly appreciates. The people who do this, are happy to talk about it. But I sense that for every success story like that, there are multiple untold stories of people just muddling by. But I don't know if my perception regarding this is correct. It could be that I'm engaging in "sour grapes" or self-rationalizing my own aversion to purchasing rentals.
You make money in real estate when you buy. People who don’t make good money in real estate most often purchased at way too high of a price. You have to be willing to pass on 100 houses and buy 1. I see it all the time. People who bought too high and try to justify it by being satisfied breaking even or worse.

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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Mon Dec 18, 2017 9:36 pm

Finridge wrote:
Mon Dec 18, 2017 2:52 am
Those of you in the rental business, what do you figure your "return on investment" (ROI) has been, on average, including not just rent, but property appreciation, and the benefits of depreciating for tax purposes? How does that compare to the ROI of your portfolio of stock and bond fund investments?
Well over 8% net depending on State and region within the state. Some much higher. Debt free. No leverage.
Solidity of principal.
Tax benefits (huge).
Deductions. (huge).
No comparison to Portfolio. Apples vs Oranges. One is a business.
j :D
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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Mon Dec 18, 2017 9:45 pm

Finridge wrote:
Mon Dec 18, 2017 7:29 pm
Yes, I was asking because I have the vague sense that a lot of people who try to landlord end up with returns that are not better (and often worse) than what they would have made if they'd just invested their money in mutual funds. And often with a big investment of time (for which they are not paid).

I can see how an astute investor could potentially make huge profits by purchasing a property at way below it's value, or by purchasing a property in an area that rapidly appreciates. The people who do this, are happy to talk about it. But I sense that for every success story like that, there are multiple untold stories of people just muddling by. But I don't know if my perception regarding this is correct. It could be that I'm engaging in "sour grapes" or self-rationalizing my own aversion to purchasing rentals.
You are correct. The "professionals" approach the endeavor as a long term business, which it is. Those who try to "get rich quick", or flip. or are lured by the seemingly passive "hands off" nature R/E income property, or those who highly leverage and are not in a position to attempt it in the lst place are often the lst to lose.
Whether purchasing a single family home to rent out, or multi family rental building, the general criteria are the same for most. There are exceptions of course.

SOME REAL ESTATE INCOME PROPERTY PURCHASING TIPS
A R/E investor might consider the following:'

1. Can I buy this property/house at "X" price and not lose money if I sold it next month, even with the 6% R/E sales commission.
2. Can I rent out this property/house after I buy it and over the next 3 years have my mortgage paid by the rents plus profit (if not a cash sale) and generate at least a 6-8% CAP?
3. Will the potential annual appreciative value of this property/home be positive based on the curb value of properties around it, the general area, and history of the region, as well as local economic conditions and indicators?
4. Is the properties intrinsic value such that I would want to live there myself and enjoy being there? (generally you don't do well if you don't like it)
5. Is my present financial position so strong that I have the "staying power" to ride out a R/E dip and still come out ahead on this property?
For myself, any property that can satisfy all 5 of the above conditions is a potential to buy.
j :D
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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo » Tue Dec 19, 2017 11:18 pm

snackdog wrote:
Mon Dec 18, 2017 4:57 am
. The value creation here is by finding the right market where you are achieving the 1% rule or way under. Trying to create value by restricting yourself to your home base and managing it all yourself to save pennies is not only doing it the hard way, but probably missing most of the best rental markets in the US.
Property managers take around 8-10 percent and their repair guys usually charge more than you could get if you were finding people yourself, plus many of them charge for finding new renters so we're looking at 10-12 percent of your gross rent out the door.

That doesn't work for me.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Re: Becoming a Landlord: My Experiences

Post by travellight » Wed Dec 20, 2017 11:36 pm

It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
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Re: Becoming a Landlord: My Experiences

Post by SRenaeP » Thu Dec 21, 2017 8:52 am

travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph

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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Thu Dec 21, 2017 12:19 pm

denovo wrote:
Tue Dec 19, 2017 11:18 pm
snackdog wrote:
Mon Dec 18, 2017 4:57 am
. The value creation here is by finding the right market where you are achieving the 1% rule or way under. Trying to create value by restricting yourself to your home base and managing it all yourself to save pennies is not only doing it the hard way, but probably missing most of the best rental markets in the US.
Property managers take around 8-10 percent and their repair guys usually charge more than you could get if you were finding people yourself, plus many of them charge for finding new renters so we're looking at 10-12 percent of your gross rent out the door.

That doesn't work for me.
Absolutely true, "denovo".
Running a rental "business" vs a "property management company" can save a lot more than a "few pennies". Only a business owner will have that level of "vested interest" in his own holdings. To do otherwise is okay for some but makes compromises.
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Lauren Vignec
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Re: Becoming a Landlord: My Experiences

Post by Lauren Vignec » Thu Dec 21, 2017 2:42 pm

Hi Denovo,

This is a wonderful thread. I'm going to email your post to a few people who really need to read it.

My own experience as a landlord is extremely limited, but I wanted to share it because many younger Bogleheads might be considering doing what I did.

I had some financially responsible close friends that I had been renting with. I live in Seattle and I got very tired of rent increases. So I bought a 5 bedroom house that I live in, and also rent out to my friends. After all is said and done, I have to pay for repairs and that's it.

This has been a wonderful experience for me, truly life-changing. But even in this limited case, I would have to strongly agree with much of what is said on this thread.

First, you make money when you buy the house. The time to negotiate is when you buy. I passed on literally 200 houses before I found the right one. The owner had already lowered their price from its original listing, and I saw many signs that they were absolutely sick of the property and ready to leave. The property was in good shape, but it is the kind of house that is no longer "in fashion". It's got a mother-in-law, and that isn't what people are looking for in Seattle right now.

Second, I would strongly agree with the points about tenant screening, especially if you are going to live in the same house as your tenants!

And finally, yes, it's still a business. These may be my friends, and that's nice, but we have a business agreement and they all know that. And this gets me back to the point about when you make your money. It's such a common mistake for people to buy a residence because they fall in love with it. Love's got nothing to do with it. If you want to do the kind of thing I did, make sure you have the right renters and that you pay the right price.

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Re: Becoming a Landlord: My Experiences

Post by DrGoogle2017 » Thu Dec 21, 2017 4:01 pm

SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.

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Re: Becoming a Landlord: My Experiences

Post by travellight » Thu Dec 21, 2017 7:43 pm

DrGoogle2017 wrote:
Thu Dec 21, 2017 4:01 pm
SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.
Thanks! Is it 25%?
364

DrGoogle2017
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Re: Becoming a Landlord: My Experiences

Post by DrGoogle2017 » Thu Dec 21, 2017 10:11 pm

travellight wrote:
Thu Dec 21, 2017 7:43 pm
DrGoogle2017 wrote:
Thu Dec 21, 2017 4:01 pm
SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.
Thanks! Is it 25%?
No, that’s the House version before reconciliation with the Senate version. The following link from the WSJ has more detail.
https://www.wsj.com/livecoverage/tax-bi ... 1513385693

Finridge
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Re: Becoming a Landlord: My Experiences

Post by Finridge » Thu Dec 21, 2017 11:37 pm

Greatness wrote:
Thu Sep 07, 2017 8:21 am
If you had 20 + units @ 800 per unit, that's 16000.00 per month in income.
I would characterize that as cash flow (gross revenue), not "income". Income is what you have left after you subtract all your expenses, which expenses might, if you are unlucky or not careful, exceed the amount of your gross revenue.

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Re: Becoming a Landlord: My Experiences

Post by hpryder » Fri Dec 22, 2017 2:26 pm

I've been searching the net & reading multiple CPAs & small business sites interpretation of the new tax law w.r.t. real estate filing Sch E. Based on information from:
Thomson Reuters Tax & Accounting News, Evergreen Small Business, Selden Fox CPA, Watson CPA & TaxProTalk
I conclude Sch E rental real estate is part of the new Sec199A Qualified Business class. And filers will get a 20% deduction based on the net Sch E rental total profit of all rentals, not the gross rental income, but after all expenses & depreciation is accounted for. What is clear is that taxable income will decrease, but where the deduction line item occurs is unclear. So if there is a net rental profit there will be a 20% deduction, if there is no profit there will be no 20% deduction.

When 2018 tax time rolls around I'll be checking with my CPA.

Hope this clears up confusion on this discussion thread.

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Re: Becoming a Landlord: My Experiences

Post by Bongleur » Tue Dec 26, 2017 1:10 am

When I had to move my mom out of the house into a Long Term Care facility, I decided to rent instead of sell. First, too much emotion involved in losing it entirely, second too complicated to immediately figure the optimum action for taxes & trust & inheritence issues given everything else going on.

Really must pay a management company rather than try to manage it myself remotely. And I find that even repairing my own home is becoming a PIA.

The assessed value is about half a million due to the regional location, and rent is about $2500 a month now. So even if expenses add up to ~20% of that, its still making 4-5% of the tax value annually. That's better than a mid term Govt bond.

Its not the 10% return suggested upthread, but there is no mortgage risk, so am I doing OK?

Mom's LTC insurance will run out in about 18 months, so that $4600/month expense will eat up almost all her income. And it could balloon if her physical abilities collapse on top of dementia.

When I inherit, I'll get the stepped-up basis, so if I sell there won't be a huge taxable profit. I foresee no reason to sell to shift into stocks, so the guesswork is to decide rental profit & risk profile vs shifting its cash value into govt or good quality commercial bonds.


My first tenant gave no trouble. But when he left I got a different agent assigned to the property, and she seems to be not on the ball. She forgot to include the trash fee in the contract -- its an item on the property tax bill semi-annually. Making the tenant pay repairs under some amount is a great idea from up-thread; I will ask the company why they don't put that in. Also language about buying their own furnace & humidifier filters.

The new tenant has been a PIA. Demands for cleaning mold out of the garage, service call to change re-balance the HVAC system because they think it wasn't blowing enough in one area !!! ... so 2017 had high expenses due to prepping between tenants, extra repairs, & months not rented.

In this neighborhood plenty of military officers bought & rented while on TDY. I understand that renting to an officer is quite safe - not paying their rent or losing a dispute over damages can ruin their career. So rent to above Captain (army).

But the neighborhood seems to have turned into a lot of rentals; lots of cars & tradesman vans hints that its not professional, single families anymore. Such is urbanization, I guess it indicates rising property values long term.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: Becoming a Landlord: My Experiences

Post by abuss368 » Tue Dec 26, 2017 7:31 pm

DrGoogle2017 wrote:
Thu Dec 21, 2017 4:01 pm
SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.
Real estate is not subject to SE tax.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Becoming a Landlord: My Experiences

Post by DrGoogle2017 » Wed Dec 27, 2017 12:39 am

abuss368 wrote:
Tue Dec 26, 2017 7:31 pm
DrGoogle2017 wrote:
Thu Dec 21, 2017 4:01 pm
SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.
Real estate is not subject to SE tax.
Not schedule E, but maybe on schedule C as a real estate professional. Here is a link from Turbotax and others. I think you need to do some research before making a garden variety comment regarding real estate don’t have to pay real estate.
.https://ttlc.intuit.com/questions/28248 ... rty-income

http://mazumausa.com/how-to-calculate-s ... ls-agents/

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Re: Becoming a Landlord: My Experiences

Post by Boats day » Wed Dec 27, 2017 11:37 am

Dendovo

Outstanding post. I was a landlord for 25 years an you nailed it with this post!!!!!!!! :D

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Re: Becoming a Landlord: My Experiences

Post by abuss368 » Wed Dec 27, 2017 9:14 pm

DrGoogle2017 wrote:
Wed Dec 27, 2017 12:39 am
abuss368 wrote:
Tue Dec 26, 2017 7:31 pm
DrGoogle2017 wrote:
Thu Dec 21, 2017 4:01 pm
SRenaeP wrote:
Thu Dec 21, 2017 8:52 am
travellight wrote:
Wed Dec 20, 2017 11:36 pm
It's my preliminary understanding that we, as small business landlords, are in the category of passthroughs and that the tax in this category is capped at 25%. Can anyone confirm?
I have not seen anything definitive but my understanding is the opposite. As a landlords (Schedule E income), we are *not* in the category of passthroughs as that is for businesses (Schedule C income).

-Steph
Both Schedule E and Schedule C are considered pass through. E is for passive investors and C is for real estate professionals. I believe for C, you have to pay SE or self employment tax.
Real estate is not subject to SE tax.
Not schedule E, but maybe on schedule C as a real estate professional. Here is a link from Turbotax and others. I think you need to do some research before making a garden variety comment regarding real estate don’t have to pay real estate.
.https://ttlc.intuit.com/questions/28248 ... rty-income

http://mazumausa.com/how-to-calculate-s ... ls-agents/
You may have misunderstood or perhaps my post was confusing. No big deal. My post was regarding Schedule E or passthrough from an LLC is not subject to SE tax. I was not addressing the possibility of Real Estate Professional.

Happy holidays!
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Becoming a Landlord: My Experiences

Post by zrzhu111 » Thu Dec 28, 2017 10:31 am

Very informal post.

tarmangani
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Re: Becoming a Landlord: My Experiences

Post by tarmangani » Thu Dec 28, 2017 10:36 am

Just some praise. My wife and I recently took up landlord responsibilities and I found this thread to be tremendous. Not wild about being a landlord, but she had the property when we started dating so we're making the best of it.

Point
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Re: Becoming a Landlord: My Experiences

Post by Point » Sat Jul 25, 2020 7:37 am

Soon to be first time landlord....

What guidance do you have on rent to income ratio?

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Sandtrap
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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Sat Jul 25, 2020 8:10 am

Point wrote:
Sat Jul 25, 2020 7:37 am
Soon to be first time landlord....

What guidance do you have on rent to income ratio?
Sometimes, if you aim for a 10% gross CAP rate, you "might be lucky" and end up with a 6% Net.
Lot's of variables here so, like all Rules of Thumb, just a starting point. Every apartment building is different.

Rather than focus on a rent to income ratio, rent at "almost" or "reasonably under" the highest market rental rate in your neighborhood taking into account all variables in location, ammenities, etc, etc. And, realize that many landlords rent for the highest or unrealistically high rate and are willing to tolerate high vacancy rates. IMHO: It's better to rent at a monthly rate that encourages long and consistent tenency. IE: A 3 month vacancy more than makes up for trying to squeeze the maximum rent out of the unit and then getting short tenancies/high turnover.

Be patient. Find the best tenant. Aim for long term.

Know the landlord tenant code like your "Bible", do everything as you would a professional business.

Then, like in Index Funds, keep your expenses rock bottom. Profit does not only come from high prices.

Yes. This is an old and excellent thread started by "Denovo". Thanks for reviving it.
j :happy
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Re: Becoming a Landlord: My Experiences

Post by Point » Sat Jul 25, 2020 8:14 am

I should be more clear- what portion of tenant’s income should they pay as rent, ie 50%, 30%...

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Re: Becoming a Landlord: My Experiences

Post by Sandtrap » Sat Jul 25, 2020 8:23 am

Point wrote:
Sat Jul 25, 2020 8:14 am
I should be more clear- what portion of tenant’s income should they pay as rent, ie 50%, 30%...
In Hawaii, and other VHCOL areas, tenants often pay at least 50% of their income in rent. Homeowners pay at least 50% of their income in housing costs, sometimes 75%.
In LCOL areas, far less.
So "affordability" and ability to pay rent, and ability to sustain a long tenancy, is based on a more comprehensive look at a potential tenant.
That said, when screening IE: 12 applicants, one would prefer to rent to the applicant with the best ability to pay. In your criteria, the best "income/rent ratio".

However, which tenant would be a better long term prospect:
A) A mature, quiet, Graduate student with marginal income, but a 6 year scholarship and rent to be paid directly to the landlord from a "Gov't scholarship stipend".
or
B) Professional Corporate person making $9000/mo. and renting your unit for $1500/mo. for the term of a 1 year lease, until he/she either decides to buy a home in the region or relocate out of the region?

Rent to income, on paper, can be different from what really is going on with a tenant because how much other debt they have is unknown. So, only so much can be ascertained on paper, on a spreadsheet. The rest is a comprehensive look at the "person" and their . . . . life perhaps.

j :happy
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Re: Becoming a Landlord: My Experiences

Post by alexp » Sat Jul 25, 2020 8:45 am

Point wrote:
Sat Jul 25, 2020 8:14 am
I should be more clear- what portion of tenant’s income should they pay as rent, ie 50%, 30%...
I aim for ~30% when looking at the applications.

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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo » Sat Jul 25, 2020 11:38 pm

Point wrote:
Sat Jul 25, 2020 8:14 am
I should be more clear- what portion of tenant’s income should they pay as rent, ie 50%, 30%...
Varies by locality, but 30 percent in LCOL, and up to 50 percent in HCOL and VHCOL. The good thing about using the smartmove is it analyzes the Applicant's rent to income ratio.

Also, consider the Applicant's other debt.

2k rent vs 5k income, but no debts is perhaps safer than 2k rent vs 6k income, but 2k in monthly student loan and car loan payments if that makes sense
Last edited by denovo on Sun Jul 26, 2020 2:20 pm, edited 1 time in total.
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Re: Becoming a Landlord: My Experiences

Post by barberakb » Sun Jul 26, 2020 1:32 pm

B4Xt3r 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!
One can usually make more than 7% pretty easily if they do their homework, especially if they self manage the property. I don't buy any houses that I can't make 10-15% on every year after expenses. The return is usually actually much higher because I don't count on any appreciation, that is just a bonus. Plus the tax benefits you get from real estate are pretty valuable.

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Re: Becoming a Landlord: My Experiences

Post by barberakb » Sun Jul 26, 2020 1:54 pm

Slacker wrote:
Mon Sep 04, 2017 10:52 am
skepticalobserver wrote:
Mon Sep 04, 2017 9:57 am
denovo wrote:
Sun Sep 03, 2017 3:58 pm
In my experience, units near college campuses, military bases, or areas popular with young professionals in their 20's, have good demand
As regards renting to military personnel (as well as non-military spouses), is the limited civil immunity provided under the Servicemembers Civil Relief Act (formerly the Soldiers' and Sailors' Civil Relied Act), (http://www.military.com/benefits/milita ... rview.html), a concern?
I would say the only big concern is if the tenant presents you with fake orders to break the lease. It is real easy to scan, modify, print and tell a landlord, "sorry, have to break the lease because I am PCSing".
Not saying this doesn't happen but I was in the military for 20 yrs, rented to military most of that time and never heard of this happening. Most people are not going to risk their careers to get out of a lease. You can get in huge trouble for falsifying documents.

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Re: Becoming a Landlord: My Experiences

Post by barberakb » Sun Jul 26, 2020 2:31 pm

Finridge wrote:
Mon Dec 18, 2017 2:52 am
Those of you in the rental business, what do you figure your "return on investment" (ROI) has been, on average, including not just rent, but property appreciation, and the benefits of depreciating for tax purposes? How does that compare to the ROI of your portfolio of stock and bond fund investments?
According to vanguard my portfolio has averaged 9% over the last 20 yrs or so. Pretty good.
But my real estate is more likely 15-20% return after factoring in all those things you mentioned.
I like to use cash-on-cash return formula. https://en.wikipedia.org/wiki/Cash_on_cash_return

So if I have a property that the COC return is 12%, that doesn't even factor in property appreciation, tax benefits or the huge fact that the tenant
is paying off my mortgage. After 15-30 yrs I have paid off houses that I didn't pay anything for besides the down payment.

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Re: Becoming a Landlord: My Experiences

Post by barberakb » Sun Jul 26, 2020 2:41 pm

Point wrote:
Sat Jul 25, 2020 8:14 am
I should be more clear- what portion of tenant’s income should they pay as rent, ie 50%, 30%...
I aim for their monthly income to be at least 3.5 times the monthly rent.

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Re: Becoming a Landlord: My Experiences

Post by WarAdmiral » Mon Jul 27, 2020 8:27 am

Bookmarking.

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Re: Becoming a Landlord: My Experiences

Post by ddurrett896 » Mon Jul 27, 2020 9:40 am

denovo wrote:
Sun Sep 03, 2017 3:58 pm
5. Screening Tenants- I consider screening tenants to be an absolute must. I pay exactly $0 for this also. I have used MySmartMove to screen tenants and tenants pay for the screening as an application fee. https://www.mysmartmove.com/SmartMove/l ... check.page The great thing about this service is that the tenant directly enters their information and pays the service directly so I don't have to worry about handling their money and bad checks. I consider evictions, bankruptcies , or bills gone to collections as automatic rejections.
When I was a landloard and showed the rental to potential renters, I always said,"is there anything that might show up on a background check that could disqualify you (Bankruptcy,etc.)? I know people fall on hard time and willing to make an exception if I know the circumstances."

It's like turning on a truth faucet lol! Couldn't believe the details they would then divulge to a potential landlord.

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Re: Becoming a Landlord: My Experiences

Post by Slacker » Thu Jul 30, 2020 9:18 am

barberakb wrote:
Sun Jul 26, 2020 1:54 pm
Slacker wrote:
Mon Sep 04, 2017 10:52 am
skepticalobserver wrote:
Mon Sep 04, 2017 9:57 am
denovo wrote:
Sun Sep 03, 2017 3:58 pm
In my experience, units near college campuses, military bases, or areas popular with young professionals in their 20's, have good demand
As regards renting to military personnel (as well as non-military spouses), is the limited civil immunity provided under the Servicemembers Civil Relief Act (formerly the Soldiers' and Sailors' Civil Relied Act), (http://www.military.com/benefits/milita ... rview.html), a concern?
I would say the only big concern is if the tenant presents you with fake orders to break the lease. It is real easy to scan, modify, print and tell a landlord, "sorry, have to break the lease because I am PCSing".
Not saying this doesn't happen but I was in the military for 20 yrs, rented to military most of that time and never heard of this happening. Most people are not going to risk their careers to get out of a lease. You can get in huge trouble for falsifying documents.
I would agree that the overwhelming majority of military personnel would not do this, but you could say the same thing about many other little crimes that I have personal knowledge of having been committed by people, who happened to be in the military, that would jeopardize their careers...yet these were just a few of the people. I doubt many landlords will bother trying to verify paperwork (going off the idea that they aren't fake most of the time, and a non-military person perhaps not knowing where to start looking to verify the PCS orders).

Just a brief list of things enlisted and/or officers have done in the US military that I know of (personally):
- adultery, numerous counts
- use of controlled substances, numerous counts (marijuana, lsd/acid, ecstacy, cocaine)
- false statements to start BAS (attesting to being Vegan, when they were not)
- usury by retired CSMs
- drug running by lower enlisted, sergeants, and a CSM
- bribing border patrol agents and customs agents
- driving under the influence, numerous counts
- underage girls in the barracks overnight, numerous counts
- firearms possession on base overseas without seeking permission from the base/post commander or host country, numerous counts
- assault, numerous counts

I mean, falsifying orders would be one of the LEAST egregious offenses based on my limited experience being associated with multiple branches of the military as a dependent and an Active Duty member over 24 years (only 9 or so of those years did I have direct knowledge of said transgressions).

However, I'd also attribute all those "potentially career ending" actions to less than 10% of the enlisted and officers I've known, but obviously I'm not privy to everything that everyone has done throughout their careers.

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