Becoming a Landlord: My Experiences

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denovo
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Becoming a Landlord: My Experiences

Post by denovo »

Bogleheads:

Many threads have come up on this site about people wanting to be landlords, and since this is a topic I have a lot of history with, I wanted to write a post on my experiences and advice on how to go about it the right way based on my experiences. The most important thing about becoming a landlord is to remember that it's a business. Perhaps when you start out, especially if you're only renting out 1-3 units it's not a full-time job, but it's a business nonetheless. I think many people haphazardly get into landlording when they upgrade from their starter home or need to move out of town for job relocation, without giving too much thought to it. And with like any other business, many people have different philosophies on how to run it. I am sure there will be many replies with people disagreeing on the way I things go about it, and that's precisely the point.


1. You can't put a rental in a 401k, but (edit: maybe in IRA, see below? viewtopic.php?f=2&t=226980&p=3518596#p3518593). Landlording will tie up a lot of your money and demands liquidity. I would not consider becoming an LL ("Landlord") unless you and your spouse are already maxing out your 401k's and IRA's. The guaranteed tax benefits from those retirement vehicles are much more lucrative than landlording in my experience in the long-term. It becomes a much more closer call and reasonable option when the alternative is taxable investing.

2. For liquidity reasons, and the financial flexibility needed, remember that it's possible to have vacancies where you will be responsible for the mortgage and other bills, I would not consider being a landlord unless you have eliminated all debt outside of your own home mortgage and would have a separate emergency fund for your rental unit. I would say 4 months worth of the carry costs of the unit plus a few thousand to account for emergency repairs is sufficient. The security deposit is not part of your emergency fund!

3. No partners- I would not consider landlording if you need to invest with partners outside of you and your spouse (such as co-workers, siblings, in-laws, parents, adult children). There are a lot of decisions that need to be made that are judgement calls (who to rent to, how much to increase rent, should this be replaced). There will be eventually disagreements. The place may need an infusion of cash because of needed renovations or a long-term vacancy. If your business partner is having financial problems, they are now your problems. I have many relatives who are not on speaking terms because of these disputes. Don't let that happen to you.

4. Finding Applicants- A very important part of being a landlord is controlling your costs. I pay exactly $0 to find tenants. I take my own photos of the unit and enter the unit for sale on Zillow's Rental Network (https://www.zillow.com/rental-manager/) which posts on Zillow, HotPads, and Trulia. I take the HTML code that Zillow generates and post it on CraigsList also. I have never had problems finding leads using this method.

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.

But there's much to screening than this. I check references too when they fill out a rental application. I don't ask for personal references. I assume pretty much everyone on Earth has 1-2 people that will personally vouch for them. I care about landlord references. I ask for their current landlord and previous landlord. Sometimes, current landlords will be eager to say nice things to get rid of the person, that's why the previous landlord is good information. I try to ask discrete questions instead of general questions like "Should I rent to X". I ask, "Has "X" ever been late on rental payments? Have you every had to start eviction proceedings? (Remember those database checks aren't always 100 percent accurate) Did they make excessive or unreasonable repair requests? Did they ever get noise complaints or in quarrels with other tenants? I also verify income and pay stubs with their current employer.

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. Some important indicators 1. Did they actually read the listing or do they call me to ask questions that are already answered in the advertisement? 2. Did they show up at the agreed time? 3. When they see the unit, do they sound like a nitpicker and complain about everything or are asking for a bunch of concessions on rental terms? 4. Their reason for moving? If they don't give me a straight answer or say, it's because their landlord asked them to leave, that's usually a red flag.

Selecting a tenant underscores why liquidity is important. I've seen landlords who can't afford the vacancy, become desperate to find new tenants and not do due diligence on screening. Also, if I find a good tenant (one who pays on time , keeps the unit in fine condition), in other words, a good tenant is never seen or heard from, I keep rent increases as moderate as possible. I like to keep good tenants. I do not want to squeeze them with as much a rental increase as I think I can get.

Here's a good way of thinking about how important the screening process for a tenant is. Have you ever loaned a friend or family your vehicle? That's a $20,000 or $30,000 asset you may be giving to someone to use. Did you have any misgivings? When you lease to someone, you are entrusting with an asset possibly of ten times the value.

7. Knowing and finding good tradesmen/handymen- I consider this a very important part of landlording. My family has been involved in construction for a long time, which gives me an advantage. My definition of a good tradesman is someone who does their work well for fair prices. It also saves time. When you get to know and trust them, I don't feel the need to come to the unit and oversee their work. It also helps when you have a background in the field, since you can more properly evaluate the work. When I've had to do renovations, I've acted as my own general contractor and managed subcontractors. That saves a lot of money, which is a vital part of landlording.

8. Selecting a property- The most important decision you make is selecting a property, and judging its rental prospects. This is something very difficult, and the most important part of your enterprise by far. I've saved this for the back end of this post , because it's the hardest to write. John T. Reed (an author of many books about real estate investing, who has written some good books about landlording,says you should try to select a home that you can find for around 20 percent below market value. That's difficult. And think about it. If denovo finds a property that is 20 percent below market value, denovo is going to buy it for himself, not give it to you. You should try find the best deal you can. If the numbers you think you can buy the home for and rent it out, just don't work, maybe it's not a good deal. It's a business decision.


You also need to judge the rental prospects for your community. Some markets or areas there may be mostly owner-occupied property. In my experience, units near college campuses, military bases, or areas popular with young professionals in their 20's, have good demand. Your locality may vary.

9. Properly accounting for costs and income- Good bookkeeping is absolutely a must for both taxes and evaluating how well your rental business is doing. Keep a folder or file cabinet or digital copies. Document all your expenses the day you make them and save your receipts. When accounting for projected income and expenses, there are very rules of thumb you can count on. You must make a hands-on judgement. The best way to figure out what a property will rent for is to actually talk to other landlords and investigate current advertisements for that neighborhood after making adjustments for renovations, location, and size of unit. Zillow Estimates are not accurate. I would subtract 10-15 percent of your income to account for vacancies.

For expenses, the mortgage, property taxes, and insurance should be simple to account for. The most important thing that landlords fail to account for are the depreciation and big-ticket expenses. I make a sheet to estimate my long-term costs. Roof every 25 years. A/C every 15 years. Appliances-10 years. Exterior painting- 5 years. Carpets-5 years. And so on.

10. Knowing your state's landlord-tenant' law backwards and forward.- My state publishes this guide. http://www.dca.ca.gov/publications/land ... tenant.pdf Yours may or may not. I've read this more than once and keep myself updated on any changes to Landlord-Tenant laws. Your state may have certain limitations/requirements on security deposits, application fees, rent increases, compensating tenants for uninhabitable units, what you can deduct from security deposits, and so on. Read up on this. 'I didn't know" is not an excuse.

11. Dealing with Stress- I've had to evict a tenant and one time after the same tenant did not pay rent for two months. One bad tenant can really make things difficult, see no. 6 again for why screening is so important. That same tenant also sued me. Would this stress you out to an unreasonable degree? Possibly having to work within the legal system is a reality of landlording.

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.

13. Minimizing Vacancies- Remember costs matter, just like in any investing. I like to show the unit while it is still occupied by the departing tenant so I can ideally have 0-1 week vacancy. Vacancies cost money, and should be as short as possible. It's good to check out the unit after they have given their 30-day notice, so you see what needs to be fixed or repaired in advance of the tenant vacating.

14. Long-Distance Landlording or using a Property Manager- I strongly disagree with this, I consider 4-7 of my list non-negotiable parts of landlording. I don't believe you can farm this out. Property management is an unregulated industry with poor consumer satisfaction. Most property managers take 8-12 percent of the gross income and use very expensive subcontractors. This goes against keeping costs down. Every landlord I know personally has regretted using property managers. If you don't have the time or attitude to manage the properties, see below....

FINAL THOUGHTS: Landlording, like any business , may not be your cup of tea. There are plenty of people who have achieved wealth and financial independence without being a landlord. I do not think it's a must-do. The best way to think about owning properties personally versus the most-common alternative (investing in REIT's) is the difference betweening owning a single stock and owning an index that represents the broad market. If you are able to find properties (or stocks) that are below market value, and manage it well, you can beat the market.

Any feedback or thoughts would be appreciated, I wouldn't mind adjusting my strategy to improve my landlording.
Last edited by denovo on Mon Sep 04, 2017 3:21 pm, edited 3 times in total.
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tibbitts
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Re: Becoming a Landlord: My Experiences

Post by tibbitts »

Knowing and finding good tradesmen/handymen- I consider this a very important part of landlording. My family has been involved in construction for a long time, which gives me an advantage.
I think that's more than half the issue right there. If you have to get ten estimates every time you need a light bulb changed and still pay retail for services and don't/can't do everything yourself (as in living elsewhere, for example), you won't succeed. So no matter the motivation I'm not sure how someone who hasn't had your background can duplicate "being in construction for a long time."
The best way to think about owning properties personally versus the most-common alternative (investing in REIT's) is the difference betweening owning a single stock and owning an index that represents the broad market. If you are able to find properties (or stocks) that are below market value, and manage it well, you can beat the market.
But it's not the same, because there's no drain in your single stock to ever plug up. And if you want to bail on your single stock, you pay maybe $0 - $10 to do that.
beezquimby
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Re: Becoming a Landlord: My Experiences

Post by beezquimby »

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.
runner540
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Re: Becoming a Landlord: My Experiences

Post by runner540 »

Thanks for sharing, denovo. This is a good thread to bookmark for the frequent inquiries tha get posted.
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cookymonster
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Re: Becoming a Landlord: My Experiences

Post by cookymonster »

Appreciate this post, de novo. I've thought about getting into this but it just sounds way too complicated, and your post is solid testimony to why.

I had a few questions though:

1) Do you document the time this takes and consider that when evaluating your returns?
2) Would you ever take a tenant who is an early retiree but can't prove they have any current income? All they might have are statements from Vanguard.
3) Do you ever accommodate pets for a fee, or do you consider that not worth the risk and hassle?
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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo »

cookymonster wrote: Sun Sep 03, 2017 5:01 pm Appreciate this post, de novo. I've thought about getting into this but it just sounds way too complicated, and your post is solid testimony to why.

I had a few questions though:
1) Do you document the time this takes and consider that when evaluating your returns?
Yes. The thing about landlording, is that it's not like a salaried job with predictable hours. Most my work comes with tenant turnover which is why try to minimize it, see #6 and #7 having handymen and subcontractors you trust to work without standing right behind them. I've learned some time-saving tricks. I will never make individual appointments to show the unit since there a lot of people who won't show up. I just create an open house for a couple hours on a weekend and let people take a look at the time.
2) Would you ever take a tenant who is an early retiree but can't prove they have any current income? All they might have are statements from Vanguard.
It hasn't come up, but I see no problem with that.
3) Do you ever accommodate pets for a fee, or do you consider that not worth the risk and hassle?
I am more concerned about dogs than cats. Am I biased because I have a cat? :D I have asked for higher security deposits for dog owners, especially with puppies who haven't been potty-trained yet. I am worried about them wrecking my floors and dog bites.

I once leased to a tenant who had a puppy and my carpet went bad after 2 years because of staining because they had problems training it. They were upset because "I let them have a dog" so they thought meant I should have to eat the costs. Fat chance.
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Carefreeap
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Re: Becoming a Landlord: My Experiences

Post by Carefreeap »

Some great guidelines. But you know this isn't what the late night gurus say about sitting back and collecting a check! :wink:

Overall my DH and I have had good luck with our rentals although there have been the occasional difficult times. Probably the worst time was returning from a three year post to Germany while evicting one 9 year tenant and simultaneously turning another unit 500 miles away who left the unit a pigsty and ruined most of the carpet throughout the 1800 sq.ft. unit. In the case of the latter, this guy was difficult from the start and in hindsight I should have been a little more patient listened to my gut and waited for someone else. It's ironic because he was a good payer but otherwise a PITA.

I don't agree with the statement that a quiet tenant is always a good tenant. One problem is that some tenants won't complain about problems because they either don't want to be a PITA or they are afraid of getting their rent raised or being accused of causing the problem. Those kinds of tenants can inadvertently allow a small problem to become a big one. One of my favorite tenants didn't tell us about an on-going problem with running large loads of laundry which backed up and flooded the laundry room. We snaked the drain once we heard about it but the real problem was that there had been a foundry defect in in the 1" waste line and over the 50 lifetime the cast iron pipe had been rusting in place to the point where the pipe had narrowed so much the head of the scoping camera couldn't fit through. The months that it took to diagnose the problem meant that all the sheet rock 4' and below and the flooring had been saturated and molded over. The new tenant moved out early because of the problem which caused additional headaches for him and me.

Craig's List doesn't work that well for higher-end properties. In 2009 when I was trying to rent out my personal residence in the Scottsdale AZ area, everyone assumed it was some kind of scam. I wound up using a local agent as a leasing agent and have continued that practice for that particular property. I find that more affluent people use real estate agents as their time is valuable and they have heard too many Craig's List horror stories especially about out of area owners.

All of my rentals have been out of area. It's definitely more of a challenge but I've got good tradespeople and that makes a big difference. I also make sure to do an annual inspection and meet with the tenant to both build the relationship and make sure the property stays in good shape.

Having a good sense of humor helps. People do the craziest things!
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Raymond
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Re: Becoming a Landlord: My Experiences

Post by Raymond »

denovo,

Thanks for the excellent primer on becoming a landlord.

While I am not suited by temperament to invest in hands-on real estate - Vanguard REIT Index Admiral (VGSLX) is more my speed - I now have a better insight into the process.
"Ritter, Tod und Teufel"
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Re: Becoming a Landlord: My Experiences

Post by knpstr »

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.
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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo »

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.
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Re: Becoming a Landlord: My Experiences

Post by JBTX »

This is an outstanding post. Thanks for sharing!

At times i think it might be nice to have some rental units to spit off some modest supplemental cash flow, especially in retirement, but for the various issues listed here I don't think it would be worth the headache for me. I am not really a DIY guy either so that doesn't help.
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Re: Becoming a Landlord: My Experiences

Post by BusterMcTaco »

denovo wrote: Sun Sep 03, 2017 3:58 pmIt's good to check out the unit after they have given their 30-day notice, so you see what needs to be fixed or repaired in advance of the tenant vacating.
More than that, in California you are required to notify a tenant of their right to such a walkthrough. If they request it, then anything you can see that you don't notify the tenant to fix, you cannot legally deduct from the security deposit.
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Re: Becoming a Landlord: My Experiences

Post by boglerdude »

Sued despite that thorough screening?

What exactly happened
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Re: Becoming a Landlord: My Experiences

Post by Slacker »

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.
It is very involved to do a Self-Directed IRA with a rental property inside. Completely not worth the trouble in my opinion.

1. You have to get a commercial loan instead of a conventional mortgage loan (so expect 35% down -> but at least you have a second set of eyes to verify your numbers are reasonable???)
2. You must keep to "arms-length transactions" such as: You cannot use any outside money to do repairs, vacancy, maintenance. All these costs must come from inside the SDIRA.
3. You now have to pay maintenance fees for your SDIRA to an SDIRA manager.
4... some other issues that I didn't like, about 3 or 4 more that get more involved and I can't quite remember at this time. Some had to do with tax treatments and such and avoiding having to pay taxes inside your IRA.
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Re: Becoming a Landlord: My Experiences

Post by bottlecap »

Great post! Very comprehensive description of what it entails.

JT
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch »

We didn't intend to be LLs but our portfolio was heavy equity.
So, I ask, How do you exit property without paying a huge CapGains?
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Re: Becoming a Landlord: My Experiences

Post by ClevrChico »

Interesting, thanks for the post.

Any idea why a landlord would convert a newer complex from rentals over to condos? Is that a sign things weren't going well? A previous landlord did this.
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Re: Becoming a Landlord: My Experiences

Post by Watty »

I've never been a landlord and never will be but there are a couple of things that you might want to consider adding to your list;

a) You need to have the right temperament to quickly evict someone even when they have a genuine hardship.

b) You need to understand the way the taxes work really well and likely get professional tax advice at least for the first few years. This is not only for your yearly taxes but also for when you eventually sell the property.
Slacker wrote: Sun Sep 03, 2017 7:32 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.
It is very involved to do a Self-Directed IRA with a rental property inside. Completely not worth the trouble in my opinion.

1. You have to get a commercial loan instead of a conventional mortgage loan (so expect 35% down -> but at least you have a second set of eyes to verify your numbers are reasonable???)
2. You must keep to "arms-length transactions" such as: You cannot use any outside money to do repairs, vacancy, maintenance. All these costs must come from inside the SDIRA.
3. You now have to pay maintenance fees for your SDIRA to an SDIRA manager.
4... some other issues that I didn't like, about 3 or 4 more that get more involved and I can't quite remember at this time. Some had to do with tax treatments and such and avoiding having to pay taxes inside your IRA.
When this has come up before a couple of other problems were;

a) If the property needs a large repair then it has to be paid out of other money in the IRA. For example if you had a rental house in Houston that was flooded all the repairs would need to be paid for out of the IRA. You would have to have a very large IRA to have enough cash to buy a house and still have additional money to handle unexpected large expenses like that.

b) You don't get the advantages of taking depreciation so the numbers may not work as well.

c) When RMDs get high you may run into a problem with not having enough other funds in the IRA to take the RMD.

d) If the IRA will be left to multiple beneficiaries, like several kids, then the house will be a problem for them since it cannot be split.
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Re: Becoming a Landlord: My Experiences

Post by westcoast »

We have had rental units for twenty years in a partnership with three other couples an have not had any real problems. We have a real estate company manage the property's for us. They take eight percent of the rents and handle everything from maintaining the properties, evictions, backgrounding tenants and market rents. Luckily one of the partners owns the management company an gave us a great deal.
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Re: Becoming a Landlord: My Experiences

Post by Chip »

Great post, denovo. I can remember violating some of your "rules" when I had my rentals and ended up paying dearly for those violations in time and money.

The worst was becoming an absentee landlord. When I bought the rentals I lived in the same small town and often did minor repair work myself. Which of course gave me an "unscripted" chance to see how the property was being treated. But then I moved away, relying on a property manager (who didn't deserve the title). When it finally came time to sell there were quite significant repairs and renovations required.
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Re: Becoming a Landlord: My Experiences

Post by carolinaman »

Denovo,
Excellent post. A good primer for those interested in becoming a landlord. I considered this before retiring but passed, mainly because I think you need a critical mass of properties for this to make sense, and I did not want to put that much money into it. Your list affirms my thinking. It requires a lot of individual knowledge and expertise. Everything you contract out, i.e. general contractor or property management, eats into your profit.

FWIW, my son oversees maintenance and repairs for 3 different property owners, mostly homes and condos but some commercial units too. When he is allowed to pick his own subs, he can generally let them work unsupervised. But when the owners require him to use their subs, often friends or family connections of the owner, he usually has to be on site to assure they do the work properly and do not overbill.
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Re: Becoming a Landlord: My Experiences

Post by msk »

Excellent post! But there is one sure way of both acquiring knowledge in the buildings trades and acquiring buildings at a 20% (or more) discount. Build your own :mrgreen: How I spent my late 20s to my 40s: Got a plot of land, built my own house using a contractor. The design phase taught me what makes a comfortable home and on-site supervision taught me about quality of tradesmen. I used the architect just to rubber stamp my design and ensure the building is sound engineering-wise. As it turned out, I got a job transfer out of the area and I ended up a LL. Used my newly-gained knowledge and built 4 apartments (half of the 8 unit block as per design) when I returned to my parent company-employer. Could not raise enough mortgage. Once the 4 units got tenants, the bank agreed to raise the mortgage to build the remaining 4. A few years later I got more ambitious and built an 18-unit block. I never did any hands-on building myself, only designing with the architects. Nice hobby, supervising the construction on daily visits, etc. Went on and built a total of 10 buildings before I gave up on being a LL. I was lucky because the local economy was booming. On various postings far away I found out the hard way that a stagnant population with a steady local economy is definitely not where you want to be a LL. Not worth the hassle. When a booming economy stabilizes, get out of renting and sell the units as condos :annoyed A rising tide raises all boats. Do not launch your LL boat into a receding tide. With the best of practices you will still not match the SP500. Like everything else to do with housing, it's location, location, location. It's unfortunately not easy to identify a location with a rising tide. Many people might say New York City, or silicon valley or London are over-priced. Really? There are people who continue making millions there as we chat. I was lucky in the sense that I had a high paying job throughout my LL sideline and made sure that at any time I could meet the monthly mortgage payments even with nil tenants. It did happen when, over a couple of months I had nil rents coming in... Make sure that where you choose to become a LL there is a rising tide!
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Re: Becoming a Landlord: My Experiences

Post by abuss368 »

Hi denovo -

Thank you very much for that well written and informative post regarding being a landlord and managing investment properties.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Becoming a Landlord: My Experiences

Post by Iorek »

Thanks for this post.

On a purely numbers-basis the worst financial decision I ever made was probably to sell my first home and not rent it out because it basically doubled in value in about 10 years, but it would have stretched us financially and we weren't interested in or prepared to be landlords, so this makes me feel better about that decision.
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Re: Becoming a Landlord: My Experiences

Post by B4Xt3r »

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!
Perkunas
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Re: Becoming a Landlord: My Experiences

Post by Perkunas »

itstoomuch wrote: Sun Sep 03, 2017 10:36 pm We didn't intend to be LLs but our portfolio was heavy equity.
So, I ask, How do you exit property without paying a huge CapGains?
That is an age-old question. I'm not a LL but a couple of somewhat common tactics are either do a like-kind exchange (trade the real estate for other real estate and defer gains) or perhaps try to move into the unit and later use the "home sale exclusion" to avoid cap gains on up to 250k (single) or 500k (joint).
Iorek
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Re: Becoming a Landlord: My Experiences

Post by Iorek »

Don't forget depreciation recapture (which technically applies so long as could have taken depreciation even if you didn't).
itstoomuch
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch »

^ aware of 1031s .
Is there a way to exit RE holdings into other investments?
Is RE a terminal investment?
:?:
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
skepticalobserver
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Re: Becoming a Landlord: My Experiences

Post by skepticalobserver »

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?
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Re: Becoming a Landlord: My Experiences

Post by CurlyDave »

itstoomuch wrote: Sun Sep 03, 2017 10:36 pm We didn't intend to be LLs but our portfolio was heavy equity.
So, I ask, How do you exit property without paying a huge CapGains?
You can do what is called "1031 exchange" into another property, or multiple properties. The rules are not that all hard to understand. Maybe get a mentor to help you through the first one.

We did this when we retired. We did this when we retired. Exchanged 3 rental houses for two four-plexes and one piece of undeveloped land which we eventually converted to personal use, and built a retirement home on. A separate 1031 exchange for each rental property.

We did the 1031 exchanges through the internet and the cost was well under 1% of the amount exchanged. On the order of $1k each from memory. We have since bought a third four-plex.

* * * * * * * * *

I run my business differently than the OP, but as he says, it is a business. Make no mistakes about that. Before we retired, we made a conscious decision to get into the business, and I deliberately chose to put my spare time into our business instead of putting in extra time at work bucking for a promotion and higher salary.

Bogleheads preach diversifying our investments, and a rental business is a way to diversify your human capital. Instead of putting it all into one job we each had a layoff-proof side job. And when we retired, it came with us through the 1031 exchanges and is now a part-time job, which stretches our retirement income.

I have no problem with using leverage, and mortgages on residential property are the best form of leverage I have ever found. All of our real estate is mortgaged, personal residence and rental properties, and I do not see it as a problem. If you keep up the payments, a mortgage can not be called even if the RE market takes a huge hit and property values drop like a rock. Rents may go down, but a poor RE market actually increases the number of renters in most areas. Low-end owners lose their houses but have to live somewhere.

With leverage, inflation is your friend. That has certainly worked out for us.

LL naysayers can tell us to look at the time we put into owning rentals, but I view that as a feature, not a bug. I can add value to my investments by putting in labor. And, that labor is not taxed before I put it in. If I ever sell the property, the added value is a long-term capital gain. Compare that to extra hours worked for an employer.

When we started out in RE, I did most of the repairs and upgrades myself. The longer I am retired, the more cash flow we have and I have started hiring out this work.

I can also put the "plugged toilet at midnight" issue to rest. It just has not happened in several decades of owning multiple rentals. If all of the units you have are at least 1.5 bath, a plugged toilet is not an emergency, it is a minor inconvenience which can wait until normal business hours.

I have never kept a separate rental property emergency fund. An EF is for sudden, unexpected events, low probability by nature. One general EF for my entire family is sufficient. Maybe add a few hundred dollars for the first rental and a hundred each for subsequent ones. I have contingency plans for move-outs, job loss, fire, etc. but there is no need for a huge EF. Instead a plan for how to access investments in a orderly fashion producing the least pain possible is better. An EF is just "dead" cash producing very little return.
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Top99%
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Re: Becoming a Landlord: My Experiences

Post by Top99% »

denovo,

Great post and a great counter to the various "make money fast" articles and books on land lording. I will stick with passive investing.
Adapt or perish
Saving$
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Re: Becoming a Landlord: My Experiences

Post by Saving$ »

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...
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Re: Becoming a Landlord: My Experiences

Post by Slacker »

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".
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch »

@curleydave.
THKS.
We have some bare land under contract. We have owned this land for 35 years so there is a lot of appreciation. The contract may not close because of intended use of buyer ( 2 - 5+ acre plots with horses). Not absolutely sure if we want another property.
So far our son has been handling the 'RE. He's in a related business and could do RE all day long if he wanted to.
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 sergeant »

OP, thanks for the detailed post. My father owned numerous rentals in my teen years and was way too cheap to hire a handyman so I learned to do everything. Countless weekends were spent making repairs instead of surfing! It is beneficial now as I do my own home repairs. I swore to never be a LL while acting as my dad's handyman but do appreciate your post.
For the ashes of his fathers, And the temples of his gods. | Pensions= 2X yearly expenses. Portfolio= 40X yearly expenses.
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Re: Becoming a Landlord: My Experiences

Post by Chip »

Saving$ wrote: Mon Sep 04, 2017 10:45 am - You will pay 25% recapture tax on all depreciation previously written off.
I see this mentioned regularly on the web. However, in reality recapture is subject to ordinary income tax rates up to a maximum of 25%.

It's very weird how it is taxed. The entire profit is treated as a capital gain for gain/loss netting purposes. Because of the way the Schedule D tax worksheet works, LT or ST losses directly offset recaptured depreciation first.

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.

Same example, but with 9,300 in other capital losses, say from TLH. Result is zero income taxes.
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Re: Becoming a Landlord: My Experiences

Post by beardsworth »

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."
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Taylor Larimore
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Re: Becoming a Landlord: My Experiences

Post by Taylor Larimore »

Any feedback or thoughts would be appreciated.
denovo:

Your opening post is outstanding and is what makes this forum the best financial forum on the internet!

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Becoming a Landlord: My Experiences

Post by Slacker »

kehyler wrote: Mon Sep 04, 2017 8:45 am 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!
No, that is not something anyone can reasonably provide a ballpark figure on.

1. Rents are very market specific.
2. We don't know if the house was purchased at wholesale or retail.
3. We don't know vacancy rates for your market and typical rental rates for your specific housing configuration.
4. We don't know the age of your house and age of systems that often need repair (roof, HVAC, water heater, carpet, appliances).
5. We don't know the financing of the home (10% down? 20% down? paid off?) to determine the monthly costs.
6. We don't know the property tax rate for the neighborhood to determine the monthly costs.
7. We don't know the typical rates in your area for basic repair (a plumber, electrician and general contractor will likely charge different rates in San Francisco vs Cincinnati).

A "rule of thumb" that some investors may follow is to expect about 50% of your collected rent to go towards expenses excluding PITI.
blue_sky
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Re: Becoming a Landlord: My Experiences

Post by blue_sky »

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.
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denovo
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Re: Becoming a Landlord: My Experiences

Post by denovo »

Taylor Larimore wrote: Mon Sep 04, 2017 2:11 pm
Any feedback or thoughts would be appreciated.
denovo:

Your opening post is outstanding and is what makes this forum the best financial forum on the internet!

Thank you and best wishes.
Taylor

Means a lot coming from you, Taylor. Thanks for creating this beautiful forum. And stay safe, it seems like an awful hurricane is headed your direction.
"Don't trust everything you read on the Internet"- Abraham Lincoln
Hulu
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Re: Becoming a Landlord: My Experiences

Post by Hulu »

Helpful and informative. Thank you. Hiring remote property managers has been helpful to me because:

1.). I can invest in better markets with better laws
2.). Saves immense time, allowing me to invest time elsewhere
3.). 7% off the top is steep but large PMs (one of mine manages 600 local units) get discounts off of services and materials to potentially offset the cost. As well offset the cost of service inferior to what a landlord would provide. Plus my units are a priority bc I'm a large client that pays attention. And the PMs service requests are prioritized bc of the volume of work that 600 units yields.

However it takes skill and experience to hire and manage effective ones. Accountability and integrity are key. No one cares as much as we do however sometimes there are bigger fish to fry.
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Re: Becoming a Landlord: My Experiences

Post by bogleboyz »

can anyone explain whats the process of transferring the title of a rental property from one's own name to an LLC.
i was told about a quit claim deed?
Has anyone had experience with this ?
Any help would be appreciated
physiorol
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Re: Becoming a Landlord: My Experiences

Post by physiorol »

CurlyDave wrote: Mon Sep 04, 2017 10:27 am I can also put the "plugged toilet at midnight" issue to rest. It just has not happened in several decades of owning multiple rentals. If all of the units you have are at least 1.5 bath, a plugged toilet is not an emergency, it is a minor inconvenience which can wait until normal business hours.
Excellent tip on two toilet properties. Never thought about it like that.
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Re: Becoming a Landlord: My Experiences

Post by itstoomuch »

Encourage the saving of trees by installing bidet seats. :D :wink: :mrgreen:
I want to try an experiment by installing bidets and see if we can raise the rents by 50. :twisted: :P
We only have two rentals. One just rented and another has 5 months to renewal.
Anyone want to participate? and report back?
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 Ostentatious »

Nice job OP
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Re: Becoming a Landlord: My Experiences

Post by clutchied »

bogleboyz wrote: Tue Sep 05, 2017 12:18 am can anyone explain whats the process of transferring the title of a rental property from one's own name to an LLC.
i was told about a quit claim deed?
Has anyone had experience with this ?
Any help would be appreciated

quitclaim works, but that assumes you have it paid off. Sometimes transferring ownership will trigger your mortgage to become due immediately.

There are also tax considerations depending on what state you live in. In CA it can cause a revaluation of property tax.

If you're planning on doing this I would consult someone because it can have pretty significant repercussions.
Hulu
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Re: Becoming a Landlord: My Experiences

Post by Hulu »

Quitclaim...depends on the state. MA just filling fees, Florida filing fees plus taxes on the mortgage amount that will cost thousands.

And sometimes dependent on your bank. If you have a mortgage and it is not held by the bank's private portfolio probably best to wait until the loan is sold. And you've made a few mortgage payments. To avoid calling the loan.
cudds
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Re: Becoming a Landlord: My Experiences

Post by cudds »

Outstanding post....

As a newish landlord myself the one point OP made that we inadvertently found ourselves: slightly lower your rent to expand your pool of applicants. A great tenant is much, much more important than an extra $100 a month.

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.
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Re: Becoming a Landlord: My Experiences

Post by Carefreeap »

physiorol wrote: Tue Sep 05, 2017 1:18 am
CurlyDave wrote: Mon Sep 04, 2017 10:27 am I can also put the "plugged toilet at midnight" issue to rest. It just has not happened in several decades of owning multiple rentals. If all of the units you have are at least 1.5 bath, a plugged toilet is not an emergency, it is a minor inconvenience which can wait until normal business hours.
Excellent tip on two toilet properties. Never thought about it like that.
Until all three stop flushing at the same time...on Sunday afternoon of Labor Day weekend. :oops: First time in 15 years that I got the emergency toilet call. Tenant called emergency plumber which dislodged clog but problem seems to be in the septic tank. Probably roots in the 30 year old system. Septic partial pump today full pump on Friday and some initial testing. There's probably a $3k septic leach line repair in my future. :annoyed
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