Why are you NOT buying rental properties?

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abuss368
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Re: Why are you NOT buying rental properties?

Post by abuss368 » Sat Jan 19, 2019 3:16 pm

Dave55 wrote:
Sat Jan 19, 2019 2:29 pm
When I was working, I was too busy to buy rentals. So I invested in RE through Limited Partnerships, in Multifamily, Office, storage, retail and development deals.

I also had a short career in commercial estate for small boutique Private Equity companies that acquired retail, office or multifamily. Even these guys I worked for with multi decades of experience made an occasional mistake that cost themselves and their investors money.

Now that I am retired, who am I to compete with people or companies that have been buying rental's for the past few decades and are experts at it? Even with my experience vetting properties from a 4 year RE career, I would venture to guess the learning curve would cost me some.

I like the passive approach to investing lifestyle too much.

Dave
Hi Dave -

Well said and thank you for sharing your experience. I feel the same and have decided to invest in Vanguard U.S. REIT Index and Vanguard International REIT Index. This has worked well.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

LeftCoast
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Re: Why are you NOT buying rental properties?

Post by LeftCoast » Sat Jan 19, 2019 4:11 pm

I've had very good results from my rental properties. For me, the most important factors were: (1) buying at low prices during the real estate recession (2010), (2) buying quality properties in coastal Los Angeles, and (3) devoting significant time to tenant selection to avoid deadbeats. I haven't had any tenants who have been abusive or destructive. I do some of the maintenance myself, and outsource the rest.

I feel that the rental properties are a good diversification from my stock and bond portfolio. I enjoy good income from the properties and they are worth substantially more than I paid for them. However, I am not buying additional properties at today's valuations -- the numbers just don't work anymore. Here in Los Angeles, my biggest fears are stronger rent control, and earthquakes.

eldinerocheapo
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Re: Why are you NOT buying rental properties?

Post by eldinerocheapo » Sat Jan 19, 2019 4:58 pm

I owned a triplex years ago, and dealing with drunks, deadbeats and drug addicts really wears you down. These people know eviction laws better than the owners. Also, try fixing a toilet after the tenant left a huge load it in it, an you'll think twice about going into RE rentals. I did it once, and would only do it again if the deal was too good to pass up. After 30 years, I've seen nothing that would entice me to invest in rental RE again.

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unclescrooge
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Re: Why are your NOT buying rental properties?

Post by unclescrooge » Sat Jan 19, 2019 5:13 pm

Yellowhouse wrote:
Wed Jan 16, 2019 6:13 pm
I've got two rentals and I've put in exactly 0 hours doing anything to them in the last 24 months. One rental is valued at a little over 100k and rents for $900/mo, the other is worth 175k and rents for $1300/mo. I owe zilch on these properties and I'm very happy with their performances.

I read many negative comments on this site relating to real estate/being a landlord, it baffles me. It's NOT difficult to buy up reasonably priced property and rent it out to tenants.
In the past 24 months, I too have done nothing on my rental properties... Other than pay for 4 months of vacancies plus $4500 in deferred maintenance/repairs on one.

In the past 12 years I've also paid 6 months vacancies, plus eviction fees, plus repairs when a nurse trashed my place after not paying rent for 6 months.

I've also spent $2500 to remove a trampoline that was cemented into the backyard.

More $$$ replacing broken screens and missing bathroom doors when tenants disappear in the night.

More $$$$ when a tree falls on the house in a storm, an HAVC, or fridge needs replacement

When I never received an annual HOA fee letter for $175 and now I owe $1175 in fee and attorney charges.

I could go on and on.

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abuss368
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Re: Why are your NOT buying rental properties?

Post by abuss368 » Sat Jan 19, 2019 5:44 pm

unclescrooge wrote:
Sat Jan 19, 2019 5:13 pm
In the past 24 months, I too have done nothing on my rental properties... Other than pay for 4 months of vacancies plus $4500 in deferred maintenance/repairs on one.

In the past 12 years I've also paid 6 months vacancies, plus eviction fees, plus repairs when a nurse trashed my place after not paying rent for 6 months.

I've also spent $2500 to remove a trampoline that was cemented into the backyard.

More $$$ replacing broken screens and missing bathroom doors when tenants disappear in the night.

More $$$$ when a tree falls on the house in a storm, an HAVC, or fridge needs replacement

When I never received an annual HOA fee letter for $175 and now I owe $1175 in fee and attorney charges.

I could go on and on.
Not fun at all. Are you planning to stay with it or are you planning to exit? Has the return been reasonable and how does it compare to low cost and diversified index funds?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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aspirit
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Re: Why are you NOT buying rental properties?

Post by aspirit » Sat Jan 19, 2019 6:16 pm

The last R.E I was considering buying and selling a couple yrs. back was in MA, about 15mi SEast of BOS in the "hills" but on main st. also, (5) buildable acres and a livable ranch structure. All for 141k.

Many I see on here succumb to R.E's nation wide outrageous asking prices.
I cannot justify it.
As we all realize R.E is a lifestyle, not an investment.
Good luck!

That property w/minor TLC is now listed @ 500k.
https://www.zillow.com/homedetails/1829 ... 5059_zpid/
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abuss368
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Re: Why are you NOT buying rental properties?

Post by abuss368 » Sat Jan 19, 2019 6:44 pm

My real estate exposure if Vanguard U.S. REIT Index and Vanguard International REIT Index. A lot of diversification and cash flows from dividends.

In addition, the goal is to eventually pay off the house. Free and clear. Someday the plan is to downsize using the paid off home and perhaps purchase a second home (maybe eventually becoming only home) in the Sunshine State: Florida.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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vitaflo
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Re: Why are you NOT buying rental properties?

Post by vitaflo » Sat Jan 19, 2019 6:52 pm

The reason I don't is because I own a home that is ~25% of my net worth. I don't need any more exposure to real estate, I have plenty already.

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unclescrooge
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Re: Why are your NOT buying rental properties?

Post by unclescrooge » Sat Jan 19, 2019 6:57 pm

abuss368 wrote:
Sat Jan 19, 2019 5:44 pm
unclescrooge wrote:
Sat Jan 19, 2019 5:13 pm
In the past 24 months, I too have done nothing on my rental properties... Other than pay for 4 months of vacancies plus $4500 in deferred maintenance/repairs on one.

In the past 12 years I've also paid 6 months vacancies, plus eviction fees, plus repairs when a nurse trashed my place after not paying rent for 6 months.

I've also spent $2500 to remove a trampoline that was cemented into the backyard.

More $$$ replacing broken screens and missing bathroom doors when tenants disappear in the night.

More $$$$ when a tree falls on the house in a storm, an HAVC, or fridge needs replacement

When I never received an annual HOA fee letter for $175 and now I owe $1175 in fee and attorney charges.

I could go on and on.
Not fun at all. Are you planning to stay with it or are you planning to exit? Has the return been reasonable and how does it compare to low cost and diversified index funds?
When I was younger, with no money and nothing to lose, I leveraged myself to my eyeballs (remember those NINJA loans?) And got paid handsomely for the risk. Of course, I bailed before the market crashed.

Since then, I'm now older, richer, have less time and less patience. I can't be bothered dealing with BS, even though investment always had property mgmt in place.

The returns without leverage are on par with stock returns.
With leverage, and more headache, they are higher.

The allure of owning tangible property is high for many people. It's a sexy story, something to brag about at cocktail parties, but actual returns can be elusive... But my friends keep asking me to put together a deal for them.

I might syndicate a deal, but only to charge fees, not because I think it's a good investment. The time to get into real estate was 2011-2014.

stoptothink
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Re: Why are you NOT buying rental properties?

Post by stoptothink » Sat Jan 19, 2019 7:16 pm

Wricha wrote:
Sat Jan 19, 2019 2:20 pm
stoptothink wrote:
Sat Jan 19, 2019 1:26 pm
I've had a neighbor, who is an electrician, at my home all morning trying to figure out why 3 of my upstairs lights won't work. Our home was built in 2014 and the electrical is, according to him, a trainwreck; it's been 4 hrs and he still can't figure it out, but he's found all kinds of issues. I don't even want to know how much this would cost if we didn't have a friend...he (semi)jokingly said this is why he chooses to rent. Just my daily reminder as to why I have no interest in being a landlord.
Let me get this right. You made your real estate decision (not to get involved) based on an Electrican who can’t get 3 lights to work after 4 hours?
That is quite a stretch. The hassle of home maintenance was simply a reminder of how much a PITA being a landlord could be. It is one thing when it is your residence, when it is a home that someone else is living in (and likely not taking care of); I can't even imagine how frustrating that could be.

FWIW, we are going to have to rip open the walls to get the problem solved and we aren't sure what kind of issues we'll find when we do that. Just based upon what we saw this morning, our neighbor is blown away the electrical passed building inspection - remember, this is a home built in 2014. Having rentals is good, until it isn't. All it takes is one bad tenant or one major maintenance issue. Of everybody I know that has rentals, all have had one of those bad tenants or major maintenance issue which negated the profit. Not worth the risk, to me.

Yellowhouse
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Re: Why are your NOT buying rental properties?

Post by Yellowhouse » Sun Jan 20, 2019 9:54 pm

unclescrooge wrote:
Sat Jan 19, 2019 5:13 pm
Yellowhouse wrote:
Wed Jan 16, 2019 6:13 pm
I've got two rentals and I've put in exactly 0 hours doing anything to them in the last 24 months. One rental is valued at a little over 100k and rents for $900/mo, the other is worth 175k and rents for $1300/mo. I owe zilch on these properties and I'm very happy with their performances.

I read many negative comments on this site relating to real estate/being a landlord, it baffles me. It's NOT difficult to buy up reasonably priced property and rent it out to tenants.
In the past 24 months, I too have done nothing on my rental properties... Other than pay for 4 months of vacancies plus $4500 in deferred maintenance/repairs on one.

In the past 12 years I've also paid 6 months vacancies, plus eviction fees, plus repairs when a nurse trashed my place after not paying rent for 6 months.

I've also spent $2500 to remove a trampoline that was cemented into the backyard.

More $$$ replacing broken screens and missing bathroom doors when tenants disappear in the night.

More $$$$ when a tree falls on the house in a storm, an HAVC, or fridge needs replacement

When I never received an annual HOA fee letter for $175 and now I owe $1175 in fee and attorney charges.

I could go on and on.
Your second to last sentence I have no clue what you are saying...your other issues are common in the rental ballgame.

To counter your horror, I've currently got a renter who I've had in place for 4+ years and he pays his rent a day early!! He will probably live in that house for another 2-3 years.

Screen, screen, screen...I've had a bad experience but I blame it more on myself because I knew better than to move this couple in, and it was my first time playing landlord.

Pu239
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Re: Why are you NOT buying rental properties?

Post by Pu239 » Sun Jan 20, 2019 10:52 pm

Why not a rental property? Because we want to enjoy our retirement. Been there, done that incidentally and profitably related to a couple 1-3 year temporary work assignments...no reason to take on the extra risk.

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rocket354
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Re: Why are you NOT buying rental properties?

Post by rocket354 » Mon Jan 21, 2019 12:48 am

I guess given the title of this thread, it shouldn't be a surprise that people are piling on real estate investment. Much like any other area of life, people focus on the negatives. There are awful tenants out there (and awful landlords!) but I think the stories of druggies and trashed houses are probably a lot more common in the, er, lower-priced neighborhoods.

I've been a landlord for 10 years. I currently have three rentals. In those 10 years I've had:

1) 0 days vacancy
2) 1 eviction--very early on, 9 year ago now. This taught me to screen, screen screen; I hadn't even done a background check on the guy
3) 1 tenant stop paying rent (see #2; missed on one month's rent)
4) Other than the above, I've had 2 late payments. For both I got notified in advance (the tenant's job had some payroll issue where some people's pay was delayed over a month due to processing errors; I saw full documentation).

My houses so far have been treated just fine with only minimal issues (the same guy as #2/3 has caused about 98% of the damage, monetarily speaking, to my properties over my landlord life, and it was less than $1k). The rents cover PITI, maintenance/repairs both short-term work and long-term allocations, HOA, and on top of that provide cash flow. The properties are in nice neighborhoods and they attract good tenants, as long as I'm careful to screen. Turnover for a property usually takes about two weeks of fairly regular phone calls. Two of the properties are currently in the middle of three-year leases. I've done less than $500 of repairs on my properties combed over the last year which was the result of one phone call and one email from tenants at normal hours, and took < 15 mins of my time each to manage. That is very typical in terms of calls/emails/repair expenditures for one year. I've been receiving automated rent on time, like clockwork, for 5+ years now. My returns have done better than the market for the same money over the same time period.

I'm not an expert or professional (I have a full-time day job) and I have nothing to sell anyone. I just want to add a little counterbalance to the anecdotal horror stories of friends-of-friends who rented to deadbeats and so forth. If you find good properties in good neighborhoods you can, with a little work, find good tenants, maintain low vacancy, low repair costs, and profitable rents, and get a better return than the market. If that extra work and knowledge accumulation is worth it is up to you. I completely understand people who like their passive returns--in fact, over half my portfolio is in index funds. But I also I like my semi-passive larger returns I get with real estate.

SuzBanyan
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Re: Why are you NOT buying rental properties?

Post by SuzBanyan » Mon Jan 21, 2019 9:49 am

Now that the IRS has confirmed that REIT mutual funds are entitled to the 20% deduction under Secion 199A but has proposed that directly owned real estate is entitled to such deduction under a safer harbor only if 250 hours per year are spent in connection with operating the propert(y/ies), REITs may be an even better option for real estate exposure. Obviously, 250 hours per year — even if it doesn’t have to be performed personally by the taxpayer — is a lot for the owner of only a few rentals. The proposed safe harbor is here: https://www.irs.gov/pub/irs-drop/n-19-07.pdf

david99
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Re: Why are you NOT buying rental properties?

Post by david99 » Mon Jan 21, 2019 10:23 am

I had rental properties for about seven years. The first property practically doubled in price in about two years. The second property was sold for about what I paid for it. If I had hung on to it for many years, I'm sure that I would have done very well. It's definitely a second job to own investment property. You have to meet tenants and screen them. If something breaks you have to meet the plumber, electrician, roofer, etc. or try to fix it yourself. I had a tenant call me at night because the furnace wasn't working and I to go over there. You can hire a property manager but that is going to cut into your profits plus a property manager won't care about the property the way you will. I'll take the returns that I get from my index funds.

I think that if you have the right personality and the right management strategies you could do well with rental properties. And I think that you could probably do better than index funds if you invest in the right locations.

EddyB
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Re: Why are you NOT buying rental properties?

Post by EddyB » Mon Jan 21, 2019 10:59 am

SuzBanyan wrote:
Mon Jan 21, 2019 9:49 am
Now that the IRS has confirmed that REIT mutual funds are entitled to the 20% deduction under Secion 199A but has proposed that directly owned real estate is entitled to such deduction under a safer harbor only if 250 hours per year are spent in connection with operating the propert(y/ies), REITs may be an even better option for real estate exposure. Obviously, 250 hours per year — even if it doesn’t have to be performed personally by the taxpayer — is a lot for the owner of only a few rentals. The proposed safe harbor is here: https://www.irs.gov/pub/irs-drop/n-19-07.pdf
They couldn’t give guidance on the issue when the question was whether landlords needed to file 1099s for payments to service providers, etc., but they’re pretty quick when they can use guidance to spook landlords about claiming a benefit.

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unclescrooge
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Re: Why are your NOT buying rental properties?

Post by unclescrooge » Mon Jan 21, 2019 11:08 am

Yellowhouse wrote:
Sun Jan 20, 2019 9:54 pm
unclescrooge wrote:
Sat Jan 19, 2019 5:13 pm
Yellowhouse wrote:
Wed Jan 16, 2019 6:13 pm
I've got two rentals and I've put in exactly 0 hours doing anything to them in the last 24 months. One rental is valued at a little over 100k and rents for $900/mo, the other is worth 175k and rents for $1300/mo. I owe zilch on these properties and I'm very happy with their performances.

I read many negative comments on this site relating to real estate/being a landlord, it baffles me. It's NOT difficult to buy up reasonably priced property and rent it out to tenants.
In the past 24 months, I too have done nothing on my rental properties... Other than pay for 4 months of vacancies plus $4500 in deferred maintenance/repairs on one.

In the past 12 years I've also paid 6 months vacancies, plus eviction fees, plus repairs when a nurse trashed my place after not paying rent for 6 months.

I've also spent $2500 to remove a trampoline that was cemented into the backyard.

More $$$ replacing broken screens and missing bathroom doors when tenants disappear in the night.

More $$$$ when a tree falls on the house in a storm, an HAVC, or fridge needs replacement

When I never received an annual HOA fee letter for $175 and now I owe $1175 in fee and attorney charges.

I could go on and on.
Your second to last sentence I have no clue what you are saying...your other issues are common in the rental ballgame.

To counter your horror, I've currently got a renter who I've had in place for 4+ years and he pays his rent a day early!! He will probably live in that house for another 2-3 years.

Screen, screen, screen...I've had a bad experience but I blame it more on myself because I knew better than to move this couple in, and it was my first time playing landlord.
Sorry I should've explained better.

I didn't get a letter for the HOA dues. That didn't just go to collections, but became a lien on the property and the I had to pay the lawyer nearly 10x the original amount to remove it.

lostdog
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Re: Why are you NOT buying rental properties?

Post by lostdog » Mon Jan 21, 2019 11:31 am

How about storage units?

https://money.usnews.com/money/blogs/th ... lternative

"A "safe" investment. For individual investors looking for an alternative to being a landlord, self-storage is considered a relatively safe real estate asset type with many positive characteristics.

Chief among them is the fact that self-storage is basically the monthly rental of various-sized interior spaces made up of steel walls and a concrete floor – nothing more. Once a renter vacates, the owner or manager can just blow out the space and rent it out again. If the lessee doesn't pay the rent and doesn't move out, the contents can be seized under the state's lien laws and auctioned off, with the proceeds going to the owner of the facility.

"For the small investor, it's a safe investment," says Mark Helm, a self-storage investor, author and coach based in Louisville, Kentucky. "It's the asset class with the lowest foreclosure rates."

Long-time investor and coach Scott Meyers, who is based in Fishers, Indiana, switched from single-family homes and apartments to self-storage for several reasons: ease of financing, overall profitability potential and opportunity to increase cash flow and value."
I don't invest looking in the rear view mirror and I know absolutely nothing about the future. I invest in Vanguard Total World Stock Index.

musselpoint
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Re: Why are you NOT buying rental properties?

Post by musselpoint » Mon Jan 21, 2019 11:47 am

LeftCoast wrote:
Sat Jan 19, 2019 4:11 pm
I've had very good results from my rental properties. For me, the most important factors were: (1) buying at low prices during the real estate recession (2010), (2) buying quality properties in coastal Los Angeles, and (3) devoting significant time to tenant selection to avoid deadbeats. I haven't had any tenants who have been abusive or destructive. I do some of the maintenance myself, and outsource the rest.

I feel that the rental properties are a good diversification from my stock and bond portfolio. I enjoy good income from the properties and they are worth substantially more than I paid for them. However, I am not buying additional properties at today's valuations -- the numbers just don't work anymore. Here in Los Angeles, my biggest fears are stronger rent control, and earthquakes.
Very similar experience here, only in a mid-COLA. Screening is absolutely key, and I deliberately keep my rents on the fair side of competitive to be able to pick and choose & encourage longer tenancies. I am very responsive to tenants' needs (things seem to disproportionately break during holiday periods) and I keep the properties sensibly upgraded. I have replaced 3 roofs and significantly upgraded HVAC on 2 properties in the last 5 years - it adds up.

Depreciation is a great benefit. My 'golden handcuffs' in a few years time when I'll be traveling more and wanting to be less hands-on is cashflow. I run the numbers on equity vs a 3.5% SWR and it's getting closer all the time. I won't be sorry to sell, and am unlikely to buy more in the current market - ROI is just not there. A 1031 into a nice vacation property in Taos could be a plan, though!

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wander
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Re: Why are you NOT buying rental properties?

Post by wander » Mon Jan 21, 2019 11:54 am

I admire people making money by real estates. It's just not my type. For me, the reason is simply the Bogle's way of investing is already a proven method to steady and firmly build a secured financial life for my family. Although the method is slow but it is a sure way so there is no need for me to be adventurous in the field that I am not comfortable with.
However, if I start investing late in life and am behind on retirement investing, I may consider to become a landlord.

mav12
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Re: Why are you NOT buying rental properties?

Post by mav12 » Mon Apr 22, 2019 9:55 pm

musselpoint wrote:
Mon Jan 21, 2019 11:47 am

Depreciation is a great benefit. My 'golden handcuffs' in a few years time when I'll be traveling more and wanting to be less hands-on is cashflow. I run the numbers on equity vs a 3.5% SWR and it's getting closer all the time. I won't be sorry to sell, and am unlikely to buy more in the current market - ROI is just not there. A 1031 into a nice vacation property in Taos could be a plan, though!
Curious, how do you run the numbers? Equity being the selling price? And you compare it against the withdrawal rate ? When would you say that it's unprofitable to you , monthly revenue vs expenses ?

fareastwarriors
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Re: Why are you NOT buying rental properties?

Post by fareastwarriors » Mon Apr 22, 2019 10:57 pm

I am buying but just buying too slow. I'm in the SF bay area. :moneybag

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beyou
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Re: Why are you NOT buying rental properties?

Post by beyou » Tue Apr 23, 2019 10:25 am

I was forced into being a landlord during an economic downturn years ago.
Needed to move, couldn't sell so I rented.
Terrible experience, never want to deal with renters again.
People can be so irresponsible, selfish, demanding, I just can't deal with that.
Things went poorly enough I finally decided to just sell at a loss to avoid being a landlord.

Also DW is an attorney. She has done lots of landlord-tenant work in the past.
Depending where you live, the courts are biased for or against tenants.
Very liberal leaning areas, tenants can get away with non-payment for extended periods of time.
In conservative leaning areas, the judge will help you get a bad tenant out, but the tenants often trash the place in anger.
No winning either way.

Lee_WSP
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Re: Why are you NOT buying rental properties?

Post by Lee_WSP » Tue Apr 23, 2019 10:44 am

What happens if the property is vacant for 6 months? I'd have to have a 12 month mortgage emergency account on top of everything else? Not owning the underlying asset in full means it's not yet mine. Seems like a lot of risk to me.

surfstar
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Re: Why are you NOT buying rental properties?

Post by surfstar » Tue Apr 23, 2019 11:15 am

Why are you NOT buying rental properties?
This is why:
"In Santa Barbara there were a total of 75 sales in March 2019. The median sales price of the 54 House/PUD sales was $1,210,000 and the average sales price was $1,432,750."
https://www.stantabler.com/market-trends/

Try making those numbers work.

rascott
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Re: Why are you NOT buying rental properties?

Post by rascott » Tue Apr 23, 2019 12:06 pm

I've been in the RE investing space since 2004, on the side, with single family rentals. I've done pretty well, but it is side business, not passive income whatsoever.

You make money in RE when you buy. You've got to find a DEAL or it's just not worth it. All of my purchases have been foreclosures....and most were during the downturn. I also manage the property myself, but hire out all repairs, etc... My only time invested at this point is doing lease-ups and managing contractors.

Aggressive tenant screening is a must. It took me several years to fine-tune my screening process. In 15 years I've never had an eviction, and never had a property trashed (knock on wood). I deny a lot of applicants.

I also live in a metro area that has very affordable housing, but is appreciating nicely (5-7% per year, last 7-8 years). Getting through 2006-2011 was rough on paper (of course so was my 401k), but wasn't an issue at all in operation. Actually was easier than now in many ways, as the tenant pool was much larger.


Basically one needs to find a crappy house in a good area, fix it up, and force the appreciation. As a landlord you can pay a bit more than the straight up fix-flip rehabbers, and still make it work well. Most of my homes were bought in the $50-$70k range, needed $10-$20k to get rent ready, and rent for $1000-1100/mo....and are all worth in the $125k-175k range now. I'd estimate my overall return on cash invested at 18-20%, conservatively. Some are much higher than that. I used leverage on all off them, with 20-25% down payments.

It helps that I love RE, like the process of renovating homes, etc...dealing with tenants, repairs, big bills (2 new roofs in the last few months) sucks, but it is part of it. I even got my RE license and do so brokering on the side here or there.

I got my friend into the business back during the recession and he went full blast and has about 12 properties now. His net worth has gone from about 150k to over $1m....and his cash flow is roughly half his job salary. But he grinds at it.

Deals are much, much harder to find today compared to even a few years ago. I haven't bought anything since 2015....and have seriously considered selling them all off in coming years, if the market stays strong. I'll likely do more rehab on each of them before retail selling them to max the possible return.

Bottom line....you can do very well with them. But it's basically all about finding a great deal on the buy. It's also a people management business....you need to be good with managing both contractors and tenants. They will both eat a newbie's lunch if you are weak.

H-Town
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Re: Why are you NOT buying rental properties?

Post by H-Town » Tue Apr 23, 2019 12:14 pm

tomtoms wrote:
Wed Jan 16, 2019 2:28 pm
Here are two scenarios (I am simplifying them to make a point on leverage):

(1) Put $80 k in RE ETF. Let’s assume you make 8% per year (after fees). After 9 years, your money would double to $160 k and after 18 years, your money would double again to $320 k.

(2) Put $80 k (20% down payment) on $400 k house. Lets assume a modest 4% appreciation per year and your tenants pay for all expenses (mortgage, property tax, fixes, property manager, etc). After 18 years, the house would double to $800 k.

So $800 k vs. $320 k. That is a big difference!
On (2): you have a big assumption that a generous person would pay all expenses for you for 18 years. Are they that brainwashed to make you $800k richer with just $80k cash outlay? Come back to reality...

greenflamingo
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Re: Why are you NOT buying rental properties?

Post by greenflamingo » Tue Apr 23, 2019 12:16 pm

Deals are much, much harder to find today compared to even a few years ago. I haven't bought anything since 2015....and have seriously considered selling them all off in coming years, if the market stays strong. I'll likely do more rehab on each of them before retail selling them to max the possible return.
This is why I'm not in the game. Four years ago I wasn't financially ready, nor did I have the bandwidth to do the work. Now I'd be comfortable doing it, but I have no interest in getting into the game in such a hot market, in my city in particular. If prices cratered again I think I'd look at it closely, but as I run the numbers now, I'm not sure I can do better than market indices.

But as other have said, you have to see it as a job/side hustle; it's not passive. And with any side hustle, you use slightly different principles than the Boglehead passive investment approach. It's more akin to starting a small business than pumping money into index funds.

rascott
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Re: Why are you NOT buying rental properties?

Post by rascott » Tue Apr 23, 2019 12:26 pm

greenflamingo wrote:
Tue Apr 23, 2019 12:16 pm
Deals are much, much harder to find today compared to even a few years ago. I haven't bought anything since 2015....and have seriously considered selling them all off in coming years, if the market stays strong. I'll likely do more rehab on each of them before retail selling them to max the possible return.
This is why I'm not in the game. Four years ago I wasn't financially ready, nor did I have the bandwidth to do the work. Now I'd be comfortable doing it, but I have no interest in getting into the game in such a hot market, in my city in particular. If prices cratered again I think I'd look at it closely, but as I run the numbers now, I'm not sure I can do better than market indices.

But as other have said, you have to see it as a job/side hustle; it's not passive. And with any side hustle, you use slightly different principles than the Boglehead passive investment approach. It's more akin to starting a small business than pumping money into index funds.

Yes.... It's a small business you are running.

No way in heck would I do it for returns that are only a few points higher than the stock market averages. It's gotta be like double them to justify the PITA factor. You also really need to LIKE the business.... not just look at it from a numbers perspective only. It's a great wealth building tool if used appropriately.

I want at bare minimum 1% of my all-in purchase in monthly rent. I prefer higher. So OP would need to get like $4k/month from a tenant in his scenario. In my experience, that ain't happening.

phxjcc
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Re: Why are you NOT buying rental properties?

Post by phxjcc » Tue Apr 23, 2019 12:35 pm

rascott wrote:
Tue Apr 23, 2019 12:06 pm
I've been in the RE investing space since 2004, on the side, with single family rentals. I've done pretty well, but it is side business, not passive income whatsoever.

You make money in RE when you buy. You've got to find a DEAL or it's just not worth it. All of my purchases have been foreclosures....and most were during the downturn. I also manage the property myself, but hire out all repairs, etc... My only time invested at this point is doing lease-ups and managing contractors.

Aggressive tenant screening is a must. It took me several years to fine-tune my screening process. In 15 years I've never had an eviction, and never had a property trashed (knock on wood). I deny a lot of applicants.

I also live in a metro area that has very affordable housing, but is appreciating nicely (5-7% per year, last 7-8 years). Getting through 2006-2011 was rough on paper (of course so was my 401k), but wasn't an issue at all in operation. Actually was easier than now in many ways, as the tenant pool was much larger.


Basically one needs to find a crappy house in a good area, fix it up, and force the appreciation. As a landlord you can pay a bit more than the straight up fix-flip rehabbers, and still make it work well. Most of my homes were bought in the $50-$70k range, needed $10-$20k to get rent ready, and rent for $1000-1100/mo....and are all worth in the $125k-175k range now. I'd estimate my overall return on cash invested at 18-20%, conservatively. Some are much higher than that. I used leverage on all off them, with 20-25% down payments.

It helps that I love RE, like the process of renovating homes, etc...dealing with tenants, repairs, big bills (2 new roofs in the last few months) sucks, but it is part of it. I even got my RE license and do so brokering on the side here or there.

I got my friend into the business back during the recession and he went full blast and has about 12 properties now. His net worth has gone from about 150k to over $1m....and his cash flow is roughly half his job salary. But he grinds at it.

Deals are much, much harder to find today compared to even a few years ago. I haven't bought anything since 2015....and have seriously considered selling them all off in coming years, if the market stays strong. I'll likely do more rehab on each of them before retail selling them to max the possible return.

Bottom line....you can do very well with them. But it's basically all about finding a great deal on the buy. It's also a people management business....you need to be good with managing both contractors and tenants. They will both eat a newbie's lunch if you are weak.
Best response so far.

I like it, make money doing it.

It IS my golf.

Glockenspiel
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Re: Why are you NOT buying rental properties?

Post by Glockenspiel » Tue Apr 23, 2019 12:36 pm

I used to think buying a rental property would be a good idea. Then, I got wise and realized I can just invest in the stock market and earn that money with literally zero work. After having kids, I'd have zero time to manage it anyway, so I think I'll stick with investing my money in the markets.

Presintense
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Re: Why are you NOT buying rental properties?

Post by Presintense » Tue Apr 23, 2019 12:44 pm

1. I hate house hunting.
2. Housing prices are at a high where I live limiting my potential to make money.
3. I can’t imagine the headache it would be to have a tenant like I was.
4. Friends and family members who have been or are landlords put a ton of effort into it.
5. It sounds like such a great , and horrible way to make money all at the same time.
6. There are enough landlords and flippers without me.
Performance = Potential - Distraction

TomCat96
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Re: Why are you NOT buying rental properties?

Post by TomCat96 » Tue Apr 23, 2019 1:18 pm

tomtoms wrote:
Wed Jan 16, 2019 2:28 pm
I am only starting this thread because I was turned off to buying rental properties when I first started to read this forum. I now own several rental properties. Not only it is easier than I had
expected, but I am also making a lot more money. I have a property manager who has been taking good care of the properties. So, I have to ask..if you are willing to hustle and you have the money, why are you not buying rental properties?

Yes, you can buy RE ETF but that is like buying S&P 500. There is no leverage. Leverage is what makes RE investing special but of course leverage is great on the way up but painful on the way down so you have to know what you are doing.

Here are two scenarios (I am simplifying them to make a point on leverage):

(1) Put $80 k in RE ETF. Let’s assume you make 8% per year (after fees). After 9 years, your money would double to $160 k and after 18 years, your money would double again to $320 k.

(2) Put $80 k (20% down payment) on $400 k house. Lets assume a modest 4% appreciation per year and your tenants pay for all expenses (mortgage, property tax, fixes, property manager, etc). After 18 years, the house would double to $800 k.

So $800 k vs. $320 k. That is a big difference! Of course there is nothing wrong with putting money into RE ETF earning 8% per year and cash out when you are 65 like everybody else. But, if you want to be wealthy at a young age, you have to start a business or buy rental properties. For me...I am doing both. I am not trying to impress you but just to let you know where I am coming from. I also have a high paying job so I am flushed with cash. I am using money from my job, business to buy more rental properties. I have stopped buying stocks besides maxing out my 401 k, SEP-IRA, HSA which is already a lot.

I am not saying your average joe can do real estate investing. But, I think if you have the money (high income, low debt) and you are street smart, you can make a lot money in real estate.

Really great post. Thanks!
I want to say however that my model came out on the other side. There's some good points to that because it implies that your argument is really based on your assumptions. I created a spreadsheet model very similar to yours that essentially came out like this:

1) 10% growth rate of stocks per year. (Based on VFINX, 10.98% per year since '76)
2) 2-3% growth rate long term of properties per year. (less than 3% continuous)
3) .5-1% of the house price per year paid for maintenance.
4) Rent based on market rates in my area, not an assumption that it will cover everything.
5) To the extent that RENT doesnt cover all expenses, such payments invested as dollar cost averaging in the Stock scenario for comparison.

Under those assumptions, stocks overwhelmingly trounced real estate.
In addition, here's what I found.

Real Estate investors who have found great success such as yourself almost always found such success early on--the 20% appreciation the first and second years, for example. Properties in my area appreciated 30% in 2007, and then proceeded to stagnate for more than a decade afterwards.

In that case, at the 2 year mark, or even 5 year mark, the real estate people heavily beat the stock people.
Why is that not the full story? Because real estate doesn't grow 20% a year, or even 4% a year. A modest real estate growth would be 2-3% a year. Furthermore, at the 2 year mark or 5 year mark, you really haven't begun to pay maintenance yet. Why?

Older houses simply cost more to maintain. Polling a bunch of bogleheads here, the general consensus was that maintenance costs between .5-1% a year with such expenses being, no surprise, weighted more heavily towards the properties as they got older. Those maintenance costs cut directly against the growth of the property value.

At this point the equation became

Growth in Property Value per year - HOA fees - Maintenance Costs - Property Tax + Rent vs Stock(s)

In my model, the question asked where would you be after 30 years? Because the long term trend of properties is to grow with inflation rather than beat inflation, stocks after a long period do beat out properties.

ERguy101
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Re: Why are you NOT buying rental properties?

Post by ERguy101 » Tue Apr 23, 2019 2:10 pm

JBTX wrote:
Wed Jan 16, 2019 11:11 pm
I've toyed with the idea, although not very seriously. It would be nice to have a supplemental cash flow stream. I don't mind putting in some effort, but I am not at all a DIY handyman type, and I would not have patience with deadbeats who fail to pay rent or trash the place.

I have friend, a finance guy, similar age and background as I, and he invested in a beach condo some years back. Did all the research, figured out how to best market it on the applicable website(it is a daily/weekly rental), got the rental data, etc. He does all the rental transactions, but he has external cleaning and maintenance. Last I talked to him, I think he was clearing $10K to $20K a year, and he and his wife put in a few hours a week on rental scheduling/inquiries, and maybe 2 trips a year for a couple of days for upkeep.

Given the way he went about it, I suspect he is doing better than most people renting comparable units. While that seems like a success, I asked him about it and he was tiring of it, and irritated by the occasional customer that gave a bad review for insignificant stuff. He looked forward to the day he got rid of it. He could have had a management company run it, but that would have eaten all of his incremental cash flow.

So for me, I don't think those headaches would be worth $10K to $20K per year, at best. Perhaps I'll pursue it in the future when I'm not working, but I doubt it.
This was my experience with a short term, vacation rental. It was a beach house, and I could profit (after utilities, mortgage, etc) about $1000-$1500 per month from the single property. But it was a pain, the renters were headaches, and it was an hour away so I had to drive out there often. I would have hired a vacation rental company to manage but there were none remotely in the area. I sold it, made a few thousand, couldn't be happier.

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Harry Livermore
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Re: Why are you NOT buying rental properties?

Post by Harry Livermore » Tue Apr 23, 2019 4:27 pm

It's not for everyone, and it's not passive.
In addition to a wide spectrum of equity investments, where the vast majority of our money is parked, my wife and I own two rental properties. One is a seasonal vacation property that is managed by the development's HOA. All reservations, repairs, complaints, and accounting is handled by them. ROI is 7%, NET of the management fees, and before expenses, which probably lop off another 1%-2%. Stellar? No, but it's not directly correlated to the market either, and it's as close to "push-a-button" as physically owning property gets. Our other property is a small single family home that we renovated in 2002, which was our former residence. It is 5 minutes from our new primary residence. It's in a desirable commuter town outside New York City, a town that attracts quality professional types. Our property seems to fit those in transition; folks being transferred by a company to the area, folks downsizing as they enter retirement, or folks moving out from the city. The price point keeps out the most troublesome type of applicants. These are professional people, some of whom have AGI far above ours. They don't want their FICO or rental history dinged, so they generally behave. A $5M umbrella policy and a strict lease helps protect us. A few texts or emails per month, the occasional repair, and a top-to-bottom refresh (paint etc.) every time we turn over (4 times in 8 years) has been our experience so far. ROI is a little over 7%, gross. Yes, we still have a mortgage and other expenses. So in dollar amounts it's not a lot of net income, but since we don't need the income to carry the property, all of it goes into our kids' college funds. So from my point of view, my three kids will get a free college education paid for by the income on that property. And with depreciation, expenses, etc. factored in to offset the income, it's tax-free. A home run. 3 years, 6 months to go on the mortgage.
No, it's not passive, but "shades of grey". You have to like people, or at least like interacting with tenants. You have to be able to keep things friendly, manage expectations, and be professional... none of which applies to a REIT. You are free to scream expletives at your computer screen at any time ;) I'm handy, and open to sweat equity. Others may not be. I may find myself at 65 years old and no longer willing to play the sweat equity game. But I'll have many options at that point. Then, like others are advocating here, REITs may be what the doctor ordered. But that requires analysis and ongoing monitoring of the management company and REIT you have chosen, the quality of which can deteriorate, and offers no tax shelter.
I think that owning real estate and investing in index funds are so totally different that it's hard to make a direct comparison. But to me, the asymmetry and cashflow is worth it.
Cheers

Steven in NC
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Re: Why are you NOT buying rental properties?

Post by Steven in NC » Tue Apr 23, 2019 7:18 pm

Wow. Are there ANY positive real estate rental stories? Seems not many.

I am at the intersection of lease/sell my current primary home as we close on a new property. We have met with two rental management companies and had our home comped out for out right sale. We own it outright so the net positive cash flow would be significant. We are in the best school district. Our home is large and the target market would be high level families moving in with a 1 year lease before they move on.

One day I am pro lease...the next day I am pro sale.

I have had rental property in the past and it was mostly positive until I had to move 800 miles away and then I quickly realized that wouldn't work.

Lextalionis
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Re: Why are you NOT buying rental properties?

Post by Lextalionis » Wed Jun 12, 2019 5:46 pm

We rented our primary residence when we moved into a new home. It worked out okay - decent renters, mostly on time, little damage. We sold and made a modest profit. Now later in life, we own several rental properties and are doing well and are planning on adding about 2 per year. Here are some thoughts some other posters mentioned or alluded to, but boiled down from our experience.

1. Renting out our first house was not a business. It was renting out our first house. There were emotional attachments, we bought it at market price, etc. The numbers on buying a primary house do not meet the numbers (typically) for buying a rental house. My advice, if you want to rent a house, double check the numbers or sell your current home that you are considering renting and buy a rental property. For us, rental properties are not sexy, they aren't near a beach, they aren't a ski lodge, etc. They are nice, modest houses for blue collar workers in a safe neighborhood to raise their kids in and affordable manner.

2. We use laddered llc's with a holding llc and have umbrella coverage. Not many folks mentioned risk management. Of course it adds cost but also piece of mind.

3. We have one specific area that we know in depth. We know the ups, downs, populace, value, neighborhoods and study them to find value. We have a relationship with a contractor who is on time and on budget. We have a PM that provides a very thorough credit check and recommendation. And we have a realtor who feeds us MLS as soon as are targets are met. We wait for the right tenant if if we have to eat rent.

4. Three types of houses come up in this market. All are in the $120k range, as you move closer to the capital city, the ranges go up to $1M plus. The first house is overpriced, remodeled and a consumer house usually for sale by a flipper. The second is a valued price low reno house with some repairs needed ($2-5k) but adds equity buffer on the upside. The third is a complete reno at auction or foreclosure and usually bought by a flipper.

We focus on the second type of house in neighborhoods in the market on the upswing. We often run into the flippers buying houses in the same neighborhood and selling at market value (first type of house), which is a lot of work and adds value to our house and neighborhood, it is just not something we can do and make money. That is a totally different model.

5. We don't count on appreciation, we only deal with the above mentioned buffer. Because of this we can only find one or two houses like this every so often and usually have to offer hours after they hit the market.

6. Not many people mentioned building equity in the calculations. This is a bonus and not considered in return and may become a liability as it approaches 100%. At full equity you lose money, but can liquidate to purchase more properties, if you are expanding but full equity you have income. Similar to stocks vs. bonds. Depends on your goals.

7. The napkin math behind the complex return is your house rents must be 1% of your purchase price. 120k has to rent for as close to $1200 as possible. There is a pain threshold in this neighborhood and $1200 is top of market. So we look for a 125k house, offer $105 and usually spend 2-5k on updates, and plan to eat 1-2 months of mortgage so approximately all in for $110-112k with $85-90k in loans and list at $1150. We list with our PM for 10% of rents and they provide marketing and a detailed report on applicants. Of course that is all in the sweet spot and we have managed 4 of these this year.

After all of this we usually gross 21% and net 12-14% and do not count appreciation or equity which grows as the amortization changes over time. Our goal is income currently, but as equity grows we may try to grow quicker. On our first house we turned away 10 applicants or so before we found a good one - who takes great care of the house, but the others have filled quicker and had good applicants early on and are families that are A or B credit who just want a nice house and yard for the kids. Two houses have depreciated about 1.5% which is still well within our negotiation margin of 15% 20% on the upside. One has appreciated considerably and is about 40% on the upside of purchase price.

If you want more free details on real estate https://www.coachcarson.com is a valuable resource on the math and neighborhood selection. Like some other posters said it does take some work, but I probably spend more time looking at my portfolio than I do worrying about my properties, I enjoy the bargain hunt, and I haven't had a meth lab yet, so there is that.

Bacchus01
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Re: Why are your NOT buying rental properties?

Post by Bacchus01 » Wed Jun 12, 2019 7:39 pm

triyoda wrote:
Sat Jan 19, 2019 2:43 pm
stocknoob4111 wrote:
Wed Jan 16, 2019 5:35 pm
MikeMak27 wrote:
Wed Jan 16, 2019 4:21 pm
Where on Earth is 4% annual appreciation modest?
Southern California - my buddy bought his home in April 2002 in South Orange County for $285,000. It's appraised now for $650,000. That's a compounding rate of 4.8%. Now, yes, he has to pay interest, property taxes, HOA and maintenance.. however he gets to live in the property as well. Current rental value for his home is around $2,500/month so it's more than a wash.

So you basically just demonstrated it would be impossible in 2019 for anyone to make a rental real estate investment in this market (buy a $650,000 home to get $2500 per month in rent).

The point being, if appreciation of rents doesn't follow buy prices (and to the extent that I understand the numbers they don't) you can't assume 4% appreciation and that rental properties are a good investment, because the 4% works if you buy at just the right time, but over the long term destroys the investment opportunity because the housing price is too high to get positive cash flow.
Exactly. A illiquid $650K asset that returns <5% gross and probably more like 3% net seems like a terrible investment to hang onto.

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Wiggums
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Re: Why are you NOT buying rental properties?

Post by Wiggums » Wed Jun 12, 2019 7:53 pm

I like passive investing and spending time with the family much more.

HawkeyePierce
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Re: Why are you NOT buying rental properties?

Post by HawkeyePierce » Wed Jun 12, 2019 8:44 pm

I used to rent a unit in a fourplex. The tenant below me destroyed the plumbing by pouring 20 gallons of used fryer oil down the sink and then disappeared shortly after.

Those are not the sort of people upon whom I want my wealth to depend.

ANZACINHK
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Re: Why are you NOT buying rental properties?

Post by ANZACINHK » Thu Jun 13, 2019 8:16 am

I find articles like this ridiculously interesting, For those that are interested below is my property gambling story:

I was extreamly lucky to start during this world asset bubble inflation, but when I started the market was flat and had been for the last 7 years so I didn't expect any capital growth. I did all purchases purely based off net cash flow.

I have always kept detailed records on everything so most of below are calculated on actual's

In my country all these houses are called home and incomes (basically a big house that has been split into 2 flats) so 1 house, 2 sets of tenants, 8 sets of tenants all together

The net cash flow (NCF) calculations are rent less interest, property management, a maintenance fund (2,500 per property per year), insurance, city taxes, accountant

The Market valuations I have below are official registered valuations done by a professional a few months ago.

House 1 (5 bed + 1 bed) bought Feb-13, deposit 59,000, PP = 590,000, Market value 1,100,000, NCF at purchase 19,356, NCF today 33,881
House 2 (4 bed + 3 bed) bought Jul-13, deposit 80,000, PP = 610,000, Market value 1,100,000, NCF at purchase 23,135, NCF today 35,936
House 3 (3 bed + 2 bed) bought Aug-14, deposit 90,000, PP = 595,000, Market value 875,000, NCF at purchase 18,284, NCF today 27,921
House 4 (3 bed + 3 bed) bought Oct-16, deposit 0, PP = 700,000, Market value 880,000 NCF at purchase 13,124, NCF today 18,147

Other things to note

- I have only seen one of these properties once, the other 3 I have never seen in person, I found a property buyer to find properties based on my criteria and he would work with my mortgage broker, lawyer and bank to arrange everything down to just me signing the documents.

- My property manager does everything, we talk maybe every quarter on any maintenance issues that comes out of my maintenance fund. He pays all the bills and I get 1 clean invoice to pay each month. I have no emotional attachment to the properties, I have never met a tenant and I am happy paying a premium for work done provided I don't need to do anything i.e. the lost money by overpaying for maintenance is worth the money, my time is much more valuable. Hell I would pay a 50% margin on everything as long as it means I spend 0 time on worrying about it.

- I live in a different country to these properties, the only real work I have to do is a days work with my accountant over the phone and some paper work signing when I move my mortgages.

- every 3 years I move all my mortgages to a different bank. The new bank will always beat the old interest rate and pay a cash incentive to do so (around 5k per property), the entire process costs around 5k in lawyers fees so some easy side income.

- I have never taken money from the properties, all net cash flow after tax goes back onto the mortgages.

- The property manager has apparently (I have never had to do anything) had to take 3 sets of tenants to the tribunal over the years, we have always had a court order for tenants to pay us the money that's owed and in one case we put a order with their employer to pay us before paying their salary.

- total untenanted time across the properties over the lifetime of them has been around 5,000 worth of lost rent.

Even if the properties go down in value I never plan on selling them, they were my long term retirement plan.

moneybeard
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Re: Why are you NOT buying rental properties?

Post by moneybeard » Thu Jun 13, 2019 8:34 am

Real estate markets can turn bad fast if you aren't in an area of continuous growth like a big city in TX or SoCal. Property values have gone down in WV, and now I am living in rural SE Ohio, and here they go up and down, but its a lot more volatile than stock markets over the long term.

cherijoh
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Re: Why are your NOT buying rental properties?

Post by cherijoh » Thu Jun 13, 2019 8:42 am

student wrote:
Wed Jan 16, 2019 4:35 pm
I am afraid of having a bad tenant. viewtopic.php?t=191039
Yeah, I remember that thread. It made my tenant horror stories look inconsequential in comparison!

cherijoh
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Re: Why are your NOT buying rental properties?

Post by cherijoh » Thu Jun 13, 2019 9:14 am

tomtoms wrote:
Wed Jan 16, 2019 4:57 pm
I get it. I have been there. But now, those “reasons” sound more like excuses to me (no disrespect).

Here are my answers:

Trashy tenants: Buy in a good neighborhood. Trashy people can’t afford to live in a good neighborhood. A good property manager should be able to screen them out (credit history, income verification, eviction history). Of course there is no guarantee but there are ways to reduce your risk.

Fixes: You need to include short and long term maintenance cost in your calculations. I don’t buy unless I get positive cash flow after expenses including long term maintenance cost and vacancy. Your property manager should handle fixes. The truth is...it is very unlikely for someone to call you at 3am on something that can handle at 8 am. Yelp is also there if you need a good handyman.

Profit: of course rental properties make more money (I didnt say primary residence). What bank is going to lend you $250 k to buy the S&P 500? Don’t get me wrong...not everyone can make money from rental properties. You need to buy them at below market value and you need to make sure the numbers make sense. Don’t even get me started on the tax benefits!

Don’t want to hustle: well, I can’t help you there. What I don’t get is...I see people working their buff off so they can make a few more bucks per hour but they are not willing to spend a few hours a week looking at houses and learning about RE?

Don’t have money: I can’t help you there. My income is high because I have a business and I also have a high paying job. This gives me a huge competitive advantage over other buyers. Coupled that with my experience and that is how I get a better deal than most people. What competitive advantage do I have when I buy the S&P 500? None whatsoever!
Here's my question - did you own this property before the housing bubble burst or did you purchase it afterwards (when prices were down).

Deadbeat does not necessarily equal "trashy". Apparently well-off individuals can also be living paycheck-to-paycheck and still have a good credit score and no prior evictions. All it takes is for the economy to head south and your tenant to lose his/her job. (Which I expect you haven't lived through yet as a landlord). The balance between tenant and landlord rights is highly dependent on local regulations. A non-paying tenant can tie you up for months, especially if you live somewhere where it is difficult to evict tenants.

Rental properties are no more guaranteed to appreciate than stocks are. What you get is a concentrated illiquid investment that you are stuck with until you can find a willing buyer. Index funds can be sold and you get access to your money within a maximum of a few days.

MotoTrojan
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Re: Why are your NOT buying rental properties?

Post by MotoTrojan » Thu Jun 13, 2019 9:16 am

onourway wrote:
Wed Jan 16, 2019 2:37 pm

While the RE market is still not as efficient as the stock and bond markets, it's still efficient enough that if the overall returns were as large as the RE zealots claim, money would pour into RE in droves from those lower returning investments. Given that these flows are generally near an equilibrium, my impression is those people speaking from decades of experience are more correct than not.
This is really the true fundamental reason. You say you have a high paying job and are flushed with cash, but I'd say it is safe to assume you have far less than hedgefunds, investment banks, etc... If this really were such a surefire way to make outsized returns then they would buy up all of these properties, driving up the cost to purchase until the risk-adjusted return made sense.

Diversification really is the only free-lunch so perhaps you have enough cash to hit a happy-medium where you are taking more risk than an equity index investor, but not so much that you could be crippled. But don't fool yourself that this is free money; market dynamics say others.

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unclescrooge
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Re: Why are you NOT buying rental properties?

Post by unclescrooge » Thu Jun 13, 2019 9:19 am

HawkeyePierce wrote:
Wed Jun 12, 2019 8:44 pm
I used to rent a unit in a fourplex. The tenant below me destroyed the plumbing by pouring 20 gallons of used fryer oil down the sink and then disappeared shortly after.

Those are not the sort of people upon whom I want my wealth to depend.
Apparently tenant vandalism is covered in landlords policy.

POLO
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Re: Why are you NOT buying rental properties?

Post by POLO » Thu Jun 13, 2019 9:27 am

Riddle me this:
The bank provides most of the money for the property. It has a clearly defined, relatively stable return on investment (for the assumption of risk).
The property management company deals with the renter and maintains the property. It generates a profit as a business.
The renter pays for these services for a place to live at a monthly price that is a fraction of what it would cost them otherwise.

What is it that you have done? What value do you add to the equation? You put some money down and signed on the dotted line? Then speculated on the future value?

Kuna_Papa_Wengi
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Re: Why are you NOT buying rental properties?

Post by Kuna_Papa_Wengi » Thu Jun 13, 2019 9:41 am

I'm currently in a similar situation in regards to us renting out our old home. My tenants are decent, but I'm not really making much money on it. It is a great learning experience. I'd like to buy another rental. I think if I plan things out better and get it for a better price, it can be profitable.

As a percentage of the rent, what are your expenses running? I try to be conservative, and estimate between 40% and 50% not counting debt service. With a $1200 rent, that only leaves me with about $200/month cash flow.
Lextalionis wrote:
Wed Jun 12, 2019 5:46 pm
We rented our primary residence when we moved into a new home. It worked out okay - decent renters, mostly on time, little damage. We sold and made a modest profit. Now later in life, we own several rental properties and are doing well and are planning on adding about 2 per year. Here are some thoughts some other posters mentioned or alluded to, but boiled down from our experience.

1. Renting out our first house was not a business. It was renting out our first house. There were emotional attachments, we bought it at market price, etc. The numbers on buying a primary house do not meet the numbers (typically) for buying a rental house. My advice, if you want to rent a house, double check the numbers or sell your current home that you are considering renting and buy a rental property. For us, rental properties are not sexy, they aren't near a beach, they aren't a ski lodge, etc. They are nice, modest houses for blue collar workers in a safe neighborhood to raise their kids in and affordable manner.

2. We use laddered llc's with a holding llc and have umbrella coverage. Not many folks mentioned risk management. Of course it adds cost but also piece of mind.

3. We have one specific area that we know in depth. We know the ups, downs, populace, value, neighborhoods and study them to find value. We have a relationship with a contractor who is on time and on budget. We have a PM that provides a very thorough credit check and recommendation. And we have a realtor who feeds us MLS as soon as are targets are met. We wait for the right tenant if if we have to eat rent.

4. Three types of houses come up in this market. All are in the $120k range, as you move closer to the capital city, the ranges go up to $1M plus. The first house is overpriced, remodeled and a consumer house usually for sale by a flipper. The second is a valued price low reno house with some repairs needed ($2-5k) but adds equity buffer on the upside. The third is a complete reno at auction or foreclosure and usually bought by a flipper.

We focus on the second type of house in neighborhoods in the market on the upswing. We often run into the flippers buying houses in the same neighborhood and selling at market value (first type of house), which is a lot of work and adds value to our house and neighborhood, it is just not something we can do and make money. That is a totally different model.

5. We don't count on appreciation, we only deal with the above mentioned buffer. Because of this we can only find one or two houses like this every so often and usually have to offer hours after they hit the market.

6. Not many people mentioned building equity in the calculations. This is a bonus and not considered in return and may become a liability as it approaches 100%. At full equity you lose money, but can liquidate to purchase more properties, if you are expanding but full equity you have income. Similar to stocks vs. bonds. Depends on your goals.

7. The napkin math behind the complex return is your house rents must be 1% of your purchase price. 120k has to rent for as close to $1200 as possible. There is a pain threshold in this neighborhood and $1200 is top of market. So we look for a 125k house, offer $105 and usually spend 2-5k on updates, and plan to eat 1-2 months of mortgage so approximately all in for $110-112k with $85-90k in loans and list at $1150. We list with our PM for 10% of rents and they provide marketing and a detailed report on applicants. Of course that is all in the sweet spot and we have managed 4 of these this year.

After all of this we usually gross 21% and net 12-14% and do not count appreciation or equity which grows as the amortization changes over time. Our goal is income currently, but as equity grows we may try to grow quicker. On our first house we turned away 10 applicants or so before we found a good one - who takes great care of the house, but the others have filled quicker and had good applicants early on and are families that are A or B credit who just want a nice house and yard for the kids. Two houses have depreciated about 1.5% which is still well within our negotiation margin of 15% 20% on the upside. One has appreciated considerably and is about 40% on the upside of purchase price.

If you want more free details on real estate https://www.coachcarson.com is a valuable resource on the math and neighborhood selection. Like some other posters said it does take some work, but I probably spend more time looking at my portfolio than I do worrying about my properties, I enjoy the bargain hunt, and I haven't had a meth lab yet, so there is that.

GCD
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Re: Why are your NOT buying rental properties?

Post by GCD » Thu Jun 13, 2019 9:59 am

cherijoh wrote:
Thu Jun 13, 2019 9:14 am
tomtoms wrote:
Wed Jan 16, 2019 4:57 pm
Trashy tenants: Buy in a good neighborhood. Trashy people can’t afford to live in a good neighborhood. A good property manager should be able to screen them out (credit history, income verification, eviction history). Of course there is no guarantee but there are ways to reduce your risk.
Deadbeat does not necessarily equal "trashy". Apparently well-off individuals can also be living paycheck-to-paycheck and still have a good credit score and no prior evictions. All it takes is for the economy to head south and your tenant to lose his/her job. (Which I expect you haven't lived through yet as a landlord). The balance between tenant and landlord rights is highly dependent on local regulations. A non-paying tenant can tie you up for months, especially if you live somewhere where it is difficult to evict tenants.
Back during the housing crash I lived in the East Bay suburbs of San Francisco. It was a nice neighborhood of, at the time, $900K+ houses. My next door neighbor was a married couple with kids. Husband was an engineer and wife was a realtor. They drove a Mercedes and an Escalade. I don't know the details, but they got foreclosed on. When they moved out they destroyed the house. They ripped every appliance out and other things like chandeliers. They even had the gall to ask me if I wanted to buy any of the appliances!

g2morrow
Posts: 57
Joined: Thu Jun 07, 2018 7:23 am

Re: Why are your NOT buying rental properties?

Post by g2morrow » Thu Jun 13, 2019 9:59 am

bloom2708 wrote:
Wed Jan 16, 2019 2:34 pm
I am not because I don't want a second job.
...
Your numbers are very (very) optimistic and make a bunch of assumptions.
.......
+1

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