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[larryc]

Do any of you own rentals or other investment property?

My wife and I are about 15 years from retirement. We have a respectable but not generous retirement income worked out, our house will be paid for by then (though maybe too big for us), we live where we want to live. My wife has been working as a educational consultant. It has been very lucrative in the past but Congress has pulled the plug on the kind of projects she worked in and that income will dry up in the next year-and-a-half. Wonderboy is flourishing in  an expensive private school that will become hard to afford at that time.

Right now we have money in the bank and an strong credit rating--I am thinking that we should take advantage of the current housing market and buy some rental properties. Browsing the real estate websites in my city I see what appear to be clean homes in decent neighborhoods that are selling at really low prices. I can buy a 3 bedroom house for $60-90k (we are in a fairly low cost of living area). A 15-year, $50,000 mortgage would run $420 a month for a home that would rent for $700-900/month.

I am thinking we buy a few houses, and have the renters pay the mortgage and maybe (depending on repairs) generate a little cash. Come retirement we sell the appreciated homes for more than we paid in the first place. Sounds like a plan. So why isn't everyone doing it?

Possibly relevant details:

• My wife to screen rental tenants and handle billing for a property management firm.
• I am pretty handy and can do most minor to medium household repairs.
• We also have handyman/contractor friends we know and trust.
• We have enough savings that we could pay for say a new furnace or other major repairs on short notice if we had to.

What am I overlooking?

[betterslac]

We are renting out our house while I am overseas. I initially had a hard time finding a renter and had to pay an agency to screen applicants and show the house when I had to leave. Dealing with that end of it might be a time suck, but at least if you do it in your city you won't have to pay the high fees agencies charge.

One downside would be those times when you don't get renters in immediately-- you would then be stuck with paying the mortgages, taxes and insurance without the extra income for several months and thereby taking a hit to your cash flow.

It also could be the case that, with depreciation, wear and tear and the condition of the housing market when you decide to sell, the prices you get may not generate a profit. But buying houses would be a way of investing money and if you do generate some profit along the way and when you sell, you would probably be ahead of where you would be if you invested in cds and other instruments that generate almost no return.

[dalekk]

Do you mind living with a constant headache?  Do you mind going a month or two without a tenant and having a net loss for the year?  

Also, low cost of living areas generally do not make for great real estate investment opportunities.  Do you have any reason to believe that your area is suddenly going to become a hot spot and experience growth?  If not, then what is going to make prices go up enough to warrant the expense and hassle?  Low cost of living areas are low cost of living for a reason: there's low demand.  Low demand = not great "investment."  

Let's also look at some math here.  Let's say you buy two houses for $150k.  Let's say they appreciate at 2.5% a year (probably best case scenario for a not particularly desirable area).  In 15 years they're worth $217k.  Let's assume you manage to break even every year of those 15 on rent versus mortgage, taxes, insurance, repairs, months without tenants, management company fees, etc.  OK.  You make a net profit of $67k.  BUT that's not counting the amount of money you're going to dump into the houses to prep them for sale, realtor fees, etc.  Realistically, you're looking at a net profit of say $50k.  Also, keep in mind that investment properties are subject to tax on capital gains, so that puts you down to $42.5 if the tax stays at 15%.  Also, keep in mind that $42.5k is in 2027 dollars, which would roughly be the equivalent today of $25-$30k.  AND that's assuming they appreciate at 2.5% a year.  In all likelihood they will be flat/down the next few years before steadily going up at 2.5% a year, if you're lucky.  So $217k in 15 years is likely the absolute best case scenario.  

$30k for 15 years of headaches doesn't seem worth it.  For your own sake, please don't do this.  If you're worried about retirement, save more.  Try to teach a summer class or something and stash the money away.  This will not end well for you.

[bacardiandlime]

I agree with the others that it's probably not worth it, having seen it from the other side. You are probably going to want to rent your properties out through an agent, and that then takes another cut out of your income.

One thing that might be better (as a lifestyle benefit in addition to financial) is buying a home somewhere more desirable, that you would like to vacation. You can then rent it out by the week during vacation periods when you're not staying there. Unlikely to be a huge moneyspinner, but in a desirable area the property is more likely to appreciate (and have demand for short-term rentals). You posted on another thread about wanting somewhere to vacation and drive your campervan....

[marigolds]

I grew up in a house one block from downtown in a downtown-desirable area (think 3 blocks from the Arch in Athens GA, and one block from Broad St.) This property would do nothing but appreciate, so when my parents moved farther out of town, they rented it out to students for beaucoups cash.

It lasted about 1 year.  My dad could not stand it another minute--tenants calling him all hours of the day and night, having to go over to do things like plunge the toilet because they didn't know how to do the teeniest thing for themselves, the annoyance of finding decent renters who wouldn't trash the place (these were mostly very rich, very entitled students)--he sold it almost immediately, and screw the property appreciation.

In other words, it's a pain in the butt to be a landlord. 

[untenured]

One friend leapt into investment properties, bought 6-12 apartment complexes, and immediately regretted it.  The tenants didn't pay.  They trashed the place.  They could not be evicted easily.  To top it off the property management company robbed them blind and my friend and his wife had to sue them.  The horrors of their misadventure consumed their lives for years.

I only know of one not unhappy landlord.  He owns two properties and charges an absurdly low rent.  We are talking substantially below market rates.  He only accepts tenants through word of mouth, and because the property is such a good deal he as a number of excellent potential tenants to choose from.  Before the tenants occupy the property, he tells them that he knows the rent is extremely low and in exchange they better leave him alone.  Don't call him when the toilet clogs.  Don't ask him to mow the lawn.  You call the electrician to fix a  broken outlet.  You take care of the place, not call me in the middle of the night for each little thing, and you'll enjoy a good property at a awesome price.

If you must do this, start with one property and see how you like it.  After a year or two purchase another if you want.  I doubt prices are going to skyrocket anytime soon.

[anon99]

Browsing the real estate websites in my city I see what appear to be clean homes in decent neighborhoods that are selling at really low prices. I can buy a 3 bedroom house for $60-90k (we are in a fairly low cost of living area). A 15-year, $50,000 mortgage would run $420 a month for a home that would rent for $700-900/month.

I am thinking we buy a few houses, and have the renters pay the mortgage and maybe (depending on repairs) generate a little cash. Come retirement we sell the appreciated homes for more than we paid in the first place. Sounds like a plan. So why isn't everyone doing it?

What am I overlooking?

I own a rental apartment.  For a house, there will be more upkeep.  Questions you need to ask are will the tenants keep up the yard, let you know if there are problems (a colleague is renting a place and has problems that are currently easy fixes (loose faucet), but over time will be a headache for her landlord, yet she doesn't tell the landlord about them-and yes it is a matter of her not telling them).  If you get a condo, there are monthly fees plus special levies, but some one else takes care of the maintenance of the common areas.  For a house you also have sewer and property taxes.  What some people here have done is buy a 3-4 bedroom house and rent the rooms to grad students.  Doing this means there is less of a chance of your house being vacant, but you may have a higher turn over.  You'd also net more money doing it this way (here people charge $500 for a furnished room so a 4 bedroom place would take in $2K but renting the house, you'd probably get $1500.  Have tenants sign leases rather than month to month.

Other headaches are people not paying the rent.

[bacardiandlime]

Ditto to Marigolds and untenured. They elaborated what I was alluding to with using an agent. Agents have the resources to do background and credit checks on potential tenants. Agents protect you from having to deal with phone calls from tenants at all hours about trivial stuff. Agents chase tenants delinquent with rent, and know how to handle evictions.
But for these services, you pay, and in a low-demand, low cost of living area, it's probably not worth it.

[infernophile]

Real Estate is a liability not an investment.

[dalekk]

Also, realize that you're going to have capital tied up in these properties.  Say you plan to buy two properties for $150k.  If you put 20% down, or $30k, then that's capital that you can't invest in higher returning assets.  If you were to earn a 7% return on that money over 15 years it would come to $83k for a profit of $53k.  But that's without the headaches. 

[untenured]

Real Estate is a liability not an investment.

It's both.

[_touchedbyanoodle_]

I have horror stories from family and friends as well, but I'll save them.

My husband and I have rental properties on the back of our mind because we will inherit some eventually from my MIL who spent a windfall on a collection of houses in a very low cost area and fixes up and manages them herself. She has no other job, so for her, it works. Also, she only rents them out when she meets someone she really likes who needs a place. Otherwise, they are empty and she has work done to them slowly.

Neither my husband nor I will be willing to give up our jobs to become property managers when they become ours (assuming they aren't sold first, which would be preferable). Fortunately for us, my husband has had a long friendship with somebody who works for a property management company. We will hire him, without hesitation, when the properties become our responsibilities.

Start watching the foreclosures, look for a rental property management company that you like, and start factoring the cost of that property management into your calculations. If you want to have a happy life after becoming a rental property owner, you need somebody else doing the management garbage, including tracking down unpaid rent.

[monarda]

We're landlords and have had great luck with tenants (once we learned how to screen) we make  a good amount of positive cash flow per year, plus it's a great writeoff for income taxes to boot (but that was the least of our motivations).  Our gross annual rental income is equal to my academic salary (but we pay four mortgages and a LOT of property tax). We manage the properties ourselves. We know a lot of good contractors if we need help for big jobs, and we do all the small repairs ourselves.  (I'm considering writing a book and titling it...  "So You Want to be a Landlord". You could be my co-author.) We have learned a lot over the 10 years we have rented these places. Yes, we have stories. Seemed horrible at the time, but really weren't all that bad. Kind of funny in hindsight.  We rent out two different 2-unit buildings, and a single family house.  We will (perhaps) be selling the single family house to our current tenant this summer, ... we'll see how that plays out.

Whether this is a good decision for you in the long-term is location location location.
Housing prices were low when we bought these properties in 2000/2001, and rent is going up here.
This is a very desirable area. So for us, it's been a no-brainer good decision. As long as Your City and Your Neighborhood in that city are desirable places to live, it will be a good decision. Our best income-generating property is in Super Cool Neighborhood of very trendy city. We've fixed up the place and just put solar panels on that property. We typically have had dozens of qualified applicants apply on the first day we place the ad on craigslist. Now we will screen for the "greenest" tenants. They will be good.

We got into rentals as an investment around 2000 because we HATED the stock market. Now it turns out our
rental income is more reliable than my academic income, (half soft money).
Like you, we are about 15 years from retirement. Our equity in these houses is much more than we have
through the university retirement program. Over the next 10 years we'll pay down the mortgages and
end up with a nice amount of equity as well as a steady monthly income. We'll sell one of the places if we need the cash. We could sell any one of the three right now (if we had to) and pocket  $60K-$140K, depending on the house. It's worked out well for us.

I'm happy to send you tips on how we screen for tenants. I've sent them to at least 5 other forumites,
and they've told me they've had really good results. You can PM me for details. And PM me your location.
I can try and help you to decide if it's a good idea (at least I can go through the calculations we went through to decide this was a good decision for us)

[polly_mer]

So, LarryC, if you can buy houses for a song in your area, why would the kind of responsible people you want as tenants want to pay you more money in rent than they could pay for their own mortgage?  If you can't think of an answer, then don't buy rentals.

Back story: we currently have a house that we could not sell.   That house stood vacant for a year because no one was hiring in that geographic area so everyone was staying put (the same reason that we couldn't sell the house and the reason we moved across country).  We originally bought that house because it was cheaper to buy than rent at the time.  Now that the hiring market has picked up a bit in that market, buying a house will generally still be cheaper than renting.  We're hoping to get our timing right this time to sell instead of the house being empty and hoping for renters.

We have had a wonderful experience with our current tenants and we currently are charging enough to cover the mortgage plus a bit, but getting tenants into the house was a long process.

[marlborough]

Also, in a college town, you are likely to get renters who are students, with all the boundary and "s*** I wished I didn't know" problems, from having to deal with their parents to neighbors complaining to you about your renters.  I have a couple of colleagues who thought this would be a great retirement project and they regret it for the hassle--one of them pays a management company to handle things, but the house has significantly depreciated from damage and he has even less control and return in exchange for no 2 am phone calls.