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Author Topic: Should I become a Landlord?  (Read 33846 times)
monarda
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« Reply #15 on: February 04, 2012, 1:00:58 PM »

Pick a location where you don't rent to students. We are far enough from campus that we don't rent to students. But there's more to this town than campus.
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aandsdean
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« Reply #16 on: February 04, 2012, 1:04:14 PM »

We are involuntary landlords for our house in Previous City about 700 miles from here.  We lose about $180/month on the deal (not counting repairs, which make us lose more, but that's another story).  Net of the tax advantages it's about a wash.

The house would be paid for at about the time of my retirement, and at that point I suspect it would yield a nice income in the neighborhood of $2,500/month.  It could be argued that the costs we are paying now are the same, essentially, as saving the money to return later, like a sort of IRA.  However, if I thought we could sell the house without writing a sizable check, I'd do it in a second.  It's simply not worth the worry, though I am pleased with our property manager and have essentially no day-to-day headaches.

Actually, I wish for tornadoes.

I know a lot of people who make good money on rentals.  I have played golf a couple of times in the past year with a rich alum of my school who is a multimillionaire based on rental income.  But he makes enough money that he "has people" who take care of everything--in other words, he's employing managers, service people, the whole deal.  But this has been his lifelong work, not something he does on the side.  His apartments are in a university town (in fact, I would not be surprised if a few of you who attended this big land-grant lived in his apartments) so he has a steady source of demand.

I somewhat envy his riches, but then I think about it and realize he's more than earned every penny.  I probably wouldn't do it.
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clean
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« Reply #17 on: February 04, 2012, 1:42:28 PM »

Quote
A 15-year, $50,000 mortgage would run $420 a month for a home that would rent for $700-900/month.


Rental property requires a different downpayment and usually charges a higher rate than owner occupied property, so make sure that your numbers are right.

In my last job, there was a landlord.  He owned 20 houses or so.  He picked them up through the Resolution Trust program.  He would say that one house was a curse, but 5 houses was not too bad.  It was in part, a diversification issue.  Own one house and the tenant stops paying, it could take up to six months of YOU paying the mortgage, and trying to go through the court process to get rid of them.  That is not likely to happen with five houses. 

But that brings me to a question for you to consider.  Can you afford to pay (financially and mentally) the mortgage for six months while some deadbeat is in your house?  Could you then afford the time and money to repair all the damage that someone does when being evicted? 

One coworker here had to evict a tenant and somewhere along the line, they sold the stove and fridge and broke the toilet.

Perhaps you should contact Prytania.  She is a landlord and has a story about some people that lived close to her mother.

Finally, see the movie Pacific Heights.  It kept me from being a landlord.

Consider looking into your employers 457 plan, and 403(b) plans (Roth and regular). 

There can be a lot of return in real estate, but there is a lot of risk.
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« Reply #18 on: February 04, 2012, 1:48:44 PM »

I'm going to buck popular advice and recommend renting to right students. That is, pick a graduate program that is dear to you and ONLY rent to those students, and only those with funding (because they have their act together, and you know they have income. As an undergrad I was offered a summer internship that came with the understanding that I could rent a room in a house owned by one of the company head honchos. The house was beautiful, the rent was reasonable, and the residents were grateful. Nobody would have dared to run the risk of ruining that ideal situation by not taking care of the house. If that situation did arise, I imagine the other tenants would have run that person out of the house in a New York minute.

If my husband and I bought a rental house in town, we would rent the bedrooms to GTAs in the same program I went through.
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clean
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« Reply #19 on: February 04, 2012, 2:04:36 PM »

Last year I dated a lady that has 8 rental properties.  She is quite handy and can fix much of the problems.  Last summer, she spent about seven weeks  and ripped out the carpet of 3 houses that came vacant and put in tile.  She repainted, replaced the hardware on cabinets, dug out a sewer pipe that needed fixing because a tree's roots broke it, fixed the doors... It was a huge list of things and every bit of it was dirty WORK...

She saved over 10grand by doing these things herself. She picked up a lot of things dirt cheap... found an odd lot of tiles for $.45 each that some store was clearing out. The bad news is that she really didnt have any choice.  With 3 houses without tenants, there wasnt any money to pay to have the jobs done.  Some of the money people wanted, though was nuts!!  She had a quote fo $6000 to paint the inside of the house!  I gave her my Wagner Power Roller and she got one done in a couple of long days.  

She is still house poor and working at Olive Garden as a bartender because the cash flow is not always positive.  Also, she is finding that the banks wont make her loans (refinance the houses) based only on the rental income!!  On paper she has a net worth of close to $800,000, but the cash flow is not sufficient to refinance.  Worse, the housing market is tight now and houses are not liquid.

Another friend still has one particular house that was picked up through Resolution Trust.  They have had the same tenant for 15 years.  But they are forever late or missing the rent payment.. they always catch up, but if you were depending on them to pay the mortgage, then it would mess up your cash flow.  That house has just had a new AC put in and they just repaired the roof.  The tennan ts are supposed to be buying it from my widowed friend, but they just can not qualify.  So she is stuck keeping up the place.  Could you evict a 15 year tenant?  What would buying a new AC for a house or repairing the roof do to your cash flow or the profitability of the house?
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clean
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« Reply #20 on: February 04, 2012, 2:13:11 PM »

Quote
Own one house and the tenant stops paying, it could take up to six months of YOU paying the mortgage, and trying to go through the court process to get rid of them.  That is not likely to happen with five houses. 


Let me fix this... It WILL happen with five houses, but the others help to diversify the issue. If they are cash flow positive, then the rent on the other four support the one.  If you screen well, it is not likely that you will have more than one problem at a time. 

He was a slum lord, though.  He was investigated for fire problems after 3 of his houses burned one year.  Basically, he 'cut a deal' with the new tenants.  No security deposit if you clean when you move in.  It seems that grease builds up on stoves that are not cleaned for a couple of years! 

One of his problems was getting out of the business.  When he retired he wanted to move.  He had long paid for the houses by then so if he sold them he had to recapture of the depreciation (pay regular income taxes rather than capital gains).  He also didnt want to pay commmissions on 20 houses.  When I moved from there, he was trying to 'owner finance' them to other faculty in lots of five.  I dont know what he ended up doing.
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larryc
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« Reply #21 on: February 04, 2012, 2:28:09 PM »

Thanks everyone, lots of wisdom and things to think about here.

To clarify, I live in a medium-sized city with some extensive areas of cheap housing and some fancy neighborhoods and much in-between. In recent years a couple of formerly run-down neighborhoods have dramatically gentrified and there is always speculation about the next hot neighborhood. The city sometimes shows up on those "best places to live" indexes and is definitely headed in the right direction.

Also, I am not really worried about retirement. We will have a decent income based on what we have right now, and there is an inheritance that should make us comfortable. What I am thinking is that this might be an investment opportunity that will not be here in a couple of years.

What jumps out at me on this thread is that I really don't know nearly enough about this business. Clean is certainly right that the figures I googled up are probably too optimistic.

We live next door--actually share a driveway--with a nicer rental home that is owned by the couple on the other side. There have been three tenants there in four years, all of them wonderful people who we have enjoyed meeting. But this is probably a unique situation and should not be my model for how this works! Back in Missouri we lived next to a crappy rental with a revolving door of wife-beaters, meth heads, and white supremacists (complete with a swastika in the window).

A house in the nicer neighborhoods, that would attract better tenants and rent for more money, would be a minimum of $150k and involve a mortgage payment pretty close to what the place would rent for. That is what got me looking at the cheaper neighborhoods where the profit ration looks better. There is one neighborhood in particular that I believe is about to gentrify.

We became very friendly with the real estate agent who sold us this house, maybe I should give him a call. Thanks again everyone.
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notaprof
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« Reply #22 on: February 04, 2012, 3:17:29 PM »

We became reluctant landlords with a house that wouldn't sell and this was before the housing bubble burst.  It is a 40 year old house in an established, quiet neighborhood.  We moved to another state and had a management company that took care of finding tenants etc.  They took 10% of the monthly rent for the very little they did.            

Here were the results - months with no tenants ranged from 2 to 4 with each change of tenant. And this is in a place with an air force base and lots of people moving in and out. Over a four year period we had three different tenants.  The first tenant was just fine.  The second tenants installed a dishwasher without asking us and deducted the amount from the rent we expected.  They later moved out without notice and did more damage than was covered by the deposit.  We raised the damage deposit for the next tenant but no damage deposit would have covered the damage done by the last tenants.  

The last tenants lived there for two years.  The first year there one late payment but otherwise things seemed okay.  Then we started getting notices of fines from the city for never mowing the front lawn and other code violations (car up on blocks in the front yard).  If you become a landlord, include a gardener or you can just kiss any money goodbye that you may have invested in your yard. When they eventually moved out, the back yard was a jungle, we had a stone fireplace that had been painted with fire engine red glossy paint, a hole in the middle of the living room hardwood floor, an infestation of mice and roaches, a master bedroom where it appeared they kept a dog locked in all day. The door had been nearly shredded on the inside by clawing, a corner of the room appeared to be the doggy bathroom.  And they stole the washer and dryer that had been included with the house.  Every room was trashed in some way.  The floor by the shower in one bathroom had water damage that the repairman must have been the result of not having a shower curtain for two years.  Every wall was filthy throughout the house. The kid's room had crayon scribbles all over the room and was stained by something I don't even want to guess about.  The other bedroom had a hole in the wall that looked like someone put a fist through it. The whole house appeared to have not been cleaned in the two years so it wasn't just from revenge damage when we asked them to move.

I don't ever plan to be a landlord again.    


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shrek
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« Reply #23 on: February 04, 2012, 3:27:50 PM »

Two stories:
1. I have a friend who is a contractor. Bought a duplex about 10 years ago-- did major repairs to plumbing, drainage, electricity, new roof, etc. about 30K. Brought it to a standard that he feels he could live in. Rented both sides and has been a low maintenence unit-- long term tenants, makes a couple hundred a month on each unit after mortgage, insurance, etc. So, I think there the story is to do all the fixing it needs -- most landlords don't.

2. I have another relative who rents in a college town to students in the military. Are you kidding, I asked. They mess up my place, I'll call their CO was the reply. Ahhh.
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hegemony
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« Reply #24 on: February 04, 2012, 3:41:48 PM »

I have a friend who started out as an academic and worked her way up through investing in rental properties until now she's a landlord with dozens of properties and a quite impressive income.  She's written a book about how to do it:

http://www.amazon.com/How-Invest-Rental-Properties-Mortgaging/dp/0972892907

What I've seen from watching her is that you have to love fixing things (she likes nothing better than to have a nice property to renovate), and that even she will not under any circumstances rent to undergraduates.  She said the nice sweet carefully coiffed girls who look as if they wouldn't hurt a fly will knock huge holes in your walls, host boozy parties that destroy the house, and cost thousands of dollars of damage.  Never again, she says.

Another friend who rented out one property, once, declares he will never do it again after the nice folks turned out to be running an industrial-size marijuana-growing operation out of the house.

So the upshot is that I recommend doing a lot more research.  There are online forums of people who have rental properties, for instance.  I've also seen a lot of threads on the subject on the forums at Get Rich Slowly (http://www.getrichslowly.org/blog/).
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missemily
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« Reply #25 on: February 04, 2012, 4:46:26 PM »

I used to have an in-law who managed the ten rental houses that she and her husband owned. When I commented that having that many rentals sounded like a lot of work, she said it really wasn't. The key, she said, was to screen well. They got credit reports and checked personal references from everyone who applied to rent, and they never had problem tenants. In addition, she had a list of reliable repair people to call when needed.

If I were in your situation, I would be tempted to buy rental properties, too. I would not, however, want to buy so many at once that having a couple of vacant properties would strain my budget.
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spork
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« Reply #26 on: February 04, 2012, 5:43:33 PM »

What is the rental market like where you live, for both renters and owners? Is there over-capacity? A lot of foreclosed rental properties unsold/unoccupied?

Can you buy a house in an up and coming neighborhood, that will likely rent close to the mortgage payment, and that you might be able to sell at a profit in maybe five years, or whenever the tax implications are the least onerous? In other words, not a quick flip, but not something you'll need to hold on to forever?

Something else to consider: what's happening to property values in your neighborhood? Will you be able to do some upgrades on your house, within reason so as not to over-improve it, so that it will be profitable should you retire to an RV? In the interim you'll get to enjoy a more comfortable living space.

The above is my plan for my current home. The mortgage, taxes, and insurance are the same as what my wife and I paid in rent for separate apartments. So we aren't saving any money by not renting. But I bought in a neighborhood where prices did not decline nearly as much as in other areas and houses sell fairly quickly. I expect home values to rebound more quickly and strongly once the market turns around. Everyone's home is well-maintained; two homes down the street have gotten new enclosed porches over the last two years. If we get tenure, then I'll pay for some improvements -- bump out a window here, tear down a wall there -- that I'm uncomfortable doing myself. I'll do this on a step by step basis over the years rather than sinking $10-20K in one shot.

I have a distant in-law who bought a multifamily at the height of the market and is now upside down by a third of the purchase price. Rents have plummeted, he can't refinance. He should just walk away and take the hit on his credit score. But he's got this delusion that in 25 years he'll be able to sell it at some huge profit. Meanwhile he has to keep paying for repairs, insurance, etc. in addition to the mortgage.
« Last Edit: February 04, 2012, 5:45:51 PM by spork » Logged

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marlborough
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« Reply #27 on: February 04, 2012, 5:55:39 PM »

A key to this might also be access to ultra-reliable, trustworthy contractors (and good luck with that), such as an arrangement with a large local company with something to lose if they screw up.  Going into rentals without a plumber you know will show up, or a crew that can get the hole in the roof done without decamping for something better, bigger or shiny and leaving you hanging is absolutely crucial. 
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ideagirl
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« Reply #28 on: February 04, 2012, 6:13:48 PM »

I am a landlord in a low cost of living area. So far so good. My brother and his wife, and also my dad, are landlords too, all of us residential. They've been doing it for, respectively, about 12 and about 30 years. All of us are happy. There have been a few annoying tenants along the way, but no nightmares, no trashed houses, no tenants squatting for months on end without paying rent.

You have to be a good judge of people, and you have to supplement that with credit/criminal background checks (I use YouCheckCredit.com) and checking references. For that to be useful, you have to have more than one person interested in renting. For that to happen, you need to choose a decent-looking house in an at least somewhat desirable area. Use your judgment about what areas people like in your area, but also check Craigslist or your local equivalent to see what the rents are... Do that before you buy, so you can get a better idea of how good an investment the house in question is.

And be responsive, but don't be a schmuck. If you rent to entitled undergrads--which you can avoid doing if you want by having standards that they don't fit, such as having a job (which includes graduate fellowships/TAships) that pays at least $x a month--don't go plunge their toilet at 2am; send them a YouTube video or instructions on how to do it themselves. Or better yet, avoid the problem by choosing people who seem more mature/responsible and even by explicitly asking them if they know how to (plunge a toilet, operate a washing machine, etc.) and paying attention to how they respond.

Again, the ability to reject potential tenants who seem entitled, immature, annoying etc. depends on having more than one person seriously interested in renting your place. Location and amenities are KEY. And so is renting just slightly under market rate (like $25 to max $50 below comparable apartments).
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oldadjunct
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« Reply #29 on: February 04, 2012, 9:30:00 PM »

Larry,

In the mid 80's" my then wife and I lived in a city with an abundance of relatively low priced double and triple deckers in a robust rental market, she lobbied for us buying one or two.  My answer was that I was not in the market for a part-time job.  Maybe a decade later I found myself owning three rentals (two residential, one commercial), my original position remains the same.

You are signing up for a part time job with irregular hours, uneven pay, and unknown outcome.  I did ok in the long run, but my circumstances were a little different from your situation: my own business was the tenant for the commercial property for six of the ten years of the mortgage (for eight months of the remaining four years the property was vacant), one of the residential properties was a cash purchase and a family vacation home for a number of years (rental income in a year-round vacation/full-time market was spotty at best), the second residential was a downstairs apartment in my own residence (one tenant, young professional, ideal tenant "fell asleep" with a pot on the stove nearly burning down the entire house and requiring the FD to kick in an antique front door since the fire truck sirens 30' from her ground floor bedroom window didn't rouse her) which cost $1,000 to replace.  Absent those special circumstances I would never have been a landlord for exactly the parenthetical exigencies.

My best understanding, from doing some very modest reading on the subject since I was never a voluntary landlord, is that personal rental investments  generally only work for folks who have a critical mass of properties.  Just intuitively that makes sense if you compare investing in one or two properties to investing the same amount in the market. Ask yourself if you would be willing to take $150-300k, drop it in one or two stocks and commit that money to those two stocks for 10 years.
« Last Edit: February 04, 2012, 9:34:36 PM by oldadjunct » Logged

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