Rentals. Tell me about them.

I'm considering purchasing a rental property (depends on my timetable for building my own home...if that happens). So, the thread title is a loaded question, right?

I'm not really looking for specifics of what I need to do before purchasing a rental property, but more so just a general consensus from those who own (or have owned) rental properties before.

Do you regret purchasing your rental(s)?

Was your investment long term (equity), or short term (cash flow)?

If you had to do it over again, what would you do differently?

Any general comments about the process/experience you want to share, feel free.

 

I just sold mine last week, I couldn't wait to get rid of it. I bought the rental for my mom to live in while I rented out the other side, It pretty much covered my mortgage but after a year my mom was like I don't like it here and moved. That left a thorn in my side and pretty much hated that place ever since. After she moved I got a good tenant to fill the spot so now I was on the plus side. I made about 5K a year on the place average over the 3+ years I owned it. If it wasn't for the whole thing with my mom I wouldn't have minded it so much but every time I got a call for something I could feel my blood pressure go up. Long term investment is good as long as you have positive cash flow for at least 11 months out of the year.

Screen your tenants well and it will make your life easier.

 

Depending on your states "tenant's rights" laws.
I haven't ever owned any but have been hired to work on a lot of them and have worked with friends who have gone 11 months without getting paid while trying to evict a bad tenant. I've also worked on apartments/rentals that the owners have gotten comfortably well off on. Do your homework and talk with other owners in your area as well as talking with a good accountant. I would look at it as a long term investment too.

 

Another thing to consider would be if purchasing a rental property could potentially effect your ability obtain adequate financing for a construction loan? I of course no nothing of your financial situation and you probably already considered this.

 

I've read extensively into this as well.

Basically ask yourself these questions:

Do you have the capital to hold the property if you have no renter for extended period of times?

Do you want to manage it yourself? Or pay a firm to manage it?

How many rentals do you want? You don't start making money until you have about 5 properties.

High end rentals are easier, but less profit. Low end rentals get more profit, but do you want to be a slumlord?

 

Finding the balance between a cash cow slumlord situation and a high end rental that you barely make ends meet with but square away a lot of equity into is a fine line. I am very familiar with the market in Kentucky where I grew up as far as the going rental rates, what type of houses to look for in certain price ranges, etc... Alaska is a new ball game to me. The price ranges are so much higher it would be much tougher to acquire properties (easier to come up with 20% of a 75k property vs 20% of a 250k condo lol)

The math on how many properties you have to have to make money is totally obscure though. Completely dependent on purchase price, mortgage terms, local property tax rates, etc. For easy math, You can purchase a home in KY for <90k, put it on a 15 year mortgage, and make ends meet while the home is being paid off for you. Technically on paper you cash flow $75-100 a month per home but realistically most of this is gobbled up every few years for major repairs such as flooring, HVAC, roofing, etc... The way I will approach it is as an equity builder for retirement. Buy X number of homes, deal with the headaches for 15-20 years of owning them, then I will own all of them outright to sell and reinvest elsewhere at that point or live off of the cash flow income.

Safest investment I've seen over the last decade easily when you look at equity built vs the initial cash investment of 20% down when comparing to stocks, mutual funds, etc. It's an investment that survives economy dips too. When the economy dives, rental demand climbs through the roof.

 

I've looked into it and after helping friends who have them, I've decided to pass. Sure they make some money but not enough for me to want some of their headaches.

There seemed to be four keys to making it work both financially and mentally.

1. You need to be able to do most of the repairs/updating yourself as calling someone all the time eats away at your profits.
2. The higher your rental price the less you have to deal with trashy tenants, destroyed property and delinquent rent. Each part of the country is going to be different as far as price goes and although you can get burnt with a high dollar rental, the odds are less.
3. Know your tennants' rights and eviction procedures. It seems the landlord just has no legal teeth in some places when you need to get rid of someone.
4. Research your states housing laws. You have an applicant that passes every phase of your application process with flying colors but your gut tells you not to rent to them. How easy is it in your state to deny a renter without someone potentially nailing you with discrimination.

 

I have a buddy that owns 5 rental houses and even though you aren't legally allowed to pick which ever tenant you want, he tells every single applicant that there are 3 people ahead of them and that if those don't work out then he'll call them. Then handpicks the one he wants.


Sent from my iPhone using Tapatalk

 

Residential Rental properties are very labor/ time intensive. I look at them as secondary in an investment. Meaning that the property has to have value to me in addition to the rental. If the rental is your primary motivation in owning the property then I would be really sure that I would only purchase units at prices that allow a lot of upside on the margin side.

 

Make the rent high enough to weed out the less desirable renters.

Blessings.........Pastorjim

 

One rental property is a PITA. You need to own a half dozen or more to make it worthwhile.

You don't do it for cash flow. You report the rental income on your tax return, but you get to deduct the interest and taxes you paid, along with the depreciation of the property. There won't be much cash flow.

The reason you own rental property is to allow the tenants to buy the property for you. So in time you own it free and clear and can sell it and keep all the money for yourself, after taxes, of course.

You will have to be prepared to take care of maintenance just as though you lived there yourself. That can be a deal-killer for most people.

 

Thanks for the feedback. I'm looking at this from strictly a long term equity builder. Something I can finance for 10 years, hopefully be paid for by rent (assuming any positive cash flow will be offset over time by expenses), and then either offload the property, or use it as true passive income. I'm good enough to fix and repair many things as I've remodeled my entire home, but of course, time is always the enemy. I understand how repairs can eat up time and money quickly. Ideally, I would never have to dip into my own personal savings for repairs. I would only purchase a rental with a separate expense account in place to handle repairs, missed rentals, and vacancies.

Flipping is another option, but I don't have the market to work with here. Our home prices are inflated which leaves little opportunity to profit from flips. Not to mention with our income levels in this area, mortgages are hard to come buy for many people making it more of a renters market for the time being.

I'm essentially looking for another investment avenue outside of my current 401k/IRA/TSA. My wife and I have been talking and I would like to retire early (around 45-50) from teaching to work somewhere else, but part time and have other investment vehicles to work off to cover the gaps. Real estate can provide that opportunity if done right, I believe. You do hear horror stories from many whom own rentals, though, so it's no guarantee.