Renting Real Estate: Worth It?

[Denis]

I have been doing research on becoming a landlord as an opportunity for the future. I can honestly say my mind is blown. Never before looking into this would I have believed the sheer headache this venture could cause nor the lack of rights you have to your own property. The only idea I've seen that avoids a lot of these issues is renting on a transient status for vacationers and other temporary residents.

I'd like to hear from the landlords on this forum. If you were to do it over again, would you?

 

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[Runum]

I have been doing research on becoming a landlord as an opportunity for the future. I can honestly say my mind is blown. Never before looking into this would I have believed the sheer headache this venture could cause nor the lack of rights you have to your own property. The only idea I've seen that avoids a lot of these issues is renting on a transient status for vacationers and other temporary residents.

I'd like to hear from the landlords on this forum. If you were to do it over again, would you?

Yes, I have been doing it for 5+ years now and would do it again, but slightly differently. Some headaches you see are absolutely the landlords fault. Some headaches are due to state renting laws. If you learn how to manage rentals properly and you are in a reasonable renting state then your headaches would be reduced.

Also, everyone has their own level of crap that they want to deal with. I would rather do what I am doing than some of the other things I hear about. To each his own.

 

[rodney]

If you were to do it over again, would you?

Without a doubt. Although, there's a lot of headaches in the beginning, it gets easier overtime. I love the passivity of collecting rent income. When I rent out my home to the first tenant, they were great! They took care of my property for 2 years without any major issues, and they made it all easy on me. Just screen your tenants well and don't settle for sub par renters.

Also, based on my experiences, I'm developing a technology start-up to help renters, roommates, and landlords to satisfy their rental needs all online at Roomplug.com

 

[DeletedUser2]

I started doing rentals in 1996.
when the market was hot, I sold.
would I do it again ?

Yep. and with better systems. LOVED depositing all that cash, and when The market was hot, selling it, and realizing a HUGE gain, was great. Now I know so much more, So usually turn rentals into Notes, less headaches, still passive, Easier management

I still pick up deals from time to time.
Z

 

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[Rickson9]

Rentals seem easy to me. The lower the price you pay, the easier it gets.

I have rentals in Toronto, Canada and Phoenix, AZ. If you can get 20% gross rental yields, it's pretty smooth sailing. Free money.

Disclaimer: I barely know how to change a lightbulb.

 

[hakrjak]

I have been a landlord for 10+ years. I enjoy the passive income and the tax benefits. Once you get past about your 5th rental house, you'll never paid income tax again generally speaking. At one time I had a lot of properties but I selectively fixed and flipped out of the ones that were hard to rent. I kept the ones that rented easily to quality tenants. I've been at 100% occupancy now for 5+ years. The rental market in Colorado is steadily improving with low vacancies and increasing rents. This mixed with having my properties on free floating ARMs that have all adjusted way down (some as low as 2.5%) has created a perfect storm of cash flowing growth. Now that I've had my properties for awhile, the mortages are starting to pay themselves down also. Overall I'd do it again, no doubt, but I'd be sure to only buy in nice areas and stick to props 3 bedrooms and larger!

 

[Denis]

Thanks to everyone for the response. I am glad it is not all bad.

If you were to offer some advice to your younger self from what you know now what would it be?

Has anyone had success with temporary rentals of vacation homes? I may be speaking from ignorance but they seem like the best of both worlds. You can charge more for the stay and the tenant laws do not apply.

 

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[roc]

Denis, I see your from Maryland, so I'm thinking buying in ocean city for a vacation rental. First thing I would look into is what type of permit is needed for a vacation rental, and what type of house you can rent.

Second I've had friends that wanted to do the same thing, and they mentioned the average price is around 250,000 correct me if I'm wrong. You would need to figure out your mortgage and your window of opportunity I.e summer months, to make money to cover everything. You will probably need a cleaning service as well as a handyman to take care of the house in between tenants. Good luck roc

 

[Rickson9]

Expenses will eat up at least 50% of the gross rental income of an investment property. I got that from David Lindahl and the rule works great.

Never pay more than 5x gross annual rental income unless you like working for free.

 

[T&R]

I have been a landlord for 10+ years. I enjoy the passive income and the tax benefits. Once you get past about your 5th rental house, you'll never paid income tax again generally speaking.

You must be showing quite a loss on your rental biz. Are you filing as a full time RE pro?

I'm expensing (estimated for year) to the max and not showing a taxable loss. :cuss:

 

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[biophase]

Has anyone had success with temporary rentals of vacation homes? I may be speaking from ignorance but they seem like the best of both worlds. You can charge more for the stay and the tenant laws do not apply.

Remember with vacation rentals you are responsible for utilities, pot&pans, cleaning crew, towels, linens, boats, bikes, etc... whatever else you would provide. Expenses will be alot higher.

 

[moneymaker]

Never pay more than 5x gross annual rental income unless you like working for free.

Is this true? Seems like that would be really tough to accomplish. So are you saying that a $250,000 house should rent for $4166/month or am I misreading?

 

[Rickson9]

Is this true? Seems like that would be really tough to accomplish. So are you saying that a $250,000 house should rent for $4166/month or am I misreading?

The math is correct.

With regards to being tough to accomplish - most investing opportunities are not easy to find, otherwise everybody would be wealthy.

 

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[Illusion]

Expenses will eat up at least 50% of the gross rental income of an investment property. I got that from David Lindahl and the rule works great.

Never pay more than 5x gross annual rental income unless you like working for free.

Where can you find anything remotely close to 5X gross except the states?

I noticed you mentioned Toronto, Im in Montreal and nothing is at 5X, with Toronto being even higher. Depending on size, 10-11X still works.

Unless im missing something?

 

[Rickson9]

Correct. I buy in the U.S.

 

[40000]

The math is correct.

With regards to being tough to accomplish - most investing opportunities are not easy to find, otherwise everybody would be wealthy.

I guess it also depends on the expense-to-rent ratio, it is not the same if the 250,000 house mentioned in the example has $600 monthly expenses than $1,000. I think the "spread" is the most important figure to know how profitable the property will be.

foe example I own 2 condos as investments in the Miami area.

1- Hialeah, 1/1 820s/f paid 62,5k rented for $850
Expense breakdown:
Monthly Maint Fee $145/mo
Property Taxes $110/mo
Monthly Profit $595
Yearly Profit $ 7140 - 11.5%

2- Doral, FL 1/1 710s/f paid 59k rented for $875/mo
Expense breakdown:
Monthly Maint Fee $325/mo
Prop Taxes: $110/mo
Profit: $440/mo
Yearly Profit $5,280 - 8.9%

As you can see in the numbers, Prop 1 was more expensive and rents for less, but makes more money.


Just wanted to know what is the best "rule of thumb" to know on the spot if a deal is convenient or not?

 

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[40000]

I'd be sure to only buy in nice areas and stick to props 3 bedrooms and larger!

Do you mind sharing why you consider 3 bed+ better investments? My strategy is to buy 1/1s. I though the money was better invested in a larger pool of properties and not fewer but bigger ones...

 

[40000]

So usually turn rentals into Notes, less headaches, still passive, Easier management


Z

I am considering too turning one condo that I have into a note through seller financing, the advantages I can think of are, you get the down payment (not such with renting), you can sell at a higher price, management is reduced to just cashing the checks, (unless owner defaults)...... what to do then? isn't it too risky in case the owners go bankrupt, trash the property, the cost and time to foreclosure, etc etc.

How can you owner-finance and still sleep worry-free? or you meant something else when you said "turn rentals into notes..."

Thank you, fran

 

[Skim Milk]

I am bumping this thread up to the top because I am also interested in 40000's question.

 

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[yveskleinsky]

Remember with vacation rentals you are responsible for utilities, pot&pans, cleaning crew, towels, linens, boats, bikes, etc... whatever else you would provide. Expenses will be alot higher.

Yup. I currently own some vacation rentals and at one point had a property mgmt company for vacation rentals. Vacation rentals are totally different than regular rentals. If you do decide to go this route, I'd be more than happy to create a list of my lessons learned and pointers to consider--just let me know.

Some other factors to consider when looking at vacation rentals are that you property mgmt expenses vary considerably. In my area, PMs charge 20-30% in Hawaii or Florida they charge as much as 70% of gross rents. Just something to keep in mind when you are figuring cash flow for a property. So know this number before you even start looking at properties!

The pros of vacation rentals are that you are able to access your property on a regular basis if you so choose, or at a minimum a cleaning crew is in there on a regular basis=no deferred maintenance. The downside (like with any rental) is your occupancy is dependent upon how good your PM is. You will want to see what they do as far as online marketing efforts before you list with one. If you are going to buy a property as a vacation rental, get an idea of when peak season is as well as the average nights per year a place is rented (as well as how many of those night peak/off peak) as well as the average rate per night. (For example, a place might rent for $100/night off peak, but $300/night during peak.) There are soooo many lessons I learned. If I had to do it over again, I'd use the 5x gross income rule. It's easy to crunch the numbers to get them to show what you want to see--but the reality is that you really want a big cushion because crazy renters happen, gas goes up to $5/gallon and people don't leave home, etc. ...I have about 14 years experience with rentals, and no I really have no desire to do SFH rentals to vacationers or to long term residential tenants again. (I would however consider buying residential real estate and renting it to businesses that are involved in assisted living or group homes= long term tenants, more stable and better cash flow.) If you are thinking about getting involved in RE, I highly suggest finding a local REI group and attending some meetings. Find a mentor and learn all you can. Good luck to you!

Biophase--I'd be curious to know what your thoughts are on owning residential real estate. I know you mentioned that you have (or had) some rentals in a post many moons ago. Given that your focus seems to be mainly ecommerce these days, would you even consider touching RE?

 

[Rickson9]

I guess it also depends on the expense-to-rent ratio, it is not the same if the 250,000 house mentioned in the example has $600 monthly expenses than $1,000. I think the "spread" is the most important figure to know how profitable the property will be.

foe example I own 2 condos as investments in the Miami area.

1- Hialeah, 1/1 820s/f paid 62,5k rented for $850
Expense breakdown:
Monthly Maint Fee $145/mo
Property Taxes $110/mo
Monthly Profit $595
Yearly Profit $ 7140 - 11.5%

2- Doral, FL 1/1 710s/f paid 59k rented for $875/mo
Expense breakdown:
Monthly Maint Fee $325/mo
Prop Taxes: $110/mo
Profit: $440/mo
Yearly Profit $5,280 - 8.9%

As you can see in the numbers, Prop 1 was more expensive and rents for less, but makes more money.


Just wanted to know what is the best "rule of thumb" to know on the spot if a deal is convenient or not?

I use a 50% expense ratio as a general rule. From everything that I've read and experienced, this rule holds very well. In your examples I don't see any expense allocation for legal, accounting, banking, insurance, property management, tenant turnover, etc. These expenses will happen.

Whatever the gross rent is - I cut it in half. Anybody who tells you that expenses only eat up 10-20% of gross rent is either a Seller or omitting something.

As I may have mentioned before, this 50% expenses rule I got from David Lindahl. Virtually all my investment strategies I've copied. Why re-invent the wheel when there are multi-millionaires (or billionaires) willing to share their techniques right?

The second rule that I copied from David seems intuitive now, but it wasn't before I ran across it. Basically, (paraphrasing) he said that "If your goal is to be hugely wealthy from RE you need to get comfortable investing outside your city. As an investor who manages a portfolio of 7000 rental units across the US (it was some crazy number) you just got to get comfortable with it."

For me, that was such an obvious, yet game changing, point of view that I stopped getting frustrated at the high prices of RE in my own city (Toronto) and started buying in Phoenix. I now manage everything remotely and I've never looked back.

With regards to the rule of paying no more than 5x gross annual rent, I adapted that from my background in stock investing. The rule works extremely well for stocks so I just figured it would work for RE. And it does. The original rule I copied from Peter Lynch, Warren Buffett, and others.

I like copying because it is 1000x easier than being an innovator/trend setter/pioneer/etc.

 

[healthstatus]

Expenses will eat up at least 50% of the gross rental income of an investment property. I got that from David Lindahl and the rule works great.

Never pay more than 5x gross annual rental income unless you like working for free.

Would those rules hold true if you were renting a Condo, where exterior maintenance (roof, siding, exterior painting) was handled?

 

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[CPisHere]

I've been meaning to ask, so I might as well put it in this thread, how much does becoming a land-lord tie you to a specific geographical area?

I'm considering moving to a different state in a few years, so I don't want to tie myself down to this area. I know that you can hire companies to do everything for you, but it seems that they would take too large of a piece of the pie.

 

[Rickson9]

I've been meaning to ask, so I might as well put it in this thread, how much does becoming a land-lord tie you to a specific geographical area?

I live in Toronto, Canada and I'm a landlord with rentals in Phoenix, AZ so, for me, it hasn't tied me down much. I guess technically I'm tied down to North America.

As I mentioned above:

The second rule that I copied from David seems intuitive now, but it wasn't before I ran across it. Basically, (paraphrasing) he said that "If your goal is to be hugely wealthy from RE you need to get comfortable investing outside your city. As an investor who manages a portfolio of 7000 rental units across the US (it was some crazy number) you just got to get comfortable with it."

I'm considering moving to a different state in a few years, so I don't want to tie myself down to this area. I know that you can hire companies to do everything for you, but it seems that they would take too large of a piece of the pie.

What is "too large of a piece of the pie"? Unless you actually ENJOY dealing with toilets, drywall, electrical, and other PITA tenant issues, I would strongly recommend allocating money for property management.

And from David Lindahl himself:

"I haven’t talked to or taken a call from a tenant in over four years and yet I happily deposit those cash flow checks in my bank account every month! When I buy properties out of state, I hire local management companies to manage them for us. The rule of thumb is to pay them 8 –10% of the gross collected rents for buildings with 20 units or less and 5 – 8% for buildings with 20 units or more."

Disclosure: I pay 8.5%

 

[Rickson9]

Would those rules hold true if you were renting a Condo, where exterior maintenance (roof, siding, exterior painting) was handled?

Yes the rule holds because dishwashers, fridges, washer, dryer, A/C break down, dogs pee on carpets, children draw in permanent marker on walls, teenagers punch holes in drywall, and adults spill alcohol. In addition to other things.

Here is some real life, outside of HOA stuff:

"Mr. Chuong,
Hope your Monday has been going great so far! Your tenant had put in a work order regarding her microwave not heating, and also the faucet in the bathroom leaking.

"Our vendor Alex was out at your property to check out the work request, it looks like the microwave will have to be replaced. We have a great GE microwave available for $x (which includes installation), do we have your approval for this?

"The vendor also noted a couple things that were also needing approval. The handle on the kitchen faucet has broken off , the cost of the new faucet would be $x, there is also a strip of light bulbs that need to be replaced in the ceiling fan, the kit needed is about $x. The labor to complete all of the above minus the microwave is $x, the total number would be $x. Do we have your approval to complete these repairs?"

Chantelle Humphreys
CR Property Services
2990 E. Northern Ave Ste E-100
Phoenix Arizona 85028
Office-602.765.7575 ext 107
Fax- 602.765.7576

 

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[healthstatus]

Yes the rule holds because dishwashers, fridges, washer, dryer, A/C break down, dogs pee on carpets, children draw in permanent marker on walls, teenagers punch holes in drywall, and adults spill alcohol. In addition to other things.

Sure, but you don't have to paint every 3-4 years, no roof to replace, driveways don't require sealing, insurance is cheaper as you only insure the interior walls and elements. I thought the elimination of those expenses might allow you to pay 6x or 7x for a property.

 

[danoodle]

How did I miss this thread? Some great stuff being tossed around here. To address some of the questions/issues in the thread:

Just wanted to know what is the best "rule of thumb" to know on the spot if a deal is convenient or not?

I just use a NOI calculator spreadsheet that I whipped up. Just input all your variables and see if the rate of return is acceptable to you. This is literally the sheet I use to calculate all my deals. Go here

How can you owner-finance and still sleep worry-free? or you meant something else when you said "turn rentals into notes..."

I see the biggest advantage to turning the houses into notes is that you don't have to worry about maintenance anymore, just if they pay or not. I know the foreclosure process is much longer than eviction, but if you get a big enough down payment, that helps mitigate the potential loss. So that is why there are much fewer headaches, you technically don't even need property management.

I am still quite "green" having only been in RE for a year. It has been a great experience for me so far! I am unlike most of the other investors on here in that I am currently fixing up and managing everything myself instead of hiring it out. I do have a guy that will do any required maintenance for $20 for the first hour, and if the job takes longer than that, $15 an hour after that. Plus the cost of materials. So if I am on vacation or at B & P or whatever, I can still have maintenance done.

I feel that the biggest issues potential landlords/investors have is not screening properly, hiring out a crappy property management company, not having a good lease, poor people management (getting a power trip over their tenants), paying too much for a property, not setting up systems which makes your life easier when it comes to rent collection, maintenance, finding a new tenant, etc, not taking into account the true costs and fudging the numbers to make a deal work. And on and on...

I see being a landlord as being just like any other business. It has its respective headaches and issues, but much of it can be reduced if you have taken the time (the process!) to learn about all the issues involved. I have read countless books on RE and continue to read and learn more everyday. A lot of people fall in the trap of not seeking out the knowledge to get better. A thirst for knowledge and wanting to get good at what you do separates the successful investors from those that will always have that "bad tenant" story and why they got out of RE for good.

Also, every house I have purchased so far falls within the 5x gross rent rule. They are SFHs but keep in mind this is rural Kansas. I think in order to achieve that in other markets, you must go with multifamily, mobile homes/parks, apartments, etc.

 

[Rickson9]

Sure, but you don't have to paint every 3-4 years, no roof to replace, driveways don't require sealing, insurance is cheaper as you only insure the interior walls and elements. I thought the elimination of those expenses might allow you to pay 6x or 7x for a property.

Sh!t happens.

 

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[healthstatus]

Sh!t happens.

Amen to that...

 

[biophase]

Sure, but you don't have to paint every 3-4 years, no roof to replace, driveways don't require sealing, insurance is cheaper as you only insure the interior walls and elements. I thought the elimination of those expenses might allow you to pay 6x or 7x for a property.

Sure you don't have to pay for any of that stuff until one year you get a nice bill for $10,000. That's what special assessments are for!