Renting Real Estate: Worth It?

[Rickson9]

I have no problem having the contract disclose what you mentioned and people will still sign it.

People will even sign it if it says "your loan is interest only and your payments will increase over time and if you miss some payments we will take your house."

 

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[garyfritz]

Cool. Glad that's what you meant.

 

[andviv]

The funny thing is, what if the houses from that contract, for whatever reason (they find gold in that place) then are worth 3 times the agreed price?

The buyers are gambling the price will be that high.

The sellers are gambling the prices won't be even close to that price, buyers walk away and they make the profit.

Yep, maybe the odds are staked in the sellers' favor, but there is nothing wrong with to parties gambling. One will lose, one will win.

[of course, if everything is clearly disclosed to both parties].

 

[treinjapan]

Hello! Finished reading the Fastlane a few days, and I have been reading this forum for a few days too. As I read the book, I found that a lot of things MJ was saying were things that I've either thought before, or agree with 100%. I'm currently living in northern Japan, and I'm at work on a "fastlane"-ish website that could end up being big. But that has nothing to do with this thread

So my other question that DOES relate to this thread is this:
Another opportunity has come up for us. My wife's Japanese, and I'm American. I've been living here for 3 years, and we've been married for a year and a half. We've been thinking about getting either a big house or a small apartment building, living there, and renting out parts of it. It's impossible for us to get financing from a bank, but her parents have offered to act as our bank, and we offered to pay them back with interest, so they are actually making a better investment than the heinous ROI most people can get in Japan. (Savings accounts net ~.01% and the most amazing CDs are something like .5% or something).

I'm planning to be here for the long term, and would like to set up some system of passive income since the opportunity is here. I know that since it's technically no money down on our part, the ROI is infinite, but what I'm wondering is what you guys think about the possible returns given the following:

-Japanese mentality is that houses are like cars...new ones are worth a lot, then their value goes down over the years. Most buildings that are ~30-35ish years old around here are considered worthless, though the land retains value. Some buildings that old are remodeled thoroughly and still retain some value though. Houses aren't made as well as they are in North America either, so that's why they don't last as long.
-We will be living near our church of 200+ people, many of whom are constantly on the lookout for a place nearby the church and nearby train station. That makes finding trustworthy tenants much easier.
-Properties almost never appreciate here like they did a few years ago in America. I'm not interested in chasing trends for property value appreciation. I'm thinking of this more like a wealth-retaining measure so that we aren't throwing away rent money, but instead we're keeping the value of the property.

Here are some examples:
A)15 year old building with 4 units. 2b each with living, dining, kitchen. Asking price is $170,000 and rents (as-is) are probably around $500 per unit, but if we spent another $5000ish, we could clean them up and get probably $600. But the building will probably be worthless in another 15 years or so. If we lived in one of the units, that would give us $1500-1800 income per month, minus the costs of roughly $800ish.

B)35 year old junker worth ZERO. 6 units, each 2b with living, dining, kitchen. Asking price is $200,000, which is basically the land price. Taking down the entire building would cost roughly $30,000, and rebuilding a similar new one would be ~$300,000. So we'd be in roughly $530K-600K. If we live in one, we could probably make $3500 per month income, minus probably $2000ish in expenses.

I realize these are both very generic examples for you guys, but I'm just interested in getting a general idea of your thoughts. Perhaps the stakes are too high for the return, or perhaps without the prospect of property appreciation, the whole idea is just a deterring waste of time. Or maybe orchestrating these just sounds like too much work for the return. I'm excited about the prospect of finally owning something for real, and really look forward to passive income as well. What are your thoughts?

 

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[Rickson9]

Those returns are not worth the time and effort. IMHO. 'finally owning something for real' is not the primary motivation of an investor.

 

[treinjapan]

Those returns are not worth the time and effort. IMHO. 'finally owning something for real' is not the primary motivation of an investor.

Thanks for your input Rickson. The problem I'm having is that it seems the "entry price" to getting into real estate here is much higher....it's basically impossible to find the right balance between price/building age/location. Perhaps I just need to get in touch with some agents and ask them to help me find people who REALLY NEED to get rid of their properties for lower prices....That being said, that property with the ancient building and 6 units has been for sale for 2 years with not much interest...I wonder how much I could get them to lower the price

 

[danoodle]

I agree with Rickson. Also to put things in perspective, this may not be the norm, but one of my houses I bought for 7k, put 6k into it so 13k total, and it rents for $450 a month. There are many of these kinds of deals around if you look hard enough. Have you considered international real estate? If all of Japan is like that, RE would not be the place to invest there imo.

I also don't understand how a house can be "worthless" after 30-35 years. If you could pick up a house there for "nothing" and never sell it, but get good cash flow from it for many years, that could be worth it.

 

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[Rickson9]

Thanks for your input Rickson. The problem I'm having is that it seems the "entry price" to getting into real estate here is much higher....it's basically impossible to find the right balance between price/building age/location. Perhaps I just need to get in touch with some agents and ask them to help me find people who REALLY NEED to get rid of their properties for lower prices....That being said, that property with the ancient building and 6 units has been for sale for 2 years with not much interest...I wonder how much I could get them to lower the price

If a deal doesn't exist, then it doesn't exist. You can't force a deal unless you want to lose money.

Agents will show you anything. It's up to you to educate them on your investment criteria. Unfortunately, they don't care what they sell you and will tell you anything (including that the Seller is 'desperate') to get the sale.

 

[treinjapan]

I agree with Rickson. Also to put things in perspective, this may not be the norm, but one of my houses I bought for 7k, put 6k into it so 13k total, and it rents for $450 a month. There are many of these kinds of deals around if you look hard enough. Have you considered international real estate? If all of Japan is like that, RE would not be the place to invest there imo.

I also don't understand how a house can be "worthless" after 30-35 years. If you could pick up a house there for "nothing" and never sell it, but get good cash flow from it for many years, that could be worth it.

Yeah, I think land value comes into play a lot less in the American way of calculating things...It's pretty well-advertised when you're looking at a property in Japan. Even if a building is rotted out and filthy mcnasty, they still will sell the property for the price of the land, and won't be willing to go much lower. Whereas, in the States, if a house is a messed up piece of work with a crooked foundation, doors that don't close and no insulation, people will just buy it for dirt cheap and redo the whole thing. The land price fades away with the house as it crumbles.

The one "worthless apartment" example that I mentioned has $200K worth of land and the building itself actually has renters in it, though it's on the brink of collapse and I'm sure no one actually likes to live there. I don't know who determines that the house has no value, and I could just buy it and continue renting it as is, but it would be $200K with a lousy return because I would have to be constantly repairing and rebuilding parts of it. Buildings aren't made to last here partially because the buidlings companies want to have more business (and collusion and oligopolies ain't no big deal here) and also because the constant earthquakes wear things down faster I assume. On top of that, we're in Sapporo, the city with the most snowfall in the world, over 1 million population.

I have some friends renting a house 3b/1b that was built around the same era as this old apartment building. It's ice cold even when you're sitting right in front of the blaring heater because the insulation has basically disappeared, and in the summer, it's boiling hot all the time. They rent it for $600 a month.

 

[Pete799p]

Buying a house for $100,000 with a current market value of say $120k and then selling it for $200k with a 5 year owner financing balloon, and knowing full heartedly that the property will not appraise for that in 5 years IS SKETCHY. They are taking advantage of people that were just foreclosed on.

I do not think it is sketchy. Based on that the ball park selling a $10 beer or a $12 hotdog would be sketchy. It is always the buyers responsibility to know what they are purchasing. If somebody in the market is willing to pay twice the price for anything then they should be able to buy it.

People will always find ways to purchase things they cannot afford and fastlaners have made millions finding ways to sell it to them. Look at Arons or Rent a Center. They will rent you a house full of furntiture for monthly payments that are twice what it would cost to own. If you decide to purchase the furniture you end up paying at least twice what it is worth and when you run out of money to live the dream they take it back and rent it out to another sucker. Another example is pawn stores who pay you nothing for your stuff knowing you desperatly need the money and then sell it for a nice profit.

These are not my type of businesses but they are for some.

 

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[biophase]

Yeah, I think land value comes into play a lot less in the American way of calculating things...It's pretty well-advertised when you're looking at a property in Japan.

Whereas, in the States, if a house is a messed up piece of work with a crooked foundation, doors that don't close and no insulation, people will just buy it for dirt cheap and redo the whole thing. The land price fades away with the house as it crumbles.

The one "worthless apartment" example that I mentioned has $200K worth of land and the building itself actually has renters in it, though it's on the brink of collapse and I'm sure no one actually likes to live there. I don't know who determines that the house has no value, and I could just buy it and continue renting it as is, but it would be $200K with a lousy return because I would have to be constantly repairing and rebuilding parts of it.

This is not the case. Land does have value in the USA. What you are describing is a run down house that is sitting on land with NO value. You just basically said that people are buying a crappy house for dirt cheap. Do you think they are actually paying for the house? No, they are paying for the land. The house is broken and has no value.

Drive into a nice neighborhood and you will see a small little house in between large new homes. Even though this house is not crappy and still livable. It makes no sense to remodel it or fix it. The land that that house is on is worth more than the actual house in this case.

You are describing this in Japan because Japan is a tiny island so land is valuable. That apartment is not worthless or people would not be living there. In fact, you should be happy that you can get it for its land value because most people who love to buy real estate for its land value and already have a building on top of it.

Did you even calculate what your return on this "worthless apartment" would be? Would the repairs be more expensive than tearing it down and spending $300k on a new building? What is this lousy return you speak of? How does it compare with the return after you put $300k into it?

 

[treinjapan]

Bio, yes I agree with what you're saying. Perhaps land prices really are just that much greater here, even though Sapporo is much more spacious than most other big cities in the country. You basically can't find any single unit homes for less than $50K, even the old janky ones. But if you only have $50K, most people are just buying condo units and settling with that.

I'm not sure if you read my above post, where I introduced my whole premise. I'm not looking at things primarily as an investing tool so to speak, I'm more looking at getting a big house or an apartment building to live in part of it, and then make some passive income on the side. No one that can afford it would want to live in the icebox that currently exists on that property!

As far as the return on the "worthless" apartment, I really have no idea how often repairs will be needed, but I can clearly see from the outside that there are severe cracks in the building and foundation, so it seems like doing little repairs is akin to polishing a turd or putting a bandaid on a gunshot wound. Might be able to get by with some minor plumbing or electric repairs here and there, but eventually things are going to need some major work, and that's I guess what I was originally asking in the post above.

 

[andviv]

The woes of being a small-time landlord - MSN Real Estate

Mark Kreditor has been managing rental properties for 31 years and has this to say to anyone considering getting into the landlord game: Don't do it.

Monthly costs inevitably creep in. Taxes and association dues only go up. And, in the end, properties aren't even guaranteed to appreciate.

"It's going to be a hardship on your checkbook every month, and every couple years there's going to be a tenant that does something really awful, and you're going to hate it, hate it, hate it," says Kreditor, president of Get There First Realty and past president of the National Association of Residential Property Managers, a trade association. "I've never seen a better time than now to invest in real estate, and I still wouldn't do it."

And many more opinions and some facts here to take a look.

 

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[Rickson9]

"Buy smart. Many, if not most, small-time landlords — those with one or two rentals — never get to take advantage of the first rule of real-estate investing: Buy when the price is right."

That's the problem right there.

"Looking at when investors buy provides some insight on how difficult it can be to make money on a rental. Kreditor has long since tossed the 1% rule, which estimated that a monthly rent check equal to 1% of the purchase price heralded a sound investment. He advises against investing in a rental that costs more than 50 times the anticipated monthly rent."

At least he smartened up and changed his rule. The 1% rule is sold by salesmen. It's a horrible rule for investors.

One person who left a comment had a good rule: monthly rent must be at least 2% of the purchase price (which is identical to the 50x monthly rent rule above). That's more aggressive than my rule of having the purchase price be no more than 5x gross annual rent. The first is a 24% gross yield where the second is a 20% gross yield.

People who don't know what they're talking about say RE is all about "location, location, location". In reality it's "price, location, location".

 

[danoodle]

This is why I don't factor in price appreciation into my numbers! Depending on a house to increase in value is a gamble. All I care about is the cashflow. If, when I go to sell a house years down the road, it is worth more than I paid for, it is all icing on the cake. If it is worth zero, but I have collected $1150+ rent monthly from a 35k house for 30 years, it would suck but would not affect me that much.

 

[PopEmersen]

This is why I don't factor in price appreciation into my numbers! Depending on a house to increase in value is a gamble. All I care about is the cashflow. If, when I go to sell a house years down the road, it is worth more than I paid for, it is all icing on the cake. If it is worth zero, but I have collected $1150+ rent monthly from a 35k house for 30 years, it would suck but would not affect me that much.

My thoughts exactly.

 

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[Pete799p]

The woes of being a small-time landlord - MSN Real Estate

Mark Kreditor has been managing rental properties for 31 years and has this to say to anyone considering getting into the landlord game: Don't do it.

Monthly costs inevitably creep in. Taxes and association dues only go up. And, in the end, properties aren't even guaranteed to appreciate.

"It's going to be a hardship on your checkbook every month, and every couple years there's going to be a tenant that does something really awful, and you're going to hate it, hate it, hate it," says Kreditor, president of Get There First Realty and past president of the National Association of Residential Property Managers, a trade association. "I've never seen a better time than now to invest in real estate, and I still wouldn't do it."
And many more opinions and some facts here to take a look.

I was most interested in the comments. I cannot believe that people A) think small time landlords are getting rich beyond their wildest dreams and it is something that they will never be able to do B) They shouldn't rent the house for more then the mortgage because that is morally wrong. C) That all land lords are evil and get what they deserve... the list goes on.

When they tell you to screen your tentants you can really see why after reading those comments.

On a side note I have read that in some states with bad land lord laws people will use month to month or short term leases to get dead beat tenants out quicker. If they do not pay then they dont renew their lease.

Anybody with experience or knowledge on whether or not this is a true statement.