Rentals...Worth the effort?

[MGH PA]

I've been toying with the idea of picking up a rental property as a long term (i.e. 15-20 yr) investment. I'm 31, I have good job with a pension plan, plus I've been contributing to a TSA since I was 22. My wife has a great job and we've been putting 9% into a 401K for the last 8 years as well. I don't feel like I really NEED more diversification, but I think it can't hurt. My dad doesn't like rentals, and many people I know recommend to stay away from them unless you can afford to pick up 5+ to make the cash flow offset potential vacancies or major repair issues.

I would be primarily doing this for equity building, but would still want to maintain positive cash flow as much as possible. I would only buy on a 10yr note, so I would be paying it off 10 years before retirement at which point I would have even more cash flow and equity building, or I could just sell. If the first rental worked out well for a while, I might even consider building onto that.

I would be focusing only local, and I'm handy enough to do most repairs, but of course emergency repairs and big list items would have to be hired out.

I would form an LLC to keep my personal liability to a minimum as well as allowing me to maintain a separate savings for repairs/vacancies.

So, those with rental experience, if you didn't really NEED the extra investment, is it worth the hassle? I know tenant screening and tenant laws really drive a lot of the major factor in people's experiences (as does the location of your rentals).

 

[newbury]

You need to know the local market.

If you can realistically expect markets to improve that's one thing. But if you are in an area heavily dependent on 1 industry you can lose a lot. Look at Flint, MI.

I'm in the DC area and I've the first house I bought (for ~$80K in '78). I rented it with minor profit for 30 yeas and now my son and his family live in it and basically pay the taxes. Even with the recession the house next to it just sold for almost $500K and mine is on the tax role for about $370K. I'm not in it for the money but it's value has gone up. Zillow reports a fair rental of $2,200/month. But it's just outside the Beltway.

I've seen others lose a lot of money w/ bad renters, depressed markets etc.

Others on here, notably ultrarunner seem very successful managing many rentals.

For me it was a pain at times to go unclog a toilet, fix a door lock. But I got one renter in there that lasted about 25 years and was a gem.

 

[TnAndy]

You have to have the right mindset for rental property. Understand that most of your renters are NOT going to care for the property like you would, and you can do OK.

Neighbor of mine has bunch of 'low end' rentals....and what I saw for years was him chasing the rent, because the reason most of those folks rent is they have money problems, and their problems become your problems.

SO, with that in mind, I decided to build 3 rentals to add to my retirement income. I figured building more high end, NICE places would mean I'd get people that money wasn't as much an issue....which was the case....but they STILL don't give a rat's backside about your property. Things like letting a sink trap leak, and instead of telling you so you could fix it, throw a towel under it, and it rots out the cabinet.....just little stupid stuff like that.

I built this one for about 50k, rented it 7 years for $800/mo, then sold it to the guy that had rented it for the last 5 of those 7 years for 100k. 2bdrm, 2baths, full basement with drive under garage. 1100sqft, 1/2ac land.

Built this one for 65k, rented it 4 years (last one did about 5k in damages) for $1,000mo, sold it after fixing back up for 160k. 4 bdrm, 2 1/2 baths, one car garage, 1800sqft, 1ac land.

Built the last one, rented it one year 1,000/mo, cost 68k to build, sold for 150k. 3 bdrms, 2 1/2 baths, double garage, fireplace, 1500sqft, 2ac land.

I figured 2 months income for vacancies, insurance and taxes, and that was pretty close.....so gross income to me was 56k + 40k +10k = $106k rental income (which, I assume you know is SS tax free), we paid cash as I built for the first one, then cash and rent rolled in for the next two.

I sold them for $310k - 183k in costs = 127 gross, paid about 10% in capital gains (sold them over 3 years)....so between rent and sales, netted a bit over 200k.

Each house was well built, things like 2x6 exterior walls, hardwood/tile floors, custom oak cabinets, oak trim, etc.

One of the kitchens:

Had I held them another 10 years or so, I'd have probably come out better.....but I decided putting up with renters was not something I had the stomach for.....plus I sold right at the peak of the market in 2005-07.

 

[QRTRHRS]

While your nature may be to feel sorry for some folks, those are the ones that will screw you. Buy in the best neighborhoods and keep the rent on the high end for the area and you will be much better off. My grandparents rented for 40 years. Left the place pristine though dated. Those days are history.

 

[2458n]

If you hate your kids give each of them two 25 year old rental properties. By the time they deal with the renters not paying and buying stuff on credit for your property. It will be time for a new roof, and furnace. You are young enough to not be tied to a couple of rentals.

 

[MossRoad]

My dad's parents bought a 2 story house, built an outside stairway to the upper floor, blocked off the inside stairway, lived upstairs and rented out the bottom. Grandpa opened a barber shop in the garage behind it. It got paid off fairly quickly, so they bought a 2nd one and did the same. Then a 3rd two-story house. They had good success with renters for the first 20-30 years and all was peachy. Many 10-15 year tenants. They bought a trailer in Florida to spend the winters, and a cottage on an island just north of here to spend the summers. Grandpa retired from barbering, and he rented out the shop as an efficiency apartment. So, they had 6 rental apartments, 1 apartment for them in town, a trailer home in Florida and a cottage on an island! Not bad for 25 cent haircuts.... :laughing:

Then, in the 70's, the worst neighborhood in town was raised, most of the people moved into the neighborhood where my grandparent's lived and rented, the tenants shifted to not-so-nice people, and things took a dump. So, they decided to sell. They sold on land contract because no one would purchase outright. They kept having buyers return the houses by skipping out on land contract. Grandpa passed away, they still had two houses on the market. Grandma kept selling on land contract. There were frauds, forgeries, a burglar living in one of the unit, even a corrupt police officer involved in a tax-scam sheriff's sale trying to buy back the house he defaulted on!!! Anyhow, it took 17 years to unload the rental units and a lot of work on my father's part helping out his parents.

All-in-all, it was a positive for my grandparents for several decades, then it was an increasing nightmare for 17 years when they tried to get out of it.

So I'd say, start small, in a better neighborhood, and see how it goes. If it goes well, expand and check. Expand and check, etc... but at the first sign of the neighborhood going south, get out ASAP. Also, get a lawyer to go over your rental agreements.

I know a guy (we all know a guy) that had 50 rental units. He rented by the week. That afforded him better tools to evict with minimal notice. Around here, monthly and longer rentals are subject to some lengthy eviction times and once a tenant knows you want them out, they'll take a hammer to every piece of porcelain in the house (sinks, toilets, bathtubs) and every piece of drywall or woodwork, and pour cement in all the drains, dirty diapers in the closets and dog poop and urine on the carpets.

EDIT: the guy with the 50 rental units had to get out because the city restructured the property tax system, and taxes on many of his properties more than tripled in a year. I think he has just a handful left in nicer neighborhoods, but his dream of holding them until he retired and then selling for a profit was toast.

 

[RollingsFarms]

Rentals have too much risk and too little reward for my taste. I've heard too many horror stories from people who were in the profession and it's not something I'd ever want to tie my money and time up in. You want to make a nice little extra income? Buy land. Rent that land for hunting or plant pine trees right now and you'll be getting income from that every so often if you manage it correctly. Let's put it this way, I came very close to buying a local diner and operating it and we all know how much work goes into the food industry. To me that's even a safer bet than rental properties. There's just too much protection for the renters vs you. No thanks.

 

[dragoneggs]

Agree that knowledge of local neighborhood, schools, and market is very important. I became a landlord in 2008 and not by choice. I bought a home and moved about 60 miles away at the peak and couldn't sell my old house before the market crashed. But I have been pretty lucky as we are only on our 2nd tenant in 7 years! The house though is in a middle/upper class area so it isn't getting trashed like some. I have a positive cash flow... not much but with the mortgage tax write off it is working okay. Market is back up and might sell in a year or two. Do your research and make sure you are in a desirable area otherwise vacancy time can eat up quickly any gains.

 

[EddieWalker]

I grew up working on and fixing my parents rental properties. Seems like I spent most of every summer as slave labor doing something on one of those houses. As a contractor, I also get a lot of jobs from property owners to fix what was damaged in their rental properties. Most of the time the damage is from the renter just ignoring a problem until it's a big issue. Leaking water is probably the most common thing. If you can do the repairs yourself and you always have enough cash available to pay for the repairs, you might do alright.

There is a guy here in town that is doing very well with his rental properties. He personally goes to every one of his properties twice a month. Middle of the month to change the air filters in the AC units, and end of the month to collect the rent. He said that he does this to inspect the houses and make sure they are being taken care of, and that there are no problems that he isn't aware of. This seems to work very well for him.

Realize that you might get lucky and find the greatest people in the world rent your property, but the odds are much better that they have an addiction issue, pets that they ignore and they always make bad decisions. You will see some of the most disgusting things ever, and you will be lied to about anything and everything. Never rent to friends or family.

 

[LD1]

As others said, knowing your area, and pool of renters and properties is the first step to deciding if it is worth it in your area.

Around me, there really are only two kinds of properties. The nice ones in town that are usually multi-unit (and when I say in town, I mean our small local towns with populations of 500 or less), then the old farm houses out in the country setting on some land.

My preference is the in-town ones. The old farm-houses turned-rental are always gonna require upkeep unless someone has completely went through and modernized everything which is a huge expense. And if that has already been done, the cost to buy vs rental income isnt as good.

the unit I purchased a few years ago was a 3-unit in-town. Very small property, sewer (which eliminates any septic system issues). It is all brick, and all higher end fixtures, trim, appliances, etc.

When looking for a rental, it is really important that you understand that you are NOT buying this for yourself, or what you like. Look at things from a practical standpoint. You want something that is going to be low maintenance. IE:

Any trees around that is going to cause constant roof or gutter upkeep?
Lots of land to mow an maintain and/or longer drive?
Basements you need to worry about renters never checking out to make sure there are no leaks/issues?
It is also in your best interest to pay for trash pickup. Its cheap, bout $15/month. Just add that to the rental cost. But thats something that a renter will "forget" to do and you end up with the place looking like a mess.

I like multi units like the one I purchased. Many advantages....
1. Its like having 3 rentals in 1. Anytime I am there doing work, It gives me a chance to check things out with the property. So I am there more often.
2. Only 1 tax/insurance bill.
3. Less mowing
4. Not as big of an impact when one person moves out
5. Only 1 drive/parking area to maintain

And depending on the interest rates, try to stay cash flow positive, but also try to pay off as soon as possible. I went 15 years on mine at 2.75%. With the down payment I made, it allows me to be $500 + each month. Which adds up quick and covers things like vacancies, major repairs like HVAC, etc. I would have went 10 years, but the savings in interest was minimal at 2.75%, and wouldnt allow much positive cash flow to cover the things I just mentioned. But all the experts claim you sould always go 30 years, which I dont agree with. Banking more money every month just to pay more in interest made no sense.

Fortunately I do live in an area that has some good renters. And living out in the sticks, I know most of the people some way or another, and know their history and family, and work ethic. Makes it easier selecting a renter when I have an opening. I dont think I would feel as comfortable if I had the same rental but in a larger city that I was unfamiliar with and knew no one.

As to your work situation and "not really needing a rental"......I was in the same boat. Bought this rental when I was 29, and will be paid off when I am 44. I think of it like this....If I had bought it 15 years sooner, I would be making $2k extra a month just on rentals. And with house and vehicles paid off, really wouldnt have a reason to have to punch the time clock at work. So I am "hoping" this rental will allow for a sooner parting-of-ways with the timeclock. And fill the gap where I would still be too young to draw retirement. I am currently looking for more rentals.