The Rental Property Thread

rather than derail the "who's good with money" thread, I'll start this thread:

alfadriver wrote:

Keven wrote:

Toyman01 wrote: My current and future investing is going to be in property. Not for the increase in value, but for rental income. I have one rental house now and will add to that as funds become available. The rental generates enough income to pay for itself and then some. I'm in the process of saving and planning for the next one. (This, to me, constitutes a wise use of credit) The master plan is for the rental units to be paid off about the time I'm ready to retire. If I can average $1000/month rent and have 10-12 rentals...you do the math.

Feel free to make a rental property thread as I think this will be my next venture.

Do your math. The info I see about rental properties- the income is not very high, relative to what is owed. It's great that you can get a property, and earn some money, but unless you do a great job in the property, you are not going to make much of a living just owning rental properties. To have 10-12 units to rent means you start with a LOT of money to get into that game. While you will build equity, many states have 2nd property rules for taxes that make them very, very high on your non-home property.

OK, I did my math.

Keep in mind it's a long-term play, as noted by Toyman01. Goal is to have rentals paid off in time for retirement. It is true that they don't make a lot of money relative to the amount owed at the beginning of the note, but at the beginning of the note we don't care about how much money we're making because we have day jobs.

The plan is not to buy 10-12 rentals today, the plan is to buy them one at a time, as finances allow. The basics are:

It does not take a lot of money to buy the first rental, especially as a DIY'er. Buy a beater house in a rental-friendly neighborhood. Make it nice to live in (a E36 M3 house attracts E36 M3 tenants). Rent has to be competitive for the combination of amenities and area, but will certainly cover PITI plus a little. That "plus a little" goes into an account specifically for that property, to pay for the emergency repairs that are sometimes required, as well as to pay for the routine maintenance stuff that is required, until some target balance is reached. After that, the "plus a little" goes into a separate account for the down payment on rental #2.

if things go south, sell. someone else (the tenant) has been making the PITI all along, so "upside down" shouldn't exist unless things were not managed properly.

One key thing I've heard is to establish an LLC for each property, rather than having all properties covered by the same LLC. Consult an attorney who specializes in landlord / tenant law, property management, etc.

My dad did rental real estate all his life. His cardinal rule was to not do this with single family homes, one problem with them is your holdings become spread out and this makes it difficult to keep up with things. His rule was to have his properties no more than twenty minutes apart. Also if one goes vacant, there are not other units to 'help' it along because the monthly profit margin on SFH's is generally lower. He bought duplexes, triplexes and small apartment complexes, those can usually be bought for roughly the same $ as SFH's in a given area.

Property taxes on non owner occupied homes are considerably higher than O/O. Three years ago the county got my house mixed up with the rental across the street, my taxes jumped from $880.00 to $2800.00.

Doing this with SFH's can certainly be done, just make sure you do your due diligence and know what you are getting into ahead of time.

Watch tax and estate sales for deals on rental property. Dad bought a 12 unit complex for $18,000.00 (no that is not a misprint or fatfinger), put another $35,000.00 into repairs and paint, got them all occupied and almost immediately was offered $110,000.00 for it (he held out for $119,000.00).

In reply to AngryCorvair:

My point was more about goals than anything else. If a rental was part of your home (aka duplex), and it meant you lived there for virtually free, awesome. If a rental or two were in place so that you had a long term investment that gave you a handful of cash a month- perfect.

If you expect to live off of the rental of 2-3 single family homes, yea... you could clear mabey $2k/mo after all the expenses- and while $24k/yr is decent money, it's tough to have a family of four live off of, especially when you have $500k of principal that hangs over your head.

As long as the math works in your favor.

BTW, a tip from a friend who used to work here, and what I see on HGTV- the most rental friendly areas are colleges. Apparently, near U of Michigan, they use to get $900/room. Not sure what it is today. But a 4BR home brings in pretty decent monthy money. Not easy to find, that's for sure- since most of the best properties are part of a bigger rental company.

So, in two words.

Math. Colleges.

Be careful with rental properties and your numbers. A lot of new landlords fail to properly take into account maintenance and upgrade costs.

Just because a property is bringing in a few hundred dollars a month in excess of the mortgage costs does not mean that it is generating a profit for you. As soon as a big ticket item needs replacing such as a roof or furnace your profit can quickly turn into a loss.

Spend some time over at BiggerPockets.com. It is one of the better real estate forums on the web.

Yeah, repairs will kill you if you do not plan ahead. My dad's stuff is being run by a property management company (long story), they have a 'hold back' of $100 per unit which goes into an escrow account for repairs. Good thing too, because we had an A/C unit let go which was due to an electrical problem, it burnt a hole in the wall.

Patrick. I have been looking at doing some rental property investing too. I think the best piece of wisdom I picked up so far is this. When you buy rental property you are starting a business. Housing is a vital service you are supplying. The fundamentals of business apply here. Make sure your cash covers ALL your expenses and gives you the return you want. Set up a legal entity that makes sense for your situation and risk tolerance. Business is a team sport. Find smart people who help you navigate all the overlapping rules and regulations and take advantage all the tax breaks you qualify for.

AngryCorvair wrote: One key thing I've heard is to establish an LLC for each property, rather than having all properties covered by the same LLC. Consult an attorney who specializes in landlord / tenant law, property management, etc.

I would definitely not do this, unless you enjoy doing taxes and corporate forms non-stop or like employing a team of lawyers and accountants and also enjoy paying insurance up the wazoo (separate liability policies for each LLC), etc. Each business entity is like setting up another person - in order to really be treated as separate for liability reasons they have to have separate bank accounts, separate tax returns, separate minutes books .. I have to do the taxes and everything for two corporations and think that's too much, especially when it's on top of my personal stuff.

In general, just have good liability insurance and you'll be covered from a "tenant gets hurt and sues" standpoint. Your rental dwelling insurance should provide that. Each property will need its own policy, but you won't need more than one umbrella policy.

Oh, and this is not legal advice; I am not a lawyer.

I am a landlord but I've only ever done commercial properties so I'm actually curious about this stuff myself. My wife and I have talked about buying some residential property as a retirement hedge (lots higher return than mutual funds if you do it right) but a bit intimidated by the amount of work it might entail.

alfadriver wrote: In reply to AngryCorvair: Math. Colleges.

You sure about colleges? I feel like that will get you a bunch of turnover and kids that party and trash the place (coming from the college kid who rented a townhome and has now been here for 5 years with a spotless home).

What about airforce bases and section 8?

Make sure to tell renters to get renters insurance so if something happens they get paid also .

Refugees.

This is what I plan on doing in a few years. I'm only telling you this because GRM is like family.

Refugees come to US and have their rent paid for the first year. If there are older folks in the family, they'll get SSI right off the bat, and most families will use that to pay rent until the younger family members get jobs.

Folks from Asia and Africa rarely complain about even the worst living conditions as long as their is good heat and hot water. Many landlords work agreements with resettlement agencies to do emergency housing at a higher rates (3 month lease for 25-50% more a month).

Downside? You need to be a in a city with refugee resettlement agencies.

I'm just needing to get rid of my student loans and then I'll be saving for a refugee only rental property.

... (googling "refugee resettlement detroit") ...

I would suggest calling the resettlement agencies and asking them where they need more housing.

My girlfriend's agency has a hard time with property owners who don't want or care to understand the refugee population and their needs, especially the whole emergency housing situation.

I have some experience here (I started painting basements in rental properties for my parents when I was 14...I am now 43.) and your plan is spot on.

My advice would be to buy only single family homes, all in the same general area. If you have more than one open at a time, you can easily show a prospective tenant a few choices. It also helps when contracting with plumbers, electricians, etc. I like an area that is popular for rentals with access to major highways, the airport, stores etc.

Establish one LLC that owns everything and carries the insurance. It is complicated, but you only need one for all properties. Talk to a layer before you do anything. The LLC also "manages" the properties, so when a tenant wants to do something that they disagree with (paint the living room black? Pave the front yard?) you can just say that the "Management Board" has denied their request.

You should also belong to a Landlords association (http://www.landlordassociation.org) of some sort. You can get lots of benefits from membership, like educational seminars, access to running credit checks and discounts at places like Sherwin Williams. Look into that, good help and advice.

Rent to people who understand that it is a house, not an apartment. You will not be over to change lightbulbs! The grass will not cut itself! This keeps routine maintenance is pretty simple. Between tenants, do some updates and repairs, repaint, swap out carpet, whatever is needed. This will help to cut down on emergency repairs.

Emergency repairs will only happen when you are out of town, so have a list of trusted contractors that you can call. Is it going to drop to record low temps? Expect a call for a broken heater. Is there a heat wave on the way? Expect the A/C to fail. Have $$$ ready for this.

When purchasing a home, the more work you can do yourself the more money you save. You will still need time (no more weekends or vacations) and the tools to do the work. As you grow, you can add more contractors.

Once you have 10 properties, expect to spend X number of hours listing, showing and working on renting them. This involves a lot of phone calls and emails and appointments, so you need to have the time. Craigslist is a godsend! Have an iron-clad lease (the association can help here) and run checks on anyone you plan to rent to. Trust no one. Believe but verify.

My oldest son works for a company that buys distressed properties, rehabs them, and rents out to Section 8 people. They buy 10 to 15 properties a month. Then they put packages of properties together and sell to investor groups. Making a fortune. He has offered me a rental agent job. Thinking about it.

Keven wrote:

alfadriver wrote: In reply to AngryCorvair: Math. Colleges.

You sure about colleges? I feel like that will get you a bunch of turnover and kids that party and trash the place (coming from the college kid who rented a townhome and has now been here for 5 years with a spotless home).

But you also get full properties and premium rates, even with properties that are not exacly the best stuff in the world. And, like you, not all students live like garabage.

nothing wrong with turnover. Unless you want a muli year lease signed.

Time to argue about single family homes vs apartments/condos.

Keven wrote: Time to argue about single family homes vs apartments/condos.

no it isn't!

refugee only rental property.

THAT'S DISCRIMINATION!!!

It's not discrimination if you never list it publicly.

My take on it as the owner of one property.

The property in question is my first house. The balance on the loan is about $85K. The payment including insurance and taxes is right at $770 a month.

When we bought the new house my plan was to sell it because I didn't want to deal with tenants. That was at the bottom of the market so I spent a year and about $15K renovating it and just sucked up carrying two house payments for about 6 months. Yes, it sucked, but I could afford it because I had no car payments, no school loans, no credit card debt and money in the bank.

It has a new roof, new paint, new carpet, new appliances, new counter tops, new laminate flooring in the kitchen, 2yo A/C unit, new insulation in the attic, basically the entire house is new. I did everything but the roof myself.

With the housing market sucking so bad, SHMBO and I decided to list it for rent on CL. Within 24 hours we had four people come to look at it and had it rented for $1200 a month. It turns out she loves dealing with tenants and doesn't work a 9-5 job so I let her handle that part of it.

The excess after making the payment is going into the house's own little checking account. Once I get a years worth of payments built up, that excess will be piled on the loan to pay it off that much faster. The checking account pays the payment, and the excess is there for emergency repairs, maintenance, and to continue the payments if the house ever sits empty. There's about $4000 in that account now. My only expenses are, I've had to replace one breaker on the heat pump that failed on the coldest day of last winter, and stop the squirrels from getting in the attic. Any money generated by that house stays with that house. Just like income off any other investment, it rolls back in to make the investment stronger. It should be paid off well before I retire and then I will use the excess off that house to pay off future houses faster.

This house is rented to two guys in their late 20s. Both of them successful sales people. Both passed their background and credit checks with flying colors. Their check shows up on time every month. Other than the calls for the A/C and the squirrels we haven't heard from them. The house looks as good as it did when we moved out. To be perfectly honest we probably got lucky with these guys. If there was ever a perfect tenant, they are it.

I'll make another post about my Sister and BIL. They are the ones that started me down this twisted path.

On to the Sister and BIL.

They still own the first house they ever bought, and they are on number 6 now. The rest are rentals and are making their payments. They have also bought additional houses and a small 10 unit apartment bringing their total up to 22. The total rental income is knocking on the back side of $30K a month. At present 95% of that goes back out paying the taxes, insurance, maintenance and payments. They have all been refinanced with 15 year loans and will pay off when he turns 55 leaving him an income of close to $22000 per month after paying the costs of ownership. I don't care who you are, that's real money.

They mostly buy smaller older houses in good neighborhoods that will rent for $1000 to $1500 a month. At that price break in Charlotte, the riffraff can't afford them so you get a better quality of tenant. They have one tenant that has been with him for 15 years and most of them stay at least 3. The longest he has ever had a house sit empty is 4 months, 2 of them while being renovated.

I'm getting a later start than they did, so I'm planning on 10 houses. As soon as I have a wad of cash, probably in a year or two, I'll start looking for number 2. It'll be about the same size as the one I have now, 1100 square feet, and in the $75K to $100K price range. The first two or three will take some time, but it should start to snow ball as things pay off and that money pays back in on other houses. We'll see.

Oh man, you guy's are putting ideas in my head. Now all I need to do is somehow figure out how to up our income. I have almost an unfair advantage due to the line of work I 'm in. And if I had the cash now would be the time to buy.

RE: Colleges

When I was in school in Flint, MI, some students would buy a property, live in it while renting other rooms to classmates, and have it PAID OFF by the time they left. Houses are dirt cheap there, it would be easy to pay cash for them. Like bordering campus for $30K cheap. Some were nice, some not so nice (and college students don't care anyway). Gotta deal with college students, but from what I understand, the profit margin is so high on them, it isn't a big deal. If something gets trashed, hire someone to fix it.

AngryCorvair wrote: no it isn't!

Awww why not!!

Single family vs multiple family vs college students vs section 8 housing is all about personal preference. Nothing to argue, they all have their merits and issues.