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Disapproving Family - Starting in Rental Property Investing
Old 06-19-2019, 10:21 PM   #1
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Disapproving Family - Starting in Rental Property Investing

​Hi all,
Since early March I have been learning as much as I can about rental property investing through articles, forums, podcasts (mostly biggerpockets), and local meetup groups. I have started to establish relationships with local lenders, realtors, property management companies, contractors, and fellow investors through the meetup group.

Just as a brief intro my wife and I are in our late 20's, we bought our first house 4 years ago but the property taxes and HOA fee has increased significantly since we first bought in (including insurance/taxes in escrow it is roughly $1,200 per month). Luckily the market value for our house has gone up to the point that if we were to sell today, even with the realtor fees we would gain about $12,000 from the sale. Due to HOA we can't rent it out, and the timing seems right to sell for us.

We also at this moment have about $10,000 in our bank account we are willing to invest. In the search for something to invest in, I stumbled on BP and was hooked on the idea of REI since. For our situation, it seems like selling our current house and using a low downpayment (3.5% FHA or 5% conventional) on a 2-4 plex is the perfect first investment. Not only are we dramatically reducing our monthly house expenses with a cheaper mortgage, but we can bring in more income on the side. Of course, I am doing everything I can to make sure we are prepared prior to closing our first deal (how to analyze deals, landlord forms, managing properties, legal, CPA, etc.).

I started telling all of my family and friends about the exciting plan my wife and I have to get started in real estate investing. My parents told me to reach out to my dad's cousin, who rents out a couple SFH houses on the U of Wisconsin (Madison) campus to ask him about his experience. I called him up and 5 seconds into my REI 5 year plan he says "Let me stop you right there" and proceeds to go on a 45 minute tirade of why we should not waste another second on rental property investing. Mostly just complaining about when tenants decide not to pay or want to move out and maintenance/capex items. Telling me over the years they have learned to only to rent to junior-senior students, never adults, never younger partying students. He assured me also his cousin who also has a couple rental properties loathes it just as much as he does. His conclusion essentially was to save up to invest in large, commercial properties/businesses. He also owns a car wash and FedEx routes today.

Besides general intro and story telling there were 3 points for this post I was hoping you could help me with...

1. Other than just proving my success later on, how do you think I can convince my family we are prepared and this is the right move for us?

2. Which concerns should I give weight to and which could be chalked up to my dad's uncle's lack of preparedness/management/bad apples/etc? In other words, what are some of the things which pose the greatest danger for those like me about to get into their first house hack/rental investment? I have been trying to learn about all of the pitfalls and instead of saying "I can't" say "How can I" overcome them.

3. Any other beginner investment vehicles worth pursuing that could yield a similar opportunity for return for my wife and I? For our specific residence situation unless we rented a place we would be getting a new mortgage anyways, it seems to make sense to house hack instead of following the traditional path of 'moving up' to a larger house and a larger mortgage. But I'm curious to hear everyone's thoughts...
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Old 06-19-2019, 10:28 PM   #2
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I wish you success, I'm sure it can work.

Since you asked:
I wouldn't want to have my tenants as my next door neighbors. Other people may feel differently, and I'm sure it frequently works fine, and it seems good to have your investments constantly under your watch. I just wouldn't want family life quite so intertwined with my job. And it is a job.

It's unusual that the very best rental properties are also the places that I'd choose to live. Doubly true if I've got children.

As far as your parents: Probably the best thing you can do is show them, through your actions, that you are going into this with your eyes wide open and are doing the necessary research. If it were my child, I'd want them to have a very objective attitude, and to hear them realistically address the risks.
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Old 06-20-2019, 05:42 AM   #3
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IMO, the more people you ask the more confused you'll get.

When I was 22 I bought some income property. My GF at the time thought I was nuts. Her father sat me down and solemnly told me: "Son, a bank will never lend you money if they think you're going to make money on their loan".

That's when I knew that the world was full of idiots.

Good luck.
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Old 06-20-2019, 06:01 AM   #4
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IMHO you've made the right choice to pursue multi-family, not SFRs as your relative has.

You need to understand it is a second job...to get a decent return you will be the one buying the properties, doing the demolition/renovation yourself, roughing in new fixtures/plumbing/electrical, screening the tenants, & collecting the rents (i.e., NO property manager)
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Old 06-20-2019, 06:11 AM   #5
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Since you've done some research, are you certain you can get 95% financing in your region? In my area, more than a 2 family owner occupied home would be considered a comercial property and likely require 20% down. And only count about 65% of (current) rental income.

Run the numbers on a couple of prospect properties and see if the numbers work for you.

As for tenants, I'd be inclined to listen to your uncles sage advice. There's a lot more to landlord in than cashing the rent checks. Plan on it being a part time job. Think about spending a weekend cleaning/fixing an apartment while your family is home waiting on you.
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Old 06-20-2019, 06:22 AM   #6
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I bought my first rental property in 1988 (still have it BTW) and it has been one portfolio component that enabled me to reach financial independence. Rental property is neither a good idea or a bad idea. It all depends on the property you choose, the tennants you choose and the neighborhood you choose. Ability to take care of electrical, plumbing, appliance, carpentry, and HVAC issues yourself, really helps too.

As far as advice from relatives go, my FIL told me back in the early 90's: "I have one great stock market tip for you.... GET OUT!" Needless to say, in hindsight that wasn't very good advice, and if I'd followed that advice, I wouldn't be retiring tomorrow.

You have done your research. Give it a try. You are young enough to recover if it doesn't work out. However, keep in mind that it is in fact a part time job, and you will be giving up some time with your family to keep it going.
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Old 06-20-2019, 06:37 AM   #7
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My wife has been in the rental business for 40 years. Her best advice was to make sure we could afford the property if it WAS NOT rented. There will be times when all the planets and stars are aligned, and other times where they all come crashing into each other. As long as you can survive the worst of times, you should be able to make things work from a purchase standpoint.

Next, you need a lot of tools, and DIY knowledge. As others have said, hiring folks to manage a property or do the endless maintenance will hurt your cashflow significantly. You will have clogged toilets, failed HVAC units, roof leaks, and bedbugs. I am not suggesting the world is going to end, but a lot of your personal life will have to suffer. Your partner in life will also need to help out, else you will get into a lot of arguments about why you are not spending more time together.

Think long and hard about this investment...I am concerned that you have so little saved and so little equity in your current house, you do not have a significant cushion of cash for the unknown problems that may come up. Having 2-3 times more cash up front could go a long way to protect you.
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Old 06-20-2019, 06:54 AM   #8
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Originally Posted by pvhawkeye View Post


1. Other than just proving my success later on, how do you think I can convince my family we are prepared and this is the right move for us?

2. Which concerns should I give weight to and which could be chalked up to my dad's uncle's lack of preparedness/management/bad apples/etc? In other words, what are some of the things which pose the greatest danger for those like me about to get into their first house hack/rental investment? I have been trying to learn about all of the pitfalls and instead of saying "I can't" say "How can I" overcome them.

3. Any other beginner investment vehicles worth pursuing that could yield a similar opportunity for return for my wife and I? For our specific residence situation unless we rented a place we would be getting a new mortgage anyways, it seems to make sense to house hack instead of following the traditional path of 'moving up' to a larger house and a larger mortgage. But I'm curious to hear everyone's thoughts...

1. Ignore the family advice. Why do you care what they think?

2. Your biggest threats are: a.) being undercapitalized, and b.) selecting bad tenants
Both can be mitigated. Make sure you have enough reserves (after everything is paid, property is made rent ready, and tenants have moved in), so you can absorb one or two “major expenses” such as a new HVAC, water heater, refrigerator, or even roof. Doesn’t mean something bad WILL happen during the first few months of ownership, but if it DOES, you have to be able to absorb it.
Take the selection of tenants very seriously. Run criminal background checks and credit reports (many tools available for this). Stick to your rental criteria. Consider m2m leases so you can get rid of bad apples quickly. A good tenant is essential, a good long term tenant is is worth their weight in gold ( well, maybe silver, but you get the point).

3. There are many other ways to invest your money. Both in real estate and elsewhere. Most, if not all, will be less “hands on” than being a landlord, but rental properties, can be an extremely powerful path to building wealth with relatively modest risk, if done correctly.

Best of luck!
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Old 06-20-2019, 06:57 AM   #9
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Bigger Pockets is full of cheerleaders and scam artists, all of whom are there to make money on you. It's NOT the place to learn about real estate investing.

I suggest that you get to know some of the local investors where you are thinking of investing. Talk to some of them and some local property managers about rents and expenses of the type of property you wish to buy. Sometimes you meet the most interesting and useful people by hanging out at Home Depot on a weekday morning.

Most important is that you understand the math. Property being sold to you will likely have an I&E statement attached that overstates income and understates expenses. Learn how to analyze those statements accurately and you will be in a much better position to decide if REI is for you.

Your family is worried about this, and rightfully so. Throwing all your capital into something about which you know little exposes you to a tremendous amount of risk. In your shoes, I would wait until I had more reserves before I started writing checks.
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Old 06-20-2019, 07:02 AM   #10
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I won't completely discourage you. RE can pay off well. But here are a few things to think about:
- Don't put all your eggs in one basket.
- RE can be volatile. What you see right now is not forever.
- Demographics change and impact the market. Things will be different 10 years from now. Today's rental and market trends will be different then.
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Old 06-20-2019, 07:15 AM   #11
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I happen to agree with your dad's cousin... residential rental properties are often a hassle... and are definitely another job. You can get some good tenants and also some tenants from hell. Like your dad's cousin, my dad owned a small apartment complex when he was in his 40s-50s... he ultimately decided that they were more trouble than they were worth and sold them.

The other issue that I have with rental real estate from an investment perspective is lack of diversification. Our neighbor down the road owned a small office building in Flint, MI that housed a dental practice. It didn't work out well of him.. bankruptcy. Unless you have a lot of properties in different economic areas you ineveitibly end up with concentration risk that you can't diversify out of.

Now all of that said, $1,200/month for property taxes, insurance and HOA seems high unless you live in a HCOL area so perhaps you are due for a move to more affordable digs.

I agree that it is not wise to follow the traditional path of moving up to a bigger house and mortgage as your income increases. The home we lived in for 25 years cost about 2x my gross earnings at the time we bought it... my earnings increased faster than the home appreciated so by the time we sold it it was less than 1x what I was earning.

A couple weeks ago I was dealing with a hassle of a broken sewer pipe on a commercial property that I manage for my mom and I said to a friend "I much prefer stocks... I've never had a stock call me about a broken sewer pipe". BTW, the repair of the broken sewer pipe uncovered two underground storage tanks that then had to be removed so that broken sewer pipe is ultimately going to cost her a lot... I'm guessing 2-3 months of rent.
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Old 06-20-2019, 07:19 AM   #12
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Quote:
Originally Posted by euro View Post
Take the selection of tenants very seriously. Run criminal background checks and credit reports (many tools available for this). Stick to your rental criteria. Consider m2m leases so you can get rid of bad apples quickly. A good tenant is essential, a good long term tenant is is worth their weight in gold ( well, maybe silver, but you get the point).
One of the reasons that you need a cash cushion is to carry the place for a few months while you find a new tenant. One of the biggest trouble spots is compromising tenant selection because of negative cashflow.

If RE investing was easy, many more people would do it. Get to know property managers in your area. Good ones can be worth gold in finding tenants.

And remember that if you can't afford a good PM, then you can't afford to buy. Any net will be because you are doing the PM job yourself.
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Old 06-20-2019, 07:35 AM   #13
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Bigger Pockets is full of cheerleaders and scam artists, all of whom are there to make money on you. It's NOT the place to learn about real estate investing.
s.
Im going to have to disagree with you on this. Bigger Pockets is an excellent place to learn about real estate in my opinion. Yes, there are a good number of “rah-rah” folks and even some scammers on that site, but they also provide a massive collection of “how to” advice, tools, forms, books etc. the site has about 800’000 members, so yeah, there will be bad apples among them, but it is pretty easy to navigate those for an average cautious individual.
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Old 06-20-2019, 08:08 AM   #14
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OP, you sound like you only want to hear stories that support buying rental property. Since you won't listen to stories that say you shouldn't, why should other family members change their mind to your way?

Why do you care what they think? Do you need money from them?

Let us know in a year or two how it worked out.
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Old 06-20-2019, 08:15 AM   #15
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My Dad has run rentals since the 1970s. They are providing the majority of his retirement income now. Should I inherit them I will sell them as fast as absolutely possible.

I've done the math on his income/expense stream since 2010 the cap rate average is only 4.26% across 4 properties (a 4-plex and 3 SFH) in 2 states with 0 mortgage expenses. I can make that % at Fidelity from my keyboard without any liability exposure from a tenant falling down the stairs or a trespasser tripping in the yard AND without ever cleaning human feces off of a bedroom wall, shoveling maggot infested dog waste out of a basement from an unapproved pet, and dropping all plans to rehab a property between tenants in 36 hours. My wife is not interested in helping clean up other peoples filth so its either me alone or hire somebody ($).

We have had crap tenants. And we've had a wonderful single school teacher (no kids, no pet) rent the same unit for 20 years. Over time you will have both great tenants and tenants from hell.

One thing that is a long way out on your horizon but you should be aware of is that while you can get wonderful depreciation deductions while you own the properties, you will pay taxes through the nose on depreciation recapture when you have to sell the rentals to pay for nursing home expenses. From a tax perspective that capital is locked up and you can only buy similar income properties (1031b exchanges) when you sell... if you change your mind you will pay depreciation recapture taxes to get out.

Rentals can be a great investment. It all depends on how much work you are willing to put into it. For me the returns are not big enough for the effort and risk required.
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Old 06-20-2019, 08:38 AM   #16
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Residential real estate has been our primary income for 30+ years. We've owned homes and multi-units in a 15 mile radius and it has been good to be able to "walk the fences" and keep an eye on what needs attention. That said, we had a rental house 1/2 a block away and I didn't like that at all: way too close and people live to suit their own light, not yours.

Multi units are safer and cash flowed better for us: economies of scale (one big roof is cheaper to replace than 5 small ones), efficiencies of time (most problems at one location, less windshield time), less vacancy risk (a vacant inexpensive one bedroom in a four-plex hurts less than a vacant 3 bedroom home).

An owner occupied small multi (4 units or less?) will offer up some great financing vs. non-owner occupied. Some real big down sides in the personal life to go with it as well.

Hired management? not happening. That 10% management fee on all rent translates to about 20% of your profit. The on-call repair staff the management company has will come with eye popping costs. Are you hands on handy? We hire most stuff out, but I also do some of it still and do show the flag and have the terms the workers use for their tools, materials, and procedures. In the beginning we did most everything: one day back then my gal stopped and noted that it had been over two years that we had worked on the rentals every single day. Not 8 or 12 hours/day, but some work every. single. day.

A big problem with the stock market is that investors spook and pull their money when things look bad, then buy in (high $) when things look rosy. Real estate can also be bought high when things look good, but it suuuuuucks trying to unload it if things aren't going well. It just doesn't sell and you are stuck falling downhill with that running chainsaw biting you with vacancy - insurance bill - taxes - leaking roof -
It can be the investment that you just can't get away from. We had plans to sell in 2008. The gods laughed. Going to be 70 this year, and still have 37 units.

Best of luck - guess my distilled thought is that real estate favors the persistent donkey that just keeps his head down and keeps slogging, year after year.
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Old 06-20-2019, 10:25 AM   #17
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Keep in mind that much of the $ in landlording is in appreciation of the value of your property, not cash flow. And that when you sell your investment property to realize that gain, you must pay back Uncle Sam (and your state, if it has income taxes) for all the depreciation you deducted while renting.

We actually did not know that when we decided to rent out my house, after Mr. A. and I got married and I moved into his house. When we sold it years later, depreciation recapture ate up a good chunk of our modest gain.

Also, even tenants who look good on paper can come up with ways to make you wish you'd never set eyes on them, but a proper lease will cover most of what they can throw at you. You just need the hide of a rhinoceros sometimes.

Good luck!
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Old 06-20-2019, 10:32 AM   #18
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1. Ignore the family advice. Why do you care what they think?
It isn't a matter of "ignoring" the family advice. It's a matter of not asking for the family advice. Just stop asking and proceed as you wish. If OP so badly needs the approval, advise and potential help from family members, he probably doesn't have the personality to be a landlord IMHO.
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Old 06-20-2019, 10:48 AM   #19
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Since the title of the thread is about the disapproval of the family, and not an objective "hey those with experience, is my plan solid" then it does seem the OP is more focused on winning over those in his family who don't support the plan.

And that's the least important thing, and therefore should not be OP's focus. The need to convince your family is something you outgrow. Same for your decisions on who you marry, raising your family, what house to buy, religions, etc. You gain their input and respectfully consider it, but you don't feel the need to "win" when you disagree (intelligently).

OP, we don't know enough about your situation, but if 10k is the sum of your investment savings/assets at this point, in your shoes, I'd look to vastly increase, have at least a 6 month expense cushion, nicely loaded 401k's, roths, and other tax-advantaged choices, long before I'd diversify into REI.
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Old 06-20-2019, 12:00 PM   #20
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Quite a funny thread actually. (For background, our first house was a duplex and I owned twos, fours, and small apartment buildings for 20 years.)

@pvhawkeye, enjoy this time. You have convinced yourself that real estate will be wonderful and you have not yet experienced the reality that will teach you what it is really like.

Also, remember that the people who have tried and abandoned your strategy are not posting here about their failures.

That said, real estate can be a good investment. Sometimes. A lot depends on luck and the RE market you are dealing in. A hot market is the worst market to enter. A slow market may be the best, depending on local economic conditions. So: California - no. Rust belt - no. Southeast near new manufacturing plants - maybe. And so on. Said another way, if you do not live in an attractive market, your probability of success will be low regardless of what the self-help books and real estate agents tell you.
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