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Advantages/Disadvantages of rental property?
Old 01-10-2006, 12:38 PM   #1
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Advantages/Disadvantages of rental property?

Hello everyone!
My husband recently retired from the military and we are considering buying a propery as a rental (actually, initially our intent will be to use it as a vacation home, then a rental, and then possibly a full-time home). The property is in an area where we lived in the past and houses are appreciating and probably will for some time due to the influx on retirees and very limited land. The property was built in the '80s and is a end-unit townhome with over 1700 square feet. Purchase price is $164,900. What would be some tax-advantages, advantages in general, and disadvantages? We would be financing it as a vacation home with an interest rate of 6.5%. We currently live in a home with a mortgage and my husband's income is $105,000 and mine varies depending upon the number of nursing shifts I am willing to work I am interested in making this purchase both for the possibility of contined appreciation and for the possibility of truely retiring one day and only being able to afford to live in a property of that price. We currently live in PA and probably can't afford to stay out here if we don't want to work someday. Any help/thoughts would be greatly appreciated. Oh, our ages....37 and 40.
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 12:41 PM   #2
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Re: Advantages/Disadvantages of rental property?

What could you get for it rentwise? Property taxes and other fixed costs? Condo fees?
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 12:45 PM   #3
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Re: Advantages/Disadvantages of rental property?

The rent would be in the $950 range (yes, realize this would not provide immediate positive cash-flow).* There are no association fees and taxes are estimated at approximately $1200 per year.* I haven't looked into insurance rates at this time.* Thank your for your reply!
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 12:54 PM   #4
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Re: Advantages/Disadvantages of rental property?

Nords should be able to recommend a good book on landlording, or do a search...he recommended a couple recently.

I heard a good rule of thumb was if you can get 1% of the total purchase price as a monthly rent, you should be able to make money. Not sure if thats feasible...it sure as heck isnt here where homes cost 400k+ and rent for a thousand a month...

Big things to think about are someone helping you build equity in the property while wrecking it for you when its not sitting empty, some tax advantages around depreciation and negative rent which may or may not apply to you, and busted water pipes at 2am.
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 06:15 PM   #5
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Re: Advantages/Disadvantages of rental property?

I'm tapping my foot waiting for the dvd master of my sons first year worth of video events to transcode, and was thinking about this further. I had this decision to make last year and this was the thought process.

Yep, Gabes first birthday is rolling around in a few weeks...how fun flies when you're doing time...

We had my wifes old house, fully remodeled, not a great neighborhood but it wasnt so bad that you'd get stabbed in your own yard or anything. Worth the 240k we finally sold it for. Could have rented it for maybe $1000 a month. $440 a year property taxes, everything that could have busted or been problematic had been replaced and my brother in law was the contractor, so any problems with his work, he fixes. Close to an air force base and we had some in's to get military renters, who tend to be plentiful and decent to rent to.

So we're looking at grossing 12k a year and I'm figuring over a five year period, given some random maintenance, some tax breaks, and a few months here and there of no rent, minus the fixed costs, we're going to see somewhere between 48 and 50k if we're lucky. After tax benefits and the income hit, maybe 40-45k.

Then I looked at what else I could do with the dough. 240k in a 5% cd gets me 12k a year gross, about 11k after taxes. I can put it in one of the vanguard equity value indexes or managed funds and take about 6-7k in qualified dividends taxed (for me) at 5%, so I get to keep most of it and also get another 4-7% a year in price appreciation over a 10-20 year period using historic data. Or I can play the tax angle and put it into a tax managed equity index, see very little tax implications but get long term growth.

Or if I really, really find myself hung up on the real estate angle, buy the vanguard admiral reit index, get 4.5% paid out, a good chunk of that non-qualified dividends, and see 14% total annual returns over the last 10 years.

I couldnt find ANY financial sense to keeping the property vs a lot of no-work options that made more money or gave me different ways to spin the tax situation and current income levels.

If I was in a speculative mood and the property was poised for some good short to intermediate term upside, I might consider that if it wasnt a huge piece of my overall net worth. This one house had just shot from ~80k in value to the 240k in a couple of years. I didnt think there was much upside to it over ~5 years.

I think the rental thing works great if you can buy into a handful of inexpensive, low maintenance properties in an area where you have plentiful prospective tenants and the rent to purchase cost ratio is pretty strong. You can drop the 'low maintenance' part if you're in the mood to be a fixer upper full time. I know a lot of couples who make this their business and it was something I was on the cusp of doing about 5 years ago. At that time I could have bought a bunch of 1 year old, very easy maintenance homes for cheap in an area near two large white collar employers that move employees enough to give me a steady source of tenants.

Right now I get to sit on my ass and play with my son as much as I want to, and i'm making plenty of passive income.
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 07:09 PM   #6
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Re: Advantages/Disadvantages of rental property?

Not really sure what the exact question you're asking but here goes:
Since it is a townhouse I would make sure that there is no policy on the number of rentals allowed in the complex. A lot of condos have this stipulation so it doesn't turn into an apartment complex. I would check around with other landlords that have for rent signs out and ask them about how much they are charging for rent, deposit, etc. That will give you and idea of whether it makes sense as an investment that makes money.
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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 07:49 PM   #7
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Re: Advantages/Disadvantages of rental property?

Check out "Weekend Millionnaire's Guide to Real Estate Investing". We sold a condo that I owned after my husband and I got married and decided to invest the 80k income we had into 3 rental properties - all in 2004, after reading this book and researching things further. It's an easy read and a friend of mine said she paid 3k for a seminar that said exactly what this book said.

We got lucky that all 3 properties appreciated at least 50% in the past year, but even if the market doesn't hold, the positive cash flow that we have ($400 a month each) makes it easy to hang onto -- other than the whole issue of being a landlord, etc. (Arif actually just convinced us again on a recent post to keep the properties a little longer instead of taking the equity out and putting them all in stocks).

A few things to consider...

- vacation/retirement properties in that are not over-valued are great investments given the baby boomers....even better since you know the area
(if it's waterfront, even better)!

- would the numbers work on a one story sfh rather than a townhome (no stairs)? We found that our tenants in our sfhs are better / easier than the townhouse.

Great that there aren't association dues though, but since you're not going to be able to manage the place yourself (sounds like you're not in the area now), dont forget to include management fees, etc.

- although the market isn't necessarily going to tank, there's definitely an increase in inventory...just study the numbers well and make sure you get a great deal before you get stuck with a negative cashflow situation.

People told us not to get into rentals...we've had our definite ups and some downs...we're slowly learning, with the help of this forum, that a good mix of re and equities might be the way to go.

Keep on researching and trust your gut!

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Re: Advantages/Disadvantages of rental property?
Old 01-10-2006, 08:31 PM   #8
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Re: Advantages/Disadvantages of rental property?

Quote:
Originally Posted by ()
Nords should be able to recommend a good book on landlording, or do a search...he recommended a couple recently.
Here they are...

http://early-retirement.org/forums/i...96575#msg96575
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Re: Advantages/Disadvantages of rental property?
Old 01-11-2006, 01:30 AM   #9
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Re: Advantages/Disadvantages of rental property?

Honest question: How do you have a townhome with no homeowners' association fees? We've never heard of that kind of arrangement.
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Re: Advantages/Disadvantages of rental property?
Old 01-11-2006, 05:10 AM   #10
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Re: Advantages/Disadvantages of rental property?

Quote:
How do you have a townhome with no homeowners' association fees? We've never heard of that kind of arrangement.
I've seen a lot (and own two right now) townhomes without the dues in older neighborhoods on the East coast. I think the difference is just how we're define it ....townhomes in our area are 'row houses' with no common areas (ie., pool, maintenance, etc) other than the walls that they share. We also have townhouses that have association dues - Your definition probably include these -- they also come with maintenance and other shared services with the dues.

We prefer, for obvious reasons, fee-simple properties and just write into the rental agreements that the tenants are responsible for all of the yard maintenance, etc, like single family homes. Hope that helps!
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Re: Advantages/Disadvantages of rental property?
Old 01-11-2006, 01:46 PM   #11
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Re: Advantages/Disadvantages of rental property?

Quote:
Originally Posted by bearkeley
I've seen a lot (and own two right now) townhomes without the dues in older neighborhoods on the East coast.* *I think the difference is just how we're define it ....townhomes in our area are 'row houses' with no common areas (ie., pool, maintenance, etc) other than the walls that they share.*
Bearkeley, as an aside, what happens if a foundation cracks under the common wall?

Ha
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Re: Advantages/Disadvantages of rental property?
Old 01-11-2006, 07:38 PM   #12
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Re: Advantages/Disadvantages of rental property?

Check the tax code regarding the ability to claim expenses and other deductions. I believe you are allowed to write off up to $25,000.00 per year if your combined income is less that $100,000.00. For every $2,000.00 above $100,000.00 -- the $25,000.00 thershold is reduced by $1,000.00 -- Once your combined income is $150,000.00 or greater -- the benefit is negated. This affects the ability to reduce income by showing a loss.

Mortgage interest on the 2nd home is still deductible.

I beleive the above conditions are waived if you are a full time realtor.

Hopefully, some else with more experience can chime in.

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Re: Advantages/Disadvantages of rental property?
Old 01-11-2006, 08:47 PM   #13
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Re: Advantages/Disadvantages of rental property?

Quote:
Bearkeley, as an aside, what happens if a foundation cracks under the common wall?
Good question, Ha -- I have always assumed that the insurance covers it. (if not fire, then our umbrella). Both houses have been considered the same as all other sfhs we've purchased. The banks did't ask for anything out of the ordinary, so doubt if there's anything different. I would recommend you check with your insurance company just to make sure, if you consider fee simple properties...
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Re: Advantages/Disadvantages of rental property?
Old 01-12-2006, 11:18 AM   #14
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Re: Advantages/Disadvantages of rental property?

Generally an umbrella policy only covers you from liability claims. Homeowners insurance usually doesnt cover maintenance or structural problems with a property.

A few examples that I think might apply:

Your water heater leaks and the water seeps into a neighbors adjoining property. Your homeowners or umbrella would protect you from a liability claim minus the deductible. Busted water heaters are one of the biggest problems with condo's, by the way.

Foundation shift from soil expansion due to flooding. Not covered by anything other than possibly special flood insurance.

How do you work it out when the units need painting? I assume the row of units is all painted the same color? Guy on the south/weather side will probably need to paint early while the guy on the north side in some areas might get some mildew staining on the paint. Guys in the middle might not need to paint as often. How about a new roof? If it fails over one unit, do you put new shingles just on that part?

Sounds like there are at least a couple of plausible situations where you and adjacent neighbor(s) will have to agree to do or not do something. Is there an agreement in place to cover this that compells someone to pay their share in the event of an expensive and necessary repair?
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Re: Advantages/Disadvantages of rental property?
Old 01-12-2006, 01:15 PM   #15
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Re: Advantages/Disadvantages of rental property?

Just heard my brother has spent the last few weeks cleaning up his rental condo after his renters trashed it. Pee+poop all over the bathrooms, holes in the walls, cabinets messed up, carpet ruined, needs new paint all over, tenants didn't pay last month's rent, and then vacated. I know he had a long period of vacancy close to a year where he didn't receive any rent, but had the mortgage, hoa dues and taxes to pay. They place is barely worth what he paid for it 6 years ago. I'm pretty sure he made nothing on the place, or has lost money on it. And he does all the repairs himself, so he has spent a lot of time on it.

His experience reminds me why I don't want to be a landlord (I was involuntarily for a while - I had some bad experiences too!). Like () said, when I can get the same stream of income from other investments that I can buy and sell with a click of my mouse, why take the risk and accept the headaches of owning rentals? My total market index will NEVER call me at 2:00 am to report a water leak in the ceiling. To each their own though.
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Old 01-12-2006, 01:23 PM   #16
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Re: Advantages/Disadvantages of rental property?

Well I've had a rental house for almost two decades now. And I have to agree with you that renters are a strange bunch. Especially after they are over about 30-35 years old.

The trick to getting good tennants is to screen them really well before you hand over those keys. Besides credit and unlawful detainer checks just take a look at their car. New or old if there is a bunch of french-fry boxes and other trash in their car then that's how they are going to treat your house.

Still you never know

I don't manage it myself anymore. I hated taking the calls. In hindsight though it has been pretty lucrative.
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Old 01-12-2006, 01:29 PM   #17
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Re: Advantages/Disadvantages of rental property?

We did that after dh moved in with me, we rented his house for 4 years. Any thoughts of us being landlords and making our fortune that way were squashed within those 4 years. You've all heard the tales of the bad tenants, we both said never again!!
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Old 01-12-2006, 01:45 PM   #18
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Re: Advantages/Disadvantages of rental property?

Quote:
Originally Posted by justin
My total market index will NEVER call me at 2:00 am to report a water leak in the ceiling.
I think, for a small fee, Fidelity will do that for you if you need it.

Renting makes great sense if you can get the right situation. I was looking at buying a half dozen rentals about 5 years ago. I could get a 1400-1600 square foot one year old house on a .20 acre lot, stucco exterior, tile roof, already has the curtains and whatnot from the short-term owner...not much maintenance or work to do until the water heater goes in 14-16 years. Prices were about $140-150k, I could get $1200 a month in rent, two large white collar employers within a 10 minute drive that like to relocate people often enough to give me a good source of new renters. All of them about a 15 minute drive from my house and within a few miles of each other.

That would have worked pretty well for an income stream, and in ~15 years when I had the mortgages paid off I could have ER'ed and done part time maintenance on the properties. Would have done better than a lot of people did in the stock market from 00-03.

Plus those homes are all worth 400k+ right now...
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Re: Advantages/Disadvantages of rental property?
Old 01-12-2006, 02:43 PM   #19
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Re: Advantages/Disadvantages of rental property?

If it weren't for my property values doubling in 2 years......I wouldn't be so excited about renting properties.

It really is a pain in the ass, but if you keep close tabs on the renters and gain their respect(stand beside them, shake their hands, make things sound like a team, and know when to put your foot down) you can do just fine. The most important thing to do is have a murphy's law savings account of at least 3k per house at all times or an open line of credit.
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Re: Advantages/Disadvantages of rental property?
Old 01-12-2006, 03:51 PM   #20
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Re: Advantages/Disadvantages of rental property?

Quote:
The rent would be in the $950 range (yes, realize this would not provide immediate positive cash-flow).
I'ld say your heading for a NEGATIVE cash flow of $400-500/month.

Always said the mortgage should be payable with 1/2 the rents. Because the rest of the rent will go to: maintenance (15%), taxes (12%), water/sewage (2%), insurance (3%) ... the rest is profit for you sweat/blood/tear. Note your taxes are right in this range.

The rents might be bumped up renting as a furnished apartment. Had good luck with these - renting to transient home owners, divorcees, long term business people, ect. Rents can double doing this; no lease though so turn over is high. Look under "furnished apartments" in the classified ads for a feel of what the market will bear.

I prefer to be a seller in this market.
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