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Old 09-16-2015, 10:04 AM   #21
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You forgot: The tenant quietly brings in friends and relatives as subrenters. When you notice the telltale signs of multiple occupancy - or actually see the illicit occupants - you are told, "Oh, these are my guests; they just needed a place to stay for a little while." Or, "My sister is just staying with us to babysit our newborn so my wife can go back to work." Etc.

Originally Posted by rayinpenn View Post
I've been a landlord for many years. - Lets just say
1) the tenant decides not to pay - have you investigated the rules and cost of eviction in your area. Will you need the rent to pay a mortgage?
2) the tenant calls at 2 am with a broken pipe
3) the tenant causes a ruckus and you get complains
4) the tenant has a fight with her lover and kicks in doors and destroys the place.
5) the tenant brings in a pet or several
6) the tenant sister complains about a faulty light switch and you go there to learn her bulb was burned out...

If your answer is that won't happen because.... Or I'll call a plumber....Then don't do it because you don't understand what it can be a landlord. I have had every one of those things happen in addition to having a tenant leave a three minute message with nothing but profanity.

If you can put up with the aforementioned, are handy with a hammer and a paintbrush then it can be a great way to diversify.

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Old 09-16-2015, 11:06 AM   #22
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Originally Posted by Senator View Post
Probably true, but that would not be a good investment. Likely negative cash flowing.

A 6x the gross rents formula, which is a good rule of thumb, would yield a .72% of purchase price every month. In the end, it is about cash flow, and return on your investment. The same as the stock market.

As you get further from .72%, 1% or 2%, you start to run the risk of losing money. Most people underestimate vacancy, property management costs and maintenance.

Neighborhood classification is also key. In a D class neighborhood, you better make sure you get a 20% ROI or a 12%+ cap rate. In an class A neighborhood, you can get by with less. There will be less maintenance. a 6% cap rate is common in A neighborhoods.

After 'getting into the business' with little education, most landlords do not have a clue how to screen tenants. Or what neighborhood classification is. Or even what they need to do, or how to recognize a bad tenant. So they have higher vacancy, higher management and higher maintenance expenses. And they lose money.

Do not think for a minute that a 'professional' property manager will save you. They make the most money when you make the least. A financial adviser is CHEAP compared to a property manager. A PA will take ~1% of your asset, and that is all. A PM will take 10% a month, plus a month's rent to place a tenant. Compare that to the amount of equity you have in the place.

As in anything, a rental is not a get rich scheme, although many people do get rich quick. Buying a McDonald's franchise is another great way to strike it rich, or lose everything.
In the SF Bay Area you cannot put 20% down payment and have a positive cash flow. Depending on mortgage or no mortgage, the ROI is generally between 1% to 5% for SFH's. I know it doesn't sound like a good investment, but it's worked out very well for me. I had a SFH that tripled in value over 12 years.

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Old 09-16-2015, 12:26 PM   #23
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Have you looked into how much it would cost to get a lousy tenant out and how hard it is to do such.
One of the reasons my sister sold her two nyc rentals. life is easy when you've got good tenants, not so much when they are hellish.
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Considering Becoming a Landlord - Advice?
Old 09-17-2015, 10:35 AM   #24
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Considering Becoming a Landlord - Advice?

Originally Posted by younginvestor2013 View Post
Hi all,

I have been considering becoming a landlord. I live in a new (~7 years old) condo building on the north side of Chicago in a popular neighborhood. I bought my unit in April of 2014 at a very good price since it was bank owned. Similar units in my building have recently sold for 12+% more than I paid.

Some units have recently come for sale in my building, and I've been thinking of buying one of them and renting my unit out. If I were to rent my unit out, my conservative "cash on cash" return would be 7% (cash flow return on my total money invested). This excludes any principal paydown and value appreciation. I feel, though, that the 7% return is really more than 7% because it is technically "after-tax" so it is higher than a comparable 7% return in an equity holding.

The unit I am considering buying is a little nicer, and more expense than my unit was. Of course, I like it because it is nicer, but I am also looking at this from an investment standpoint.

I am considering purchasing the unit (say at $250K).

If I were to put 20% down or $50k down, my net monthly increase in monthly payments (over my current place) would be about $300/month. If I were to put 5% down and pay PMI, my net monthly increase over my current place would be about $400/month (with PMI quoted at about $100/month from my mortgage broker).

My *very conservative* estimate on what I would positive cash flow from renting my current place each month is $300, which is roughly a 7% cash on cash return.

I am considering pursuing this but am curious to hear your thoughts:

1) Is it wise to pay the $100 PMI per month so I can only put down $12,500 instead of $50,000? Assuming I could earn 7% on the additional $37,500 ($2,625), I would still come ahead $1,425.

2) Put down 20% ($50k) and avoid PMI and essentially the additional $300 in extra monthly living costs would come from my rental unit's cash flow.

I honestly think #1 is a good move if I can keep the PMI fixed at $100/month, but it really is dependent on how RE values pan out in the future. #1 and #2 are really only "good moves" if values continue to increase slowly but surely. Of course, no one will no the answer, but if values tank then neither idea is good. I also could eventually move out of this second unit one day and rent that one out as well.

I am also attracted to this whole thing because of the idea of becoming a landlord, and a condo unit presents an "easy way" to become a landlord, because I am not handy and it would require little maintenance vs. owning a house or a duplex.

Thanks in advance for your thoughts!

I agree with senator 7% is low. I use an app called property evaluator to take a good look at returns and projections. What I can't stress enough is due your homework. Nolo has some good books. You have to do your due diligence on tenants ie background checks, credit reports, history etc. Doing all that for a 7%, highly leveraged property doesn't seem worth it but that is IMO.

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