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Need Advice Re Buying Rental House
Old 09-02-2011, 09:59 PM   #1
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Need Advice Re Buying Rental House

I'm hoping some of those with experience with managing rental units will give me some advice. My wife and I have decided to relocate to Enterprise, Alabama and build a house on a parcel we recently purchased. Were tinkering with idea of also buying a modest home to live in while our house is being built and then convert this home into a rental unit. Since I have no experience as a landlord I'm seeking some advice. The rationale behind having a rental unit is that I am hoping it will outperform an equivalent investment in a CD (I'm assuming for sake of comparison I could get 5 percent in CD -- an unrealistic assumption in this economic cliamate, but this is the standard I intend to use to measure the rental house against). The house I am considering is listed at $150K, built in 1984, 2080 sq. ft., and is in a good neighborhood and is in good condition. The realtor I'm dealing with assures me it will rent for $1400 per month, and that if I would accept $1200 per month it would rent immediately and stay rented. Having looked at the rental market in Enterprise, I believe this is an accurate assessment. If you're curious, here's the house: http://www.trulia.com/property/10694...prise-AL-36330. My question for the landlording gurus is this: does this transaction make sense from your perspective. Am I likely to achieve my goal of a minimum 5 percent return on my investment (I intend to pay cash rather than finance the house), or will operating costs (maintenance & repair, insurance, property tax, etc.) eat all my potential profit, or worse, leave me with a net loss? As I am an utter novice when it comes to being a landlord, your comments/suggestions would be GREATLY appreciated!
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Old 09-03-2011, 08:47 AM   #2
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We have a few duplexes that we paid $180K for and are renting for $850 x 2 per mo. Bank required 25% down - $45K. 30-yr mortage payment is $720. With insurance/prop taxes/business fees/taxes/repairs (we're an LLC), all-in is in the $1000/mo range so we're clearing $700/mo, call it $8K/yr. The way I look at it we're getting 8/45 = 18%/yr return plus gaining equity. Note that overwhelmingly most banks won't allow you to have more than 4 mortgages total including your home.
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Old 09-03-2011, 09:18 AM   #3
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The happiest day of my life was when I sold my rental property (SFH) but I was a long distance landlord. For me, the property would have to return 25% to put up with the problems that come with being a landlord. OTOH, it will be a tremendous learning experience about the incredible things humans are capable of. For example, I never knew there were families who had booger walls. We always just used a Kleenex and threw them away. It never occurred to us we should be saving them on one of the living room walls for later viewing.

Do you plan to travel and be out of town for extended periods of time? You will never fully enjoy being away because you will learn that something big breaks every time you leave. Be sure and include that in your vacation budget!
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Old 09-03-2011, 09:25 AM   #4
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Real estate has been good to me and my family, however it is a part time job.

The more you can do, i.e. low purchase price, repairs, maintenance, tenant screening, etc., the more you keep in your pocket. Be careful and research the area and not over buy as your intent is rental (not a primary residence) unless the market can truly support it. Always have a handyman resource close by that you trust as it can be helpful if you travel or just don't want to give up your personal time.

Do your research and read up on landlording/rentals. Do your homework on all ongoing and capital expenses to project your returns. Talk with your accountant if you don't like numbers. Be sure to factor in vancancies and management fee even if you are doing it. If you are paying cash for the purchase, I would expect a higher return, but that's personal.

Network in real estate investment groups and chat with seasoned investors, but be careful as they may see you as a silent partner and/or a source to dump underperforming units.

On that note, time to go replace a garbage disposal on one of the rentals. Good luck.
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Old 09-03-2011, 03:29 PM   #5
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Quote:
Originally Posted by Geoffrey View Post
Since I have no experience as a landlord I'm seeking some advice. The rationale behind having a rental unit is that I am hoping it will outperform an equivalent investment in a CD (I'm assuming for sake of comparison I could get 5 percent in CD -- an unrealistic assumption in this economic cliamate, but this is the standard I intend to use to measure the rental house against).
Here's the first question to ask yourself: If it's such a hot deal, then why doesn't your realtor buy it and rent it out?

But since you asked for advice from experienced landlords, mine would be to suggest that you avoid gaining any landlording experience.

If you must landlord, then at least educate yourself from a disinterested source before you jump in:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and
(2) Landlording by Leigh Robinson (7th edition or later).

I'm also slowly working my way through the number-crunching posts at Real Estate Software for Investors and Developers . So far so good. Don't spend any money on this site-- just read the free stuff and see if their reality matches your realtor's rosy-colored glasses.

I'm not sure why you'd compare a CD's yield to real estate. CDs are (pretty much) guaranteed to return principal, perhaps even interest, while you do absolutely nothing. They're even fairly liquid, assuming you pay the early-redemption fee.

Meanwhile a rental property is a large hunk of depreciating construction material needing maintenance, repairs, tenants (who actually pay rent!), property taxes, and constant cash injections. It has lousy liquidity, high trading costs, and most of the time the land it's built on only appreciates at about the rate of inflation. When it's good, it's profitable. When it's bad, it's going to take over your entire life and require you to choose between abandoning a bunch of lost rent (and paying to repair the damage) or spending months in evictions & court hearings-- to get a worthless judgment that effectively achieves the same result.

So if you're trying to choose between a small guaranteed upside versus a possibly slightly larger return with a huge potential downside... keep reading those landlording books and try to decide if that's your personality.

Maybe a more realistic returns comparison would use local real estate data (from a landlording website). But you might also want to compare those numbers to the yield you could get from a Vanguard high-yield bond fund or a good residential/commercial REIT.

I have yet to meet a landlord with a real no-foolin' exit strategy. It's always "when the real estate market improves" or "as soon as I clean up this rental roll" or "when we find someone to take over the property-management chores" or "next year fer shure".

In my case we're waiting for our teen daughter to someday decide (1) if she wants a family and (2) where she wants to raise it. I think the waiting period might be more than two decades. My exit strategies may be a choice between conservatorship & probate...
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Old 09-04-2011, 02:38 AM   #6
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OP:

If your numbers are correct. Does not sound to bad in todays environment.

However. You have to have the Landlords mentality. Just last month, my

Tenant called. Plugged drain. Turns out it was a broken sewer pipe. $ 3K.

Just received a e-mail yesterday. Broken drain pipe from washing machine

sink to wall. $ 225. And today, the cement sink has a leak. Tenant said

he could fix for $45.

Can you live with these occasional calls? Also, keep reserve fund for repairs.

And never forget the golden rule, " LOCATION, LOCATION, LOCATION".

(Near best schools, stable and growing job market, climate, etc.).

In my experience, having a great location, I'm able to attract very good

Tenants.

Also, rather than paying cash. If you can get a loan, your returns will be better because you are leveraging your investment. (If you are "scared, cautious",just keep your cash in a conservative place, until you get used to
being a landlord.).

As, mentioned earlier, the more you can do yourself, the better your returns.
In my opinion, you need to have the "handyman", mentality to be a Landlord.

Later, when your property has appreciated, and the cash flows are good, you
can sub-out some of the repair work.

Being a Landlord can be fun, only if you know how. Also, would be good if
you have an accounting background. IRS rules. Depreciation, what is considered an expense, and what is considered a capital improvement and
has to be written off in 7 yrs, or 27 years....

Otherwise, you have to use an Accountant, and it just adds to your expenses.

Not really hard to learn the rules....just takes time....or ask someone to show you....
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Old 09-04-2011, 06:27 AM   #7
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I believe it is a good investment. If your realtor is correct, then you can be very picky about the tenant. It has been my experience to give up a little rent to lure great tenants. Real estate has it's ups and downs. That's why it is superior to equities in the past 20 years, IMO. Equities have been a disaster with virtually no upside. I don't see why it should be any different going forward. Good luck.
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Old 09-04-2011, 08:04 AM   #8
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Quote:
Originally Posted by wolf
As, mentioned earlier, the more you can do yourself, the better your returns.
In my opinion, you need to have the "handyman", mentality to be a Landlord.

Later, when your property has appreciated, and the cash flows are good, you
can sub-out some of the repair work.
I've seen this advice over and over. Shouldn't you be able to pay a repairman right away if you find a good enough deal to have lots of initial cash flow?

Obviously doing it yourself would bring even more returns, and if if your margins are that narrow it may be necessary to bring yourself a profit, but in my mind that means you've just gotten yourself an extra job as a handyman (besides all the other jobs that come with being a landlord - debt collector, secretary, etc).

But I see over and over "landlords should be able to repair sinks, etc etc" when it seems to me if you find a good enough deal and count paying someone to do stuff for you in your returns, you shouldn't have to be "handy."

Further, it seems deals like this are quite possible in today's market (in certain locations, at least).

/shrug

Just something that I've seen people post a /lot/ that I'm not sure about, or I just don't get.
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Old 09-04-2011, 08:22 AM   #9
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Based on the information you have provided, it looks like a good investment financially. We just picked up two properties here with very similar numbers. But as others have pointed out, being a landlord is an active job, not a passive investment and, like any job, how well it works for you depends in large part on your interests and aptitudes.

You should be able and willing to do a lot of the routine maintenance yourself. And make contacts with people who can do the things you canít before you need them. For major repairs, you really need to use a licensed contractor since you want his insurance covering the work and workers. And even with that, you will want an umbrella policy for a few million if you donít have one already. Itís cheap.

The most important thing is to pick good tenants. You have to be pretty unemotional in deciding who you rent to. Once you have good tenants, keeping the rent a bit low to keep them from moving is definitely worthwhile.
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Old 09-04-2011, 09:03 AM   #10
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Originally Posted by Hamster View Post
Based on the information you have provided, it looks like a good investment financially. We just picked up two properties here with very similar numbers. But as others have pointed out, being a landlord is an active job, not a passive investment and, like any job, how well it works for you depends in large part on your interests and aptitudes.

You should be able and willing to do a lot of the routine maintenance yourself. And make contacts with people who can do the things you canít before you need them. For major repairs, you really need to use a licensed contractor since you want his insurance covering the work and workers. And even with that, you will want an umbrella policy for a few million if you donít have one already. Itís cheap.

The most important thing is to pick good tenants. You have to be pretty unemotional in deciding who you rent to. Once you have good tenants, keeping the rent a bit low to keep them from moving is definitely worthwhile.
One of my gigs was as a tax preparer, working for a CPA firm. I formed the opinion that what made small landlording successful was that these guys and their wives were willing to "buy a job". That, and inflation, which has been a reliable presence for almost all of our lives. Often stocks were much better as a straight investments, but that required a different kind of abstract thinking and also the cojones to not panic and sell during market squalls.

But most stock investors fail at this, so overall the landlords seemed to be more successful. If they control their debt, the landlords are protected from too quick responses by speed bumps -leases, illiquidity, a feeling of commitment, regular rents, etc.

I counseled my sons to look into RE investment. They both said no way, if I have any extra time and energy it is worth much more spent at my profession. And I think that will be true for almost all high earners. Of course a fairly young ER guy is in a different position.

Ha
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Old 09-04-2011, 09:45 AM   #11
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I believe it is a good investment. If your realtor is correct, then you can be very picky about the tenant. It has been my experience to give up a little rent to lure great tenants. Real estate has it's ups and downs. That's why it is superior to equities in the past 20 years, IMO. Equities have been a disaster with virtually no upside. I don't see why it should be any different going forward. Good luck.
Does the realtor do rentals on the side?

I just noticed the house has an in-ground pool. Does it have a "kiddy fence?" Do you have a lot of insurance?
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Old 09-04-2011, 12:08 PM   #12
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Does the realtor do rentals on the side?

I just noticed the house has an in-ground pool. Does it have a "kiddy fence?" Do you have a lot of insurance?
It may not be a deal breaker for you, but I consider a pool a major negative in a retal property since the liability and maintenance costs are almost never covered by additional rent. Personally, I would never buy a rental house with a pool.
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Old 09-26-2011, 10:19 AM   #13
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Originally Posted by Geoffrey View Post
My question for the landlording gurus is this: does this transaction make sense from your perspective. Am I likely to achieve my goal of a minimum 5 percent return on my investment (I intend to pay cash rather than finance the house), or will operating costs (maintenance & repair, insurance, property tax, etc.) eat all my potential profit, or worse, leave me with a net loss? As I am an utter novice when it comes to being a landlord, your comments/suggestions would be GREATLY appreciated!
,

Hi,

Not a guru but can offer a little experience and advice... be warned that there can easily be no expenses for 2 to 10 years then they come in big lumps e.g. roof 10k+, painting $5k, flooring a few thousand.

I think getting a valuer to do a comparable rent schedule may be $400 well spent and help you to itemize outgoings: (vacancy 2%; replacement cost of stoves/ranges, refrigerators, dishwashers, A/C, washer/dryer, HW heater, furnace, roof, pool) over life time to calculate replacement reserves, and operating expenses (any utilities, taxes, interior painting, general repairs, supplies, management expenses, insurance, umbrella insurance, pool) and then net cash flow.

I like spreadsheets and the valuer would be a handy checklist to which you can always add a margin of error.

I would also include management expenses even if you are not using a manager... as you are trying to compare to a no risk, no effort CD.

Even if you have the cash, a little leverage may kick up the return if you can get a good long term deal... and you are in it for the long term. ie if you can cash flow... then you have the option of doing it twice... if it suits.

Small point, I usually like to buy with an eye for bonus capital appreciation, easy to sell - strong jobs, beach, superior location.

I think if the numbers work out and you can manage the negative dips in cashflow then enjoy!
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Old 09-26-2011, 11:47 AM   #14
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There's a lot of great posts on here, so definitely take each comment seriously, do your own math and research before you do it. We have 15 rentals currently - started with our 1st one 9 years ago with a condo I lived at. Had a lot of success but definitely a lot of problems too. Considering buying another property now because the numbers seem to work, but getting advice from this board to help me figure out what makes the most sense for us. Sometimes, the financial aspecsts aren't enough.

Additional things to consider....
* what's the demand for rentals in your area....did a quick look, not a lot of rentals by owners...is that because there's high demand or is it just a soft rental market
* if you decide to go with a house (nice one by the way) with a pool, please seriously consider liability insurance (supplemental) as well as home warranty that could save you thousands in repair.
* it's cool to tell your friends you're in the rental business....it's not cool when you are cleaning someone else's dirty bathroom after you evict someone (and your cleaning person doesn't show up!)
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Old 09-26-2011, 11:48 AM   #15
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I have had several rental properties over the years. I currently have sold all "standard" rentals and have bought two homes in an over 55 community for rentals and looking to buy a third. Based on the population shift IMHO this type property will have a better value growth potential going forward then normal rentals. I rent these by the month vs annual so lots of tenant turnover. And had to rent furnished as these are mostly people who want to rent for a month or two before buying. These are in Florida so also get snowbirds. Most retirement age tenants are excellent and rents are significantly higher becuase of the short term aspect.

They have far exceeded my wildest expectation for tenant quality and occupancy. I do some of the work myself and I also hire a handyman. My personal retirement home is in the same community so I own 3 properties there. I hire my handyman one day a week do do everything. Mow lawns, trim shrubs, pest control, painting, repairs, pool cleaning, and he is able to do most everything for the 3 homes in the one day a week. Sometimes an occasional repair can't wait, but so far it has worked very well for both of us. He is retired and was looking for some extra spending money and I wanted to fire my lawn service, pest control, and other service providers.

So for me it works. My annual ROI runs in the 30% range and my equity build is solid. I am looking right now to refi them to a 15 year mortgage and equity will build faster. Current cash flow will be hurt a little, but will still be slightly positive.

Real estate has historically been a good investment and today with the low home and interest cost I believe it is even better. Should only be a part of a balanced investment strategy, but I have been more successful with RE then most other investments.

Biggest con is lack of liquidity. So doing the math is pretty easy to see what your ROI will be, so if it works, do it.
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Old 09-26-2011, 05:41 PM   #16
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Originally Posted by arebelspy View Post
I've seen this advice over and over. Shouldn't you be able to pay a repairman right away if you find a good enough deal to have lots of initial cash flow?

Obviously doing it yourself would bring even more returns, and if if your margins are that narrow it may be necessary to bring yourself a profit, but in my mind that means you've just gotten yourself an extra job as a handyman (besides all the other jobs that come with being a landlord - debt collector, secretary, etc).

But I see over and over "landlords should be able to repair sinks, etc etc" when it seems to me if you find a good enough deal and count paying someone to do stuff for you in your returns, you shouldn't have to be "handy."

Further, it seems deals like this are quite possible in today's market (in certain locations, at least).

/shrug

Just something that I've seen people post a /lot/ that I'm not sure about, or I just don't get.
The reason you hear this advice, over and over, is because to be a successful
landlord this is a requirement. It is very rare, when an investor can purchase
a Rental, and have enough cash flow to cover all of the current and future expenses. (In the early years).

Being a Landlord, is like owning a "small business". The owner needs to know how to handle the majority of the work. Once, the rental has "aged", cash flow increased. Property appreciated some. Then, the Landlord has the option of subbing out some of the work.

Just my 2 cents. Has worked for me.
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Old 09-27-2011, 07:14 AM   #17
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But I see over and over "landlords should be able to repair sinks, etc etc" when it seems to me if you find a good enough deal and count paying someone to do stuff for you in your returns, you shouldn't have to be "handy."
Depends on what returns your willing to accept. No plumber/electrician will step foot onto a job for less than $90. So my tiolet snake ($65) as paid for itself ten-fold.

Once paid $45 to have a light bulb changed ! It was at the lake (2.5 hours away) in the dead of winter. A group of skiiers couldn't see the lockbox with out the over head light .... so sometimes you'll pay for the simple things too.

Cut costs where you can. Do this by doing what you can. If you're the type that doesn't enjoy a challenge ... don't do rentals.
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Old 09-27-2011, 08:09 AM   #18
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You might want to find a Plumber that moonlights..Mine works his regular job and does side jobs in the late afternoon. He charges $50 per visit/hour in case the sink or toilet needs work, or something I can't do, or don't have the time for.
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