Real Estate Advice

Need some advice from the experienced among you. I am considering purchasing a couple of single family homes as rentals to supplement my near future ER. I have looked at different options and cannot find any reason to not become a landlord.

The plan is to invest enough that the properties will be very positive even if I choose to use a manager. Granted, the returns will be lower, however the hassle factor will be low and the return will still be in the 5% range not counting future appreciation.

On the surface it seems like this is a way to generate income, future growth and avoid taxes. Am I missing something?

Please let me know if I am off base.

JP

[db]

Although not responsive to question, your post reminded me of advice my dad received (and ignored) when he retired in the mid-70's. He went to the financial planner his next door neighbor used, who advised him to buy a dozen or so tract houses in San Diego, then selling in the $20 to $25 K range, as part of his allocation. The cash flow would have been positive, and those dozen properties would be worth maybe $6 million today. Instead, he went to a broker at PaineWebber who put together a portfolio comprised of a bunch of front-loaded, high-management fee mutual funds.

My advice is go for it, but I found a property manager indespensible. I prefer the distance they provide, and I think it makes tax deductibility of expenses less questionable.

db

[cute fuzzy bunny]

Its extremely dependent on local situations and circumstances.

I thought to do this a few years back, ran the numbers, and the cashflow looked positive. I had some problems with my first purchase (seller backed out just before closing) and decided to put it off. Prices went up. Cashflow didnt look as good. Had I gone ahead and bought though, RE prices shot up and the home prices would have almost doubled. I had a captive and demanding pool of potential renters.

So the tough questions are:

- will the properties increase in value or stay static and decline due to renters depreciation
- can you stay 95% occupied
- do the numbers run right? I've seen scenarios that say anything from 25-38% of base rent is eaten up by overhead, not including the mortgage payments if any
- Can you fix and manage the properties yourself...handymen and property managers will often gobble up your income unless the properties are new and fairly low maintenance

[Nords]

(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).

They're pretty widely available and could be at your local library.

Most rental units run at a 4-6% return on invested cash. If you're planning to use a manager that will eat up the cashflow. The Eldred book will help you ensure that your projections include all the real estate costs. Or, if you want an extremely realistic check on your estimates, take them to your local bank and ask for a 90% loan on your rental property. They'll tell you in 20 minutes if they think you have a good investment.

Over many decades, real estate has appreciated at approximately the rate of inflation. If you're in an area that has seen several years of excessive appreciation-- maybe even a bubble-- then your investment plan needs to consider your position if your properties revert to the mean for the next decade by dropping in value at 5% per year.

If you're missing anything, it's an appreciation of the cold fact that real estate is both an investment and a job. You get out of it the amount of hard work that you put into it. If you don't acquire the temperament to be an active manager, then hiring a property manager is like hiring a broker to buy load mutual funds. You might still make money but you'll be paying other people to do most of the work for most of your profits. And if you lose money, you'll still have to pay them.