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Rental as retirement income
Old 12-02-2014, 12:53 PM   #1
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Rental as retirement income

Seems that many retirees own rental property used to provide a steady flow of retirement income, Why? A few retirees I know have rental apt buildings. I don't currently own any but have thoughts of developing such property.

My pros:
--There is definitely a need for LOW income rentals where I live.
--In my state you can evict for non payment etc ( some states u can't)
--I would build the units myself. I enjoy it and will need more to do,
I think I'm a workaholic
--I would most likely do all the maintenance myself

My cons:
--I really dislike dealing with people!
--I would have to build new, no older places to purchase reasonably
--LOW income rentals, my thoughts are $700 for appox 500 sq. ft but they
would be stand alone units and considerably nicer than anything locally
but not sure if it would return enough to be worth the hassle
--Tax assessor appraises everything about 1 1/2 what it actually sells for
so would expect property taxes to be high (kind of a retired
community so the older folks won't stand up for themselves)
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Old 12-02-2014, 01:57 PM   #2
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That is a show-stopper, unless you plan to pay an intermediary (property manager) to deal with tenants. Even then, since you will be doing your own maintenance, you can count on nervous-nellie tenants having to be there hanging over you the whole time you're in "their" home. We did not do our own repairs, but heard from those who did. To a man, they reported our final set of tenants made their skin crawl with their anxious hovering and non-stop questions.

The rest will vary state by state, and even county by county.

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My cons:
--I really dislike dealing with people!
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Old 12-02-2014, 02:19 PM   #3
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I am considering getting into the retiree rental business in that I inherited residential real estate recently.

As the sole heir there is no issue for me with having to split the equity with anyone else (although paying off the mortgage was a separate issue).

-gauss
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Old 12-02-2014, 02:19 PM   #4
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Its work to do rentals properly unless you arrange a manager and let them run into the ground. Do you want to be a slumlord? Lower income rentals are more risky than most. In my experience those with lower incomes made, and continue to make, bad decisions. You are trusting them with a $50000-$100000 investment and they can do an amazing amount of damage quickly. You don't like dealing with people and determining which people are good risks is a requirement to get good tenants who will care for your property. The advantage is you can usually arrange for government subsidies (section 8 is typical). The problem is now those low income renters have even less skin in the game and you have to deal with government standards--some of which make no sense. Good luck whichever way you choose!
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Old 12-02-2014, 02:43 PM   #5
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All are correct. What kind of return do most make on rental units?
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Old 12-02-2014, 03:17 PM   #6
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All are correct. What kind of return do most make on rental units?
To me, you need to start with a + cash flow or forget it. And that's with allowing for some empty time. If that's where you start, it will only get better with time as rents rise.
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Old 12-02-2014, 03:22 PM   #7
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--There is definitely a need for LOW income rentals where I live.
--In my state you can evict for non payment etc
In all states, you can evict for non-payment. That is the number one reason for evictions.

There is a reason why there is a shortage of low-income rentals. It is near IMPOSSIBLE to make money on them. Let the government lose our money, not you.

Unless you are good at being a slumlord, stay away from low income rentals. Too much crime, too much maintenance, too much drama. And the City may be after you to bring the buildings up to code after the tenants destroy it.

Plan on more crime, more violence, more pest issues, more wear and tear, etc.

If you do low income rentals, allocate 20% of rents to maintenance, 12% to property management and at least 10% to vacancy. You will also need at least a 20% return on equity, or cash on cash return. They are extremely high risk. You need this 20% return from DAY ONE.

Never take a C+ rental and turn it into a low-income place. You have to have a low income place for low income people. Target your market.
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Old 12-02-2014, 04:33 PM   #8
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OP, might I suggest you look at NNN real estate instead of simple residential real estate, especially if you are looking at it for retirement income.
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Old 12-02-2014, 04:51 PM   #9
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I would suggest going to BiggerPockets: The Real Estate Investing Social Network to learn more - it's the best site for real estate investment advice.

I have 11 rental properties that will provide a big chunk of my retirement income. Returns are in the 9-10% range. All are decent locations with average to above average tenants - no real issues other than occasional repair and turnover. I do it all myself but will probably hire PM in a few years.

With the recent rise in real estate prices over the past 2-3 years and decline in lender mediated inventory it's getting very hard to find any more units that meet my numbers.
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Old 12-02-2014, 06:34 PM   #10
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unless you plan to pay an intermediary (property manager) to deal with tenants
And then you have to manage the property manager...

After owning multiple rentals for many years I can tell you I'd be richer much less stressed if I'd stayed away from rental property.

I would have retired sooner, too.
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Old 12-02-2014, 07:26 PM   #11
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Some people seem to be very good at making money with rentals. I've done alright. For me, being a landlord is great when everything goes right. But I get very frustrated when issues arise, especially when I have to deal with people. Property managers who don't return my calls, contractors who don't show up, tenants making excuses... They can all go to hell.

I am getting ready to sell my last rental. It needs some work done before being put on the market and I entrusted my property manager with finding contractors and supervising the work. Now I spend my days managing the property manager. I can't wait to be rid of that ball and chain.

I am now moving towards investments that I can manage myself with a simple click of a button - no human interaction needed.
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Old 12-02-2014, 11:14 PM   #12
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I think a lot of retired folks end up retiring while they still own the rental property they had from years before.
That's my situation, and my plan is to sell and invest in VTI etf, as it will be a lot less work, and really the avg long term rise of the stock market ~9% profit without any work (and lower taxes) is far better than being a landlord.
Besides, the tax advantage of depreciation turns into a negative aspect when retired. You have to depreciate even when your tax rate might be 10% or 15%, then when you sell you recapture it at 25%.
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Old 12-02-2014, 11:32 PM   #13
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I've been a landlord for 25+ years. My worst experience was the two times I tried to work with the section 8 federal program (or whatever it is called). With private tenants we're been fine. We have a management firm that charges 10%. I LIKE paying, so that I don't get those middle of the night phone calls when the toilet stops working. I've looked at the numbers, I cannot get a plumber, electrician, etc. "on my own" anywhere as low in cost as my management firm, which handles thousands of properties, and has a "economics of scale" ability.
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Old 12-03-2014, 05:39 AM   #14
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I prefer a higher end property that I keep in very good condition to attract a better quality tenant willing to pay a premium rent. I've never had a missed rent payment or a middle of the night call. I do most of the maintenance myself, but have a plumber and HVAC guy I use when needed. The HOA takes care of all outside maintenance for the townhouse, so that really reduces the workload and expense. I use a realtor to find tenants and check their credit, employment and criminal background. It's been worth every penny. My last tenant recently moved out after seven years and we easily found a new one we expect to be around for several years, too. We looked into section 8 about 15 years ago, but learned it was much more troublesome than it was worth with higher levels of damage by the tenants. Property taxes and insurance were more than I expected too, so keeping expenses down would be a challenge.
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Old 12-03-2014, 06:00 AM   #15
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I would not go anywhere near rental real estate, and definitely not near the low income market. My Dad had a multi-unit building and it was a time hog so he sold it. BIL has a 3 unit building and just narrowly escaped some tenants from hell. Stay away.
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Old 12-03-2014, 07:30 AM   #16
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Hyper - I'm a RE investor and very happy with it. However one thing that you need to figure out is what is your exit strategy. Unlike stocks and bonds, when you decide to finally sell the property it gets strange. As Sunset said, there is a depreciation recapture tax of 25% on top of any other cap gains. Many I've talked to say the best exit strategy is to take it to the grave. Then your heirs will get a stepped up basis and not owe the recapture tax. That is my plan, one house to each of my 2 boys. They can then sell, continue to rent, or move in. Both are in good neighborhoods, and would easily meet the boys needs. Of course, they would need to continue to pay property tax, insurance, and HOA. If you can get over the hump of an exit plan I say go for it, once you have a good plan in place for problems that can and will occur.
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Old 12-03-2014, 08:25 AM   #17
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I prefer a higher end property that I keep in very good condition to attract a better quality tenant willing to pay a premium rent. I've never had a missed rent payment or a middle of the night call. I do most of the maintenance myself, but have a plumber and HVAC guy I use when needed. The HOA takes care of all outside maintenance for the townhouse, so that really reduces the workload and expense.
I agree with this approach. In one gated community I now have 4 nice townhomes. First tenant moved out after 12 yrs. Other turnover has been in usually 3-5 yr stretches. I have a standard paint configuration that I use, trying to get out of the appliance business, and try to rent to tenants that fit into the community. My favorite is more seasoned single individuals who do not want to live in an apartment but can't afford or choose not to own their own place. After years of being an owner I now set on the HOA board. Was treasurer the last 3 yrs and I really focus on keeping the reserves funded and maintenance up to date. This helps keep property values up and also rents rising. Our biggest challenges is dog crap and parking. We put up a couple of poop bag dispensors and first problem solved. As for parking some well placed temporary signs in the spring time resolves that issue along with periodic warning tickets. We have a few parking variance spots that we raffle off each year for $120. Amazing how all those cars now park somewhere else.

For now I manage them and it only takes a handful of hrs a month. With tenants you can't let their problems become your problems. If I ever get to the point where I am tired of managing them I will turn them over to a Mgt company or offer one of our kids the opportunity to manage them for the experience and taking care of their future inheritance. If I see the community begin to deteriorate I will 1031 exchange out.

JDARNELL
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Old 12-03-2014, 09:04 AM   #18
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Would you mind explaining how you select for "seasoned, single individuals" without running into laws against age and marital/family status discrimination?

Amethyst

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...try to rent to tenants that fit into the community. My favorite is more seasoned single individuals
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Old 12-03-2014, 09:21 AM   #19
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Many I've talked to say the best exit strategy is to take it to the grave. Then your heirs will get a stepped up basis and not owe the recapture tax. That is my plan, one house to each of my 2 boys.
I've heard the same thing regarding the best exit strategy. After the 1031 exchange loophole closed several years ago there isn't really any other good option to avoid that recapture tax.

As far as property goes, if you go for a higher-end market (SFH instead of multi-unit rentals) it makes your life much simpler. We have great cash-flow that will last as long as we live, and then passing on a great property tax-free to our children.

In answer to Amethyst's question about getting around discrimination laws, you can certainly discriminate based upon income and number of people, which are the two main criteria by which you can select a great tenant. (Of course we're talking about the higher-end of the rental market here.)
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Old 12-03-2014, 01:41 PM   #20
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Would you mind explaining how you select for "seasoned, single individuals" without running into laws against age and marital/family status discrimination? Amethyst
If you select single individuals you are, by definition, discriminating.

Use credit score, income, rental history and criminal checks to select qualified tenants.

Some states are against using criminal checks...
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