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Rental income vs. Market returns
Old 09-30-2015, 08:04 AM   #1
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Rental income vs. Market returns

Looking for more practical/experience advice.

DW and I own a house in socal. Roughly 1.2-1.4m value (who knows exactly ) and owe about 680k. I'm currently out of country for work so we're renting it for about 1200 over mortgage (5500/mo rent, 4250/mo mortgage, insurance and taxes).

Were planning to FIRE and relocate to about half the cost area (400-500k house), which creates some options.

Monthly non-house costs are roughly 6k post fire (4k pre fire so 1k for medical and another for buffer).

Current portfolio is around 3.6m which makes a pretty low SWR once we move and cut mortgage.

My previous plan was sell house buy new house live off investments because managing a rental seemed like a nightmare.

But... We've been dry running living from investments and fluctuations are more stressful than I thought.

So plan B. Pay off house and rent it out. 4-5k rental income can cover most of our expenses... Still have a big chunk of investment and so far management company has been good and pretty affordable.

Then we either mortgage the new house for more like 2k or just buy it outright and reduce investment to like 2.4m. That would be mostly an interest rate and tax decision I guess.

I'm just wondering how anyone fared with rental incone vs investment incone? It might be 6 in one half dozen in the other but seeing the 5500 hit the bank account while the market acts nutty is VERY enticing....

But I haven't been doing it long so maybe a 6 month stretch with no renters is just as common/stressful.

Thanks all!

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Old 09-30-2015, 08:54 AM   #2
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I don't think its a "vs" thing at all. Rental income and market investments work nicely together. A large fraction of my income comes from rental and it's nice to have a stable income source in these times of market volatility.
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Old 09-30-2015, 09:02 AM   #3
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I currently have 3 rental condo's for the last 4 to 5 years. Net ROI 8% to 9%. I definitely like the steady income. I've had zero days vacant and average 10 to 20 hours per year in maintenance (condo's were approx. 5 years old when purchased).


Several years ago I had a rental Single Family Home for 12 years. Four days of total vacancy and maybe 20 to 25 hours per year of maintenance. ROI was about 5%, but capitol appreciation was large.


I've been lucky and YMMV.
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Old 09-30-2015, 09:23 AM   #4
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I went the rental route mostly to create a cash flow so I wouldn't just be drawing down our portfolio. We've had good luck too, after a bit of a shaky start. Our first management company was a fiasco, but since then (after the first year) we've had 100% occupancy and reasonable maintenance costs. I think it's a good supplement to equities and bonds, and beats the hell out of interest rates on CDs, which is where the money was before we bought the houses.

Also the cash flow enabled us to refi our main house, whereas before we had that we couldn't get a refi even though we had plenty of money in investments. You definitely want to do all your borrowing while you are still employed. It gets very difficult after FIRE.
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Old 09-30-2015, 09:38 AM   #5
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I have 24 rentals. You get $5,500 in rent, but are very likely mistaking deferred maintenance for profit. Odds are, you are losing money.

I assume 5% for vacancy, and with 10 turnovers this year, I have had a ~2.5% vacancy rate.

I assume 10% for maintenance, you are not including any. Roofs, driveways, hot water heaters, appliances, tenant turns, all cost money. I do all my own maintenance, so I can reduce this by a significant amount.

I have paid off most of my mortgages, I get well over a 10% return on my equity (1.6M) of what I have invested since 2008.
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Old 09-30-2015, 09:47 AM   #6
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I've got a couple of single family rentals in the same neighborhood ...relatively new houses with relatively low maintenance. Has been working well ...however, a caveat. We bought them (closing on a third house HUD repo in same neighborhood next week) when market was extremely depressed ...knowing the upside would improve the total ROI - and the rents received were high relative to the cost. They have started to recover in price and the rental rates have also continued to increase a bit.

My basic rationalization is that the rentals take the place of bond holdings ...while providing greater upside due to value increase over time. Yah, I recognize it doesn't always work that way...

My rule re the specific properties ...I have to be willing to live there myself (for some period of time) ...I didn't want to be a slum lord.

Oh yeah ...we have our own maintenance guy ...we don't go through the property manager for repairs ...this has been one of the factors that both saves money, improves responsiveness to renters' needs, and ensures high quality work.

Oh yeah 2 ...my sister lives in the area so I feel like someone is always watching.


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Old 09-30-2015, 09:56 AM   #7
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Been doing mostly single bedroom apartment rentals for 30 years or so, mostly self managed, and doing much of the maintenance myself. In 2010 we bought another house at a cost of $140k down in La Quinta and now snowbird. Took on a manager to do so, but share duties. In the last month we've had the perfect storm of six vacancies, including an eviction and two pretty major re-do's. I been a busy boy.

OTOH, in a couple weeks we are off to SoCal before the Oregon gloom sets in, and even after divesting of 1/4 of the rentals they still provide more annual income than we spend. This has allowed us to make property loans, which have done quite well, and to invest substantially with Vanguard this year, following the 30% growth of the market last year. Those fund investments have had a leveling effect on the sustained exuberance of the property business. I keep telling SWMBO that it is supposed to work that way, we are investing for ten years from now, that losing 10 grand in a day is all part of the cunning plan... Not sure she is really buying it.
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Old 10-01-2015, 11:13 AM   #8
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We have several rental properties, and get enough income from them to cover our basic living expenses. Like stephenson, I think of this as taking the place of bond income. I am happy with our return from the rentals, as well as the regularity of the income. It keeps us from needing to sell stocks after big declines. It sounds to me, though, like your home may be expensive relative to the rent, and relative to your total portfolio. Whether it's a good idea to keep it depends in part on whether it will appreciate a lot more than other, more diversified and better yielding rental investments. Another factor to consider is taxes--as primary residences (even former ones) do have some favorable tax options.
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Old 10-01-2015, 12:23 PM   #9
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The OP strategy mentions one option was to sell the Socal house and relo to a low cost area. Unless the low cost option is in Calif. so you are stuck with CA taxes, the OP may want to run a proforma tax exposure with the new location (almost anywhere but CA will be cheaper). It is my understanding CA tax authorities will expect you to still file a state income tax return. Certainly not a hassle I would to continue if I had the option. Others can weigh in but CA may also want a portion of income beyond just your rental income even if you are not a state resident any longer. Other former Californians have commented regarding the effort they had to go through to escape Calif tax collectors so be sure you have all the residency verifications CA requires (eg new drivers license, voting registration, etc)
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Old 10-03-2015, 09:41 AM   #10
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OP - totally see why you are rethinking your plan....having your RE work for you + upside of appreciation is great! 33% of our portfolio is in rentals and although we plan to liquidate, we haven't yet because it just seems 'safer' for us than the market.

Things to consider further, as you evaluate your options....

- diversification - you'll have 1 source of rental income ....when tenant moves out, how long before you find someone? If it takes 3 month, how stressful would that be?
- numbers - a certain amount of mortgage on rentals can be great for tax purposes....what's your interest rate (prob low given it is your primary) compared to return from a 'safer', more diverse portfolio





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Old 10-03-2015, 10:02 AM   #11
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I have never been a landlord, so bear that in mind.

Still, I am musing about your old age, even though that may be a long time from now. I wonder if it might not be difficult to keep a house in good repair and all fixed up for renting when you are living elsewhere. If it's not difficult now, how about when you are in your 70's or 80's? Maybe you couldn't even easily drive there due to old age at some point, and when you got there you might not be able to do much. If you don't have enough in your investments to live on, what is your plan for your old age?

Something I really LOVE about a conventional investment portfolio, is that it doesn't require physical work.
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Old 10-03-2015, 10:18 AM   #12
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I have one rental house and even though it's relatively new and turnover isn't too bad, I hate being a landlord. About 3 years ago I discovered hard money lending and have been thrilled with it. I loan people $150k - $350k at a pop, secured by their real estate, and they pay interest in the 9% - 10% range. All payments go automatically to my checking account and no one has ever missed a payment. Only issue has been that sometimes they pay off the loans with little notice and then I scramble to find a replacement.


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Old 10-03-2015, 12:56 PM   #13
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Quote:
Originally Posted by RenoJay View Post
I have one rental house and even though it's relatively new and turnover isn't too bad, I hate being a landlord. About 3 years ago I discovered hard money lending and have been thrilled with it. I loan people $150k - $350k at a pop, secured by their real estate, and they pay interest in the 9% - 10% range. All payments go automatically to my checking account and no one has ever missed a payment. Only issue has been that sometimes they pay off the loans with little notice and then I scramble to find a replacement.


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We also do hard money and like it - when it works. Did have a company we lent to vanish with a fair amount of our cash - which taught us about having adequate security. Did a second mortgage, which taught us to never do that again. Had a borrower make no payments, which taught us not to lend too little, as foreclosing costs the same regardless of amount lent. Had to foreclose on one place, which worked out ok, but was protracted and stressful and expensive till we got through the process.

Still manage to do well with the loans.
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Old 10-03-2015, 01:28 PM   #14
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Calmloki-sounds like a lot of lessons learned. Thus far I've only done first liens where the LTV does not exceed 70% and where the borrower is bringing significant cash to closing and the minimum loan was $100k so definitely worth pursuing foreclosure. So far so good. Also I've interviewed each borrower personally and made it clear that payments are due on the first and that I'm no push over. Fingers crossed that things continue to go well.


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Old 10-03-2015, 01:42 PM   #15
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Calmloki-sounds like a lot of lessons learned. Thus far I've only done first liens where the LTV does not exceed 70% and where the borrower is bringing significant cash to closing and the minimum loan was $100k so definitely worth pursuing foreclosure. So far so good. Also I've interviewed each borrower personally and made it clear that payments are due on the first and that I'm no push over. Fingers crossed that things continue to go well.


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Sounds like you are doing the right stuff - you go through a title company, yes? We also use an escrow collections company, which protects the borrower, as that company holds all signed paperwork for re-deeding to borrower. All costs paid by borrower of course.
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Old 10-03-2015, 01:49 PM   #16
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I got lucky and found a broker more interested in my returns than his commission so he guides the decisions a lot. Yes on title and escrow company and loan servicer who collects all money owed


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