Rental Real Estate Surprises

[Curmudgeon]

Thanks for posting your story. I was a landlord many years ago, while a grad student, and it worked out really well for me - I owned and lived in a triplex, and so could keep close eye on the tenants. I bought it with 10K down, and walked away with ~100K in equity when I sold it a few years later, thanks to some sweat equity and market conditions.

I'm in the Portland area now as well. I've thought about getting back into rental property, but with the changing laws - such as you mentioned - I don't think I will in this state. The local and state politicians seem completely disconnected from the reality of market forces. They complain (perhaps legitimately) about a housing crisis, but don't understand that making it more difficult and less profitable to rent out property is going to make the problem worse, not better.

 

[Souschef]

When I got married I moved out of my condo to our new home. The real estate marked sucked. We got the place painted, etc and rented it out. The first tenant was there for 3 years, and that was great. My next 2 were there for a year each, and every time one moved out I had to get a bunch of stuff fixed. One year i had a positive cash flow of $400!
I finally sold it when the market improved, but took a 65 K bath on the original appraised value. Never again!

 

[FIREd]

I was an accidental landlord for a few years (had to move for DW's job, could not sell the house quickly due to poor market conditions but found a good renter, and now moving back in the house). I am glad that this is behind us. We were actually quite lucky. The tenants always paid on time and left the house in pretty good condition. But I am not cut out for this. And I was always concerned about the possible liabilities. When I created my Investment Policy Statement last year, I specifically noted that we shall never be landlords again. At this point I prefer completely passive and liquid investments.

 

[calmloki]

When I got married I moved out of my condo to our new home. The real estate marked sucked. We got the place painted, etc and rented it out. The first tenant was there for 3 years, and that was great. My next 2 were there for a year each, and every time one moved out I had to get a bunch of stuff fixed. One year i had a positive cash flow of $400!
I finally sold it when the market improved, but took a 65 K bath on the original appraised value. Never again!

Heh. We sold a little house owner carry contract to our tenants of the last 10 or more years in October. Had owned it almost 28 years. Didn't collect much down and then had to reach deep into our pockets to pay the capital gains tax to the state and feds in December. Paid them more in taxes than we paid for the place back when we bought it.

OTOH, rentals have paid all our bills for decades and we are now in our winter house down in SoCal. Net worth is adequate, we loan out money to house flippers and builders, and we are trying to figure out whether we want to pay off our PenFed 3% loan or take their refi offer just to have yet more cash to have a still fatter cushion. Rentals have been very very good to us.

 

[Winemaker]

I have been a landlord since June 1999, and have not regretted it yet. A duplex, 4 unit apartment building and a single family home. The key is that rentals are an investment in time and money. I provide very nice housing for an affordable price.

The units must cash flow positive immediately, and do not rush to approve tenants to help them out. It usually means they're screwing somebody else. Make a set of standards, do not waver or bend, and do NOT weaken at the knees when they wave cold hard cash under your nose.

You do your due diligence when you buy a stock, mutual fund, ETF or bond, and you must do DD on the person who is going to pay you your rent.

 

[nun]

Thanks for this Sunsnow.

Did you do a calculation of your return (a percentage is fine) over the time you were a landlord?

As a remote landlord myself I made certain choices that there are no regrets (i.e. Buy-and-hold now going on 25 years as a primary residence and for the last 15 years as a rental).

Very different than the ordinary method of stocks and bonds, but I've been working that angle at present.

The annual gain of (5.5%) is just what is required to compound the original cost to what the apartment is worth now. After costs of renovations, new furnace, taxes etc over the 20 years I estimate I've also netted $160k in income. Right now the place is mortgage free and I get $19k/ year in rent and the annual expenses are around $3.5k and because of depreciation I take another $3k off to get the taxable income.

All my tenants have been quiet and easy to deal with. I've got them through Craigslist or personal recommendations. One of the couple renting right now works for my next door neighbor. She saw I was renovating the place, told her employee and he put a note through my letter box the next day....so I didn't even have to advertise it this time.

Having $19k/year in income without having to make any retirement account withdrawals is great particularly as it will be a few years before I'm 59.5. I also have a $20k/year pension that just started and together they more than cover my annual spending.

 

[Sunset]

...........
With that being said. As a landlord myself, getting a 4% raise from 1 year to the next is like pulling teeth. I never raise rent during a tenancy, but will raise it when a unit turns over.

......................

With rental real estate you make your money when you buy. Set the rents at the start and leave them there unless the market gets way out of wack, then only adjust between tenants. Your costs are pretty much set from the start and the small nickle and dime increases you are talking about aren't worth the aggravation of changing tenants to recoup. For example insurance and taxes 5% on $4000 is less than $20 a month. Turning over an apartment is typically 1.5 months rent........

It's more like 5% on $6,000 for insurance and property taxes = $300 per year. For that one house in 10 years that is $3,000 extra expenses for not raising the rent.
Then next year that same cost going up 5% is = $300 per year for 9 years it is $2,700.
You add all that up and it's a lot of $$$$$ you are paying out because you don't try to keep up with your costs.

 

[gerntz]

I have been a landlord since June 1999, and have not regretted it yet. A duplex, 4 unit apartment building and a single family home. The key is that rentals are an investment in time and money. I provide very nice housing for an affordable price.

The units must cash flow positive immediately, and do not rush to approve tenants to help them out. It usually means they're screwing somebody else. Make a set of standards, do not waver or bend, and do NOT weaken at the knees when they wave cold hard cash under your nose.

You do your due diligence when you buy a stock, mutual fund, ETF or bond, and you must do DD on the person who is going to pay you your rent.

Excellent advice. Agree on the immediate cash flow. Previous owner wanted a higher sale price & we made the cash flow point & he stopped pushing.

My BIL manages our jointly-owned 4 duplexes & does all these things. He's found Section 8 subsidized renters to be excellent tenants as they don't want to lose their subsidy. Usually stay for years so not dealing with turnover. At times he accepted them at $50/mo lower rental price for their stability. When he's run into problems on occasion, county agency is willing to withdrawal subsidy & we can evict.

Another thing: Our 3-BR units are rare & thus in high demand. Good choice.

 

[street]

Interesting stories on life of a landlord! Lol I always wanted to buy a small apt building or a few homes and fix and rent with intention of selling but it never worked out for me. My wife was never in favor of that so that is that.

The next best thing was to buy land with no structure etc. and rent the land and that is what I did. I bought a small irrigated farm and worked a small part of it and rented most of it to a farmer in the area. My landlord years where very good with small problems and was a fun venture. They paid me what we agreed on in a signed contract and things worked great. No plumbing, heating or other things to deal with. I made good rent and got to improve the land which was a tax benefit.
I got the land at a good price and when I sold it I got 14 times more for the land then what I paid for it. It was a win for me and some fun years working the land.

 

[CaliKid]

If you are in your 1031 right now I would strongly look at the cash flow cities like Memphis, Kansas City, Birmingham, Indy, etc.... The rents are significantly higher than cities out west. For example let's say you have a $200k rental in Portland and it gets $1,250 a month in rent at best. Take that to Memphis, buy two $100k houses and you'll be getting $2,400 a month because the rents are significantly higher. I am giving real world numbers not hypothetical. That's going to be a pretty decent neighborhood at that price too! Check it out.

 

[euro]

If you are in your 1031 right now I would strongly look at the cash flow cities like Memphis, Kansas City, Birmingham, Indy, etc.... The rents are significantly higher than cities out west. For example let's say you have a $200k rental in Portland and it gets $1,250 a month in rent at best. Take that to Memphis, buy two $100k houses and you'll be getting $2,400 a month because the rents are significantly higher. I am giving real world numbers not hypothetical. That's going to be a pretty decent neighborhood at that price too! Check it out.

Agree. But you do sacrifice appreciation. Most flyover country properties don't appreciate over time - certainly not the way many costals do (West coast, NE, midAtlantic)

 

[kgtest]

She saw I was renovating the place, told her employee and he put a note through my letter box the next day....so I didn't even have to advertise it this time.

One of my rentals perpetually finds itself new tenants...or the tenant moving out usually knows someone. I haven't had to advertise or fix anything for almost four years now...checks get direct deposit to the checking account every month.

Bought this one in 2007 and its now almost paid off. Trick is to payoff early while still maintaining positive cash flow.

Dad had same tenant for 15years....guy paid off dads mortgage and part of his personal mortgage. His son rented it for another 7years after dad moved.

A 22 year tenant. had to do a lot to fix that one up when he moved out but it was paid for.

 

[Winemaker]

Bought this one in 2007 and its now almost paid off. Trick is to payoff early while still maintaining positive.

I don't necessarily agree with you on that strategy. While some folks abhor debt, sometimes refinancing and removing equity can be another strategy. It
gives you tax free cash to either spend, or add to portfolio. The interest is currently federal and state tax deductible. Although I also highly recommend umbrella insurance, in the unlikely event of a lawsuit, no one would in their right mind would sue to seize a mortgage laden building. If you bought cash flow positive in the first place, no skin lost.

 

[Souschef]

I don't necessarily agree with you on that strategy. While some folks abhor debt, sometimes refinancing and removing equity can be another strategy. It
gives you tax free cash to either spend, or add to portfolio. The interest is currently federal and state tax deductible. Although I also highly recommend umbrella insurance, in the unlikely event of a lawsuit, no one would in their right mind would sue to seize a mortgage laden building. If you bought cash flow positive in the first place, no skin lost.

I agree. I had a Home Equity loan on the house and pulled a bunch of cash out of it. And the interest is indeed tax deductible.

 

[CaliKid]

Agree. But you do sacrifice appreciation. Most flyover country properties don't appreciate over time - certainly not the way many costals do (West coast, NE, midAtlantic)

I agree. No question there has been significant appreciation over time, in the other places, as you indicate. However, most people in retirement want stable income. Checks in the mailbox!

 

[nun]

A 22 year tenant. had to do a lot to fix that one up when he moved out but it was paid for.

Yes I just had a 10 year tenant move out and took the opportunity do the kitchen, bathroom, refinish the floors, update some electrical, new appliances and paint throughout and re-wallpaper the hallway. I also replaced an old oil furnace with a new high efficiency gas furnace....so $35k latter the place now looks really good. There are definitely expenses to renting, but the capital appreciation and positive cash flow have been good for me. Here is my wallpapering handy work.

 

[Luck_Club]

It's more like 5% on $6,000 for insurance and property taxes = $300 per year. For that one house in 10 years that is $3,000 extra expenses for not raising the rent.
Then next year that same cost going up 5% is = $300 per year for 9 years it is $2,700.
You add all that up and it's a lot of $$$$$ you are paying out because you don't try to keep up with your costs.

So it's $25 bucks a month. I'm not saying to adjust to market rents. I'm just saying do it between turnovers. If your cash flow on the property is so tight you can't absorb a $25 a month hit for 2 years, you probably over paid. My typical buy point was about 30%+ free cash flow above mortgage and insurance. Anything less and I would say see ya

Another observation is market rent's don't go up just because your taxes and insurance did. Rents in my area for a 3 bedroom have only gone up about $100 a month in the past 10 years. Just because costs of taxes and insurance may have increased, doesn't mean the market will pay for it.

Of course I'm sure you passed on any tax reductions when proerty values fell, and insurance savings when you found better rates.

 

[Joylush]

So it's $25 bucks a month. I'm not saying to adjust to market rents. I'm just saying do it between turnovers. If your cash flow on the property is so tight you can't absorb a $25 a month hit for 2 years, you probably over paid. My typical buy point was about 30%+ free cash flow above mortgage and insurance. Anything less and I would say see ya

Another observation is market rent's don't go up just because your taxes and insurance did. Rents in my area for a 3 bedroom have only gone up about $100 a month in the past 10 years. Just because costs of taxes and insurance may have increased, doesn't mean the market will pay for it.

Of course I'm sure you passed on any tax reductions when proerty values fell, and insurance savings when you found better rates.

Absolutely I passed along a rent reduction when property values fell and my taxes went down.
I've been renting houses for 31 years.
The dumbest thing you can ever do is not raise rents on a regular basis.

 

[BeachOrCity]

This isn't rocket science. Depends on your local market and how one values their own time. Some locations have high rents compared to prices and make landlording an attractive option. Other markets don't have high rents compared to prices.
If you are located in an area where it is the former and you are willing to put some time into it (ie you don't consider a few hours avg per month for a house and perhaps a weeks work when there is turnover to be too much) then landlording can be a great way to get much much more than 4% on your capital and hence be able to FIRE earlier. ...and if you consider landlording to be w*ork then maybe it is not for you.

 

[calmloki]

Oh Shanice112 - please don't give away all the secrets to the glorious glamorous of real estate finance - I've been keeping that a closely guarded secret!

 

[MichaelB]

Oh Shanice112 - please don't give away all the secrets to the glorious glamorous of real estate finance - I've been keeping that a closely guarded secret!

I don't think she's here to give anything away. Sell something, but not give.

 

[Brat]

Here is what is happening in Portland: the city pushed condo development and did not encourage the construction of apartments. Now comes significant immigration (typically from the Silicon Valley) and we don't have enough housing. Rents are skyrocketing but as all of you know it takes time to build apartments (property acquisition, design, permitting, construction - typically 2 years minimum). At the present time there is no protection for renters who can be evicted without fault. Even the middle income can't afford to rent let alone low income.

DH & I do not do rentals but it is not difficult to screen for good tenants. Verify income, check references not just from where they currently live (the landlord may want to be rid of them) but before that.

The City is ham-handed about formulating laws around no-fault evictions but they don't apply to landlords with just a couple rental units.

If the OP purchased during the housing slump s/he has a huge gain if they sell.

I agree, landlords buy themselves a job.

Not hosting a pity party, just work smart.

 

[Curmudgeon]

Don't want to steal the thread, but I've been considering purchasing a home somewhere I'd enjoy visiting frequently, and hiring someone to manage it as a vacation rental. I could stay there 14 days a year, PLUS whatever time I needed to 'maintain' it, and all costs would be fully deductible. Have people generally had good/bad experiences with this type of rental?

 

[Sunset]

So it's $25 bucks a month. I'm not saying to adjust to market rents. I'm just saying do it between turnovers. If your cash flow on the property is so tight you can't absorb a $25 a month hit for 2 years, you probably over paid. My typical buy point was about 30%+ free cash flow above mortgage and insurance. Anything less and I would say see ya

Another observation is market rent's don't go up just because your taxes and insurance did. Rents in my area for a 3 bedroom have only gone up about $100 a month in the past 10 years. Just because costs of taxes and insurance may have increased, doesn't mean the market will pay for it.

Of course I'm sure you passed on any tax reductions when proerty values fell, and insurance savings when you found better rates.

I've raised my rent every year except for one long ago, which was a mistake, same tenants still there, so that is about 15 years.
By increasing it, they pay over $4,000 more per year compared to the 1st year -> that is NOT a hit I would want to take.
That is the one nice thing about a rent controlled area, tenants expect the rent to go up.
The other nice thing, is nobody builds a lot of new rental housing as profit is limited.

I'd much rather increase the rent a bit each year and keep the tenants, vs freeze the rent and kick them out 2 years later so I could catch up to the market rent again suffering the 1.5 month turn around time

As for my property values falling, taxes never went down, even if the property values sagged some time during that period. The City still needed the same revenue, so they just changed the mill rate (multiplier).

 

[SumDay]

I inherited property when my parents passed, and quickly discovered I don't have the temperament for it. It is not for the faint of heart, nor those who don't like surprises. It was a lot of work and frustration.