Worth it to pursue Rental Income properties?

[RioIndy]

Trying to word this succinctly, sorry for long post...

I have been contemplating the idea of purchasing some rental income properties to add to my portfolio and retirement plans, as many members of this forum do. And have been evaluating the various pros and cons to see if this is an endeavor worth pursuing. Wondering what other members experiences and opinions with this would be, or if I am missing anything.


My current situation is that I am pretty much in the OMY stage, as my portfolio of equities is not too far from being (theoretically) enough on it's own. But doing another 0-5 years of salary would add some nice additional cushion and/or luxuries.



Basically, some see generating income from rental properties as an alternative to generating income from a very large portfolio of equities. Or perhaps a good thing to complement one's portfolio of equities.

The big benefit of rental properties is that they generate income FROM BORROWED MONEY, that you can get much earlier in life than income from equities.

Income from Equities Portfolio is reached pretty much just from a lifetime's worth of accumulation from your salary at w*rk.

Income from Rental Properties can be reached by getting a mortgage loan to buy the properties, which one can do at basically any age, and just make sure that the income is greater than the mortgage loan payments. So you can theoretically retire sooner with this method.




As I am currently seeing it
PROS of rental income properties are:

-Generate income from BORROWED FUNDS earlier in life, as opposed to 20-30 years of salary accumulation for an Equities Portfolio
-No matter what happens to real estate home prices, or the stock market, your property should still be generating the same income. More stable/secure?
-Hedge / diversify your income from equities, or from real estate price increase alone
-Continiously increasing your number of properties to 2, 4, 6... properties can eventually become VERY lucrative.
-Be your own boss

CONS of rental income properties are:

-I have heard and seen many NIGHTMARE stories from people, including my father who regretted getting into this industry.
-Entirely new industry for me that I thus far have not been super interested in, though I am probably capable.
-Would be best to learn a lot about home improvements and repairs.
-It is more semi-passive income compared to equities, as you still need to maintain the properties and deal with tenants and renting it out etc.
-Purchasing a property is not an insignificant ordeal involving a lot of paperwork: (property taxes, land transfer taxes, utilities, Real estate agent stuff, mortgage stuff)
-Could get some bad tenants that cause lots of stress and additional work.
-Could be hard to go on extended vacations, as I might get called up at any time to fix a problem. Need to always be available.
-Would pretty much need to own a car again.
-Would be carrying a large dept for many years.
-Difficult to do in big cities due to cost of the properties being much higher for the income they generate.


Is taking on this endeavor worth pursuing? I am completely overlooking large aspects of this? Do forum members who do this recommend it? Has it been a positive experience that was worth it or something they regret? Thanks

(also note there are a couple threads related to this in the past in some ways, but I guess this looks to delineate the PROS / CONS a bit more thoroughly and relate a bit more to my personal situation)

 

[Mulligan]

I just met my old landlord who built a massive apartment complex in 1998 with a pool and 3 little hole golf course. I was a renter who got in when they were brand new and stayed for 2 years. I saw him at a golf tourney last weekend...Probably one of the most kindest religious person on earth. I asked him about the place and he told me he just sold out last month. It just is too draining to collect rents from people and the quality of renters just isnt there like it was. He is so done, and so glad he is through with it he said. And he always takes the positive road on everything.. YMMV of course!


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[Souschef]

I can only comment on th experience I had. When I got married and moved, the market was very soft, so I converted my condo to a rental. I had a management company handle everything,so I did not get calls in the middle of the night.They advertised the property and screened the tenants. My first tenant stayed there 3 years, but I discovered that every time you had a new tenant, the fix up expenses were the problem. One year my net cash flow was $400!
I was able to deduct the depreciation, etc, but when I sold I had to recapture it and add it to the proceeds.

 

[jazz4cash]

I am considering doing this also. It's a very personal choice and may be more like a job if you are holding these properties in retirement. It can be very risky to trust strangers with a valuable asset. Local conditions vary widely but I believe we are in a sweet spot right now due to low rates and recovering property values. Generally it can be very difficult to find properties with positive cash flow in my area. It appears that I may need to pay cash to secure the more attractive deals and apply for delayed financing since I also believe I need the leverage of a mortgage to make it worthwhile.


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[samclem]

-It is more semi-passive income compared to equities, as you still need to maintain the properties and deal with tenants and renting it out etc.

I don't know about "semi-passive"--I would call it "active" (as the IRS does) unless you have somebody else doing all the tenant selection and property management (in which case it will be very difficult to end up with posiitve cash flow if you are borrowing a lot of the money, which seems to be a major attraction to you).

When you buy and manage residential real estate, what you are, in effect, doing is buying yourself another job. Compare RE to just getting another part-time job or a small business to run on the side. You might find this second option puts a lot less of your money at stake and offers higher returns.

The real estate market is very inefficient. Unlike stocks, it's hard to learn everything you need to know about a property before buying it. The pros/very experienced RE investors have a big advantage over a neophyte. Now, these inefficiencies can result in bargains, but unless you are experienced you'll have a tough time knowing if you are getting one--or just getting taken.

 

[l8_apex]

Rental real estate, like all real estate is local. I left CA for MT, with the main reason being that the cost of rentals in MT made sense to me whereas it didn't in CA.

I starting investing 4 years ago (now have 6 rentals) and will quit my regular job in just a couple of weeks and just be a landlord/lawnmower/maintenance guy. If I had stayed in CA and not gotten into real estate, I'd probably just have to work until 62 whereas now I'm getting out at 47.

 

[dallas27]

Build models of income/outflow streams in excel. Build variables that will tell you ROA,ROE, and ROI as each year goes by. Learn functions pmt, irr, and understand pv, and your next best alternatives.

If you do all that you can make an informed financial bet on real estate, if you incorporate you own time as a cost.


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[rayinpenn]

I have been a landlord for ten years and when my tenant moves out in September we are selling the property. What I've learned...

If you answer no to any of these question don't do it...
1) can you afford to carry the cost of the unit for 6 months (the time it takes to evict a non paying tenant)
2) can you replace the toilet flange with a split ring? Do you know what that is?
3) do you paint and spackle? No it isn't a dance.
4) would you give up 4 days vacation/weekends to do the items in # 3.
5) when the tenant calls and casually mentions a leak - and you run over there to find a 5 gal bucket full with water on floor and water stains on the ceiling? Can you restrain yourself?
6) will you blow a gasket when you find senseless damage
7) will you sweat ever time the tenant doesn't pay and the wife says "you need to call the tenant it's the 20th and they haven't paid..."
8) when the tenant leaves you a message cursing you for three minutes can you brush it off.

Come to think of it ...Don't do it. Oh yeah you can get a management company but you won't make money...

Yeah the tenants have paid the mortgage off but we've earned every dime...it's all about temperament and how you are able to deal with people. The last 4 years have been easy but before that I've been tested...

 

[Mulligan]

Ray, your post reminded me of someone....Me as a renter...I rented from college onward off and on for 15 years. Always a great tenant, paid on time, clean, and always got my deposit back...Well, one time in early 90's I was just recently married and my wife and I were moving to a house to rent. We had already shut power off preceding day and returned for final cleaning and moving washer and dryer. I had my wife remove the hoses from the washer and exhaust vent from dryer while I was moving something....Big mistake....After a month passed I called the landlord to see if he had mailed me my deposit. He calmly said, he had to keep it because when the next renter came they had water turned on when they were not there and of course it went cascading down ceiling into apartment below. He said he had insurance. I said I understand....See even a "good renter" can destroy property....


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[RobbieB]

Hehe, it's been my observation that the best tenants eventually become home owners and you get to deal with the rest of them.

 

[COcheesehead]

I own a commercial building with two tenants. Their lease payments cover everything. At the end of the year I am plus or minus a few grand depending on variable expenses. In 9 years when the loan is done, I'll own a 1.8 million dollar building paid for by someone else. I would do it again.

 

[Another Reader]

As a landlord who is getting older, I'm not thinking of adding to the portfolio. I'm looking at each property with a critical eye to see how much income it's producing for how much hassle. I sold one in June, and expect to renovate and sell another this fall. If you read Senator's posts, you will see he is thinking of doing the same as he gets older.

If you have not owned rental property, I suggest you cultivate a few landlord friends and have some honest discussions with them about what is involved. Rental ownership is a business, and generally not an easy one. If you buy rentals and self manage, you will have bought yourself a job.

 

[Backpacker]

We have 4 single family homes, we paid cash for all, so I can't speak to the financing part. I am too conservative to borrow and my wife is even more so. We have been landlords do about 7 years with only one troublesome tenant. I am a money lender by day ( as well as pretty well versed in collection). I also do nearly all my own repairs. I felt very comfortable with this line of work. For us it has been a blessing. I can say the most stressful part is tenant selection, lots of weirdos out there with lots of stories, you've got to be able to sift through the BS and find the good ones. We are looking at maybe picking up one more. I see them as a bridge between FIRE and drawing on tax deferred investments. I recently reduced to part time employment at 52 to begin semi retired phase. My DW has 2 years until able to draw pension at 50. It's a good ways until 59 so we needed cash flow to bridge. We have friends in rentals and we cover for each other for vacations.

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[SumDay]

-I have heard and seen many NIGHTMARE stories from people, including my father who regretted getting into this industry.

I inherited eight when my folks died. A decade later, I'm down to two and trying to unload them. Moral of the story: If you love your children, you won't leave them real estate.

The property isn't the issue, it's the people. OMG, I could write a book.

 

[SumDay]

Darned double post....

 

[Sunset]

I have been a landlord for ten years and when my tenant moves out in September we are selling the property. What I've learned...

If you answer no to any of these question don't do it...
1) can you afford to carry the cost of the unit for 6 months (the time it takes to evict a non paying tenant)
2) can you replace the toilet flange with a split ring? Do you know what that is?
3) do you paint and spackle? No it isn't a dance.
4) would you give up 4 days vacation/weekends to do the items in # 3.
5) when the tenant calls and casually mentions a leak - and you run over there to find a 5 gal bucket full with water on floor and water stains on the ceiling? Can you restrain yourself?
6) will you blow a gasket when you find senseless damage
7) will you sweat ever time the tenant doesn't pay and the wife says "you need to call the tenant it's the 20th and they haven't paid..."
8) when the tenant leaves you a message cursing you for three minutes can you brush it off.

Come to think of it ...Don't do it. Oh yeah you can get a management company but you won't make money...

Yeah the tenants have paid the mortgage off but we've earned every dime...it's all about temperament and how you are able to deal with people. The last 4 years have been easy but before that I've been tested...

+1
I agree so much with the above, it can be done, but it is a lot of work.

I just sold one of mine, and will sell the other when the tenants from heaven move out. Even though I have been blessed by fantastic tenants, sometimes they do the weirest things.

Like phone you as you are a long distance away, to tell you the fridge does not work, nope it's not cold and the light is off, plug something else into the socket and it does not work.
I tell them check the breaker box and they come back to say they turned off and on the fridge breaker, and it still has no juice.
Ok, call an electrician ($200 minimum) he comes, and finds another breaker is off, turns it on and the fridge works..... has continued working 3 more years. Arrgggggg

Tenant tells me no screen on the window after living there 2 years. I'm sure there was one, but it only costs me $20 and 3 hours of my time to build a new one.

The one I just sold, I spent weeks cleaning it and painting it as the tenant painted rooms dark blue including the ceiling and baseboards

As for stable/secure, only if you are lucky, just get a run of bad tenants, or think about the landlords in Louisiana right now, with water up to the ceiling and tenants complaining to them about their stuff.

 

[laurence]

Well, I bought mine (3 bedroom 2.5 bath townhouse with 2 car garage, new construction) 3 years ago here in San Diego for 345k with 25% down. Mortgage is now sitting at 230k (we've made extra payments) and the property rents for about $500 month over carrying costs - $2500 a month rent, $1300 mortgage, but taxes, homeowners, fixes, vacancies, etc. make it much less of a profit.

I've found it's essentially a second, side job, taking about 10-20 hours a month depending on how lucky I am. It's appreciated to $460-470k now but has flatlined in price since early spring, I think that's where it will sit for a while. Essentially I'm getting paid $25-$50 bucks an hour (less than my salary) plus having the mortgage paid off and get appreciation. Our plan is to pay it off before we retire and have the passive income from the rental and let the kids sell post probate. On paper we are seeing huge return on our ~$100k initial outlay, but it's definitely not easy money. I almost decided to sell it but the tax man would destroy the profit we've seen, so we decided to make it the inheritance and the retirement income.

Have lots of insurance. Have umbrella insurance. I have a relationship with the top attorney in San Diego for landlord/eviction issues due to the seller being reluctant to move out after the 30 day rent back, silver lining of that. Have nerves and a good stomach because you will feel some stress. Having said that the right disposition can really benefit going into land-lording.

I'm just not sure of the timing right now. I would not have bought this place at current prices. Do your research, and buy local if you can. Having the property literally down the street from me makes it a detour to the beach instead of a weekend wrecker when something goes wrong. I've fixed a toilet with the wife and kids in the car waiting for me in swimsuits on the way to the beach!

 

[RioIndy]

Thanks for the great responses everyone. I will have to contemplate some more over the next year or so with a real hard look and thorough evaluation. But from what I am seeing thus far I am probably going to lean towards just getting an easy part time job to create the same income.

 

[pjigar]

I don't have a long history (4 years) but I have 4 single-family rentals in Dallas, Texas area. Here is my experience:
* I use broker to find new tenants to avoid hassle of screening and more importantly showing since I have a demanding day job.
* I do my own management and repairs except AC service. If you outsource these two then you will have barely any positive cash-flow.
* I average about 1 trip every quarter per house. Usually regular wear and tear.
* I see 4% cash-flow on current equity. Not a lot but I treat it as an inflation adjusted return so I can spend it all.
* The biggest repairs are when tenants move out. Lot of little things to fix which they fail to report while living but new tenant will find them. Averages 3-4 days of my time every cycle.
* All the tenants I have had paid on time barring technical issues like bill pay. I have been fortunate but not by accident. My theory is to hit the sweet spot in the house size so you don't end up with el-cheepo tenants but also avoid low-occupancy big houses. In Dallas, the sweet spot is 1800-2800 sqft house with rent range of $1600-2200.
* Most tenants I find In Dallas area have one or two dogs. So far I have been asking for refundable deposit but most tenants leave dog related smell and mess which is hard to get rid off without replacing carpets so I am going to make pet deposit non-refundable going forward.
* Most tenants will have spotty credit history. My biggest criteria for renting is no criminal history and less than 30% rent/income ratio. With low rent ratio, they will be able to pay me with their most irresponsible spending behaviors. e.g. one of my tenant has 10% of his income on car payments!!

Edit:
* If I don't use the broker for leasing then I can bump up my cash flow 4.5%. I plan to do this once I can afford to allocate time for screenings and showings.

 

[intl]

I sold one of my businesses and purchased some MFHs in NJ and upstate NY. I paid cash and pay around 10% for a prop. management company to manage them. Receiving a dividend of 20% + annually. All properties pay back the principle in about 4.5 years. Just acquired two apartment buildings. Had one leak, prop. management company is handing it. I keep high reserves and have credit lines if I need them. However, since I do not draw a salary (my regular business covers my salary), I just reinvest the money into other properties. I'd like to have 50 + one day.

 

[samclem]

But from what I am seeing thus far I am probably going to lean towards just getting an easy part time job to create the same income.

That might work out best. Once you calculate the value of your time and the opportunity cost of having dollars in real estate, a part-time job or small business may prove to be better--a lot depends on the particular market, your skills/temperament, and your access to information.
If you eventually decide you want to get into residential real estate it might be a good idea to partner with somebody who has been doing it awhile. As you can see from the responses here, people get burned out on this not-so-passive investment, and that includes people with a lot of properties. If you can find someone who wants to scale back from this business, perhaps you could learn the ropes from the inside while risking little/none of your money.
When a person wants to buy a franchise store, open a restaurant, etc experts advise that the best prep they can have is to first get a job in another store/business of a similar type and see how things work from the inside. They gain some very useful information that can't be gotten any other way.

 

[pjigar]

By the way, multi-family has better margins than single-family home. Apartment complex has even better margins. For example, my SFH has 8-10% RoR on cash vs my apartment complex has 15-20% RoR on cash.

 

[intl]

By the way, multi-family has better margins than single-family home. Apartment complex has even better margins. For example, my SFH has 8-10% RoR on cash vs my apartment complex has 15-20% RoR on cash.

Hence why I only buy multi-families. [emoji2]

 

[laurence]

Hence why I only buy multi-families. [emoji2]

I noted that, too, the cost to rent a SFH is just a bit more, but buying it was a huge price difference.

 

[RioIndy]

Any difference if one rents out condos? Since the condo building should take care of all maintenance it would remove a lot of the headaches.