Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Rental property - a good investment?
Old 09-22-2019, 06:40 AM   #1
Confused about dryer sheets
 
Join Date: Dec 2018
Posts: 6
Rental property - a good investment?

Hi All, I am looking for ways to get some passive income. While I definitely invest 20% of my income, I was thinking of getting a rental property with some of my extra cash. I was going to finance this as to not tie up a lot of my money in a rental property but easily be able to make the payments with the rental income (and I could swing on my own too).I donít necessarily live in a real estate hot spot like Cali or NYC but I do live in an area with a huge military rental presence. If I do the math and get a home to rent out I feel I can rarely make $500 on a month, would you consider this a good investment? Looking for pros cons etc from folks who have done it. TIA
__________________

court6449 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-22-2019, 06:57 AM   #2
Full time employment: Posting here.
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 679
I've never done it, but every time rental property comes up, those who are invested make the point that it is NOT passive income. It will either require a lot of time and effort on your part, or you'll need to pay for a management company and have a handyman on call, which means you probably won't be generating income while you have a mortgage.

You'll still be building equity, of course, so unlike a lot of people, I don't see breaking even on rental properties as a financially bad move, but then I prefer to stick to the two-fund portfolio (index fund and bond fund) to keep it simple and easy to manage.
__________________

__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is offline   Reply With Quote
Old 09-22-2019, 07:04 AM   #3
Full time employment: Posting here.
Luck_Club's Avatar
 
Join Date: Dec 2016
Posts: 696
Rental property can be an excellent investment, or can be a bad investment. There are many factors which determine if it is a good or bad investment. As the investor you can manage and control many of those factors. Some rule of thumb numbers that have served me well:

purchase price plus repair cost is <100X the current monthly rent.
Monthly rent-(mtg payment+taxes+insurance)=30% or more of the monthly rent
Only buy properties and neighborhoods you would feel comfortable living in yourself.
Tenant selection:
Don't rent to people who show signs of aggression, anger, or entitlement.
NEVER RENT TO BAD CREDIT it can have blemishes, but avoid people who have all kinds of charge offs, bankruptcy, foreclosures, etc
General knowledge:
Understand the landlord tenant laws and rules for your area.
You should have basic handyman skills at a minimum or your profits will be eaten up quickly.

Good luck with it, many real estate investors have very good passive incomes that have been earned from other peoples money.

let the show begin!
__________________
2017 dry run spending: 2018 accelerate debt elimination: 2019 RV procurement & 1MY begins: 6/19 DW last month went early: 9/19 start cross country loop: 1/20 first reinforcements arrive. 6/20 sell business or shut doors. 9/20 begin globe trot: 4/26 401K reinforcement.
Luck_Club is offline   Reply With Quote
Old 09-22-2019, 07:05 AM   #4
Recycles dryer sheets
 
Join Date: Jun 2014
Posts: 132
I have investments in real estate as a form of diversification. I did not invest aggressively (e.g. 20/25% down) and use a property management company for the majority of my properties. They are in a very nice area and do not meet the 1% rule. They are also SFH, which I could sell fairly quickly. For me it works perfectly in that it generates income with very little work.

When I decided to try it out, I did many of the things myself as a learning experience before handing it off to others.

If you have a cushion, you could try it out to see if you like it. At a minimum, you'll learn.
Toocold is offline   Reply With Quote
Old 09-22-2019, 07:05 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Jan 2013
Posts: 2,105
Start with the anticipated purchase price and market rent for that property. The rule of thumb for rental houses is the rent should be 1 percent of the value. Why? Because another rule of thumb is 50 percent of your rent should be allocated for operating expenses, not including your mortgage.

Have you calculated operating expenses? They include vacancy and collection loss, property management, taxes, insurance, any HOA fees, repairs and maintenance, and reserves for replacement of capital items.

If you don't understand this or think the expenses are "too high," you should skip real estate investing until you have a better understanding of the numbers.
Another Reader is online now   Reply With Quote
Old 09-22-2019, 07:47 AM   #6
Thinks s/he gets paid by the post
joeea's Avatar
 
Join Date: Mar 2015
Posts: 3,459
Quote:
Originally Posted by court6449 View Post
Hi All, I am looking for ways to get some passive income. While I definitely invest 20% of my income, I was thinking of getting a rental property with some of my extra cash. I was going to finance this as to not tie up a lot of my money in a rental property but easily be able to make the payments with the rental income (and I could swing on my own too).I don’t necessarily live in a real estate hot spot like Cali or NYC but I do live in an area with a huge military rental presence. If I do the math and get a home to rent out I feel I can rarely make $500 on a month, would you consider this a good investment? Looking for pros cons etc from folks who have done it. TIA
I have friends who have one or more rental units.

Some have done quite well. Others not so much. A few have sold at a considerable loss.

In all cases it was not exactly "passive" income. Most spent a fair amount of time researching, buying, improving, marketing, maintaining, etc.

One who wanted to go as passive as possible spent a little time up front and used a management company for ongoing work. He complains that he isn't getting anywhere near the return he expected, and talks about selling (although he hasn't done so yet).

One moved from his home into a new home in a more expensive locale. He decide to rent his former home. It went well for two years, then he ended up renting to some folks who were into selling drugs (I know because I was his neighbor and had to call the police often). Of course they stopped paying rent, and it took many, many months to get them evicted. And of course the house was completely trashed when he eventually got it back. He spent a lot of money getting it back into decent shape. Somehow he didn't learn his lesson vetting renters though. He got a fair share of deadbeat renters. I have since moved so not sure what he's doing now. Maybe it will still work out for him.

If you think of it more as a second job rather than a passive investment, you might be better off.

Do your homework up front. Good luck.
__________________
Old enough to know better.
joeea is online now   Reply With Quote
Old 09-22-2019, 07:48 AM   #7
Thinks s/he gets paid by the post
joeea's Avatar
 
Join Date: Mar 2015
Posts: 3,459
Quote:
Originally Posted by The Cosmic Avenger View Post
You'll still be building equity, of course
Probably, but not of course.

The real estate market is hyper-local. It doesn't always go up.
__________________
Old enough to know better.
joeea is online now   Reply With Quote
Old 09-22-2019, 09:20 AM   #8
Thinks s/he gets paid by the post
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 3,433
Quote:
Originally Posted by joeea View Post
... If you think of it more as a second job rather than a passive investment, you might be better off. ...
+1

BTDT: Our first house was a duplex, which began 20+ years of owning small rentals; duplexes, fours, and small apartment buildings. They are not the tax shelters that they once were, but still have investment advantages. By borrowing, you are leveraging and magnifying the effects of inflation on your property value(s). Leverage is the way to make money from real estate.

"A good investment?" The answer has to be "it depends." The properties are illiquid and transaction costs are high for purchases and sales. It is good that you are not in a "hot" (aka risky) market, but if the market is dominated by military you'd better take a good look at the various base closings proposals and at the functions of the base. A big headcount cut could be devastating to real estate values. Your congresscritters will try to protect you but success is not guaranteed.

Illiquidity and risk are probably OK if you are in your 40s, but not so much if you are retired. Similarly, irregular cash flow is OK if you don't need it to live on. Remember, when you own one duplex, occupancy is either 0, 50% or 100%. You will experience all of these.

Using a hired management company will suck all the juice out of the deal. In addition to their fees, they are hiring all jobs to be done without a lot of concern for cost. Ditto a condo/HOA situation.

Real estate can be a very good deal but it is not like holding a 20-year treasury bond.
OldShooter is offline   Reply With Quote
Old 09-22-2019, 09:27 AM   #9
Thinks s/he gets paid by the post
OldShooter's Avatar
 
Join Date: Mar 2017
Location: City
Posts: 3,433
Quote:
Originally Posted by Luck_Club View Post
... purchase price plus repair cost is <100X the current monthly rent.
Monthly rent-(mtg payment+taxes+insurance)=30% or more of the monthly rent. ...
The brutal truth is that you don't get to set the rent. The market will tell you what the rent for your unit(s) needs to be. Rules of thumb are nice but the way to use them is: "Can I buy such that purchase price plus repair cost is <100x the current monthly rent?"

DO NOT use ratios and theory to project your numbers. Use actual rents currently being paid for units similar to your still-theoretical real estate empire. If you're not willing to put forth the effort to really learn your micro-market, you shouldn't be doing this.
OldShooter is offline   Reply With Quote
Old 09-22-2019, 04:08 PM   #10
Recycles dryer sheets
 
Join Date: Dec 2016
Location: Encinitas
Posts: 266
Plenty of good advice here. Our rental properties are the bulk of our retirement income, but I am a second-generation landlord and had the advantage of adding to an existing portfolio that we started as a family years earlier.

It's not a path for everyone, but our family's first rental property was a very nice triplex in a great location that we bought - and occupied one of the units. (this was back in the early 70's when the interest rate was 9%!) It was a family decision, and a great deal, and we were lucky to fall into it. After living there for a couple of years, we eventually bought another home nearby and kept the triplex as a rental, which paid for itself many times over during the next 25 years.

My folks eventually sold the triplex for a huge gain and purchased four SFR properties in a different area (plus, they gifted my brother and I down-payments for our two homes). Their rentals provided them with a very comfortable retirement; and ultimately I inherited the rental properties, which made our ER possible. If I were starting from scratch, I probably would do the same thing as my parents, and get a nice 3-4 unit property that I could live in and manage. It would provide me with a place to live, a good education on being a landlord, and investment income via tenants who help pay the mortgage.

Incidentally, the 10% rule is something you'll hear a lot, but it is a metric that is highly influenced by the local market. The 10% rule is a great goal, but is more typically applied to multi-family rentals given that the property valuation is a function of income. For SFR rentals, your selling price is 100% market-driven, and I think the 10% rule is less valid on account of market appreciation.

It is important to know your ROI, and to understand that you can get a better ROI by choosing your rental properties carefully - and also by choosing your rental market (if you can). Attached is a spreadsheet showing single family rental prices by market. By using the average rents and average prices, you can see which markets offer the best average ROI on SFR rentals. Not surprisingly, the less desirable markets have the best ROIs - which makes total sense give their low cost of housing. These calculations do not take into account the impact of market appreciation, but you can see those market trends in the year-over-year spreadsheet numbers too.

I believe that your purchase decision is the most important factor that will influence your ROI. Buying the right property, at the right price, at the right time, makes all the difference over the long run.
Attached Files
File Type: xls Single Family Rentals Data.xls (98.0 KB, 9 views)
Starsky is offline   Reply With Quote
Old 09-22-2019, 05:26 PM   #11
Full time employment: Posting here.
 
Join Date: Sep 2002
Posts: 762
I have had rentals since 2003. Both single family and townhouses. Personally I like townhouses. HOA takes care of the outside and I tend to get professional people, people who are down sizing, or people who donít want to live in apartments. They tend to stay for multiple years. I have had military tenants teachers nurses etc.

My next venture is probably gonna be to build a triplex or if I can swing it with my VA loan a quadplex. The va cap will drive the number of units. I just have to find a location I want to build it. I want to do it near a new hospital. Probably will do it in the next 5 years. This venture will be 100% finance for the next 30 years as I will use it as an inflation hedge and an addition to my kids inheritance.
JDARNELL is offline   Reply With Quote
Old 09-22-2019, 05:59 PM   #12
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Williston, FL
Posts: 3,755
If you think you are just going to buy a rental property and make money, you should avoid it.

There is a lot more to it than just invest. Do you know how to screen tenants? Do you know how to interpret background check results? Are you only going to rent to military? If so, that may be discriminatory.

Understand the laws first. Attend investor group meetings. Study first, then look for an opportunity.

Depreciation, and appreciation, should not even be considered when buying a property. Look for cash flow.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 09-22-2019, 06:08 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 6,055
We started with a place that was to be a practice burn - but we liked it and saw what it could be. Spent 5 years and too much money on it. Christmas presents between us were a kitchen window here and a front set of stairs there. Had a good time and still feel good driving by it. Can't say it was the best use of time economically or profit wise. We then were into the 80's - interest was sky high and places, especially ragged rough and challenged places, were very cheap. We bought another SFR, then an 8-plex. Both needed buckets of work. Every day they needed work for over two years. The 8-plex got us rolling though; paying 9-14% interest really gives incentive to get loans paid off ASAP. We've been divesting but still have 37 doors and do daily bookkeeping and bills and 6 months of hands on every year. Eight turnovers this summer with the gal and I doing more of the work than this 69 YO wanted to do. Great for the bottom line, but our passive income sure takes a lot of work.
__________________
"Be kind whenever possible. It is always possible." Dalai Lama
calmloki is online now   Reply With Quote
Old 09-22-2019, 07:05 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Oct 2012
Location: Colorado Mountains
Posts: 2,741
We rented a place we had lived in for a few years when we were transferred out of the area. When we got transferred back, the place was still rented so we planned to keep it as a rental. The renters moved out at the end of the lease. I spent my spare time the summer that DD was born fixing the rental up. I decided that I was way too particular on the condition of a rental place and we sold it rather than keeping it as a rental. For me, that was the right move. Others have done very well in the rental business.
Hermit is online now   Reply With Quote
Old 09-22-2019, 07:10 PM   #15
Full time employment: Posting here.
Luck_Club's Avatar
 
Join Date: Dec 2016
Posts: 696
Quote:
Originally Posted by Senator View Post
Look for cash flow.
+1

This is the number one rule of rental real estate.

I like real estate. Had tenants call me tonight drains are slow. Called 1 then a second. Looking at $500 tops for $1200+ a month positive cash flow on the building. This month I'll have to cut back on the grey pou pon.

Trying options for marketable securities. They may provide more $$$ then the real estate with less work. Need to analyze every Sunday actively monitor during the week and realize results on Friday to start the week again. Sounds like a job All of you could really say with no 2nd thoughts I'm an active financial manger as opposed to retired.....

Sensing resentment from working people, how to respond?


I'm not complaining. So far it is proving better then buy, hold and collect the dividends. Neither of which is better then real estate.
__________________
2017 dry run spending: 2018 accelerate debt elimination: 2019 RV procurement & 1MY begins: 6/19 DW last month went early: 9/19 start cross country loop: 1/20 first reinforcements arrive. 6/20 sell business or shut doors. 9/20 begin globe trot: 4/26 401K reinforcement.
Luck_Club is offline   Reply With Quote
Old 09-23-2019, 11:41 AM   #16
Recycles dryer sheets
 
Join Date: Feb 2016
Location: SoCal
Posts: 467
I bought 3 rental properties and wished I bought a lot more. One has appreciated 500% over 23 years. I spend 2-3 hours a month on them, mostly all yard work because I haven't hired a gardener. Helps keep me fit.
Mr. Tightwad is offline   Reply With Quote
Old 09-23-2019, 12:59 PM   #17
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 198
We have a Rental that we've owned for 33 years. Paid it off after 15 years. Just had a one month vacancy from a Tenant that moved after nine years.



After painting, clean-up etc. the rent will be $300 more a month and nets about $30k per year.
Livefree is online now   Reply With Quote
Old 09-23-2019, 01:51 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Jun 2016
Posts: 2,975
I bought a commercial building in 2010. It was bank owned at the time and I got it for a song. I put $75,000 down. Today my equity is worth about $740,000 based on what similar buildings are selling for. There have been expenses along the way for sure, but the one thing someone told me a long time ago about real estate is that the money is made at the buy. So if you pursue it, buy low.
COcheesehead is offline   Reply With Quote
Old 09-23-2019, 03:13 PM   #19
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 573
OP. Can be a great investment. But it depends on you. Are you a self starter. Hard
worker. DIY. Willing to take advice, from successful landlords. Do the homework!

Been, a landlord, over 35 yrs. IN expensive San Francisco, bay area. Lots of work in the
beginning. Did a lot of my own, painting, cleaning, repairing. Today, with properties, all paid for, I can afford to hire out the major repair jobs.

Also, do not forget the "tax" advantages. Depreciation expense, is a great none cash
expense. (part of the homework, is talk to a tax accountant. Or a talkative landlord, "free").

If you are "lazy", and want to use professional management. Then "forget" being a landlord. IMHO.
wolf is offline   Reply With Quote
Old 09-23-2019, 08:41 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Sep 2014
Location: Grapetown
Posts: 1,806
Quote:
Originally Posted by wolf View Post
OP. Can be a great investment. But it depends on you. Are you a self starter. Hard
worker. DIY. Willing to take advice, from successful landlords. Do the homework!

Been, a landlord, over 35 yrs. IN expensive San Francisco, bay area. Lots of work in the
beginning. Did a lot of my own, painting, cleaning, repairing. Today, with properties, all paid for, I can afford to hire out the major repair jobs.

Also, do not forget the "tax" advantages. Depreciation expense, is a great none cash
expense. (part of the homework, is talk to a tax accountant. Or a talkative landlord, "free").

If you are "lazy", and want to use professional management. Then "forget" being a landlord. IMHO.
+10
__________________

Winemaker is offline   Reply With Quote
Reply

Tags
rentalproperty


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Investment - Rental property in the Villages Ohio Tealady FIRE and Money 34 03-22-2018 11:25 AM
Financing rental property and using property management services GreenER FIRE and Money 12 01-12-2015 08:00 PM
Rental property rent raises Toejam Other topics 12 03-09-2005 04:48 AM

» Quick Links

 
All times are GMT -6. The time now is 07:36 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.
×