Investment Property ROI?

[Senator]

I think you are confusing 'cash flow' with 'net gain/loss'? You always need some liquidity to cover some bad stretches (vacancies, repairs, etc). With a higher cash flow, the amount of liquidity required is less. But with a mortgage (all else being equal), you have (much) more liquidity available.

Seems to me the net gain/loss is the end game, cash flow is a consideration towards that end.

Let's not forget that the funds invested will typically provide 2% cash flow (dividends). Wellesley is ~ 2.9%, and a very good chance of gains over the long term (therefore diversifying your investment). Compared to a low rate mortgage (what are current rates on rentals?), that doesn't seem like a huge difference, certainly not enough for your such definitive language:
-ERD50

Mortgage rates are 4%+ generally. It must be non-owner occupier, which adds ~.5%. An adjustable commercial loan might be less, but resets every 5 years.

A standard freddie/fannie loan for a 1-4 unit, non-owner occupied, 30 year fixed, you need ~25% down.

Whether or not to mortgage a small investment property is really a question on the amount of risk you want to take. If you have the capital required, and take a mortgage just to leverage, it's not too bad.

If you are taking a mortgage out for a $30K property because you do not have $30K, you probably need to evaluate whether or not you should be in the rental business. You do not have enough money.

 

[ERD50]

....

Whether or not to mortgage a small investment property is really a question on the amount of risk you want to take. If you have the capital required, and take a mortgage just to leverage, it's not too bad.

If you are taking a mortgage out for a $30K property because you do not have $30K, you probably need to evaluate whether or not you should be in the rental business. You do not have enough money.

Agreed on that (though I might say having the capital AND taking a mortgage is lower risk - more liquidity) - you need enough liquidity to carry you through a bad spell either way.

-ERD50

 

[Sunset]

Timely post in that I have a question on this on a transaction that I am considering. I know that depreciation recapture is even if you did not take a depreciation deduction and I understand that. The question is what would the "required" depreciation be on a seasonal rental that is rented 3-4 months a year and sits vacant 9-8 months a year? Is it the full year of depreciation or only the portion of the year that the unit is rented?

Would the answer change if during the period it was not rented the owner used it occasionally as a vacation home vs not using it at all?

I'll be gone for the day but will check in to see if there are any responses tonight.

As already said its normally over 27.5 yrs.
Under special circumstances you can make it over 40 yrs, which is really worth checking into if you forgot to take it over the past many years.

If you just forgot a few years, then file amended returns quickly to catch it all the way back to 2012 (I think) by April 15.

 

[Sunset]

..... 10% of rent for maintenance seems high since the condo fee covers all exterior maintenance. .... The unit doesn't need any rehab which is good because i'm NOT handy with that stuff. ......

I guess you never heard of tenants using the dishwasher door as a footstool, or spilling water on the bathroom floor while showering so it collapses the lower floor ceiling.
Stuffing the washing machine so full it dies and needs replacement.

One landlord I know had $30,000 worth of repairs to do after she evicted her husband's co-worker from the rental, and she was a real estate agent.

 

[Amethyst]

Even the "best" tenants can't be expected to take the same care of your property, flooring, and appliances as you would. They are under no obligation to do so. Rented things just naturally wear out faster. Nor do tenants control their guests' behavior the way the owner would.

Also, insurance companies (rightly) consider tenant-occupied properties to be higher risk than owner-occupied, so premiums are higher.

Finally, in Maryland, landlords pay a 10% premium on property taxes. I'd expect other states to do something similar.

Amethyst

I guess you never heard of tenants using the dishwasher door as a footstool, or spilling water on the bathroom floor while showering so it collapses the lower floor ceiling.
Stuffing the washing machine so full it dies and needs replacement.

One landlord I know had $30,000 worth of repairs to do after she evicted her husband's co-worker from the rental, and she was a real estate agent.

 

[Senator]

Also, insurance companies (rightly) consider tenant-occupied properties to be higher risk than owner-occupied, so premiums are higher.

Actually, no inside contents are covered, so it is likely cheaper...

There are plenty of horror stories though. Here is a picture of a place I had a while back. Lots of junk, not much damage though. I eventually got a judgment and a wage garnishment. Then, they were evicted from their new place.

The goldfish did not make it through the 28-day holding period, so they went down the toilet...

 

[Sunset]

...
Also, insurance companies (rightly) consider tenant-occupied properties to be higher risk than owner-occupied, so premiums are higher.
....
Amethyst

I have found insurance much higher, maybe because tenants are more likely to damage the property or to consider suing because they slipped.

 

[Amethyst]

You just had to see the dead orange Christmas tree - still adorned with frugal paper chains - that one set of tenants still had up in July. "Oh, we just couldn't bear to take it down."

This was the "couple" that the property managers leased to while we were overseas. The tenants were big-hearted people, who let all their friends stay in our rental. When we took over management, there were six people living there. "Oh, these are our guests! They just needed a place to stay!"

The horror stories could go on and on, but the place was sold 2 years ago and I'm only now getting over the PTSD, so I'll quit.

A

 

[aaronc879]

One landlord I know had $30,000 worth of repairs to do after she evicted her husband's co-worker from the rental, and she was a real estate agent.

If this happens then you put a lien on the renter, right? I know there's no guarantee that you'll ever get the money but you could. Many years ago I co-signed for my girlfriend and when she caused several thousand worth of damage, I was on the hook. I paid it so I didn't have a lien against me so I could buy a home some day.

 

[Senator]

If this happens then you put a lien on the renter, right? I know there's no guarantee that you'll ever get the money but you could. Many years ago I co-signed for my girlfriend and when she caused several thousand worth of damage, I was on the hook. I paid it so I didn't have a lien against me so I could buy a home some day.

Possibly. You need to got to Court to get a Judgment first. Then attempt to collect.

It's better to avoid low quality renters.

 

[wolf]

Interesting comments.

But I think getting off topic.

 

[zerogravity]

Even a 1031 exchange only delays it, it does not eliminate it. Death (or donation) is the only way to avoid it. There are ways to change the basis when you sell, but that only help for some of it.

Senator, thanks for the interpretation of the word 'avoid'. In this case I'm pretty sure I'm using the word correctly. A 1031 exchange enables the taxpayer to 'avoid' the depreciation recapture tax ( for another 27.5 years).
I didn't say it eliminated the tax. I said avoid.
Now, transferring on death actually does eliminate the tax. With the caveat- "under current tax laws".
Any owner of rental real estate needs to buy with an EXIT PLAN in place. How long they wish to manage the property will affect the ROI.

From the posts I've read you seem to have a lucrative business in rental properties.

I would advise the OP that his deal is dead on arrival.

A condo 'very rarely' makes a good long term buy and hold ROI, especially in the case described by the OP. Assessments and monthly fees eat up the potential cash flow.

Would you agree?



--ZG