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anyone  use  rental  homes as way  for income?
Old 03-22-2004, 10:57 AM   #1
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anyone  use  rental  homes as way  for income?

what are some pro and con of rental property ?

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Re: anyone  use  rental  homes as way  for income?
Old 03-22-2004, 11:21 AM   #2
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Re: anyone  use  rental  homes as way  for income?

Pro: potential for good regular income, potential for good capital gains on the property if bought in a rising area, potential for a lot of tax writeoffs.

Cons: Hassles of getting good tenants, evicting bad ones, dealing with the damage they do, repairing properties, managing day to day issues (or giving away about half of your income for a pro to do these things), etc. High initial cost of "rental mortgages" usually requiring high down payments - 1/3 and up.

I considered doing this about 5 years ago. My process was going to be to buy relatively new, fairly bullet proof (stucco houses, tile roofs, 1400-1500 sq feet, small lot, nice neighborhood) properties, about six of them. Rates were right and properties were close to rising. I made offers on two and both sales fell through in the 11th hour with the seller backing out. A lot of work out the window, and I was a little annoyed by it so I put the plan on hold. Six months later property values had risen about 15% and rates were up, and I wasnt comfortable about doing it anymore.

Five years later, those properties that I could have bought in the $150-160 range are selling for $235-260. I could have refinanced the mortgages to 40 year lows to increase my income.

So my homes would be worth about 500-600k more, and the roughly 3k of clear after tax income would more than meet my monthly needs.

A bad decision to not do it in this case.

Some people buy old crappy properties in depressed areas on the rebound, fix them up a little, rent them out to nice folks, and every week have to take a trip to one of them to fix something. That method works as well but you have to be a lot more hands on.
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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Re: anyone  use  rental  homes as way  for income?
Old 03-22-2004, 12:52 PM   #3
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Re: anyone  use  rental  homes as way  for income?

My husband's early retirement is largely due to the fact that he bought rental property, managed it, and eventially sold out. Some things to think about:

1. Managing property yourself saves a ton of money. However, it is not retirement, it is a job and can be a 24 hour a day job. (The toilet is clogged, it smells like gas in here, the lightbulb in the hall is out, the people upstairs are playing their stereo too loud. . . )

2. When my husband was selling his properties, we were surprised how much people were willing to pay and how little analysis they would do on how the property will cash flow. So many people simply thought they would eventually make money through appreciation. That is all well and good, but the income should cover expenses and provide a return on your investment, your down payment.

3. Condition is important. Is there deferred maintainance? Cash flow might be great because no one ever put money back into the building.

4. What kind of tenants are you looking at? In my community, lots of people by houses to rent to a largecollege student population. Major cash flow but major problems as well. The students sometimes trash the places and the neighbors are mad when they misbehave. Do you want calls about parties in the middle of the night?

5. There is a saying that "no one ever washes a rental car". Similarly, it is the rare tenant that really cares about the place and even good tenants can be hard on a property.


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Re: anyone *use *rental *homes as way *for income?
Old 03-22-2004, 01:30 PM   #4
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Re: anyone *use *rental *homes as way *for income?

To add to Martha's post - you gotta be a landlord(personality wise). Had one lonely duplex for 15 yrs, generally good tenants and made money but never bought more or scaled up - discovered it wasn't my cup of tea.
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Re: anyone *use *rental *homes as way *for income?
Old 03-22-2004, 01:49 PM   #5
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Re: anyone *use *rental *homes as way *for income?

It (landlording) was my cup of tea at one time.
Not now. There is still a pile of money to be made
but someone else will have to make it. Also, they
need to do it before the government provides
all "low income" people with free or subsidized
housing using your tax dollars. This will happen.
It's only a metter of time.

John Galt
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Re: anyone  use  rental  homes as way  for income?
Old 03-22-2004, 02:46 PM   #6
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Re: anyone  use  rental  homes as way  for income?

Yes, but I don't like all of the day to day work that it implies early on. Also, there are economies of scale when you get into larger rental properties. It takes time for the real estate market to go up (more if you get in at the wrong time).

I bought 2 4-plexes with 2 friends in 1988 for $5k each as down payment, and then funded negative cash flow for a few years of abut $200/month. In 1997 I bought out one building from them. In 2002 I sold that building for about $200k cash and bought a 20 unit in Denver for 1.1M (240k down). It provides >$1k cash flow per month plus principal paydown of $1k/month plus eventual appreciation. I have found an on-site manager and an on-site maintenance person for about 1/2 rent per month each. I still go and check on it once or twice a month, but having others on-site to deal with most issues really cuts down on the headaches.

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Re: anyone *use *rental *homes as way *for income?
Old 03-22-2004, 03:24 PM   #7
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Re: anyone *use *rental *homes as way *for income?

Here is another observation (Martha made me think of it)
vis-a-vis rental property. After a while, I got so good at this I could determine within minutes, (with minimal
data) if a property was worth buying.

From 1990 to 2000 I made offers on about
20 to 25 properties, actually buying few or none.
Mostly, IMHO the properties were priced at a point
where positive cash flow was impossible. The thing
that really got me was the thought that someone
might come along and buy with no chance of
making money. I never bought unless it was a lock.
If you spend enough time you can find properties
which are "no-brainers", i.e. there is no way to lose.
I can still do it, but choose not to invest the time.

John Galt
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Re: anyone *use *rental *homes as way *for income?
Old 03-22-2004, 07:48 PM   #8
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Re: anyone *use *rental *homes as way *for income?

IMHO the properties were priced at a point where positive cash flow was impossible.
I think that pretty much nails it. * Today, we're in an environment in which residential property has appreciated due to low mortgage rates (buyers tend to think in terms of what monthly payment they can afford). * This has made the "P/E multiple" for houses outrageous since rents haven't gone up nearly as fast as prices.

If you focus on multiple-unit rentals, you'll have a better chance of finding something that will pencil out.

I'm in the process of selling one of my rental SFR's because I can make more from the appreciation than I can from the rent (and the appreciation only costs me more in property taxes if I continue to hold).
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