become a landlord or more index funds?

[tmitchell]

Hi. I am selling a property that a family member lived in. It didn't cash flow because I was helping her out, and it still won't cash flow now anyway due to the high purchase price & current rents. Here are the numbers:

Purchased for 250k
Selling for 315k
Cap gains to be incurred: appx 63k (after closing costs, fees, etc)

I've been considering finding a cash-flowing turn-key property or two out of state (I live in CA), but I'm not convinced its a good idea. A 1031 exchange will save me about 13k in taxes, but is it worth the headache of becoming a landlord all over again? I wasn't thrilled first time around, so I'd definitely put the properties under management...

For the record I'm 49 and another 2-3 years away from FI.

What are your experiences & thoughts? Many thanks!

 

[Senator]

There is a lot of risk in being a landlord, hence the big rewards. Having said that it brings me ~$180K+ a year if I do a bit of work, and much of it is sheltered by a depreciation deduction.

If you can buy a property in a self directed ROTH Ira, it would be the best.

 

[Souschef]

There is a lot of risk in being a landlord, hence the big rewards. Having said that it brings me ~$180K+ a year if I do a bit of work, and much of it is sheltered by a depreciation deduction.

If you can buy a property in a self directed ROTH Ira, it would be the best.

I agree with Senator, but in my experience as a landlord, even with it management company, it can be a PITA.
The other downside is when you sell the property, you have to recapture the depreciation.
The theory is that you can deduct the depreciation against your income, but recapture it as a cost basis when you sell the property as capital gains.

 

[calmloki]

As a landlord for 30+ years I vote no. Especially if you plan on having a management company - and outa state? you gotta have a management company..

 

[NW-Bound]

Landlording is work! I have never been a landlord, and never want to be one, certainly not in retirement. I'd just buy stocks or bonds and live off whatever they throw off as income.

 

[samclem]

If you weren't close to FI, wanted a sideline gig to make some extra money for a decade or so, and wanted to buy some rental properties in your own town to manage yourself in a neighborhood you knew well, that would sound like a good idea. But everything about your situation sounds exactly the opposite of that, which increases your risk and decreases your chance of making money.

 

[DrRoy]

I have read a lot about this on both sides. One bad tenant can ruin the investment. It's just a gamble, but so is much else.

 

[nun]

I vote yes for being a landlord, but it depends how you do it.

I've been a landlord for 20 years and rent out a one bedroom apartment in the house I live in. The mortgage is paid off and I get $1600/month in rent. There's a bit of work involved, but not much. It's a nice diversifier and produced income and capital appreciation.

 

[Senator]

I have read a lot about this on both sides. One bad tenant can ruin the investment. It's just a gamble, but so is much else.

Exactly. At least in the landlord game you can mitigate your risk by knowing how to screen tenants. You get most of the control.

With the S&P or similar index, you have no control over it.

As with anything, diversify. I have about 50% in real estate and 50% in equities.

 

[jkern]

I don't know about out of state properties, but having an easy time at being a landlord is highly dependent on the property and the area. For example, a near new condo in a strong rental market can be a pretty easy job.

 

[HFWR]

My index funds have never set my rental ablaze cooking meth...

 

[calmloki]

We stood at attention on the deck as GM went banko with our money. Ditto following Bank of America all the way down. No fire, no meth, the money just vanished.

 

[euro]

We stood at attention on the deck as GM went banko with our money. Ditto following Bank of America all the way down. No fire, no meth, the money just vanished.

Yes, as Senator pointed out, everything has its risks and can go South. Diversification is important - true for real estate as well.

That said, I too rode a perceived "bluechip" all the way to zero (MCI-Worldcom) back in the days..... even worse, I decided to double down about halfway in!

 

[ls99]

Owning real property for most of us involves w*rk. Rentals, a LOT more w*rk.

In my younger years I w*rked in a real estate office part time as a licensed real estate agent. Renting and selling.

The expereince convinced me never to own rental property. YMMV

 

[Lsbcal]

Management companies are a crapshoot and reduce your return. If you cannot manage your property, stay away.

I view RE as a small business. Absentee landlording sounds like a lot of risk to me.

 

[calico1597]

I'd vote NO, run Forrest run. We had three rental houses for 20 years. Never again.

 

[Clone]

1031 the property into some farmland recently enrolled in CRP. Should be able to lock in a 6% ROI (5% after accounting for property taxes, insurance, and occasional maintenance). 8 year to 13 year contract. Income initially subject to self employment tax, but that goes away if you start drawing social security. At your age, you need to include the SE taxes (15%), so that would also drop the ROI.

Possibility of appreciation in value (also possibility of land prices going down...). Other than change in value, all of the numbers are known up front.

 

[Senator]

1031 the property into some farmland recently enrolled in CRP. Should be able to lock in a 6% ROI (5% after accounting for property taxes, insurance, and occasional maintenance). 8 year to 13 year contract. Income initially subject to self employment tax, but that goes away if you start drawing social security. At your age, you need to include the SE taxes (15%), so that would also drop the ROI.

Possibility of appreciation in value (also possibility of land prices going down...). Other than change in value, all of the numbers are known up front.

Why would renting land be subject to SE taxes? It is still passive income. Renting a home or apartment is not subject to SE taxes. If you are thinking it should be paid because he is young, but not required, he may be better off just putting it in an index fund. I am not sure you can just pay SE taxes unless you have active income.

 

[zekeboz]

Owning property has worked out well for us and has provided some nice diversification.

I think there are four key areas that you need to be good at in order to succeed.

1 - Good with numbers? Can you determine and establish what a good - ROI, CoC, Cap Rate, Vac. Rate is for your area or more importantly you? If you buy high to begin with you are already sunk in realizing a good return.

2 - Can you be firm but fair? Non paying tenants or those that destroy your investment need to be dealt with swiftly. If you give them 'one more chance' or 'I'll have the money next week' go on and on you are not only hurting yourself financially but enabling the tenant. Hold firm to your late fees and collect or evict.

3 - Location. I've never had any luck with distant properties, tried once and it was not for me. I believe that if you are looking to invest in this type of asset you need to put in the face time at least a couple times a month. My property is located the next town over so I just plan on swinging by the building during my errands to check on it, mow the grass, collect laundry money, etc.. Most tenants appreciate to know I am around and I think develop pride in living there - pick up trash, raked leaves on their own.. You have the added plus of knowing the location and economy.

4- Handy / Homework. Do you know how to screw in a light bulb? Can you shovel snow? Do you know the difference between fuses and a circuit breaker? I think having a basic understanding of home maintenance can go a long way when dealing with issues that develop and help you spot a fraud when you need to actually call in a pro to fix something. It may sound crazy but I actually had a friend who had a property that did not want to deal with the most minor items - like replacing dead light bulbs - and hired out these items.

Good luck.

 

[Spudd]

It may sound crazy but I actually had a friend who had a property that did not want to deal with the most minor items - like replacing dead light bulbs - and hired out these items.

Off topic, but is that really the landlord's responsibility? That seems crazy!

 

[Clone]

Why would renting land be subject to SE taxes?

CRP payments are different. They show up on a Schedule F as income. If you have net farm income, you pay SE on that amount. If you are drawing social security, you subtract off the CRP payment from the income for the purpose of calculating SE tax. It is a bit of a mess, but those are the rules.

IRS & CRP

<<< Although the payments are called “annual rental payments” for purposes of the CRP, these payments are not rental payments for federal tax purposes. Generally, a rental payment is an amount paid for the use or occupancy of property. The government does not use or occupy the land covered by a CRP contract. >>>

<<< Unless the taxpayer is receiving Social Security retirement or disability benefits, CRP “annual rental payments” are includible in net income from self-employment subject to self-employment tax. >>>

 

[BreathFree]

I have had rentals since 2007. I have 11 units. I have a property manager and hire out all of the work (sometimes I'll paint a unit myself if I am bored.) I like to keep it as passive as possible. It has been good to me so far. Income is much better than 3 to 4% withdraw rate I plan for my index stock bond portfolio. Last i checked it was 8% with property manager and maintenance or 10% if I did all of the work (this does not include appreciation.)

I do have to manage my manager, he is awfully slow at making necessary repairs but he is quick at finding tennents.

I purchased the rentals because the SWR for a stock and bond portfolio was too low for my liking, I wanted an income that covered my basic living expenses, that was not subject to sequence of risk, and an income that had some inflation protection. I've got that now and do not plan to purchase more properties unless I swap out a property for an upgrade.

An umbrella liability policy let's me sleep at night.

My biggest surprises were termites and tornado damage.

I would much rather have a pension or large portfolio, but those options were not available to me.

 

[pjigar]

Off topic, but is that really the landlord's responsibility? That seems crazy!

In Texas, Bulb, Air Filters, yard work, etc. are tenant responsibilities.

 

[kcowan]

We have a use and replace policy. There is a supply of light-bulbs and a plumbers plunger.

Treat the place like your own. If you need to hire a handyman to do them, that is your cost. We have found that that policy attracts tenants who are capable.

 

[HFWR]

We stood at attention on the deck as GM went banko with our money. Ditto following Bank of America all the way down. No fire, no meth, the money just vanished.

Not discussing risk, though. Discussing minimizing hassles. I'm retired!