My Pro's and Con's of real estate investing

[97guns]

since RE income is my sole source of income I've become pretty passionate about it and always get into arguments of how much of a headache they can be, repairs will be costly and that I'm not really truly retired. Just thought I'd throw out the positives and negatives that I've encountered in my 8 years of rental investing, start with the Con's because everyone without RE investments shoots me down with them.

1) had to replace 3 water heaters, $2000
2) installed high wear flooring in 3 units, $7500
3) finishing up an eviction, lost 2 months rent, payed $1600 to eviction company, had 1 other eviction prior
3) replaced 2 A/C units $8000
4) replaced fence in 1 unit, $2400

The Pro's
1) don't work and spend 10 minutes a week tending to them, more now with the eviction
2) rents have kept up with the pace of inflation
3) $3000 pocketed on insurance claim
4) IRS tax benefits are off the charts
5) tenants have literally paid me in full for the homes they are living in
6) equity has tripled up in 7 years
7) net worth has jumped 6 fold in 8 years
8) leaving for Seattle next week, came back from Hawaii 2 months ago and Las Vegas/Los Angeles 3 months ago. did Hong Kong, Thailand, Taiwan, S Korea, Ohio and Denver last year.


So for me the Pro's outweigh my Con's by a wide margin, I have a great property manager and spend very little time tending to them, I've managed to keep my repairs down because I bought the newest units my money would buy, all late 90's early 2000

 

[euro]

I have a great property manager and spend very little time tending to them, I've managed to keep my repairs down because I bought the newest units my money would buy, all late 90's early 2000

Congrats! RE seems to work well for you.
Of course, you understand that those "late 90-ies/early 2000" properties that currently have low upkeep will by MUCH higher to keep up during the later course of your retirement (possibly 40y+).

 

[Toocold]

We are also using real estate as a way to further diversify our portfolio. The big time sink is usually the upfront cost and time to acquire properties, fixing them up if needed, and getting it rented. After that, I found that it's minimal to maintain as long as you have the contractors in place for any issues. Plus I like the slightly active aspects of them.

Right now, all the assets are a bit inflated IMHO -- stocks, bonds (low yield), and real estate prices. Having a bit of each I think is a good thing.

 

[Scrapr]

You bought at a great time in the RE cycle. The saying in RE is you make your money on the buy not the sell. Sadly I learned this truism too late. Sold our last property several years ago. (and now rents have exploded here!)

 

[Starsky]

Congrats! RE seems to work well for you.
Of course, you understand that those "late 90-ies/early 2000" properties that currently have low upkeep will by MUCH higher to keep up during the later course of your retirement (possibly 40y+).

I have a very similar setup and I've begun flipping my 80's properties for much newer ones as I see expenses rise. It's not a huge hassle after owning the property for 15 years, and my management co. knows the market and can find good properties at great prices - it's also a lot easier to negotiate a good deal when you can be 100% flexible on closing terms. It helped me to recoup in excess of my turnover costs in equity immediately on my most recent deal. (It also is a win-win for my PM, who gets to make a few bucks on the sale and re-purchase, and gets to find good rentals she can fill easily.)

Rental properties are usually long-term but don't have to be permanent investments, and I think it's important to play monopoly occasionally to increase the long-term value of the portfolio. It also lets me respond to changes in a community and property values over time. It's all about the ROI.

And most importantly, as the OP mentions, while we were enjoying our retirement courtesy of our rentals, my taxable income was zero last year - thanks to RE.

 

[Another Reader]

I have a very similar setup and I've begun flipping my 80's properties for much newer ones as I see expenses rise. It's not a huge hassle after owning the property for 15 years, and my management co. knows the market and can find good properties at great prices - it's also a lot easier to negotiate a good deal when you can be 100% flexible on closing terms. It helped me to recoup in excess of my turnover costs in equity immediately on my most recent deal. (It also is a win-win for my PM, who gets to make a few bucks on the sale and re-purchase, and gets to find good rentals she can fill easily.)

Rental properties are usually long-term but don't have to be permanent investments, and I think it's important to play monopoly occasionally to increase the long-term value of the portfolio. It also lets me respond to changes in a community and property values over time. It's all about the ROI.

And most importantly, as the OP mentions, while we were enjoying our retirement courtesy of our rentals, my taxable income was zero last year - thanks to RE.

Where are your rentals located?

 

[Luck_Club]

Just ran firecalc this morning, the impact from rental income is off the charts.

First like 97 guns rentals were my planned retirement vehicle. Despite that plan I have managed to accumulate a portfolio of marketable securities on top of the real estate. Despite adjusting my retirement income up to double & triple my current spending level, I never deplete the portfolio, and it is expected to be worth 8X on average. Take out the rental income and convert the assets to marketable securities and I fall to an 86% success rate.

Pros:
tax efficency
controllable risk leverage
low time investment (spend more time analyzing the portfolio)
CASH MONTHLY as opposed to quarterly

Cons:
Evictions (lose some rent during the process)
Maintenance (I have dozens of 1/2 gallons of paint)
Selecting property. Typically research 100's of properties to view 20-40 to offer on 10 and get 1.
Tenant selection

Speaking of tenant selection, funny story. My wife said she would help and show the apartment 1 day a while back. She said afterwards their was this one dumpy looking family that came in and the lady asked to use the bathroom. She proceeded to take a dump and leave it un-flushed for my wife to deal with after she left. Now the rentals all fall on my shoulders again.

 

[97guns]

I haven't flipped or played monopoly yet but ive often pondered on it and have run numbers, it's another key note from the argumenting camp that RE is not liquid but I can tap equity anytime I want.

 

[CaliKid]

Also tax deductible trips to visit your property if you invest out of the area! At least once a year is allowed even if you have a property manager. It's a small perk but a nice benefit that plays in well with my plan of geographic diversification of my real estate.

 

[Carpediem]

Good post and thanks for sharing. We currently own 2 vacation rentals and would like to buy more. How do y'all buy additional properties? Using cash? Using equity? Do you carry a mortgage on your rentals? Between the two properties, we probably have ~$100k equity.

 

[Amethyst]

I'm glad it's working for you. Some people are just smart about real estate and land-lording. I consider it a gift. My "smarts" lie in other directions.

Being small-time landlords worked fairly well for us for a few short years in the late 80's and early 90's. After that, we had nothing but one headache after another, and a lot of expenses - much more than yours. We ditched the properties. Many hard lessons learned, that we could have done without.

 

[97guns]

Mortgaged 2 and paid cash on 2, when my dad passed in 2013 I added another all cash from my share of proceeds of his estate

 

[Senator]

My rentals provide 200%+ of my spend. It has exponentially increased my NW. They do not really require too much work either.

I am currently working on a flip of a 1885 building. I bought it for $38K in December 2015 and kept the renters in place. Should be able to sell it for $140K+ when I am done. The original buy was a assignment of a contract for deed that I immediately cancelled and took ownership of the home. I also extinguished a IRS lien on the property when I did that.

Tearing out lath and plaster in the kitchen. Adding outlets, redid the plumbing in the entire house. It will have new windows, kitchen cabinets, new floors, new paint, etc.

Probably will spend $25K total, plus the $38K or a total of $63K. Plus some sweat. I did collect over $13K in rents while the tenants were in there.

Once I sell, I will buy a place in Cape Coral, FL. I may even buy a place first, and do a reverse 1031. Slightly more expensive to do it that way, but much more controlled.

With 25 tenants, I have not had an eviction in years. It's all about screening them. Easy peasy, just do not take a sob story.

 

[FIREd]

People in my family are big on real estate investing. They don't believe in the stock and bond markets so they hold either cash or RE (RE investments are also treated very favorably by the tax code where they live). They have done very well for themselves. I decided to go the other way to build wealth, putting my faith in the financial markets, since I am already set to inherit a bunch of RE properties down the road. I like the hands-off aspect of stock/bond investments.

 

[travelover]

I'm curious who you are trying to convince. If you are happy, isn't that enough?

 

[calmloki]

We've been in rental property since the mid 80's. It did well for us and continues to even after we've sold and given some away. The taxes we pay at sale time are pretty onerous though - when the places are about all depreciated out you end up with a big honkin capital gains hit as all that depreciation recapture goes rushing out. At almost 68 I'm getting tired of being a landlord but I'm too connected with the properties and want them to look a certain way. Even if I have management it is a struggle between hands off and micromanaging. The gal has a real aversion to giving up the profitability of the rentals and paying the government a ton of taxes - even though I point out that we would have enough after selling to just about stick the money in a drawer and live off it for the rest of our lives.

 

[flintnational]

We are down to one rental and are planning to sell it next spring. While I enjoyed rental properties (20+ year RE investment history), I found that I enjoyed them less as my net worth increased and/or as I got older. But, I know of a RE investor in his early 80's that still enjoys property management.

My enthusiasm for RE decreased similar to my decreased enthusiasm for w*rk. Both were a means to an end. YMMV.

FN

 

[97guns]

I'm curious who you are trying to convince. If you are happy, isn't that enough?

Not trying to convince anyone, thought this was a place for conversation... no more, no less

 

[RenoJay]

We are down to one rental and are planning to sell it next spring. While I enjoyed rental properties (20+ year RE investment history), I found that I enjoyed them less as my net worth increased and/or as I got older. But, I know of a RE investor in his early 80's that still enjoys property management.



My enthusiasm for RE decreased similar to my decreased enthusiasm for w*rk. Both were a means to an end. YMMV.



FN

I'm in a similar camp. I have one newer (built 2010) rental, a vacation condo (currently not rented, a primary home and some land.). Rental house has been a great investment but I cringe every time I get a call from a tenant. I think it's important to look back and calculate the rate of return on your real estate vs. passive stock index investing and be honest with yourself about the numbers, including forgone dividends. Any premium with real estate = the value of your time. You can decide if your time is worth more or less than you've earned and make new decisions accordingly. I decided I'd rather make hard money loans and let the borrower put in the sweat of identifying, fixing, etc. the real estate.

 

[Luck_Club]

With 25 tenants, I have not had an eviction in years. It's all about screening them. Easy peasy, just do not take a sob story.

+1

3 evictions I've had out of many many tenants. Every one of them was my fault. I fell for the sob story, and altered my criteria to accommodate them.

 

[LRDave]

I am glad it has worked out so well for all the landlords here. Just my own very-personal preference, I'd rather stick a sharp stick in my eye than be a landlord.

 

[CaliKid]

I am glad it has worked out so well for all the landlords here. Just my own very-personal preference, I'd rather stick a sharp stick in my eye than be a landlord.

That's good because if everybody enjoyed landlording, and did it, then there wouldn't be such great profits for the rest of us that do landlording! Thank you!

 

[BreathFree]

I think it's important to look back and calculate the rate of return on your real estate vs. passive stock index investing and be honest with yourself about the numbers, including forgone dividends.

The number one pro for rentals for me was lack of sequence of return risk during withdrawal.

I have rentals because the withdraws are higher with no sequence of return risk. I pull out 8% a year and do not reduce my principal. If you are going to make a comparison I would hazard a bet stocks would be more advantageous during accumulation when no withdrawls are being made from either investment, but it seems rentals would win out during withdraw due to sequence of return risk.

I am invested in stocks and bonds as well, so I'm not suggesting one is better than the other. They are just different and diversification allows me to sleep at night.

 

[Winemaker]

Maintenance (I have dozens of 1/2 gallons of paint)

Here's a hint I've used for about 15 years.
Anytime you are in Lowe's, HD, or Sherwin Williams, buy the lightest color mistints they have. Sometimes I get several gallons of $60+ paint for $5 a can. Get a 5 or 6 gallon bucket, I have several from grape juice. Whenever you need to paint a unit, mix 5 gallons of like kinds together,...... semi gloss, flats. Don't care if they're blue, pink whatever... mix 5 gallons together and you will get a beige neutral color. EVERY TIME! Paint your unit. Whenever you are done, and have paint left over in the 6 gallon bucket, fill it back up with your inventory of mistints. Mix it up and it's gonna be beige. Next time you have to paint, you may only need to paint 2 walls, because $60 paint washes up better. Use your 6 gallon bucket of paint. You have to paint the whole wall, you just can't touch it up. NOBODY will ever notice a difference in the neutral beiges. Rinse and repeat.
No more dried up half gallons, remembering colors. I have several high end units, so it's not like I'm a slum lord, and my tenants are just thankful they have a roof over their heads. My wife and kids laugh about the color all the time.

 

[Starsky]

Where are your rentals located?

The Raleigh-Durham, NC area - I'm in CA.

(This may sound crazy, but I've never met a single tenant, or ever been inside most of our properties. Doesn't get more pain-free than that.)