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
Rental property - a good investment?
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The Cosmic Avenger
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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.
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.
Luck_Club
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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!
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!
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.
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.
Another Reader
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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.
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.
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.
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Probably, but not of course.
The real estate market is hyper-local. It doesn't always go up.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
+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
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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.
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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.
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.
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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 don’t 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.
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.
Senator
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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.
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.
calmloki
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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.
Hermit
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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.
Luck_Club
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+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.....
http://www.early-retirement.org/for...-people-how-to-respond-99973.html#post2301230
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.
Mr. Tightwad
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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.
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.
After painting, clean-up etc. the rent will be $300 more a month and nets about $30k per year.
COcheesehead
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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.
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.
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.
Winemaker
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+10
Retired Expat
Full time employment: Posting here.
Don’t forget 1031 exchanges
One thing that always seems to be missing from these rental property discussions are the 1031 benefits or ability to sell and pay no capital gains tax or the appreciation. Another is the tax free or deductible cost of travel to check on your property. I have owned rental properties most of my life and now in retirement they provide 40-50% of my income. Some are passive with a manager others not.
Additionally I live part of the year outside of the US and the local properties are a great source of income in the local currency so I am not tied to the constant fluctuations in exchanges rates or need to pay exchange commissions.
They make up about 30% of my networth but are an invaluable part of my retirement strategy. Problem is most people dont know how to do it, or they buy something they like for themselves and don’t look at it as a business. What will earn the best return, which will have the least vacancies, lowest costs? Etc
One thing that always seems to be missing from these rental property discussions are the 1031 benefits or ability to sell and pay no capital gains tax or the appreciation. Another is the tax free or deductible cost of travel to check on your property. I have owned rental properties most of my life and now in retirement they provide 40-50% of my income. Some are passive with a manager others not.
Additionally I live part of the year outside of the US and the local properties are a great source of income in the local currency so I am not tied to the constant fluctuations in exchanges rates or need to pay exchange commissions.
They make up about 30% of my networth but are an invaluable part of my retirement strategy. Problem is most people dont know how to do it, or they buy something they like for themselves and don’t look at it as a business. What will earn the best return, which will have the least vacancies, lowest costs? Etc
Sunset
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
In your foreign country, do you have to do a tax return for the rentals, and then basically repeat the process for the US tax return (assuming you are US citizen) ?
Won't that screw up the 1031 exchange ?
Retired Expat
Full time employment: Posting here.
Actually 1031 only applies to US properties, foreign property is purely for income in foreign currency. I do pay local tax on rental income and federal tax on my net foreign income but as a non Resident citizen in the US I pay no state tax which isc bout what the foreign tax Is. as these foreign properties are self managed I am told I could try to claim them as foreign earned income which would make them exempt but I don’t think it worth the risk. My taxes are complicated enough!
Point is, if done right rentals are a great source of income in retirement requiring limited time and effort and they get little attention in the AA discussion.
Point is, if done right rentals are a great source of income in retirement requiring limited time and effort and they get little attention in the AA discussion.
stephenson
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Our version of the rental story - based on the same feeling I get when the stock market has a major reset.
I visited a town where my mother and sister lived and in which my mother was buying a small single family house as perhaps her next house to downsize into. This was in 2012.
After looking at the house in the generally over 65 yr old demographic (3 BR, 2 BA, two car garage, slab on grade, brick and vinyl with small yard), and working the numbers - my math is pretty simple (rents around 1100, prices $120k, low maintenance, 10% management fee) - bottom of market feeling washed over me, we made a ridiculous offer, bought it, repainted, cleaned it up. Our motto is: we don’t buy rental property unless we are willing to live there. (We know this limits our income level)
Rented in three days. Bought another one a few months later. Same thing. Six months later another. Two years later, another.
So, quite by accident (market down, particular little city has relatively high rents to property value ratio) we diversified our overall portfolio.
2012-2014 starting numbers
- 7.75% return a year based on rents only (includes 10% management and 10% maintenance)
- property value growth about 5% per year ($27,500)
- total per year around 15% on total invested
- no mortgage
2019 today numbers (sloppy but gets me close)
- 6.3% return a year based on rents only (includes 10% management and 10% maintenance)
- property value growth about 5% per year ($38,500)
- total per year around 12% on value, 19% on invested amount
- no mortgage
Lessons learned (certainly arguable)
1. Over 55/65 demographic pays on time, takes better care and causes less damage than a younger demographic
2. Single family houses are still easier to sell
3. Single family houses in an HOA covered neighborhood maintain value better (these are in such a neighborhood)
4. Up equity stock market would do as well
5. I like feeling diversified
6. The right management company is important
7. A competent handyman is important
8. Not all areas have this level of return
9. Over time, values increase to the point the net based on rents/value may decrease ... sell, or transfer to next generation?
Lots of folks are more scientific, but this is our story.
I visited a town where my mother and sister lived and in which my mother was buying a small single family house as perhaps her next house to downsize into. This was in 2012.
After looking at the house in the generally over 65 yr old demographic (3 BR, 2 BA, two car garage, slab on grade, brick and vinyl with small yard), and working the numbers - my math is pretty simple (rents around 1100, prices $120k, low maintenance, 10% management fee) - bottom of market feeling washed over me, we made a ridiculous offer, bought it, repainted, cleaned it up. Our motto is: we don’t buy rental property unless we are willing to live there. (We know this limits our income level)
Rented in three days. Bought another one a few months later. Same thing. Six months later another. Two years later, another.
So, quite by accident (market down, particular little city has relatively high rents to property value ratio) we diversified our overall portfolio.
2012-2014 starting numbers
- 7.75% return a year based on rents only (includes 10% management and 10% maintenance)
- property value growth about 5% per year ($27,500)
- total per year around 15% on total invested
- no mortgage
2019 today numbers (sloppy but gets me close)
- 6.3% return a year based on rents only (includes 10% management and 10% maintenance)
- property value growth about 5% per year ($38,500)
- total per year around 12% on value, 19% on invested amount
- no mortgage
Lessons learned (certainly arguable)
1. Over 55/65 demographic pays on time, takes better care and causes less damage than a younger demographic
2. Single family houses are still easier to sell
3. Single family houses in an HOA covered neighborhood maintain value better (these are in such a neighborhood)
4. Up equity stock market would do as well
5. I like feeling diversified
6. The right management company is important
7. A competent handyman is important
8. Not all areas have this level of return
9. Over time, values increase to the point the net based on rents/value may decrease ... sell, or transfer to next generation?
Lots of folks are more scientific, but this is our story.
nancyfrank232
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This isn’t true
I’m Canadian and use professional management for all my US properties
My friend lives in Minnesota and uses professional management for his 50 unit building in Phoenix
OP, at the right scale and price price to cash flow, you can be as lazy as you want
PS: unfortunately no 1031 for me as a Canadian
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