Purchase of Rental House
 

Hello,

I am thinking of purchasing a rental house. I live in the SF Bay Area (20 min. from SF) and am thinking of purchasing in my neighborhood. Prices have dropped, but I don't think that is going to last forever. I think it will be a good investment.

Does anyone have experience with rentals? I have heard some horror stories, but I know others who have had mostly positive experiences.

I have a house in mind. It should rent for close to piti - it's in a good school district.

My husband & I both can paint, clean, etc. and my husband can do most handy man work.

Your thoughts are appreciated.

i wouldnt be a landlord again ever

I have owned and managed several single family homes over the years. This activity financed my kids college educations and helped make possible a very comfortable retirement. If I had it to do all over again, I would have bought more.

I have never been called in the middle of the night by a tenant, I have never found ity necessary to evict a tenant. Landlords who have experienced such problems usually need look no further than the nearest mirror to dioscover the true cause.

If you really want to do it, then educate/prepare yourself and go for it. Whether or not real estate investment is for you depends a lot more on your personal; attributes than anything else. Real estae offers you a great amount of control but you must know what you are doing. If you are not prepared to put in the due diligence it is probably not for you. There are no shortcuts. If you get smart and learn how to select, evaluate, appraise, negotiate and manage your properties, you will do well. Otherwise, well . . . .

Agreed!

I had three of 'em and ONLY the great price run up of 2003 thru 2007 saved my arse.....and the luck of having
been totally PO'd enough to sell them just before the peak ;D.....

After sharing with Uncle Sam, I figure that I could have/would have done better in equities!!

The rental could work out if you are willing to put in the work to get good tenants and maintain the property. It should be viewed as a small business and it's possible that many years may go by before it becomes a profitable investment. Does it work on a cash flow basis after considering ongoing maintenance expenses? Are there any deferred maitenance issues on the property you are going to purchase? Will putting money into this property make it hard to finance a house for yourself?

If you can find a good book on how to manage a rental property that would be a good idea. Don't buy a book that is full of hype.

For true experiences and solutions, research: Discussion Board

I was just speaking to a guy on Friday who purchased 3 townhouses in the Austin TX area two years ago. After rejuvenating them, he has 7 figures total invested in his little project. They now have a market value of less than $500,000. Not each, total.

I've looked into directly owning real estate and concluded that it's not for me. I'm just not the type of person who can handle the 3Ts of direct real estate ownership (i.e., tenants, termites, and toilets). ;D

But I still believe real estate is a great asset class to own, so I buy my real estate on Wall Street in the form of REITs (which are for commercial real estate such as apartment buildings, office buildings, hotels, and industrial buildings rather than single-family homes). Thanks to REIT ETFs and the fact that other countries are starting to adopt the U.S. REIT model, you can now buy international and global REIT ETFs to get a very broad commercial real estate diversification across the planet.

I've heard stories of real estate investors who made a lot of money after the Savings and Loan Crisis of the late 1980s when they were able to buy single-family homes at a deep discount to their fair market value. These kinds of bargains may happen again when the current sub-prime crisis hits bottom (which might still be years away, but who knows for sure), so it's probably worth looking into if you have a knack for being a landlord.

I would not consider being a landlord or owning property directly.

To me managing the property is a job... I do my investing so I do not have to work. Plus it does not provide very good diversification.

REITS are a better approach if you want real estate exposure (a plus is that it provide some diversification in that sector).

amatuer rental real estate is only good until its not, then depending on laws in your area it can be a total disaster when you get that one tenant in 20 years thats an issue.

laws in most states protect tenants not landlords in court.

had a tenant that stiffed us on the rent and it took 6 months to get them out. as well as 8,000 in damage and renovations needed at that point. remember we are talking single family homes or apartments in co-ops or condos

and your right, i would have faired much better in equities over the last 20 years , even here in new york city which was a hot market.

house we had was 165,000 in 1987 worth 425,000 today. same amount in equities following the same newsletter i always have is well over 2 million . and no real estate taxes and major renovations, insurance , etc along the way.

most people think they did well because they made a profit in single family residential rental real estate but have nothing to compare it to had they invested elsewhere. because the newsletter i follow was something i followed back then its easy to see a comparison


the run up we just went thru clouds the real long term results of residential real estate. its like buying stocks and catching it lucky right before the biggest bull market but look at the long term returns and they are way way lower

ditto...had four at one point. I could not keep decent renters and could not get rid of the bad ones...

R

At the very least, the rental property you purchase should give you a break-even from the start. Of course you are looking for positive cash flow, but if the property can't even pay for itself, it's not a good investment.

Sure, you might think the appreciation over time will cover the shortfall in current cash flow, but 1) cash flow is realized on an ongoing basis while appreciation is unrealized until the property is sold, and 2) there may not be any appreciation by the time you sell.

Most people don't count the time they spend on the property as an expense. That hour that you spend mowing the lawn, or shoveling snow, or fixing the leaking faucet is valuable time you could have spent working somewhere else and getting paid for it.

If you account for rental property capturing ALL the allocated expenses (and all the benefits as well), you may find that compared to equities, they may provide somewhat equal returns over the long term.

2 things ill never do AGAIN ,EVER that looked great before you learn all the pitfalls.
1-BE A LANDLORD

2- BUY A TAX LIEN SALE

Do you realize that if instead of buying one rental property for all cash you could have bought 5 with 20% down and their total worth would be over $2,000,000? Considering all the tax benefits, real estate would be the winner hands down if you had only chosen to properly leverage your money.

Here is a spreadsheet that will help you calculate the return on your investment using different scenarios.

Real Estate Valuator Spreadsheet ~ Canadian Housing Price Charts and Real Estate Valuator Blog

Here is a good reference book:

Investing in Real Estate, by Andrew McLean and Gary W. Eldred, PhD. Wiley & Sons, 2001. ISBN 0-471-32339-X.

The two most important things to remember about the financing are:
1. Cash flow must be positive from Day 1
2. Leveraging greatly multiplies the rate of return. But only if there is a rate of return!

i could have bought 5 equity mixed portfolios on margin too the same as 5 mortgages...

tax benefits? on a rental what they may be? paying 3 bucks in real estate taxes and mortgage interest to get back one of those dollars? or is it taking the depreciation allownace which i have to pay back later any way when i sell.


remember this is a rental so when you sell its taxed the samer as equities

Our experience with owning a rental house has been very good. Over time rents keep up with inflation and the depreciation write off is nice in a high income tax state like California. Including the tax savings, we get about a 7% return on the cash we have invested in a 3 bedroom, 1 bath house, and that doesn’t include the jump in equity. We bought it in 2000 for $183,000 and it is worth about $350,000. You can donate a highly appreciated asset like real estate and create a charitable remainder trust with guaranteed income for life to avoid capital gains. Or if you leave it to your kids, they will inherit it at a stepped up basis and avoid capital gains.

My husband is handy, and I’m an accountant with some property management experience so we have the basic skills to handle it. Tenants have been good. I did rent to one family that I wasn’t sure about and I should have trusted my instincts on that. No major problems, but the wear and tear on the property was greater than usual. Current tenants have been there for almost 3 years and take good care of the place. We rent it for slightly under market with the understanding that they are to take care of minor things. The house is only a few minutes from where we live.

We’re thinking of buying one more, again in our neighborhood, but are waiting for prices to drop further with all the negative amortization mortgages re-setting. If I did buy something now, I’d probably offer 15% below asking price to account for the dire predictions of further price deflation in 2008-2009.

again, people talk about the tax savings, there is noooooo tax savings in rentals. if anything its the reverse, the soaring real estate taxes and water and sewer taxes can be a killer. the depreciation allowance you love so much must be paid back when you sell the property. only way to beat that is die or constantly try to do 1031 exchanges. good luck pulling one of those off depending where you live.

there is no magic deduction in writing off real estate taxes and interest. you really are paying an extra 3 bucks to get back 1.00 buck

the costs of renovations over time if you dont sell the property can really take their toll unless you spend your time doing it yourself . i myself havent found single family rentals profitable enough considering the expense and aggrevation eventually over time.

equities have done way better with alot less grief and yes they can be leveraged too with margin. but i wouldnt use margin anymore than you can get a positive cash flow on a property with putting down only 10% or so in our areas or i would venture to say most areas .

One item most people forget to factor in is the opportunity loss on the cash used on a downpayment.

For example, if you take out $100,000 from a CD or money market account to use as a downpayment on a property, you are foregoing $3,000 to $4,000 a year in lost potential interest on that money.

That is a real loss that needs to be subtracted from any real estate cash flow analysis. That real estate investment has to carry itself plus give back the otherwise lost stream of income from your asset transfer.

Never again.