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

[Senator]

Well I'm not sure where you can buy a house for 70k - not anywhere around me. Much less a house sub 150k that you wouldn't have to rehab with significant upfront cost. Also, seems crazy someone would rent a house for 18% of the purchase price per year. I can't get the math to work.

You cannot get the math to work as you do not understand real estate investing. Look for a 4-plex for $280K, not a $70K house.

Real Estate is a high-risk, high reward game. Some were paid for in cash, so maybe I have more invested than that, but 20% of my purchase price, it is ~$360K.

I have bought homes at Sheriff's sales, short sales, foreclosed on mortgages I purchased, cancelled contracts for deeds I purchased, put mechanics liens on properties and redeemed, etc. My investor friends have had deeds signed over to them for $0, the latest one was a $369K sale on a $200K mortgage redemption. (they put money into it, but had $170K to work with.

All my properties are within 15 miles of my home, and 20 renters are within 4 miles.

My most recent purchase was for $38K on 12/30/2015, with renters in place, paying $830 a month. Zillow says it is worth $135,662. The renters have moved out and I am now prepping it for sale. Hopefully it may be sold for $150K+.

I flipped a property in 2013 I bought for $128K I sold for $200K a month later. Several 4-plexes I purchased since 2008 for a total cost of $1.3M are likely worth $2.5M. They are in a class A suburb and are built in 1985. I cleaned up the neighborhood, a homeowner association complex, (i.e. gentrification) and increased values and rents by a lot.

If all you are looking at is the MLS, you are right. It is impossible. Forget any rent to buy calculators. They are for amateurs.

 

[Senator]

Very impressive! How the heck do you find someone willing to finance those properties? We'd love to pull the trigger on a few more.

I only have three mortgages left on nine properties. Commercial lenders will loan you the money, if the numbers work. You can get four mortgages easily from most any bank. Even up to six. I have had five at the most.

By October, I will only have two mortgages. Only a $2,380 total monthly mortgage outlay.

 

[Fermion]

To me rental investing has always been like stock market investing. You hear a lot more positives from the winners and the losers just sort of slink off quietly.

I could come on here and tout that I invested in stocks like KITE, who just got bought up by Gilead for $180 when it was trading for $75 just months ago, or Juno, which I did own at $21 and is trading at $44 today because it was pulled up by KITE.

It would be similar to someone who got a steal on a foreclosure and then the local market turned hot, so without a lot of work they managed a 200% return. I could click a button and manage a similar return as outlined above. I posit that both situations require a high degree of luck and there is a bias toward only revealing the winners.

If I went into landlording, I would instead end up with a Radio Shack or Sears house.

 

[Senator]

To me rental investing has always been like stock market investing. You hear a lot more positives from the winners and the losers just sort of slink off quietly.

I could come on here and tout that I invested in stocks like KITE, who just got bought up by Gilead for $180 when it was trading for $75 just months ago, or Juno, which I did own at $21 and is trading at $44 today because it was pulled up by KITE.

It would be similar to someone who got a steal on a foreclosure and then the local market turned hot, so without a lot of work they managed a 200% return. I could click a button and manage a similar return as outlined above. I posit that both situations require a high degree of luck and there is a bias toward only revealing the winners.

If I went into landlording, I would instead end up with a Radio Shack or Sears house.

You are mostly correct, but the horror stories are mostly about poor quality tenants. Tenants are easy to screen, telling them you do not want to rent to them is harder. Even most property managers do not know how to give up a commission, in favor of a better tenant later.

most landlords do not even understand that lowering prices increases demand. If I am $25 too high on my rent, I can see the tenant quality go down.

 

[BreathFree]

Well I'm not sure where you can buy a house for 70k - not anywhere around me. Much less a house sub 150k that you wouldn't have to rehab with significant upfront cost. Also, seems crazy someone would rent a house for 18% of the purchase price per year. I can't get the math to work

I just purchased a duplex last year for $85,000. Rents are $1200 a month. This is 17% of purchase price. Obviously your ability to find this return would vary with location and I typically dont get this return in my area, but it is nice when you find one.

 

[BreathFree]

I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years.

I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

I use a quick gross rent multiplier of 70% to determine if I will investigate a potential rental property further. I find it interesting that your numbers fall right in this range.

340,000/12 = $28,333

28,333 * 70 = 1.98 M

 

[Fermion]

I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years.

I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

You could have taken $360k invested in 2010 and purchased $1.2M of SPY on 30% margin. The dividends would have covered the margin interest and the $1.2M would be worth about $3M today.

Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

 

[jkern]

Rental properties have always been very good for me. Had one SFH from 1992 to 2004 that didn't require a lot of work and yielded a very large profit.

Now, I've had 3 condo's for the last 6 to 7 years. They were built in 05 to 06. Two tenants are the originals and one unit is on the third tenant. Total vacancy is ZERO days. I was able to do a walk through in the morning and hand the keys off to the next tenant in the afternoon.

Over the last 6 to 7 years, I've averaged about $400 per year in maintenance and put in about 8 hours per year of my time.

I understand the potential drawbacks, but RE has been very very good to me.

 

[BreathFree]

You could have taken $360k invested in 2010 and purchased $1.2M of SPY on 30% margin. The dividends would have covered the margin interest and the $1.2M would be worth about $3M today.

Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

You can't seriously be making this comparison as if the two have equal risk.

 

[Islandtraveler]

I never made money with rentals. It seems that my timing was always wrong. I have made several attempts in later life to re-enter on the commercial side but something always got in the way. I have come to realize that someone was trying to tell me something. I love the equity and bond markets. They have never missed a payment and I have never gotten a call from them complaining of a clogged toilet.

 

[97guns]

Couple of stories from my moms siblings

#1 uncle purchased 2 RV parks for around 200k each and ran them for 25 years, making income all that time and finally selling them 5 years or so ago for 1.2 mil and 1.75 mil

#2 uncle had a contract business refurbishing radios for the army, bought a 3 building commercial unit for $100k to run the business, now retired and on the market for 1.1mil

#3 aunt was a RE tycoon, owning apt buildings, multi families, and single family homes, buying, selling, wheeling and dealing, left everything to her only son

 

[NgineER]

I just had my first tenants sign a lease for an additional year. Tenant screening is extremely important, get the wrong tenant and you will have issues.

My first and so far only property was a tax foreclosure, I ended up spending 2x on renovations compared to the purchase price. Once I had rehabbed it and two tenants on lease I refinanced and got all but $2k of my investment out. I get $2.5k each month in rent and cash flow ~$5k/year after assuming 50% of rents going to expenses and after 15 year mortgage payments.

Looking for similar opportunities, but they don't come very often.

I've had to deal with one broken storm door and an arc-fault breaker that kept tripping. So far 10 hours of work in the first year, including quarterly inspections to stay on top of maintenance and tenants.

 

[travelover]

This thread reminds me of the people that occasionally knock on my door to convince me I have the "wrong" religion.

 

[97guns]

My moms parents were flippers in Hawaii in the 1940's And 50's, flipping the house they lived into something else to live in, making $500 on a deal, my mom moved 4 times before finishing school. Their final flip was into a house in California on 3 acres purchase for under $20k, it's probably valued at 1.5mil today, grandma sold it in the 90's for a couple 2 or 3 hundred K.

 

[Fermion]

You can't seriously be making this comparison as if the two have equal risk.

True. If your rental houses were on the Texas coast, you could be wiped out by a hurricane which has only had a 0.02% effect on the stock market.

 

[RunningBum]

This thread reminds me of the people that occasionally knock on my door to convince me I have the "wrong" religion.

I can't figure out why. This seems like the kind of business where you'd want less competition, to keep the price of these bargain properties down.

 

[Fermion]

I can't figure out why. This seems like the kind of business where you'd want less competition, to keep the price of these bargain properties down.

I am waiting for them to sell me a book or set of tapes.

 

[Amethyst]

We thought the worst tenant ever was the Section 8 woman, until we rented to a guy with an 800 credit rating but no landlord history (b/c they had sold their home and were "renting while looking for another." On paper they were terrific. He turned out to be the most insufferable tenant we ever had. Despite all the other issues we've had, we probably would have stuck with our property, but he just PITA'd us to death. Imagine an utterly humorless Woody Allen type (no, not Jewish, just saying). Among other things, he constantly got us into trouble with the various HOA's and Community associations we were subject to - he found their rules risible, and kept arguing with US as to why they should not apply to HIS perfect family. And he constantly felt slighted and was very vindictive about every perceived slight.

I Tenant screening is extremely important, get the wrong tenant and you will have issues.

.

 

[NgineER]

Very impressive! How the heck do you find someone willing to finance those properties? We'd love to pull the trigger on a few more.

I believe the new Fannie Mae rules (2016) will allow for up to ten properties, including your primary residence. If you are married, you can have 19 properties, 1-4 units each, between you and your spouse. In theory you could have 36 tenants plus your primary.

 

[Luck_Club]

True. If your rental houses were on the Texas coast, you could be wiped out by a hurricane which has only had a 0.02% effect on the stock market.

Do you have house insurance?

Guess what so do landlords. Our insurance sometimes even comes with fair rental replacement coverage. meaning we get our rents while the place is being rebuilt.

 

[Fermion]

Do you have house insurance?

Guess what so do landlords. Our insurance sometimes even comes with fair rental replacement coverage. meaning we get our rents while the place is being rebuilt.

Headline "Most Harvey flood victims on hook to pay for repairs"

https://www.yahoo.com/news/most-harvey-flood-victims-uninsured-040528436.html

Perhaps they did not see the need for flood insurance in addition to hurricane insurance and regular homeowners insurance. I would assume flood insurance is going to be quite expensive now and would reduce your overall return.

If the stock market investor wanted to reduce their return, they could also buy insurance against market failures in the form of protective puts.

 

[Luck_Club]

You could have taken $360k invested in 2010 and purchased $1.2M of SPY on 30% margin. The dividends would have covered the margin interest and the $1.2M would be worth about $3M today.

Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

Not exactly the same thing. Leverage in real estate is usually higher, and the risk of a margin call is virtually non existent. In your scenarios a 10% price drop would trigger a margin call.

When you buy a rental on margin, it is like buying a tax free municipal bond that yields 7%, after your margin payments, while someone else pays off the 80% margin balance for you.

All I know is year after year I pay $0 in taxes on my rental income despite putting thousands of real dollars in my pocket.

 

[euro]

Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

Not really the same. If you buy on margin and the underlying equity tanks, you will get a margin call and will have to cover the difference. On a leveraged real estate deal, you still collect the same rent (and owe the same mortgage), regardless of whether the property loses its value.

 

[jollystomper]

As Sly sang, "different strokes for different folks". Some folks enjoy real estate and see "problems" as "opportunities". Some do not. Neither is right or wrong, just different.

 

[Curmudgeon]

Tax DISadvantage to real estate investing?

People always write about the tax benefits of RE investing, but it seems as though there is a huge disadvantage, namely depreciation recapture: If I buy a property now and write off depreciation, it doesn't save me much - I'm already in a 15% Fed. tax bracket. Years from now, when I sell (say, if I need to cash out to fund my retirement) then I owe 25% tax on the depreciation I claimed. That could be a huge tax bill. Do I misunderstand this?