pitfalls of rental real estate

[mathjak107]

well one of the things i always say about rental real-estate is its freat ,until its not.as long as your tenant pays the rent things couldnt be better but here in new york city what a nightmare when the tenent stops paying.to get a tenant out is a horror,it takes months,,you almost always must have a lawyer and the fees are crazy..
heres some tips i learned...the hard way.

make sure you always give the tenant a lease.i got sloppy after the origonal lease ran out and didnt do a new one with my tenant .i figured what the heck no lease i can do as i please now...wrong!..when she stopped paying the rent i couldnt prove what the rent even was supposed to be.

make sure you both swap signed receipts on payment of rent.you need a receipt from the tenent so you can show a pattern of rent payment if you have to go to court.its needed to get your case rolling .the judge cant just ask the tenent for their proof showing they paid the month in question..you need to bring enough proof of a rental pattern so the judge can open the case for you and then is able to question the tenant

watch out about pushing to hard ,,if the tenant declares bankruptcy game is over for you.no back rent and the judge may even let them stay longer..


theres a few more tips i learned the hard way but ill post them later.....

 

[roadkill]

I owned residential real estate for almost 15 years before I finally decided it just wasn't worth the trouble.

From court appearances, tenants leaving in the middle of the night, eviction proceedings, repairs to property,  etc, etc.. I even had to evict a tenant who landed in jail..........Would have been better off putting my money in an index fund.

 

[modhatter]

Their are certain States that are Tenant friendly, and there are States that are more Landlord friendly. Arizona is Landlord friendly, Florida , New York, and New Jersey are not.

Buying low end property in bad neighborhoods, is deffinately asking for trouble, as the tenants willing to live there, are not the tenants you want. (always exceptions, of course)

But as a landlord for over 40 years, I can tell you it is a hasstle. I do think your investment in the long run is safer in Real Estate. (Rarely do you lose money if you buy right) but it is in no way a passive investment. It is work.

 

[Ed_The_Gypsy]

Our extended family has had rental property of various kinds. It sure enough takes work and the situation has to be right.

REITs sure look good to me. Especially Vanguard's fund. That is as close as I want to get to rental property at the moment.

 

[brewer12345]

For those of you talking about hassles (which I am very mindful of), how much would your opinion change if pricesdropped 25 to 40% and properties could be bought that would flow cash pretty much from the start?

 

[poyet]

Why always residential RE and never commercial RE
Why not NNN if you do not want to be the landlord (with all the hassle) ?

 

[Ed_The_Gypsy]

brewer,

You mean like Buffalo, NY? You still get the hassles.

 

[brewer12345]

Commercial cap rates have plummeted along with residential appreciation.

Not talking about Buffalo and other rust belt basket cases. I'm talking about actual desirable places to live where RE is currently vastly overpriced.

 

[renferme]

Why not NNN if you do not want to be the landlord (with all the hassle) ?

I've owned NNN for several years,,, a very nice dividend and they have a record of increasing dividends for many, many years !
.

 

[wildcat]

Problems will always persist in the rental game but that is the price you pay for trying to achieve a higher return than a REIT index.  Young person's game if you ask me.  I think I would keep the number of properties limited to what I could control, especially if I had a day job.  Instead of holding 20 SFHs, I would rather own a 20 unit building - one building, same number of tenants.  RE is and should be a diversifier in addition to other financial assets.
 

 

[brewer12345]

I've owned NNN for several years,,, a very nice dividend and they have a record of increasing dividends for many, many years !
.

Just curious, where do you find NNN opportunities?

 

[thefed]

For those of you talking about hassles (which I am very mindful of), how much would your opinion change if pricesdropped 25 to 40% and properties could be bought that would flow cash pretty much from the start?

That's my goal. I feel that within 5 years some better investing opportunities should present themselves....

 

[thefed]

Our extended family has had rental property of various kinds. It sure enough takes work and the situation has to be right.

REITs sure look good to me. Especially Vanguard's fund. That is as close as I want to get to rental property at the moment.

Do you thing vanguard's REIT index still has a lot of upside? I've been considering adding this fund to a tax deferred account...but I'm not so sure....it seems to be a bit toppy, but I also thought that over a year ago....

 

[Nords]

For those of you talking about hassles (which I am very mindful of), how much would your opinion change if pricesdropped 25 to 40% and properties could be bought that would flow cash pretty much from the start?

Keep in mind that the things taking prices down 25-40% also tend to take rental rates down by the same amount.  Hawaii watched the Japanese RE bubble end as more houses came on the market and the military reduced its size.  The result was lots of real estate for sale or rent, not so many customers.

Another problem with a RE sale may be mortgage rates.  Although prices may be down, mortgage payments may rise disproportionately.  So a cash buyer would make the numbers work (and avoid a mortgage hassle) although cashflow would be greatly reduced.

So cash flow in any market at any price is good!  But having a 25% off sale would always make me more interested in jumping in.  

The landlord hassle issue can more easily be resolved by an 8% investment in a property manager.

For everyone who doesn't want to learn how to be an experienced landlord, there's REITs.

 

[brewer12345]

Another problem with a RE sale may be mortgage rates.  Although prices may be down, mortgage payments may rise disproportionately.  So a cash buyer would make the numbers work (and avoid a mortgage hassle) although cashflow would be greatly reduced.

The kind of environment that would have me getting out my checkbook involves banks making mortgages on VERY attractive terms to people willing to take foreclosures off their hands.

 

[Sheryl]

Just curious, where do you find NNN opportunities?

Here, there are several commercial RE brokers offering opportunities, including buying 1/10 shares and such.... The vacancy rate deters me at this point - our area is greatly overbuilt and tenants aren't willing to pay the prices for the expensive new stuff.

 

[cute fuzzy bunny]

Home prices went up, but rental rates didnt around here.

I'd have to see more than a 50% drop before a rental income under favorable circumstances started to look better than investing in a REIT (valuation concerns aside) or another investment vehicle.

Houses selling for $400k+ around here generally rent for about a thousand bucks a month...

 

[thefed]

Home prices went up, but rental rates didnt around here.

I'd have to see more than a 50% drop before a rental income under favorable circumstances started to look better than investing in a REIT (valuation concerns aside) or another investment vehicle.

Houses selling for $400k+ around here generally rent for about a thousand bucks a month...

Here, I could snatch up a house for about 130k and rent it for the same.....

 

[cute fuzzy bunny]

Its an interesting phenomena to live in. I cant wait to see what happens.

Look at this baby
http://tinyurl.com/nxero

$525k for a 50 year old home on 2 acres, not far from my house. Doesnt sound too bad. But I saw it before they 'remodeled' it by smearing stucco on it to make it look new. It was a partial manufactured/mobile type home that had been added on to, and I can guarantee that it structurally will not support that stucco exterior for long.

But you should see the neighborhood. Theres a mini-mobile home park a few lots up that according to the sex offenders database houses a few rapists and child molesters. Except for one other home on the street, the others all have yards full of dead cars, dead jetskis, old water heaters, chunks of wood, etc. Everyone has a vicious looking dog that isnt fenced or leashed.

I just drive down the street with the dogs in the back of the truck so they can bark at all of the other dogs. We end up at the other end of the street with a trailing flotilla of mad barking dogs running as fast as they can. My dogs favorite thing to do...

I bet I could rent that for maybe $800 a month. A thousand would be pushing it. But thats the 'best buy' within a 25 mile radius due to the size of the lot.

 

[Arif]

The kind of environment that would have me getting out my checkbook involves banks making mortgages on VERY attractive terms to people willing to take foreclosures off their hands.

90% of what I buy are foreclosures. Typically you can get them for 70% LTV with little work needed. There are still deals out there to be had as I am sure my market is not unusual. Real estate is a lot of work if you don't buy right. As far as I am concerned if a property doesn't return my initial investment within a year and a half then I pass. I still don't understand "investors" that buy rental properties that barely cashflow or negative cashflow. By buying cheaply you can afford to hire out the management and still get great cashflow. Here's an actual example of buying right:

100k for a fourplex in the hood (no other way to say it)---Appraised for 145k
5k downpayment and finance the rest

1850 per month in rental income
900 PITI
185 MGT fee
765 est. net income per month

So with a 5k downpayment our annual income is 9k, not including vacancies and repairs, which would bring it down to about 5 or 6k per year. Don't forget the 45k in equity that required 3 HVACs and some carpet.
This guy sold 13 total units just like the example I illustrated. Him and his dad owned over 150 units across town and these units were not worth their time to manage so they were your typical "don't wanters" but with plenty of money.

 

[renferme]

Just curious, where do you find NNN opportunities?

Don't understand your question.
NNN is symbol for Commercial Net Lease

 

[Enuff2Eat]

definite hassle, nothing is easy, especially when u got to chase down the "dead beat" tenants whose are ready to sue u anytime for anything.

but i do have to say that i am lucky enuff to have some equity growth on my properites and done much better than 401k and stocks.

no esay free ride. reit u do have to tons of fee don't you??

enuff

 

[macdaddy]

I can speak from a little personal experience. I bought several condos in an upscale area of Boston in 1999. They were all in nice buildings (e.g. professional management company, doorman, security, etc). Cap rate when I bought them was around 5.5% after expenses. This was at the beginning of the housing bubble, which I won't take any credit for anticipating. Prices have risen and rents have risen, but prices more than rents, so the cap rate at current market value is now 3.8% after expenses (and 6-7% after expenses based on my purchase price).

The best part about owning these condos has been how little work has been required. Each unit has a bathroom and kitchen, no laundry. Once in 5 years I have had to call a plumber to replace a part for one of the sinks ($175). Twice I spent a weekend repainting a unit ($100 bucks plus 10-12 hours each time). Once after renting to a guy with a dog I had to call a company to replace the carpet ($250 out of pocket + $250 out of security deposit). Building management (for a condo fee which works to ~ 3% of the monthly rent) is great and takes care of a lot of other problems. I can count on one hand the number of times I've been called (or emailed, which is an easier way to handle problems) randomly to deal with a problem. The units are so simple that not much can break in them (unlike a SFH).

Since I live in the area I can rent the units myself using a personal network, craigslist, and rental brokers. Once I had to pay full fee/one month's rent to a broker. Another time I had to pay half fee. But in return I got great tenants, vetted by the brokers. And the rest of the time I found people myself, vetted them, printed 2 copies of a lease off from the internet, and it's a done deal. One time I have had a tenant leave town in violation of the lease. I put the unit back on the market and it rented within 2 weeks, so I shrugged it off. For the most part, the area/building attracts professional tenants (even the guy who ditched his lease was professional, though a lawyer...) and this may be the key to low hassles.

I know other landlords in the area who have retired down to Florida and hired management companies ~ 5-10% or a lower % and an exclusive rental listing. They are all happy and have no complaints. The key to their happiness seems to be buying in nice areas where you can rent to professionals (of course, you make less money doing this).

I would be interested to hear others with good/bad experiences. Oh and one last thought. Whenever I read this board or the other boards over at Motley Fool, I always see people complaining about inflation and predicting hyperinflation under Bernanke. So I am relieved when I read things like that to know that I am heavily in property which is a nice inflation hedge.

 

[boont]

A NNN lease means no costs of any kind to the landlord. I had one with the Standard Oil Company. They sent me rent and paid all my expenses. That means ALL. Property tax, upkeep, everthing.

I have never found any investment to equal a good one in real estate. With depreciation, tax free exchanges, expenses, and personal home sales with 100% tax free money available on sales every two years, I do not see anything to compare.

I have no idea what you guys are talking about. No, money doesn't fall out of the sky but it is really difficult to not make a nice return.

Currently, you are right, prices are way up, but hell, where have you been for the last ten years or so? Profits have been huge.

I dumped out of the stock market in 2000 when the dow was 10,300. Well, we ain't back there yet and real estate has been through the roof.

Hello?

b.

 

[poyet]

NNN properties are offered by various brokers and a search query in your favorite engine will bring back many to you. It's the best means to own commercial estate, being diversified, not exposed to hazards (e.g. seismic), and not being a landlord, and having a good occupancy rate.

My two cents to add that commercial RE does not work the way residential does. You deal with companies, not individuals, when they get in they often spend a lot of money to re-design according to their marketing / operational needs to run their operations (I've seen up to half of the price of the shop/warehouse !), rents are supposed to be 10% of the capital invested min and then follow construction indexes, when companies go bankrupt they cease to exist and it's quicker to get rid of them (though sometimes a hassle ! given what's left behind, e.g. I had once tons of mechanical equipment left over thousand square meters which you cannot remove easily), and rents are significant. Good selection can yield 14-15% (before taxes), but sometimes things go wrong. All taxes on properties are paid by the tenants, etc.

I prefer commercial estate to generate revenue. Though sometimes (quite often) in terms of capital appreciation, residential delivers better. You can see it through the funds (or REITs) price evolution. But Jeremy Siegel says it, do not buy RE for capital appreciation (especially now) but for its cash flow.

Three cents.