Having owned houses and rented apartments as well as single-family homes I have an idea of what can go wrong with a dwelling. And while I’ve never trashed a place, wear & tear happens and it can’t be cheap to fix even if you do it yourself.
So where’s the income/profit come from? Until you actually sell the property it seems to me like it can only be a liability and an enormous stress factory.
Well, a lot of real estate investors basically look at their tenants as the guys who are paying the mortgage for them. They don’t expect to make a ton of net profit on rent, just enough to cover the mortgage, taxes, and reasonable expenses and sell the property later. It’s the latter step where the real profit comes in.
Depreciation can be a nice tax offset.
I don’t know anyone who is renting out property and not making money off of it on the short term. Appreciation doesn’t generate a good ROI in most markets.
I worked in rental property management for 26 years, and this basically the idea. Buy low, rent out the property for a few years, and sell high. Buying abandoned or condemned rental property, fixing it up and then renting for current market rents is almost always a way to break even.
If a landlord can find a way to have all but one apartment to pay the expenses, then they have a free place to live for a few years.
I’ll probably be targeted by the landlord illuminati for revealing this but the secret is you rent the property out for more than it costs you to own it.
It’s definitely easier said than done in some places. The thing is that the real estate market and the rental market often aren’t quite in sync. In some places the rental market is really strong but the housing market isn’t particularly. College towns are the classic example. So you can easily clear your mortgage and maintenance costs and make a tidy little profit. I do wonder about some cities where it seems like house prices are astronomical but the rental market isn’t particularly competitive; it seems like there you probably have more of the investor-type landlords.
There’s also the matter of volume. The apartment complex I live in has somewhere in the neighborhood of 200 units. This complex, and about half of the other apartment buildings in my suburb, are all owned by the same company. Which also owns properties in many other municipalities. The leasing company has a single office in my suburb, with perhaps a half-dozen people working there, plus a few maintenance workers for each complex (I don’t know exactly how many, but I only routinely see two of them in this complex). And those employees are probably compensated at least in part with free housing. It doesn’t take very much profit at all per-unit to add up to paying the salaries of that few people.
When I was buying property I ran the numbers. I used a 20% to 30% operating expenses. I added operating expenses, taxes, mortgage, and other fees together. Compared that to what I would collect in rents. If it was a negative or low number I did not buy. I may have made a counter offer to get better numbers.
In addition to what everyone else has said, I’ll add this: A sizable chunk of the general population I’ve encountered like the idea of having a secondary source of income. Sometimes it’s because they aren’t making enough at their primary job but I’ve met doctors who consult for malpractice lawsuits as experts and other things along those lines. So, it’s not always about needing extra money, people just like the idea of a 2nd income source.
Owning rentals can be a great source of extra income, because you can apply skills like your ability to list and show your rental yourself, fix all kinds of minor maintenance problems with your handyperson skills, etc. Investing some of your time saves real cash you’d otherwise have to pay out, so depending on how you value your time it can contribute a lot to your profitability. Around here, paying someone to show and lease your rental costs 1 month rent or 1/12th your revenue for the year for that unit.
Now financially speaking I realistically would be better off developing software 1 extra hour and paying a handyman to spend an hour doing the rental work… but I write software all day. I like using my hands to do something useful, even if it’s not the most economically efficient way of doing it.
Or in short, you can save a lot of cash by doing various landlord things yourself, which can offer some psychological benefits to certain landlords even if we’re not “saving” as much as it might appear objectively.
Secret One: Every property one owns should be profitable month-over-month. This includes after taxes and a contingency fund for repairs.
Secret Two: Carefully pick your markets. Don’t be afraid to rent out-of-market and use property managers.
Secret Three: Screen your property managers and/or prospective tenants like one is about to give them the nuclear football.
Secret Four: Treat one’s tenants right - turnover chews into profit margins.
Secret Five: Strong leases are both tenants’ and owners’ best friend. Get everything in writing. Go over the important parts, especially tenant responsibilities.
Secret Six: Get involved in a RE Investment Club or Association, and pick the brains of other landlords. Great place to get referrals for all kinds of services.
Secret Seven: Asset Protection. Even if it is just one property, set it up as a business, not under one’s personal name.
In my case, it pays the mortgage. My ex ran up quite a bit of credit card debt, and upon inheriting my Mother’s house, i rented it. The first tenant was horrible, the second one of the best tenants in the world. As already mentioned, depreciating heat and A/C helps on taxes. Until the mortgage is paid off in a couple of years, I lose money.
Good list, especially 4–I know what it costs me to turn an apartment, I’d rather keep the rents on the lower side of market and be somewhat flexible. I have tenants at occupancy of 15 yrs., 10 yrs., 5 yrs., 3 yrs. in my 4 units.
But I don’t care for property managers. That’s mostly because I have my own trusted tradesmen that I can speak plainly with, and they know they’ll get paid, so they have no trouble running over to a property while I’m working and letting me know later what the damages are i.e. delivering a major appliance when I’m at work.
My units offset the taxes I owe on my salary. I bought because once I found myself with no deductions, the tax man was hungry, and an IRA or CD was paying nothing. At least I have equity now, but the write off is key for me now. And I look to sell in about 3-4 years.
But, #1 landlord secret??
NO CONTACT PAPER!! ANYWHERE!! EVER!!!
This is very true in the neighborhood I live in. It’s quickly gentrifying and there are a lot of houses that were converted to two duplexes. Rent for each part of a duplex is about $1400-$1600 for two bedrooms. Compare that with the cost of a duplex building which runs about $225K-$250K and you have your mortgage paid with just one unit.
You don’t need appreciation if you’re not paying for the property in the first place.
Solid info. And remember- if you do have turnover, figure that unit will be 'out" for about a month, plus expenses to fix it up again.
Also knwo that there are “tenants from hell” who move from place to place, trash the unit, refuse to pay rent, their deposit check bounces- and they fight being evicted. Once you spend $5000 on legal fees, plus thousands on fixing the place up, they move on to another sucker.
Very common strategy for people who are just starting in rentals. Buy a duplex, rent 1/2 of it. Then save the $$ your not paying to your own mortgage expense to buy another duplex and rent both units. Wash, rinse, repeat.
I wouldn’t say I like paying property managers, but I live in NYC which is very expensive and extraordinarily tenant friendly. I’d rather have rentals in other, less expensive, more landlord friendly markets. 4 rentals homes at $80,000 each are safer than 1 at $320,000.
What markets do you like these days?
Every once in a while I think about buying some property in Nevada but I don’t really know how I feel about paying someone 2800 miles away to maintain the place and deal with tenants.
Indeed. I was audited because they quit paying rent, and I was taking various deductions. I even paid the water bill. The utility was going to remove the meter because the tenant turned the water back on when it was shut off for nonpayment.
Pittsburgh (Penn) and the greater Orlando region (Fla). Almost got into Oklahoma City right before the oil prices crashed. OKC has been working to diversify their revenue base, but it’s still pretty much an oil and gas town. Las Vegas is in a boom right now. Just heard a story this morning how they can’t build enough schools to keep up with the growth. Other investors I know are doing well in Rochester (Upstate NY) and Salt Lake City (Utah).