I’m considering purchasing a duplex or triplex (maybe bigger?). I’d be doing it for income and possibly also for a place to live. I’ve looked at some listings and there appear to be some real deals on foreclosed properties right now. Of course, I realize that good deals often mean problems.
The idea would be to live in one apartment and rent out the others. Ideally, if I do it, I’d like to use a property management company to handle all of the headaches.
Good idea? Bad idea? Thoughts? Suggestions?
I’m not looking for legal or investment advice, just some general information. I understand that I shouldn’t depend on anything posted here.
Don’t become a landlord thinking there won’t be real work for you involved. Sure, you can delegate a lot to a property management firm, but they’ll also take a slice of your profits to do so. The more you delegate the less for you in the end. The more profit you want the more you’ll need to do on your own.
And there will be work/complications regardless. I suggest an accountant for your taxes if you don’t already have one. You’ll want to at least consult a lawyer regarding your legal liabilities, to draw up things like leases, and to deal with problem tenants should you ever have one. Problem tenants may also require you to occasionally appear in court (I have a friend who was in your situation and could not get rid of a tenant. He made about 8 appearances in housing court trying to get him evicted. The problem resolved only when the tenant died, and that still entailed some legal crap.)
In other words, it’s not a matter of 1) buy duplex 2) PROFIT! Being a landlord means being a business. It’s another job. That doesn’t mean you shouldn’t do it, it can be a good thing when approached properly, add to your income, and a good tenant can be a good neighbor and friend, just don’t think it’s effortless.
You will want to consult a lawyer in the jurisdiction where you want to buy and find out how hard it is to evict a bad tenant. That can vary considerably, and it is not something you want to find out after you have a bad tenant.
However, I was a landlord in NYC for a while (I rented out my co-op apartment) and I had a fairly good experience (thankfully, because NYC is very tenant friendly).
I have consistently read and heard that a situation as you describe is perhaps the single best way for an average person to build wealth.
BUT - you have to be very careful to buy the right property in the right area.
-The wrong property will be a money pit that will nt attract the right type of tenants willing/able to pay the rents you wish.
-Also, do not think this will not involve considerable effort on your part. It is not easy money. Heck, I am less than thrilled with maintaining my own place. Not sure how much it would be worth to have some bonehead tenant interrupt a family dinner demanding that I rod out his toilet after he flushed something he shouldn’t have…
-Be scrupulous regarding routine maintenance. It will inform your tenants of how you expect the property to be maintained. Heck, replacing filters and detector batteries gives you access to the units on a regular basis.
-Hiring a property mgmt company is going to significantly reduce the benefits from such a small property. Can be done, but usually more economical for larger/multiple properties.
But if you are willing to put up with the effort and hassles, it is the best way I can think of to lower the cost or your own rent, while growing equity. Once the money/capital reaches a certain oint, buy another building. I know several folk who have pursued this route. It can be a nice income supplement - oe even grow into a sifficient primary income should you wish to go this route.
If you are going to incur the costs of hiring out all of the maintenance and management, it might be just about a wash to simply buy a place of your own, instead of becoming a landlord.
People I know who own rental property all use a property management service and all have the advice of “never personally interact with the tenants- it’s best if they don’t know your face or your name, let alone where you live”.
I have another caveat for you. Let’s assume you have a good tenant, get a good rent and generally make out fairly well. There are still some surprises in store for you.
Let’s say you value the part of your house that is “in business” at $100,000 (you paid $220,000 for the whole thing). When you file your taxes, you depreciate the business part of the house (allowing you to take 3, 4 thousand a year in expenses, lowering your profit or extending the losses you can declare). All seems good until you sell your property (let’s say you are not staying in the landlord business and you are just buying a family home). You sell the entire property for $350,000, valuing the business part at $140,000. You will note that the business part did not actually “depreciate”. You now have to return all the money you depreciated into regular income (i.e. pay income tax on it) and you have to pay capital gains tax on the $40,000 you made on the sale. This can amount to a rather heavy tax bill in that year, especially when you don’t expect it and haven’t planned for it.
Keep in mind that I am not a CPA or even an A or, for that matter a particularly smart person. I am sure there are ways to avoid (or at least ameliorate) that situation, but you need to plan ahead and talk to an accountant, or at least someone smarter than me.
To echo what others have said, you need to contact an attorney and an accountant before you get started on this. The attorney can advise you on how to setup the business, whether to form an LLC for it, handle the settlement of buying the property, draw up lease agreements, help you in getting into business with a property management company and advise you on attaining any loan financing if needed for the property.
The accountant can advise you on all the tax consequences of owning the property, how to properly maintain records of the business for bookkeeping purposes (the Property management company will handle a lot of that, but you should still have things like a separate business bank account setup, and a way to track expenses paid for the property not handled thru the Property Management Co.), and help you with financial and tax planning for the future as a result of the new business.
In my experience many people who get into the rental real estate business wait too late to contact attorneys and accountants. They buy the property, take out a mortgage or construction loan for it, start doing work in it to fix it up for future tenants and then only contact professionals when they think they are getting close to ready to start renting the place out. Most of them do it this way because they do not want to spend money on attorneys or accountants unless absolutely necessary. This is a terrible way to do things and usually causes problems down the road.
As a CPA specializing in tax, I am obviously more familiar with the taxation side of the business, but you should realize what you are getting yourself into before starting out. If you attain the right property in the right location, this could be a very lucrative side or main business for you, but I have also seen many people sink a fortune into trying to get a rental business up and running and it never work out.
We have a basement apartment in our house that we rent out. I haven’t had many problems with it. Since it’s a basement unit, people don’t stay so long that they start to get on our nerves and since we live in a popular location (right by a subway stop), it’s easy enough to rent out again when someone leaves.
Having said that, we have had to take one tenant to a housing tribunal after he got too far behind in his payments which was a hassle. But that was one time in four years, and otherwise I haven’t had any trouble or expensive maintenance (nothing beyond occasional repainting, replacing lightbulbs, and fixing a washing machine once).
We did an owner-occupied fourplex that worked out really well for us. Being owner-occupied, and renting 3 units or less, we were able to work a lot of the taxes, loans, and leasing stuff so it benefited us very nicely. We had some experience in the apartment management business, and so we were comfortable doing everything ourselves - and through careful screening and luck, we had excellent tenants throughout our time there.
The income from the rentals was enough to cover mortgage and property tax payments, but not quite enough to take care of repairs and remodeling. The profit came when we sold - we bought when the market was somewhat low, and sold shortly before the bubble burst, in a neighborhood that had increased a lot in value. A smart investment plus a lot of luck made for quite a profit for us.
Which makes the point - it’s a very different and difficult thing to have income-generating investment property on this level. The value is that it can be an excellent investment.
Going with a property management company certainly has its advantages (not so much if you’re thinking owner-occupied), but I would never trust the ones in my area to so much as screen tenants; I knew I would do a much better job of both finding good renters (and keeping them!) and making sure I stayed on the right side of tenant laws. The key for us was to be active and involved, and to do our research.
26 years of experience in rental property management. Some suggestions:
Put everything in writing, and I mean EVERYTHING. State that occupancy is limited to the following occpants, and list their names, relationships and ages.
If you choose to rent to Section 8 subsidized housing tenants, immediately refuse anyone who offers to pay additional rent under the table. Not only is that illegal, it lets you know you are dealing with a person willing to break the law.
State that the rent is due on the first. After the 5th, a 5% late fee is added. After the tenth, 10% is added and eviction proceedings will be started. Do not listen to any sob stories. Rent is due when rent is due.
Check with your city to make sure what documentation is needed. If you don’t and they find out, the fines are very high.
Make sure that your lease states “any illegal activity will be grounds for immediate eviction.”
Thanks for all of the great answers. I’m thinking about this as a retirement plan. It doesn’t sound like I can make a lot of money doing it, but then again, if I live in it and the rental income covers the mortgage I’ll be ahead of where I am now - paying rent to someone else.
I’m thinking that this may be a good time to buy, especially if I look at foreclosures. Is my thinking right on this?
A good time to buy depends as much on your finances as anything else. Are you in a position to purchase property at this time? If so, then yes, it’s a good time to get into the market as prices have dropped from their historic highs.
Use some caution with purchasing foreclosures - if they’ve stood empty for awhile they may need some serious repair.
Not knowing much about foreclosure, and not having kept my eye on the market, I can’t speak to this directly. However, what I did when I was looking for my 4-plex was to create an Excel spreadsheet. I plugged in costs (mortgage, est. repairs, utilities, etc.) and a conservative estimate of expected rents. Something like that should let you be pretty confident about how affordable the properties you’re looking at might be.
When I did this, I was surprised by how few properties were even close to profitable (possibly) based on sale price vs. expected rents - and this was with first-time homebuyer perks for us. My guesses as to why: the better deals were swept up quickly by pros or close friends of realtors, and perhaps the rest went to people who were willing to take a bigger risk as far as fixing up the place and jacking up the rents, or willing to take a monthly loss for the sake of investment (a deal for which we could not have gotten a loan).
On the other hand, the previous owner might have been doing just fine and handling payments with no problem… until loosing a good job, plunging his/her income to near zero.
I know of one instance where a person was foreclosed after job loss, then, with the small amount of cash she had after the dust settled, turned around a paid cash for a much smaller house that was also a foreclosure (basically, when from a 400k mortgage to paying 20k cash for a house). In that case it worked out very well, but it was also partly a matter of luck in finding a cheap house in decent shape.
As I said - use caution in regards to a foreclosure. They can be a good deal, but aren’t always.
The only suggestion I can make is find the owner of a big property (check the tax records, which are public knowledge and should be on-line) and ask who they use. Interview at least three PM companies, and ask to see a lease and how they handle deliquencies.
My friend has a rental property, but every time he looked into a property management service it seemed like a bad deal. Around here anyways, they take a percentage of the rent but also nickel and dime you for every “extra” service call they have to make. Definitely read the fine print if you hire a company to take care of it.
I am uncertain how you could live there and have a PM to handle the “headaches.” Unless you hid your ownership from the tenants.
And take CarnalK’s advice to heart. A PM will use their own tradesmen, repair companies whatever, and typically there’s a “referral fee” paid back to the PM. (Read: kickback)
However, if you’re still employed, I must say that the expenses on the property make a nice write off now, while you are still building equity for the future.