Basic question: Is owning a rental property worth it? (poll to follow, if I don’t screw it up)
Expanded scenario:
So we’re moving soon, but for several reasons are keeping our current property. My thought is that in a year or so we’ll sell it and bank that money for retirement. My husband wants to rent the place using a management company.
The problem is, in my mind, that this house is a dump and to rent it we’d have to spend megabucks to fix it. His other option is to raze it and put up something else, which I also think would negate any profit we might get.
If anyone owns or has owned rental property and wants to chime in, I’d love to hear tales both good and bad.
We have a rental property and manage another for a relative.
It is not something I would attempt to do long-distance. You’re not going to make any money (and may lose money) if you’re paying someone else to do the work.
IME, you don’t make a lot of ready cash with only one or two properties. The rents will just about cover the mortgage and insurance and repairs and etc. The newer house we have has a mortgage, the other is paid off but seems to eat up the same amount in repairs and upkeep. And that’s with us doing most of the grunt work.
I do know a few people that make money at the rental game, but they’ve built up to multiple properties (with several that are paid off) and do most of the work themselves.
When Madame Pepperwinkle and I were newly wed, we bought a rental property. It didn’t need fixing up at the start, but after a few tenants who were less than tidy, it soon turned into more of a drain of resources than a boon. Our problem may have been that we were just too nice to our renters, so they took liberties a tougher landlord wouldn’t have allowed.
I have a couple of coworkers with rental properties (They’re a couple of the VPs at the company).
They don’t make money at it, but the rental pays the mortgage and maintenance, so their plan is when they retire they can sell off those properties for a big nest egg. They couldn’t sell them now, because they’re all underwater, but since they weren’t selling them anyway and someone else is paying the mortgage, they don’t really care.
They do recommend not renting a house you particularly care about, because renters are usually not too nice to the property (never mow the lawn, if a stain gets somewhere it’s not cleaned, etc). But If you can take on the other mortgage credit-wise and don’t mind putting the effort in, it’s basically a free nest egg for retirement.
We moved at the bottom of the market, so got a great deal on the new home but kept the old one. We lucked out and got great renters. The old house is a nice one, not fancy but built in 1920 with charm & character and well-maintained, in a friendly & desirable but not exclusive neighborhood, close to a major university. If all continues to go well we’ll probably keep it until we need the money. Our goal is for the renters to cover the costs; we don’t expect annual income and are prepared for occasional loss years due to major repairs or unrented periods.
Keep in mind that if you have to refinance the old place, you can’t get a homeowner’s mortgage, so the interest will be a bit higher (assuming you don’t lie on the application). Still, rates are so low right now it’s a bargain. Best time ever to get money.
You can get a renter’s assessment to see what rent you can expect to get and what you’d need to do to get the place up to code etc. We didn’t do this, but I recommend it especially for a place that needs work. If you liked the contractor you used to inspect the new home, ask him or her.
This is the only way I’ve seen anyone come out happy from renting property. They do nearly all of the repairs and all of the general maintenance themselves and they don’t get emotionally attached to the property. The rent pays the mortgage and materials costs. It’s a lot of work and the payoff is later. You have to pretty much live near enough to drive in to fix the leaking faucet.
You also have to be able to either screen renters tightly, drop in with minor repairs or upgrades often while putting the fear of gord into them, and/or not care about damage. I have an uncle with multiple rentals who wouldn’t raise the rent for anyone who didn’t make maintenance or repair calls. He didn’t like having his plans interrupted and didn’t like finding new renters. So he’s got folks who have been renting from him for decades just because the rent doesn’t rise. When one of them does move, it’s a major cleanup and repair, but he prefers that and doesn’t take any damage or mess personally.
I know I’ve mentioned the folks with four cats and a pot bellied pig in previous rental threads. He had to rent a floor sander (grinder?) to chip the carpet off the floor when they left. But they were there more than thirty years with no calls at all. The house is paid off and he figured it was probably the same amount of work as thirty years of maintenance, just collapsed into one week. He has the attitude to make that work.
Oh, and if you leave your house empty for a year or two, it’s still going to need some level of maintenance and supervision. You do not want vandalism, squatters, broken water pipes, mold, etc.
The important thing to realize is that renting RE is a long terms deal. In the short term you’re lucky to break even. If you take the longer view, you can make out very well.
Over time, everything goes up in price, to one extent or another. This would include both the price of real estate (long term) and rents. The one big thing that does not increase is fixed rate mortgage payments. If the monthly principal+interest portion of your costs starts off as 2/3 of your costs, then if the remaining 1/3 of your costs increases with inflation, and the rent also increases with inflation, you will make an increasing profit over time.
For example, suppose your mortgage payment was 2,000 per month, of which 1,400 was principal+interest and 600 was taxes+insurance, and you average another 100 in repairs. If the rent is 2,100, you’re breaking even. Now next year, everything that’s not fixed goes up 2%. Your costs increase by (600+100).02=14. Your rent increases by 2,100.02=42. And so on, year after year.
I don’t think there’s a big difference in profitability between owning one property or many. What may make it seem this way is that the people who own many properties tend to be people who have been in business longer, and thus have lower fixed costs, as above.
But it’s a long term proposition. If you’re looking to make a quick buck, stay away from RE investing/renting.
First, my wife and I own one rental house. We bought it cheap and rehabbed it ourselves. We didn’t get it rented for nearly a year because of the extensive work we did on it. We now have a stable renter who does minor repairs herself. We have a small positive cash flow from it and expect to have a paid-for income-producing asset within 5 years. Based on our experience with this house, I am in the market for another one.
My sister-in-law is a pharmaceutical executive who moves every couple of years and has accumulated three fairly high-end houses over the years. She rents them herself, no management company, and has the tenants handle repairs. In other words, if the tenant needs a plumber, the tenant hires a plumber, and my SIL pays the bill or deducts the cost from rent. So far this arrangement has not been abused, but she is dealing with renters who can afford high-end rents. My SIL is very satisfied with the way her real estate holdings are working out for her.
I’d never do it. I know several landlords, and while they do have a handful of really good renters, the horror stories that I’ve heard (and seen, when they take pictures) have scared me off of ever wanting to rent property.
I often read real estate advice columns, and they all say if you’re going to do it, don’t do it long distance.
I’ve also read that in some areas, developers are buying houses that are in poor shape with the intention of tearing them down and building something new. Maybe you should look into that. If you’re intending to tear it down anyway, I’d advise you not to build something new. A buyer might have his or her own opinions as to what he or she wants there.
This is going to depend on a lot of variables, such as
[ol]
[li]The type of property – house, condo, apartment[/li][li]The market – residential, vacation[/li][li]Your equity – can you keep the property without a rental check?[/li][/ol]
Your expenses and obligations will be different. With an apartment or condo, you may have to pay for things that are out of your control: is maintenance of the roof, windows, and grounds paid out of your condo fee?
If the property is residential, is there high turnover or at least a large population of renters that can afford your place? If the property is at a vacation destination, you will probably have great success renting in season but have the place empty out of season.
A realtor I spoke to told me that it was really only worthwhile renting out property if you can afford not to rent it; ie, if you’re not depending on the rent to keep it going. I think this was based on the (not unreasonable) assumption that some tenants would be duds or PITAs.
What would be the average rate of return for a rental? Obviously each situation is different, but what type of return would be considered an average return for a rental, including all costs (maintenance, taxes, etc). Because of the maintenance costs of the rental, I’m not sure what type of return a rental gives.
Say you had $400k. Take $200k and buy a house and rent it out. Take the other $200k and buy S&P 500 mutual fund shares. After 20 years, what would each investment be worth? Even if the value of the house goes up, there would have been a lot of money spent over the years on maintenance. If the mutual fund goes up less, there would be less costs associated with owning the investment, so it could still be a better investment.
If you do it like the guy across the street, pretty much every penny is profit, once the taxes are paid. He does nothing for his renters and never upgrades the place. I’ve been inside recently and it’s a horror show. To be a good landlord requires attention to the place, and can be a lot of upkeep expense. I don’t think I’d want to do it.
I’m assuming you have non-financial reasons for keeping the house for a year or so, because it’s unlikely that the housing market will change drastically in a year. In that case, the question is really: Should we rent our house out for a year, or do something else with it for a year. The other options would be to get a housesitter or I guess just leave it empty.
In that case, sure, rent it out. And get a management company to do the work. You’re not going to make a bunch of money doing this, but you are going to make a lot compared to the alternatives that have the same carrying/opportunity costs and no income.
A few years back we had a house in our neighborhood that had been a rental for a long time. The renters really wrecked the place. Instead of tearing it down he donated the house to the fire department. They eventually burned it down. He still owned the lot which was large enough to build five houses on.
I’m sure he had to pay to have the ashes hauled off but that’s probably cheaper than having the whole house hauled off. And he did get the tax break which may probably reduced his taxes for several years.
Just as an example of the cost of cleaning up a lot a friend of mine lost his house to fire in Colorado Springs last June. The clean up cost was 30k, but it was a very large house.
I bought a condo in college. The market collapsed my senior year and I couldn’t sell it. I lived no closer then 6 hours for the next 6 years. At first I left it empty trying to sell it and when that didnt work I hired a management company. They were terrible a selecting tennants or checking on them and in 3 years I never had a single tennant complete a lease either do to failure to pay or just moving out mid lease. Everyone of them damaged the property in excesss of the gross rent they paid and on top of that my management company claimed I couldnt throw out their left behind garbage without an evection even if the lease was expired. Each eviction costs a months rent. So after 3 tries I fired that management company and spend all of my savings fixing up the place to try and sell it again after that I was still under water in 2010. I gave up selling it again and hired a different management company every one of their tennants has completed their lease and this year I had my first set renew a lease. I live about 5 miles away now and I’ve considered taking back over the property since their 10% is the difference between profit and loss for me even without repairs. But I’m finally getting a consistent revenue stream even if it isnt positive and its the best its ever been.
All of that to say if youre not local get a manager but make sure they are worth what you are paying them.
We’re keeping the current property because we’ll still have a business here in TN, and my husband will be coming back once a week to monitor it. We just refinanced, and the place we’re buying in SC is cheap enough and at a low enough rate that maintaining the two will not be a huge stretch for us. The TN property is in a growing area, right on the edge of rural-suburbia, and has 13 acres with it. I don’t want to hang on to the place forever, but for now it makes sense to keep it, I think. My husband really likes this area of TN, and isn’t thrilled about the move yet though he recognizes it as necessary and the best option for us. He wants to keep the place as a foothold here, I think. And, on the plus side for me, a good chunk of his motorcycle/tool/canoeing/miscellaneous projects collection can stay in TN and not clutter up the newer, smaller place
Personally my perfect scenario is to sell both property and business in a year or so. He’s not of the same mindset, but I’m crossing everything possible that this move and job change work well enough that he will want to let go of the baggage we have here -both literal and figurative.
He’d like to rent it just to cover the basic costs, but of course then he couldn’t stay here. I think at this point he’s just looking for ways to hang on to a piece of TN, though on the other hand he’s always had buying property to rent in the back of his mind. I see it as a PITA for minimal amount of cash return, and I’m not entirely sure why he likes the idea, other than as “an investment”. Then again, he basically likes people and I don’t, much
Thanks again for all your comments and letting me ramble. It’s amazing how much it helps to write things out!
Management companies, are IMHO, a bad idea. And I tried it once. The thing I most objected to was their use of their repair/trades people. I was never satisfied with the prices or the work, and I always sort of thought that the repair company kicked back a part of the fee to the managment company.
As far as renting it just to cover the basic costs, if by that you mean your mortgage, ins. etc. (any BTW, check the property tax structure in your town-here the property taxes on a non-owner occupied house, are about 4% higher), but basic costs only mean you’ll be digging in your own pocket for repairs. And there will be repairs. What you or I may decide just to live with (a broken outdoor light, a shower that won’t turn off unless you turn it to just the right position, a frost free refrigerator that makes ice where it shouldn’t)–your tenants won’t live with it-they’ll want it fixed. Electric bill too high? They want it mitigated. Etc. And then there’s the chance of a catastrophic happening-sewers, no heat, roof blows half off.
Just a warning I give my friends who think “easy money.” You’ll need ready cash flow.
