Rental properties

[jason]

I'm thinking of buying rental properties for cash.  The low end of the housing market in my area is around $130K for a small house in a decent neighborhood, and rents go for around $1,500 per month, which should deliver a cap rate (investment return) of over 10%.  Since it's the lower end of the market, I expect it to be recession-resistant, so I don't think it's very risky.  Other than the PP, I feel this is the lowest risk investment I can make that has a strong return, plus, it has the added benefit of generating somewhat predictable income.  Am I taking more risk than I realize?  What am I missing?

[iwealth]

I'm thinking of buying rental properties for cash.  The low end of the housing market in my area is around $130K for a small house in a decent neighborhood, and rents go for around $1,500 per month, which should deliver a cap rate (investment return) of over 10%.  Since it's the lower end of the market, I expect it to be recession-resistant, so I don't think it's very risky.  Other than the PP, I feel this is the lowest risk investment I can make that has a strong return, plus, it has the added benefit of generating somewhat predictable income.  Am I taking more risk than I realize?  What am I missing?

Maintenance and vacancy costs on top of property management costs and/or labor. Have you talked to other landlords? I mean really sit down with them and dig into the life of landlording. From what I gather there's a lot more to it than collecting rent checks. I have a buddy who is desperately trying to unload his 4 units right now. He hates the job. Others will love it.

I think the investment is sound, but make sure your personality is suited for the task. Good luck!

[Cortopassi]

I was always interested in this, but for my mentality (I would want to not pay people and fix everything myself) I know I would have killed myself.

The only way I ever saw this working for me was to buy a big enough property, 24 units+ where I would be forced to use a property manager.  I think, but I am not sure, once you reach enough units, vacancies, maintenance, insurance and such all should be covered easier by the rents and you should have a better chance to be cash flow positive.

[iwealth]

rented units that tenant won't pay rent, requiring eviction

Apparently this can be a real nightmare. Example: tenant can't pay rent, landlord starts eviction process, tenant fabricates issues such as landlord negligence, landlord sues tenant, tenant countersues landlord, months and months pass with tenant paying no rent, tenant/landlord agree to drop suits, eventually tenant moves out or starts paying rent again. From what I gather the laws favor tenants.

This happened to that buddy of mine in the past year. I guess that'd explain why he's so eager to unload his units.

[l82start]

I was always interested in this, but for my mentality (I would want to not pay people and fix everything myself) I know I would have killed myself.

The only way I ever saw this working for me was to buy a big enough property, 24 units+ where I would be forced to use a property manager.  I think, but I am not sure, once you reach enough units, vacancies, maintenance, insurance and such all should be covered easier by the rents and you should have a better chance to be cash flow positive.

for a smaller complex or single house that (in bold) is the type of thinking that will serve you well, it keeps you hands on with your property and you can be on top of what happening there, even if you are not mechanically inclined its not a bad idea to mow the lawn or handle at least one regular on property job just for that reason..

BTW, property is an investment third or fourth, its better and more realistic to see it as a career or a job first. don't take it on lightly unless its a type of work you like (dealing with people - and tenant law - and problems at weird hours - etc.)  or you are rich enough to be owner only and subcontract out all the headaches to management company's ..

[jason]

I was always interested in this, but for my mentality (I would want to not pay people and fix everything myself) I know I would have killed myself.

The only way I ever saw this working for me was to buy a big enough property, 24 units+ where I would be forced to use a property manager.  I think, but I am not sure, once you reach enough units, vacancies, maintenance, insurance and such all should be covered easier by the rents and you should have a better chance to be cash flow positive.

for a smaller complex or single house that (in bold) is the type of thinking that will serve you well, it keeps you hands on with your property and you can be on top of what happening there, even if you are not mechanically inclined its not a bad idea to mow the lawn or handle at least one regular on property job just for that reason..

BTW, property is an investment third or fourth, its better and more realistic to see it as a career or a job first. don't take it on lightly unless its a type of work you like (dealing with people - and tenant law - and problems at weird hours - etc.)  or you are rich enough to be owner only and subcontract out all the headaches to management company's ..

I don't think it will be fun.  I am not handy and I find home repairs to be a black box.  I find it very frustrating when I am being told that I have a roof leak that is going to cost $2,000, for example, and I don't even trust the person telling me that.  And I am not going to enjoy chasing people for rent nor evicting families with children, etc.  But, I think I am willing to bite the bullet because I can't think of another way that I can get a somewhat predictable 10% annual return on my money (plus appreciation, if that happens, plus annual rent increases than can give me a 3% raise every year).  My plan is to buy 10 houses to help diversify the risk of repairs and vacancies.  There are private real estate partnership investments I have looked at where you can consistently get 10%/+ real estate returns with zero work, but I can't handle the counter-party risk.  Also, I am only looking at houses, not condos or townhouses because the association fees can be a significant expense, plus, if there is a big increase in vacancies, the association fees can dramatically increase since there are fewer people paying fees while the association's budget may not change very much. 
When I got into the PP, I was hoping it would give me a somewhat predictable 9% a year (around its historical average), but I've been in it for over 2 years and so far I am averaging about 2.25% per year.  So, I need to put some of my money to work where the returns are more predictable.  I don't see an alternative to just going out and buying houses, and then renting them out.  Does anyone know of a way to make a comparably predictable income of 10% with a similar risk profile to owning rental properties in the lower end of the market, but without all the work and headaches?  Rental properties seem unique in this regard.  I'm open to any ideas/investments as I am not looking forward to dealing with rental properties, but I feel like I have no other options.
Thanks,
Jason

[mathjak107]

as a real estate investor for 25 years i can tell you real estate investing is great , until it is not .

then it can be your worst nightmare some times .

no matter how carefully you choose tenants eventually one of the big three will get your tenants  .

illness- job loss-divorce .

depending on state it can take up to 6 months to evict , plus legal fees , plus loss of back rent and forward rent .

i had a tenant who not only did we have to evict but she had 8k worth of damage we had to fix .

all a tenant has to do is declare  bankruptcy and on top of everything else  a sympathetic judge will give them an extra month or so on your dime to get their act together if they have kids .

being a landlord can be another  job , not a passive income .

[ngcpa]

I personally never had a rental propery, but as a tax preparer, I have had numerous clients with rental proprties.  Some things to consider:
- It is not three times the work to have 3 rental properties as it is to have 1 (there are definitely economies of scale).
- If you have a lot of other income, you will be limited upon how much in lossess you can deduct on your tax return (losses begin to phase out with > $ 100,000 of adjusted gross income and competely phase out at > $ 150,000).
- Military personnel make really good tenants.  They are easier to find after skipping out and their employer frowns on
them for not paying rent.
- Before starting, it would be worthwhile for you to talk to a CPA and learn about the tax aspects of it.  For preparing
your first tax return involving a rental property, it would also be wise to hire a tax  professional. For years later, you
could probably just follow the original.  However, in years where you made any improvements or bought additional
furniture, you might need help with the cost recovery (depreciation) on your tax return.  You definitely would not want
to handle the tax reporting of a sale of rental property on your own. 
- There are a lot of special cases and complications that could arise with rental property under the tax law.  For example, renting part of your residence while living there (taking in a roommate).  There are special rules for "vacation properties" as well.  I found that one of the largest areas of cheating was in the area of vacation home
rentals.
- As is the case with most investments, the "right" amount of leverage is quite important.
- Rental property is not something you want to "dabble" in!
- In general my clients that have had success with rental properties were those who were well orgainized, well prepared and willing to do a lot of painting,lawn mowing, etc themselves and had multiple properties and treated it as
a business.  My clients with the least success with rental properties were those who only had 1 property and hadn't
planned on it, but became landlords through circumstances. An examples is a young couple who marry and each own a house and turn one into a rental property.  Another is someone who relocates because of his job, and has
difficulty selling his house.  It is much more difficult to be a landlord from afar. 
Hope this helps.
Norm

[mathjak107]

we even hated having a 2nd home from afar .

i would get calls from our temperature monitoring box in the dead of winter at 2:00am telling us we have a temperature alert .

great- we don't know if the heat is broke , whether the power is out in the area or a tree came down and just we have no power .

it was a horrible amount of stress since any freeze ups could be devastating . while we kept the water off the house was still filled with water since we used it during the winter .

it was a whole lot more trouble then it was worth .

[l82start]

I don't think it will be fun.  I am not handy and I find home repairs to be a black box.  I find it very frustrating when I am being told that I have a roof leak that is going to cost $2,000, for example, and I don't even trust the person telling me that.  And I am not going to enjoy chasing people for rent nor evicting families with children, etc.  But, I think I am willing to bite the bullet because I can't think of another way that I can get a somewhat predictable 10% annual return on my money (plus appreciation, if that happens, plus annual rent increases than can give me a 3% raise every year).  My plan is to buy 10 houses to help diversify the risk of repairs and vacancies.  There are private real estate partnership investments I have looked at where you can consistently get 10%/+ real estate returns with zero work, but I can't handle the counter-party risk.  Also, I am only looking at houses, not condos or townhouses because the association fees can be a significant expense, plus, if there is a big increase in vacancies, the association fees can dramatically increase since there are fewer people paying fees while the association's budget may not change very much. 
When I got into the PP, I was hoping it would give me a somewhat predictable 9% a year (around its historical average), but I've been in it for over 2 years and so far I am averaging about 2.25% per year.  So, I need to put some of my money to work where the returns are more predictable.  I don't see an alternative to just going out and buying houses, and then renting them out.  Does anyone know of a way to make a comparably predictable income of 10% with a similar risk profile to owning rental properties in the lower end of the market, but without all the work and headaches?  Rental properties seem unique in this regard.  I'm open to any ideas/investments as I am not looking forward to dealing with rental properties, but I feel like I have no other options.
Thanks,
Jason

Not being handy or knowing how to price a roof repair is fixable, they are are learnable skills, and skills brought over from other business experience, like knowing how to select vendors, how to shop for competing bids, how to ask the right questions of a lawyer or maintenance guy to get the info you need etc.. will helps lot even if you spend a bit extra on the occasional hard lessons. The part that needs to come natural is the people skills, unless you have those to start with the personal growth necessary to acquire them on the fly is a tougher learning curve than the business/mechanical side of property ownership. as an example the complex next door to mine has a manager who (for lack of a better description ) comes off as being a bit of a d**k, he just seems to have a way of speaking that is inherently confrontational condescending and generally irritating, i hear him over the fence in yelling matches with tenants on a semi regular basis and in weekly top of the lungs screaming confrontations with the homeless that root through our dumpsters, my hunch is that this guy is well on his way to an ulcer, the homeless throw garbage on the ground behind my complex just as often, but instead of confronting i just give the a "wassup " head nod and ask "would you mind tossing the trash back in when you are through"....  i have been in zero screaming arguments with the homeless, and 97+ % of the time i don't have to pick up after them...  knowing how to get what you want or need, and to chill a potentially confrontational situation, to embody authority without being a d**k are all priceless skills in the property management business...

[mathjak107]

real estate  has always been to much of a real job for my taste .  my thing eventually ended up being special situation real estate . i was not really interested in just collecting rents .

our deals were buying out rent stabilized leases from original co-op tenants  in prestigious buildings over looking central park  and then selling the apartments .  or owning lease rights we could sell on commercial spaces in Manhattan  . this is where the big money is , but you need the contacts to do this stuff.

these deals are not things non professionals will find  .  we partnered up with one of the country's real estate moguls bernard spitzer , elliots spitzer's father . he passed away last year  in his 90's ..

we would never have been privy to these deals on our own .

13 years later all we have left are two rent stabilized apartments out of 9 . these  tenants have no interest in leaving at this point so we are stuck with them  paying way below market rent , but well worth it compared to what we sold .

[Kriegsspiel]

Maybe you'd like flipping houses instead of renting them? Maybe you're better suited to worrying about your contractor/repair estimates/comps than you are about your tenants/vacancies/repairs. You can start off with a chunk of your AA dedicated to flipping, and see how far you get.

[MachineGhost]

Does anyone know of a way to make a comparably predictable income of 10% with a similar risk profile to owning rental properties in the lower end of the market, but without all the work and headaches?  Rental properties seem unique in this regard.  I'm open to any ideas/investments as I am not looking forward to dealing with rental properties, but I feel like I have no other options.

Residential REITs.  Tax liens LLCs.  There's also some real estate LLC's on the startup portals.