Anybody Here Own Rental Houses?

[Coffee]

Anybody here own rental houses?

I'm having a hard time justifying buying one, in comparison to just letting the same money sit in the PP.

[MediumTex]

What is the expected return of the rental house?

I have thought about this myself.

If you buy a rental house, I would try to get something newer.

[melveyr]

My parents are heavily into the rental business. I think it is important to treat the rental unit like a job. If you treat it as a job, then things start to pencil out. If you hire everything out, you would probably be better off just buying a REIT. Also, the housing market is very illiquid. That means that opportunities do exist to get a great deal. You are competing with locals to find market inefficiencies. As opposed to competing against the entire globe with the equity markets.

All of this being said. If you already have a full time job that keeps you busier than you would like, I think the PP is a better choice. Finally, with the PP you can move anytime you like. The PP is just so darn liquid and portable; it's ridiculous.

[KevinW]

If you hire everything out, you would probably be better off just buying a REIT.

Yeah, at one point I was strongly considering setting up rental houses and analyzed that prospect in detail.  I came to the same conclusion.  If you are hands-off and hire out all the dirty work, your operation is the worst of both worlds: you are buying all those services at retail and unlike an apartment complex or REIT you have no economy of scale.  At that point you would be better off buying securities i.e. REIT or PP.

It seems like a rental house will be lucrative to the extent that you're willing to do parts of the business yourself.  The more you do yourself, the better the profit margin, but the more the whole thing starts to resemble a job.  That might be fine as an alternative or supplement to a day job.  I know people that struggle to hold down jobs that might be happier working for themselves as landlords.  But that's not me.

That being said, I've thought that a nice compromise would be to buy a single triplex or quad, live in one unit, rent the rest, and do the management and light maintenance yourself.  It's not too much more responsibility than maintaining your own house, and the rent is a diversifier beyond wages and investment income.

[BRESLOW]

Have two good friends that own rental property. They are both complaining about bad tenents, bad payers and too much to fix.  One guy lives in one of the Apartments with about 20 tenents. He is always fixing things and trying to collect rent. He probably makes good money, but he puts in plenty of his labor. Other guy will not sell because house belonged to his father. He is always fixing up house after tenents leave. No rental property for me, I just want to fly my little airplane.

[MediumTex]

Have two good friends that own rental property. They are both complaining about bad tenents, bad payers and too much to fix.  One guy lives in one of the Apartments with about 20 tenents. He is always fixing things and trying to collect rent. He probably makes good money, but he puts in plenty of his labor.

One suggestion I might make if one were to get in the rental property business would be to buy properties likely to be inhabited by people whose culture you understand and with whom you can communicate well, or make a serious commitment to learning to deal effectively with whoever may be inhabiting your rentals.

This is a more important point than people realize, I think, and can create huge frustrations (and worse) if you don't allow for it.

I used to run a business in which over 50% of my customers were working class African-Americans (I am white).  It was obvious to me from day one that I needed to become a student of this group of people and learn to interact with them effectively or it would not be a good experience for me or them.  By staying ahead of this issue it helped me to be more successful and provide better service to all of my customers.  When I left that business I had built some great relationships with a lot of my customers, including people that others had warned me would hard to deal with.

As a general rule, I think a lot of problems in business are the result of failing to see the problem before it makes itself obvious.  If you could have identified the problem at an earlier stage of development, you could have addressed it much more easily.  One of the things about understanding your own culture is that you can pick up on subtle cues that allow you to deal with others more effectively (and identify potential problems earlier).  OTOH, when working in a different culture (even one that is only slightly different from yours), the inability to pick up on subtle cues can lead to problems that never would have occurred if you had possessed a more nuanced understanding of the environment you were working in.

[Lone Wolf]

I used to run a business in which over 50% of my customers were working class African-Americans (I am white).  It was obvious to me from day one that I needed to become a student of this group of people and learn to interact with them effectively or it would not be a good experience for me or them.  By staying ahead of this issue it helped me to be more successful and provide better service to all of my customers.  When I left that business I had built some great relationships with a lot of my customers, including people that others had warned me would hard to deal with.

This is a fascinating sidebar.  How does one even start building that kind of keep compatibility with a culture that they are not a part of?  I don't even mean socioeconomic cultures, either.  For example, while you could say that this board has a culture that is a "cousin" of the culture on Bogleheads, we're a different set from BH.  An investing outsider, however, would not be able to easily pick up on the different.  And we're very different from say, ZeroHedge or some shaving forum.  If someone were trying to understand and sell to a bunch of Permanent Portfolio adherents, it's hard to imagine knowing how to do this without becoming one.

[LifestyleFreedom]

I looked into owning rental property back in the 2004 timeframe and decided against it.  I attended several meetings sponsored by real estate investing clubs where I live.  There was a "get rich quick" aroma in the air back then, along with a few scam artists who were willing to help the fools part with their money (luckily, I recognized the danger and left before I got burned).

I agree with the observations about how directly owning real estate is a full time job requiring patience and knowledge.  Real estate is illiquid, and getting rid of bad tenants can be a challenge.  Some states are "tenant friendly" (although a few are "landlord friendly"), so it's always an uphill battle.  The investor gets to reap all the profits when there are profits, but also gets to absorb all the losses.  A lot of investment real estate does not cashflow positive (at least at first).

I've decided to stay with publicly-traded securities, whether c-corp businesses (what most people think of as "stocks") or real estate businesses organized as REITs.  I have no desire to manage property.  I'm a passive buy-and-hold-and-rebalance investor who likes to be able to buy and sell my investments quickly and easily when it's necessary to do so.

[MediumTex]

This is a fascinating sidebar.  How does one even start building that kind of keep compatibility with a culture that they are not a part of?  I don't even mean socioeconomic cultures, either.  For example, while you could say that this board has a culture that is a "cousin" of the culture on Bogleheads, we're a different set from BH.  An investing outsider, however, would not be able to easily pick up on the different.  And we're very different from say, ZeroHedge or some shaving forum.  If someone were trying to understand and sell to a bunch of Permanent Portfolio adherents, it's hard to imagine knowing how to do this without becoming one.

I think you have to make yourself part anthropologist.

It's not hard if you identify the challenge and humbly insert yourself into the culture you are studying.  It's when you unwittingly continue to perceive (and make judgments) too much through the filter of your own values and beliefs that you get in trouble (and very frustrated).

It's obviously a slippery slope at the extremes.  If an anthropologist is studying a culture that believes in human sacrifice, it may not be possible for that person to work in that culture because the beliefs/values chasm is too great.

The key metric, in my view, is effectiveness.  Is what you are doing effective or not?  The goal in business from a cultural perspective is normally just to have smooth and easy commercial dealings.  We are talking about some intricate mental maneuvers, but it's really in pursuit of something pretty simple.

[l82start]

Renting to those on housing benefit provides a degree of certainty that you'll get the rent in a timely manner as if they don't pay then the rent benefit can be redirected from them directly to you (the landlord).  Get a bad tenant however and things can be really bad.

with most of the programs you are definitely taking a risk,
-the plus side is the guaranteed portion of the rent, most programs i have seen don't pay all of the rent but they do send that portion directly to the owner, also the amount they pay will often decrease over time, but guaranteed pay and filling apartments when there is a glut in the market are both good.
- the downside, is many programs pay a small to nonexistent security deposits and the difficulty's you can get with problem tenants on programs can get out of hand real quick.
they take program tenants in the complex i am at and it runs about 50/50 good tenants to problem tenants, but between doing all there own maintenance, having onsite management and this being a business not a hobby or an investment i think program tenants work out as a plus in the long run.. 

[cuti31]

I live in Bay Area (California) and have a few rentals in Sacramento (2 hours from San Jose). I hire a property management to take care of my property. The return is not that bad. It is about 10%-12% (downpayment is about 25%, rate 4.875%, rent $1250-$1350, price of the house 130K 150K). I don't assume any appreciation for the next 7 year.

[Coffee]

I live in Bay Area (California) and have a few rentals in Sacramento (2 hours from San Jose). I hire a property management to take care of my property. The return is not that bad. It is about 10%-12% (downpayment is about 25%, rate 4.875%, rent $1250-$1350, price of the house 130K 150K). I don't assume any appreciation for the next 7 year.

After you get done with taxes, insurance, maintenance and vacancy... I just don't see how you can make any money with those kind of numbers?  Especially if you throw in a couple of Black Swan tenants (think: Rod Stewart in a hotel room in the 70's). 

Been there, done that.  {{Shivers}}

[MediumTex]

Been there, done that.  {{Shivers}}

You were with Rod Stewart in a hotel room in the 1970s? 

[cuti31]

If all my tenants are black-swan, I will lose money for sure; however, for a normal case, I make money. Let's go over one typical rental
House: $135000, Loan $101250 at 4.875% (30yr fixed)
Income: $1300
Expense:
  Mortgage: $535.25 (Principal 124.50)
  Property Management: $70
  Tax: $112.5 (1.1% of the house price)
  Insurance: $41.7 (landlord policy)
  Vacancy: $78 (6%- I rent to section 8 and shelter plus. The vacancy is less than 3%)
  Repair: $130 ( Average of repair cost the last two year is $67/month)
Cash Flow: $332
Equity: 124.50

ROI: (332+124.5)/33750= 13%

Ct

[Coffee]

How many sq. ft. is your typical house?
How many houses do you have?

I feel you're wildly underestimating your maintenance issues, over the long run.  Have you had a total trash-out, yet?

[Coffee]

Been there, done that.  {{Shivers}}

You were with Rod Stewart in a hotel room in the 1970s?   :D

I think it was him.  But between the goat, the hookers and the blow... who really knows?

[cuti31]

How many sq. ft. is your typical house?
1300-1400 sq ft (3bd/2bt SFH)
How many houses do you have?
3 houses (plan to buy more since it seems to work for me for the last two year)
I feel you're wildly underestimating your maintenance issues, over the long run.  Have you had a total trash-out, yet?
I don't have a total trash out yet. I could underestimate the maintenance issues. I allocate  130*12=$1560 for repair. Let's see if it works out for the next seven years.

[Coffee]

I'm really surprised at the rent you're getting in comparison to the price of the house.  I know the text books suggest that you should be able to get 1%, but from what I've seen it's usually closer to .75 - .8.

I had two small apartment houses and two sfh rental houses in San Antonio a few years ago.  I'd buy them as junkers, renovate and then rent.  Total headache. 

They weren't Sec. 8 though. 

The mistake I made was expecting it to be more of a passive investment, rather than a second business.  And this is what's keeping me from buying any more rentals.  Right now, anyway.  (At least until 3/4ths of the PP drops 60%. LOL.)

[cuti31]

>I'm really surprised at the rent you're getting in comparison to the price of the house.  I know the text books suggest that you should be able to get 1%, but from what I've
> seen it's usually closer to .75 - .8.
You're right. Normally, you could buy .75 -.8. I did the following things to achieve the above number.
* I took RE license so I can buy/refin for myself and save roughly 5.5% for both purchase/refin transaction. You could search for internet broker who charges flat fee $500 per transaction.
* Buy the house with cash (and refinance later). It seems that the best time to buy house is from Nov-Dec in Sacramento.
* Rent to section 8 (you get $50-$100 higher than market price).

ct
PS: http://www.finestexpert.com could help you gauge the rental in your neighborhood.

[Coffee]

Thanks for sharing that link. 

I'm not sure how they're coming up with their "estimate rent" figures, though?
Interesting nonetheless.  Will definitely give me a "jumping off" point, should I succumb to the bug of collecting rental properties, again.