Buying property to rent out

shotgunshooter3

Has anybody done this? What do I need to know? I am considering buying a town home in the local area and renting it out for awhile. I know a few people in this area who have done it with success.

Thus far I haven't gotten beyond that thought though. Any words of wisdom are greatly appreciated.

Teach

My family has owned rental property at various times since the 1930's. Unless you can be a "hands-on" landlord with a very close relationship with your tenants (like living in one side of a duplex and renting out the other side, for instance) things can go south in a hurry. If you're an absentee landlord and using a property management company as your representative, it's possible to get into a negative cash flow situation in a hurry- - -the manager siphons off most of the profit over paying the mortgage. If you can afford a break-even situation for awhile and use rental property as a long-term investment it might turn into a good thing- - - -as long as you don't get tenants who trash the place and disappear. Doing a big rehab after a renter flies the coop unexpectedly can get expensive in a hurry- - - -been there, done that a few times!
Jerry

BigDanS

Your formula for renting as a business person is:

(Rental income - all expenses ) / all expenses > 20%

If you can't make 20% on your property don't do it. You need multiple properties to spread your risk and the extra high profit is to cover your rehab expenses and skipped out renters. You need a solid rental agreement, and a deposit that equals 1st month rent plus last months rent plus 1 month. If they can't cover it they can't rent.

If you do it for real you would need 10 properties to make a business out of it , and at $150,000 a property that's $1,500,000 in assets, yielding a profit after expenses, before taxes of $300,000. And yes you need to work your butt off to make it work as an accountant, handyman, property manager, and do it all.

IMHO

D

shotgunshooter3

I guess I should clarify that I will most definitely be an absentee landlord and have to use a property manager. However, I can afford to break even for awhile.

zorba

It has worked pretty well for us - property management firm earns their money!

Buffco

I think Dan is way over thinking this. He is absolutely correct, if talking to someone who is looking to do this four a living. For you? Even if you were coming our of pocket $100 a month (or more) you have to look at it as someone us buying you a house, or at least you are buying one for 100 bucks a month. Long term gain is what you are looking for, (when you sell the house) not necessarily immediate profit.

I've rented three mobile homes and a house at one time. Its great as a means of gaining equity.

To much to type.. I'll respond later..

Jay

I don't think it would be a good thing in the long run for a guy who will likely be moving around the country. I also don't see the point in breaking even. I can break even by putting my money in a CD, without dealing with rental headaches......

I kinda agree with Dan. I don't think it's worth it if you can't make money. I've been invovled in rentals through my mom, who has multiple rental properties. You can make rentals work when one is sucking money but another is running enough to balance it out. The first time you get stuck with a $10,000 bill for repairs and your property isn't making anything, you've quickly turned what you thought was a blessing into a nightmare. Last month, I put a new AC on one of my mom's houses. She just had the cost of materials in that one. That same week, a tenant called her and said the roof was leaking and the ceiling had caved in. $8,000 for a new roof, only to find out it was the swamp cooler leaking water into the ducts that caused the damage. Another $2,000 for a new AC and another round of ceiling repairs..............Add that $10,000 to the $1,000 she had in my AC install...........good thing she has other properties cashflowing the money suckers....I will say that the last few years has been a great time to invest in properties, with the market being so bad. You can pick up some good deals, although that seems to be starting to dry up as the market continues to recover.

I will say that we have no experience with rental management agencies. Never used one. We just run it as a family thing.

zorba

Buy new, or almost new properties. Its the only investment that has any return these days - where else can I make around 8-10% on my money? Not at a bank!

NN

My views come from living near a Military base.

Renters are here, their deployed, their here, their deployed, there back getting ready for a PCS move.

Which means they do not give a hoot about what happens to the place and it gets tore up.

Then the civilians are here all the time and do not care about the place and tear it up worse and probably don't pay the rent either.

Then there is the pluming and the roof leaks that get ignored and worst of all is the dog doing it's job inside in the same spot until the floor
gets a sinkhole.

I guess you have figured out by now I wouldn't do it.

Buffco

Jay wrote: »

I don't think it would be a good thing in the long run for a guy who will likely be moving around the country. I also don't see the point in breaking even. I can break even by putting my money in a CD, without dealing with rental headaches......

At maybe 1 percent, yes. Meanwhile, every month the tenant pays your mortgage, you just gained 4-5 hundred dollars in equity. (Or more/less, depending on the price of the house)

agewon

Buffco wrote: »

At maybe 1 percent, yes. Meanwhile, every month the tenant pays your mortgage, you just gained 4-5 hundred dollars in equity. (Or more/less, depending on the price of the house)

It would take a bit of time before that were true. Assuming he is going to mortgage the place, a Hugh chunk of the payment goes to the interest first. Then whatever profit is left over gets smaller because you need to sock away some money to have on hand for maintenance and emergencies. A busted AC unit, or a leaky roof can drain an account faster than my wife at the mall.
I'd apply BigDans method, or ask someone else who manages their own property. Imagine if the rent was 1000, mortgage was 800, that leaves you with 200$. that should go into a savings account until you have roughly 4000, or 6 months payments socked away. And then you can MAYBE start drawing income.

Teach

A guy I worked with at Little Rock AFB got some very unexpected PCS orders to southeast Asia a couple of months into a 6-month lease agreement on an apartment in beautiful downtown Jacksonville Arkansas. He found out that he had not only signed an unbreakable lease agreement and had to pony up rent for the remainder of the lease, but he was also required to paint the place befor he left! I think they might have had a little trouble re-renting the place with the walls, ceilings, and all the trim painted gloss black!
Jerry

Razorbacker

I used to know a retired military guy. He and his wife had bought a house every time he got moved around, then would rent it to military folks when he got moved again. When he retired he had houses all over the place. He was pretty happy the way things worked out.

I used to manage several high end homes for an out of state doctor. He would buy foreclosures and pay me to fix them up and then a management fee. No one ever tore anything up and most things were new or in good shape to start with but for what ever reason we had trouble keeping them rented. Ultimately he stretched himself to thin and declared bankruptcy. It's to bad. I had sweet little deal going. He should have just stayed with a 1/2 dozen or so units, he'd probably still be around.

I guess the lesson is, don't get in over your head.

Razorbacker

Buffco wrote: »

At maybe 1 percent, yes. Meanwhile, every month the tenant pays your mortgage, you just gained 4-5 hundred dollars in equity. (Or more/less, depending on the price of the house)

I am aware of no CD rates that pay even half the rate of inflation.

bullsi1911

I have managed family rental properties before. Renters are a pain in the backside.

Jay

Buffco wrote: »

At maybe 1 percent, yes. Meanwhile, every month the tenant pays your mortgage, you just gained 4-5 hundred dollars in equity. (Or more/less, depending on the price of the house)

I'm not really trying to say that a CD is better than real estate. Don't get me wrong. Just using that as a way to point out that if I'm going to break even, I'd rather do it in a way that puts my money in a coffee can and I can failry well trust that it's there for me. We seem to quickly forget that when the market sinks or the roof and AC need to be replaced, equity is not money in the bank. It's not money and is not there any more.

Some folks, probably including you, do well with it. It helps when your local and handy enough to do a lot of work on your own rather than hire people. My point is, if I'm going to play the real estate game, I want to have money coming in to put in the bank, not equity that may or may not be there when I need or want it.

Fisheadgib

Matt, most all of the replys relate to the poster's part of the country and their specific circumstance. From what you describe, I would advise against it. I've owned rental properties and location and the payment compared to the rent generated have a bit to do with the profitability of a rental property. If you own a bunch of trailers that you got cheap and you do all the repairs yourself, you can make a tidy profit. If you own condos and townhomes that have a payment less than the rent and you can do all the repairs and maintenance yourself, you can make a profit. If someone else manages the property and you are not nearby to verify any issues that may have to be repaired or replaced, you will likely lose your butt.

Razorbacker

OP, Fisheadgib gives wise counsel. Also, and I haven't seen this mentioned, but investment property mortgages, while available, are much more strict and carry higher interest rates.
Rental property can be a good investment but it's not for everyone. The people I've seen be most successful with it were either Realtors or maybe their dad did it or something.

Jermanator

I am with Buffy on this. I actually lose a bit of money each month on my properties, but I am gaining equity. Once everything is paid off and the market isn't complete crap, I will sell them on land contract. Just for illustration purposes look at it this way...
Buy for $20k, spend $15k on rehabbing the property. Let tenant's rent cover interest, insurance, maintenance, and mortgage payments. In 10 years, that $35k is paid off, you hold the deed free and clear, and is now worth $50k. From there, you can continue to rent, sell on the open market, or sell on a land contract for $55k, 6% interest. With the land contract option, you now have $55k earning 6% interest for you. Take that, have all the payments go in an IRA and reinvest it further in a tax shelter and make it earn even more money.

No, it is not an immediate income stream, but you can see how it can become one over the long term.