Author Topic: Are rental properties worth it?  (Read 5110 times)

Bearded Man

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Are rental properties worth it?
« on: August 28, 2015, 10:08:33 AM »
Even on paid off properties, a surprising amount of money goes toward keeping the house fixed up and looking good. This does in turn allow me to charge higher rents, but then there are the tenants who damage the place, etc.

Add to that the hassle of cities wanting licensing fees and regulation. Granted, I would need 300K in index funds to make the equivalent income that I get from 75K invested in two rentals, but still. I'm exposed to the potential for lawsuits, dealing with conflict with neighbors who don't like my tenants, flaky and dishonest contractors, etc.

Just wondering if anyone else got out of the rental game. This would be a good part time retirement job I suppose. but it also ties you down to an area, unless you want to pay a ridiculous amount of money for property management, on the full amount of the rent, most of which goes to mortgage, expenses, taxes, etc.

Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

iamlindoro

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Re: Are rental properties worth it?
« Reply #1 on: August 28, 2015, 10:46:44 AM »
Speaking for myself, yes.  Absolutely.  Well worth it.  It will have cut 4-5 years off the FIRE schedule of having gone with equities only.

Quote
Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

This is a pretty concise description of exactly why the returns are higher on REI.  You bear more risk, so you expect greater return.  Most people just gloss over the "greater risk" part without thinking about how that could impact them.

I know that you invest in the Seattle market, so I'm assuming that you're not hitting the 2% rule.  This is exactly the reason I *do* invest out of state, and why when I analyze properties, I do so with pretty pessimistic figures.  I want to be absolutely sure that even in cases of 2x average vacancy, frequent replacement of tenants, property management, etc. I still come out well ahead.  While I might consider less of my monthly transfer from the property to be "safe" cash flow, I have the added peace of mind of knowing that if I FIREd tomorrow, I could pick up and move out of the country with no substantial disruption to my REI operations.  Everything is built into the budget, and every outcome better than my pessimistic one is just extra money in my pocket.  I don't have to deal with angry neighbors, tenant complaints, or anything else besides authorizing repairs and collecting my money-- and that's exactly how I like it.
« Last Edit: August 28, 2015, 10:49:31 AM by iamlindoro »

Bearded Man

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Re: Are rental properties worth it?
« Reply #2 on: August 28, 2015, 11:12:14 AM »
Speaking for myself, yes.  Absolutely.  Well worth it.  It will have cut 4-5 years off the FIRE schedule of having gone with equities only.

Quote
Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

This is a pretty concise description of exactly why the returns are higher on REI.  You bear more risk, so you expect greater return.  Most people just gloss over the "greater risk" part without thinking about how that could impact them.

I know that you invest in the Seattle market, so I'm assuming that you're not hitting the 2% rule.  This is exactly the reason I *do* invest out of state, and why when I analyze properties, I do so with pretty pessimistic figures.  I want to be absolutely sure that even in cases of 2x average vacancy, frequent replacement of tenants, property management, etc. I still come out well ahead.  While I might consider less of my monthly transfer from the property to be "safe" cash flow, I have the added peace of mind of knowing that if I FIREd tomorrow, I could pick up and move out of the country with no substantial disruption to my REI operations.  Everything is built into the budget, and every outcome better than my pessimistic one is just extra money in my pocket.  I don't have to deal with angry neighbors, tenant complaints, or anything else besides authorizing repairs and collecting my money-- and that's exactly how I like it.


I don't think the returns are purely higher because of more risk. If you buy a property too high and the rent is too low, then the return is lower, even though you have the same risks. The returns are higher as a result of fundamentals of operations. Buying a house with a small price/mortgage but high rents makes the property far more profitable as the above example but with the same risks.

Index fund returns are lower than that of just buying Google, by a considerable margin in fact, however; you have less risk with index funds and more risk with google, mostly because of the fundamentals of Google and how it operates, it's revenues, expenses, etc. The return on Google is not higher because of more risk, it is higher due to fundamentals, you're just taking on more risk by not diversifying like an index fund does.

Alas, my point is, with REI, it's hard to hide the fact that you have money, and many people are required for the deal. Each of them wants a cut, and their cut is typically unreasonable IMO. My agent makes tens of thousands for unlocking a door and filling out a cookie cutter contract. The home inspector gets paid $400 for a 3 hour visit.

I had a contractor quote me 3K for labor, for 3 days of manual labor. Another quoted me almost 1K to replace 2 doors, a few hours work...

With index funds none of these hassles exist. Especially with Vanguard. Still, it does make me FI early, though I could also sell, and put the money in index funds and be FI as well. I like RE advantages, but sometimes I wonder if the risks and the hassles are worth it.


iamlindoro

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Re: Are rental properties worth it?
« Reply #3 on: August 28, 2015, 11:58:08 AM »
I don't think the returns are purely higher because of more risk. If you buy a property too high and the rent is too low, then the return is lower, even though you have the same risks. The returns are higher as a result of fundamentals of operations. Buying a house with a small price/mortgage but high rents makes the property far more profitable as the above example but with the same risks.

That is true, but all other things being equal, knowing that you bear a greater risk than an index fund investment, RE investing makes sense as an investment because of the higher returns.  This is, of course, a personal assessment, but one that many people share.

Index fund returns are lower than that of just buying Google, by a considerable margin in fact, however; you have less risk with index funds and more risk with google, mostly because of the fundamentals of Google and how it operates, it's revenues, expenses, etc. The return on Google is not higher because of more risk, it is higher due to fundamentals, you're just taking on more risk by not diversifying like an index fund does.

And just as above, if you invest in Google, you accept the greater risk of your investment going to 0 because you believe the return will be better.  You may or may not be wrong, just as in any given RE investment you may be wrong-- but you are always balancing risk with reward.  Few people invest in real estate because they because they believe it to be less risky than investing in an index fund, though surely those people exist.  Everyone must invest according to their tolerance for risk, and their perception of how much risk a given investment represents.
 
Alas, my point is, with REI, it's hard to hide the fact that you have money, and many people are required for the deal. Each of them wants a cut, and their cut is typically unreasonable IMO. My agent makes tens of thousands for unlocking a door and filling out a cookie cutter contract. The home inspector gets paid $400 for a 3 hour visit.

What one person finds unreasonable, another might consider money well spent.  I build a huge margin for this kind of thing into my purchase analysis, so I know that if I find the end number acceptable, it is only likely to get better from there if my pessimistic assumptions are wrong.  If they're right, I still make money.  That means very few properties that I look at are acceptable to me, and that's ok.  You mentioned huge sums paid to PMs earlier-- the minimal involvement needed from me on a monthly basis for my properties makes it money well spent to me.  My long term plan to live abroad in RE makes it a necessity.

With index funds none of these hassles exist. Especially with Vanguard. Still, it does make me FI early, though I could also sell, and put the money in index funds and be FI as well. I like RE advantages, but sometimes I wonder if the risks and the hassles are worth it.

It sounds like RE might be approaching the wrong side of your risk tolerance at this point-- which is totally okay.  It just happens to be an individual's assessment to make.  Me feeling the opposite doesn't make either of us wrong, it just means we have different tolerance for risk and differing thresholds for acceptable expenses in RE.
« Last Edit: August 28, 2015, 12:00:43 PM by iamlindoro »

Thinkum

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Re: Are rental properties worth it?
« Reply #4 on: August 28, 2015, 12:32:15 PM »
This is exactly why I have stayed out of REI, except by way of REIT funds. Plenty of people make a good living off their rental incomes and a lot more people don't. I don't like landlord liabilities so I invest in the market instead. It all comes down to what you're comfortable with. I just bought into VCLT yesterday after deciding against buying a rental. While the yield of ~4.8% paid monthly is not the same as if I had a good rental, it helps me keep a peace of mind. Same with O, OHI, and VGSLX.

clarkfan1979

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Re: Are rental properties worth it?
« Reply #5 on: August 28, 2015, 11:24:01 PM »
Even on paid off properties, a surprising amount of money goes toward keeping the house fixed up and looking good. This does in turn allow me to charge higher rents, but then there are the tenants who damage the place, etc.

Add to that the hassle of cities wanting licensing fees and regulation. Granted, I would need 300K in index funds to make the equivalent income that I get from 75K invested in two rentals, but still. I'm exposed to the potential for lawsuits, dealing with conflict with neighbors who don't like my tenants, flaky and dishonest contractors, etc.

Just wondering if anyone else got out of the rental game. This would be a good part time retirement job I suppose. but it also ties you down to an area, unless you want to pay a ridiculous amount of money for property management, on the full amount of the rent, most of which goes to mortgage, expenses, taxes, etc.

Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

Have you ever owned any real estate. Your post reads like a list of fearful rumors. If you have had a bad experience with real estate then maybe it's not for you. None of your claims apply to my situation with rentals.

Rental #1: Purchased for 182K in 2007. Put 20% down and 10K in improvements. It's a 4 bed/2 bath. The total mortgage is $950 with taxes and insurance. Within the next two years I plan on doing another $5 in rehab and adding a 5th bedroom and expect to rent it out for $2500/month. I have managed it myself long distance for the past 4 years.

Rental #2: This was my primary residence and it just turned into a rental 1 month ago. Purchased for 95K in 2011 and did 16K in rehab. The total mortgage with taxes and insurance is $670. The rent is $1600/month. I pay my step-sister $120/month for listing it and property management. Next year, I will list it for $1700/month or re-new with the current tenants for $1650/month.

Every situation is different. For me it's been a very positive experience and I am very optimistic about the future. 

clarkfan1979

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Re: Are rental properties worth it?
« Reply #6 on: August 28, 2015, 11:27:33 PM »
Sorry, but rental #1 currently rents for 1900/month. If you are in the Seattle area, you need to do the labor yourself. It is a high cost of living area so contractors are going to charge what is consistent with the area. If you own property in a more rural area with lower wages, it might be worth it to pay someone.

Bearded Man

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Re: Are rental properties worth it?
« Reply #7 on: August 29, 2015, 09:06:47 PM »
Even on paid off properties, a surprising amount of money goes toward keeping the house fixed up and looking good. This does in turn allow me to charge higher rents, but then there are the tenants who damage the place, etc.

Add to that the hassle of cities wanting licensing fees and regulation. Granted, I would need 300K in index funds to make the equivalent income that I get from 75K invested in two rentals, but still. I'm exposed to the potential for lawsuits, dealing with conflict with neighbors who don't like my tenants, flaky and dishonest contractors, etc.

Just wondering if anyone else got out of the rental game. This would be a good part time retirement job I suppose. but it also ties you down to an area, unless you want to pay a ridiculous amount of money for property management, on the full amount of the rent, most of which goes to mortgage, expenses, taxes, etc.

Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

Have you ever owned any real estate. Your post reads like a list of fearful rumors. If you have had a bad experience with real estate then maybe it's not for you. None of your claims apply to my situation with rentals.



No, I was just joking in my OP about being a landlord and wondering if it's better not to be a landlord...

Ricky

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Re: Are rental properties worth it?
« Reply #8 on: August 29, 2015, 10:47:12 PM »
Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

I mean you could flip property owner with renter except add back in the property owner to that list...You're not immune to those externalities even if you don't own property, so I wouldn't lump them into downsides for owning RE.

sol

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Re: Are rental properties worth it?
« Reply #9 on: August 30, 2015, 12:32:57 AM »
My rental properties have about kept pace with my other investments over the past few years, though stocks were winning until the recent market dive.  30% market returns in 2013 aren't really a fair comparison though, as I expect the rental income to be less volatile.

NoNonsenseLandlord

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Re: Are rental properties worth it?
« Reply #10 on: August 30, 2015, 07:37:23 PM »
Higher risk means higher reward.  With an index fund, you have 0% control.

With a rental, you have 95% control.  You can choose the tenants.  You can pick the rent price.  You can manage effectively. 

At some point, I will likely sell, but for now it is a 6-figure income.

clarkfan1979

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Re: Are rental properties worth it?
« Reply #11 on: August 31, 2015, 11:13:26 PM »
Even on paid off properties, a surprising amount of money goes toward keeping the house fixed up and looking good. This does in turn allow me to charge higher rents, but then there are the tenants who damage the place, etc.

Add to that the hassle of cities wanting licensing fees and regulation. Granted, I would need 300K in index funds to make the equivalent income that I get from 75K invested in two rentals, but still. I'm exposed to the potential for lawsuits, dealing with conflict with neighbors who don't like my tenants, flaky and dishonest contractors, etc.

Just wondering if anyone else got out of the rental game. This would be a good part time retirement job I suppose. but it also ties you down to an area, unless you want to pay a ridiculous amount of money for property management, on the full amount of the rent, most of which goes to mortgage, expenses, taxes, etc.

Seems like when it comes to real estate, everyone and their mother is getting rich off the property owner. The agent, the inspector, the city, the feds, the property manager, the lawyer, etc. What's left is mine to keep for bearing all risks...

Have you ever owned any real estate. Your post reads like a list of fearful rumors. If you have had a bad experience with real estate then maybe it's not for you. None of your claims apply to my situation with rentals.



No, I was just joking in my OP about being a landlord and wondering if it's better not to be a landlord...

I'm sorry that I missed the joke. It sounded so similar to all the negative nancy's I hear from time to time. It's only been a few years and it seems like it has been totally worth it.  I can't wait to be an "old-timer" and tell stories about back in the day and how much I paid for a house 30 years ago. Still collecting rent checks that will probably be 5 times what they are now.

zephyr911

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Re: Are rental properties worth it?
« Reply #12 on: September 01, 2015, 08:15:49 AM »
BM, your question would be better phrased as, "does this kind of investment fit my personal goals and values?"

Rental investing is challenging where you are. I have a friend who just bought his first primary residence in a transitional area south of Alki... 1100sf, $400k! He is toying with eventually buying rentals - in my region. The cash flow fundamentals are much less enticing in the urban PNW. On top of that, you clearly dislike the legal environment and the typical costs of doing business. So I'd lean toward "no". But it's ultimately a question only you can answer for yourself.

jinga nation

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Re: Are rental properties worth it?
« Reply #13 on: September 01, 2015, 09:49:32 AM »
I have 5 properties, four are 1/1 condos, the fifth is a 2/1.5 townhome. All in the same city, various zip codes, all paid in cash. Property manager charges fixed $65/month. If he finds a tenant, then 50% of first month's rent. If I give him a property with existing tenant, no tenant search fee.

I used to manage the 4 condos myself before starting a family, so have a list of dependable A/C, plumber, handymen, etc. I take care of some of the minor non-emergency stuff on weekends. When I've had A/C repaired or replaced, the tenant and/or property manager are on hand during installations and inspections. I do my due diligence and pass/fail the potential tenants.

I have about $280k invested in rental properties, yielding minimum 10% EBITDA.

I bought a townhome a couple of years back for $52k, minor paint and fix, got tenants for $1000/mo., sold it after 8 months for $70k, only due to a Nazi-style HOA. I have been on HOA boards and play by the book. A bad HOA means GTFO. Sometimes you can't know much of the closed HOA dealings until you buy in, nature of the business.

It's worth it. You have to get your hands dirty and do everything yourself initially to control costs and learn the ins and outs. Make the first deal a local deal to increase chances of success. If you just want to be a passive investor, stick to low ER index funds and don't dabble in RE.

david51

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Re: Are rental properties worth it?
« Reply #14 on: September 01, 2015, 10:35:44 PM »
          For me the answer is a big yes.  I haven't had a job in 7.5 years because of the rents I'm collecting.  There is a minor hassle from time to time, have spent a lot of $ on plumbers, but overall I wish I had 30 homes instead of 3. My purchase prices were 160, 193, and 225.  Now worth 500, 900, and 900.  Without those 3 purchases I would have had a 30-40 year working career.

CashFlowDiaries

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Re: Are rental properties worth it?
« Reply #15 on: September 02, 2015, 12:59:17 PM »
I absolutely LOVE rental properties and I am going to reach FIRE off of them so for me, absolutely its worth it.  All the maintenance, vacancies and issues that come with owning rentals is just part of the game.  And im okay with all that because I am expecting it and putting money away to handle those issues when they come.

NoNonsenseLandlord is a prime example of how to reach huge success with rental properties.  I look up to him and I will reach that six figure income from rental properties some day too.

tooqk4u22

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Re: Are rental properties worth it?
« Reply #16 on: September 03, 2015, 01:41:46 PM »
Higher risk means higher reward.  With an index fund, you have 0% control.
  Yup - 100% passive. 

With a rental, you have 95% control.  You can choose the tenants. 

But you can't control what they do or when they pay especially if something happens to their jobs. 

You can pick the rent price.

Not really, market is market - you can choose to go below market though to help get a tenant...but even then your below market is probably the market.

You can manage effectively.

Absolutely, but typically it takes a lot of experience to have this be a skill and not luck. Knowing when to make capital improvements (water heater, HVAC, floors, etc) to maximize your return and avoid costly middle of the night emergency repairs takes experience.


powskier

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Re: Are rental properties worth it?
« Reply #17 on: September 04, 2015, 12:40:26 AM »
If the math works. There is no magic.
Our properties pay for themselves and for our primary home ( mortgage, taxes, insurance, all utilities, repairs, upkeep) sometimes we have had  to throw in a little money for major repairs ( i.e contribute 5k out of pocket on a 20k roof replacement). Currently besides paying for all expenses my tenants are building us about $2200 of equity a month.

When RE goes well life is great, when problems arise it can be hell, no doubt about it. You have to do the math, both dollars and time/emotions and decide if it will work for you.
It has been great for us.
« Last Edit: September 04, 2015, 12:46:36 AM by powskier »