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About 10 years ago, I was white hot about real estate, but then ... life, ya know? Here is my situation:
Next year, I'll turn 40, and I want to have my family of four set up well down the road. Currently, we own two houses outright. Our primary residence (zillow valued at about 190k) and our rental (zillow valued at about 155k). The rental was really just for family, and "produces" $700/mo. We have 40k in the bank and about 70k or so tied up in investments/collectibles.
We are looking at possibly purchasing another house to actually move to, with a garage apartment or similar for the family member to move into that is currently in our rental. I had long considered just selling the other two houses and getting into a house that is 300-350k, and be done with it, but I am starting to think about having both properties as rentals. The total approximate rent coming in from the two houses (according to zillow) would be about 3k a month.
I would love to hear the input from everyone here - what would you all do? What are your suggestions based upon my situation? I'm happy to answer any other questions that need to be answered, if I have missed anything. Thank you!
Steve, can you weigh in on this, as I am curious, too, about using rentals as income stream in our retirement
iris lilies
9-1-19, 1:45pm
Using the 1% guideline* you are losing money on the $155,000 property. Since you seem to hold it mainly to house a relative in need, perhaps you dont care.
But a sum total of $345,000 in real estate that generates only $3,000 per month is digging yourself further in the hole.
Don’t you post over on the Mr. Money mustache forum? Those guys are pretty good at assessing these kind of questions.
Another general guideline I’ve learned from that forum is generally speaking, if you are landlording in in flyover country you had better be making your money via the rents. Only on the coasts and in a select number of large cities will you make money on property appreciation.
Another truism they’ve been promoting lately is this idea: landlording is a business, it is not a passive investment. When you buy income property you bought yourself a job.
*Guideline is a rental should generate 1% -2% per month of its market value. For those assessing income property, walk away from any deal that doesnt hit the 1% minimum.
I’ve never owned rental property but my sister and SIL rented out their house in san diego for the four years they lived in seattle for her work. (They only did so because they planned to move back to san diego after sister had earned big money in seattle working for a major tech company there.)They paid a management company 15% of the rent and the management company definitely earned their money. There was nothing passive about it.
I went back and read your post and have a couple of observations--I think at max you should own one rental property, if any. I wonder about the 40k and 70k being adequate for taking care of emergencies that may arise. Two rental properties opens you up to two sets of emergencies, and three properties is even worse. I would be concerned about having to dig into my money in the bank to take care of the properties.
Also, the investment/collectible designation confuses me, as I'd be concerned about collectibles as any source of value, but I don't know about what you collect, obviously..
I worry about renting to family as I would not be willing to evict family if circumstances changed, and I couldn't afford to carry them.
Teacher Terry
9-1-19, 3:58pm
We had rentals and they were a giant PIA.
iris lilies
9-1-19, 5:46pm
My message below is not intended to be snarky.
Three years ago you asked the same question and the overwhelming response from posters here was to to sell the properties.
You’re asking the same question today. You’re not showing us any math at all, just are throwing out some Zillow estimates. This is absolutely not the foundation of a successful real estate investment plan.
First thing I would do is go back to the question you posed three years ago and read those responses. What has changed?
My message below is not intended to be snarky.
Three years ago you asked the same question and the overwhelming response from posters here was to to sell the properties.
You’re asking the same question today. You’re not showing us any math at all, just are throwing out some Zillow estimates. This is absolutely not the foundation of a successful real estate investment plan.
First thing I would do is go back to the question you posed three years ago and read those responses. What has changed?
Too funny! I've gotten a few messages like this in the past with the "I don't mean to be snarky, but..." and I roll my eyes because it comes off as snarky. So, after I rolled my eyes, I searched my posts from 3 years ago. Sure enough ... I did in fact ask a similar question, only with much more clarity. I appreciate your reminding me about this, because I had ZERO recollection I posted this before. That should be a testament to how many extreme highs and devastating lows I've had over the past few years, that I didn't even remember.
A lot has changed since then, though, financially, it isn't a whole lot different, aside from apparently both of the properties having increased in value (yay!) It sounds as though the responses here are a resounding SELL! I appreciate the responses ... even from 3 years ago. Thanks guys!
TI searched my posts from 3 years ago. Sure enough ... I did in fact ask a similar question, only with much more clarity. I appreciate your reminding me about this, because I had ZERO recollection I posted this before. That should be a testament to how many extreme highs and devastating lows I've had over the past few years, that I didn't even remember.
!
oh heck. I can ask a question yesterday and not remember. But I hope your highs and lows have mellowed out and things are going ok.
Steve, can you weigh in on this, as I am curious, too, about using rentals as income stream in our retirement
Tybee, if you mean me (I think I'm the only Steve on the forum right now), then I will say jschmidt has received excellent advice here -- now and three years ago.
The only thing I can see changing the equation is if property values have increased considerably due to an organic improvement in the local market -- and, even then, there are caveats. I don't quite agree with IL that property appreciation happens only on the coasts; there are pockets of appreciation in flyoverland and real estate is a truly local endeavor. Minneapolis/St. Paul is doing well as the strongest economy for states around, what with the collapse of Dakota gas mining and Target, Best Buy, and United Health Care (all HQ'd here) thriving. That and real development in our neighborhood have buoyed property prices to the point where we're at least where we were when the bubble burst 10+ years ago. But I think there's another real estate bubble coming; last thing I'd want is to be close to extended on credit and on the hook for major repairs to even sell when that happens.
I finally raised the rent on my rental starting last January (it's still below the 1% rule because relatives but still is below market for this area). In the last three years I've had to replace the roof, the water heater, the furnace, the back door, and substantial chunks of the plumbing; added a ceiling fan; and partially remodeled the bathroom. The central A/C will need replacement in the next few years and the appliances are all ten years old and are on a timetable to be replaced. Like regular home ownership, it's one thing after another.
I've largely decided that, when my relatives no longer need the house, I will sell it. Just not the way I want to spend my time. Even at market rents, it's not going to be a huge income stream. Maybe it would be different with "real" tenants (with whom boundaries can be set more firmly). But it's just real work -- rarely on my schedule -- and that's one property. Or you pay someone else to do the work (and earn a profit because most people aren't going to work for free), which takes a bigger bite out of your margin. I may change my mind if I have the house to sell when the bubble has burst. But, right now, I want to be out of the accidental-landlord business. I have zero interest in expanding that role by two- or three-fold.
Thanks, Steve, you were indeed the person I was looking for. This is really helpful for me to read. We are getting older, and the part of this that makes me think twice is all the repairs you have had to do, and how we would fund them out of retirement money.
I have a friend who recently sold her two rentals and stashed the money somewhere - I don't know where . She figured that with encroaching age, constant maintenance, rising taxes, it made sense to sell now. I was a landlord for a short while as the house we bought here had tenants in it and we had to honor their lease. All I can say is I never want be a landlord again. Perhaps it is different if a family member you like and trust. I would sell the two and buy a nice house if it were me.
iris lilies
9-2-19, 11:19am
Steven Twin cities may be one of those exceptions to flyover country, but if your real estate prices are where they were or a bit better than ten years ago, you arent San Francisco or Seattle etc.
look, the OP has given no numbers, so it is impossible to say if he will make money on rentals.
First order of business: make a business case for the real estate investments. That includes all costs, projected costs, projected vacancy rate. Compare bottom line to no risk savings accounts earning 2%. That is far more important than people’s stories about tenants being a PITA.
I agree that tenants are a PItA. I have not had a tenant in the 30 years we have been married because I do not want the headaches of landlording. DH had rental properties when we got married and sold them off pretty soon after.
First order of business: make a business case for the real estate investments. That includes all costs, projected costs, projected vacancy rate. Compare bottom line to no risk savings accounts earning 2%. That is far more important than people’s stories about tenants being a PITA.
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Good point about figuring in all costs, etc. A good book for that that I have been using is Frank Gallinelli's What Every Real Estate Investor Needs to Know about Cash Flow.
Doing the calculations in the book discouraged me from a couple of investment opportunities.
JScmidt, you might find it useful to get the book and apply the calculations to the rentals you actually own. It's detailed, and for me, it made me realize I wouldn't make enough on those particular houses.
I do think it's actually helpful to hear people I respect say they found being a landlord a PITA. Those stories give me pause.
I knew of a similar situation to Bae's mom, where the guy who bought our house in upstate NY had a rental in a small town nearby that becomes valueless because of the tenants. Admittedly, the houses were only worth maybe 30,000 to start with there, but bad tenants wiped him out in that house.
The list of grievances from dealing with our tenants was long - stood on bath vanity to change light and broke marble top claiming it was already broken, parked cars in yard, acquired extra dogs that damaged woodwork, grew pot in the storage shed, threatened to sue me, burned trash in fireplace, sub-leased the basement without our knowledge, did not disclose that one of the tenants was a violent parolee by mis-spelling his name on lease. I guess we just got lucky but it sure soured me on the landlording experience.
part of this that makes me think twice is all the repairs you have had to do, and how we would fund them out of retirement money.
Well, a rental property should be self-funding. That's the 1% IL refers to. It gets a bit more complicated than just taking in enough money to meet expenses (since you get depreciation and other tax considerations but then you can add in the notion of being paid for your time "landlording"). Since I got the property as a foreclosure and I am renting it to close relatives on fixed incomes, I took it easy on (okay, I ignored) the 1% rule. The math more or less worked for several years, but we never thought I'd be carrying this house for as long as we have -- long enough that long-term expenses like roofs and doors came into play. Hence the rise in rent. It's still tight but at least we're not subsidizing the house out of our own pockets every year.
Steve seems to be a voice of experience on this thread. It's interesting to read about peoples' first hand experiences with real estate investing; I used to think that landlords "cleaned up." One has to own a lot of apartments to make a lot of money. The margins aren't enormous and costs are better spread over many units. Oh oh! If that sounds like you have to go to school to learn the business, it's probably advisable. My two high school classmates who did well in real estate often made their own repairs and had a day job as did a third friend who worked for the city of Philadelphia and bought houses when they were much cheaper than today. Consequently he is traveling around the World. He did his own repairs and still does!
My two high school classmates who did well in real estate often made their own repairs and had a day job as did a third friend who worked for the city of Philadelphia and bought houses when they were much cheaper than today. Consequently he is traveling around the World. He did his own repairs and still does!
"His own repairs" is a bit of a bone of contention with me. I don't have a problem doing my own (interior) painting, or installing ceiling fans or replacing faucets or toilet innards, or managing pest control. But I don't know anyone who is a licensed electrician and plumber and does drywall and lays ceramic tile ... Some stuff (not all of the preceding) is critical to do right and some of it is subject to municipal inspection in investment properties. The bathroom I just had remodeled was subject to plumbing and drywall inspections by the city. Does someone who does "his own repairs" have the skills to do all that stuff properly? Or is it just the "flip" mentality of making it look good even if underlying issues are never fully addressed?
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