Is Buying Investment Property Not For Faint of Heart? [Archive]

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Mighty Frugal

4-30-13, 1:51pm

dh and I are risk adverse. We do have a nice nest egg that we are too afraid to risk. I just saw a Frontline episode about Index funds and then did some research and noticed some of my RPP (retirement acct) has index funds. They seem the way to go if you don't want to pay for CEOs yachts and reflect the true market fluctuations

Still scary though. but keeping X in a saving account is scary too because it depreciates yearly-ugh

So then we began discussing buying a rental property. In a seedy-ish part of the city (but one we SPECULATE will go up due to a few reasons) If we put down the down payment the rent can cover the mortgage. But with that comes the fear of bad tenants, bug problems, the fear it will be vacant, the fear it won't go up in value

sigh..how does an Eeyore in finance get ahead? How did you bite the bullet grow a pair and risk it?

ApatheticNoMore

4-30-13, 2:15pm

This is hijacking but:

The Frontline show MF is talking about:
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

I mean to watch that too, apparently 401ks are ripping us off, but I doubt I have many index options anyway, so it's that or taxable accounts.

Geila

4-30-13, 2:31pm

I totally get what you're saying MF. Dh and I debated real estate investments for a while too. Ultimately we decided that we just didn't want to be landlords so I don't have any good advice or story of how we overcame our fears! Our house is paid for so we count that as our real estate investment and we know that it's a good one.

The people I know who have been very successful in real estate are those in the same position as you are now: extra cash laying around and good opportunities presenting themselves. Usually it's the case that they can afford to carry the mortgage if the house is vacant and have the cash to handle repairs and emergencies. Also, they have a personality that doesn't mind dealing with the sometimes unpleasant aspects of being a landlord.

I think several people here are landlords and hopefully they will give you some good tips. You might also try to find someone you know personally and get their advice. Plus it would be helpful to have someone local to share resources with: reliable tradespeople, services they use for credit/background checks, rental/eviction forms, tips on insurance, etc.

Best of luck to you!

Gardenarian

4-30-13, 2:38pm

I have an investment property. To me it is less scary than the stock market, about which I know nothing.

I did know the area where I was buying extremely well, I knew I was getting an incredible bargain, and I think the most important thing is that I just love the place. I also had the money to pay cash, no mortgage.
I am also fairly handy and with the exception of some gas line and other plumbing work have been able to do all the fixing up on my own.

California property is a pretty solid investment in any case.

Mighty Frugal

4-30-13, 3:40pm

thanks for all the replies. I recommend watching the Frontline episode-very good.

We would have a mortgage on the rental property-which is good in a way as the mortgage interest is tax deductible (primary homes mortgage are not in Canada)

Our area there are no 'deals' super expensive..

sigh...thanks for advice and I will keep searching but truthfully I don't think I am built for any risky venture....

pinkytoe

4-30-13, 4:51pm

Would love to do the same but all the big gun investors in our neck of the woods have cornered this hot market. One thing we have considered is buying a small vacation home that could be rented out when we aren't using it.

Aqua Blue

4-30-13, 5:19pm

It wouldn't be for me. My brother has several in "seedier" parts of town. Some of their renters have to be appoached weekly to get the rent. Low income renters tend to not report problems until things like the water heater almost fall from the apartment above(they didn't know where the water was coming from that was running down the wall of their apartment). Plan on being VERY handy and not easily grossed out. Expect to run over theer at all hours of the day and night. expect to be there on holidays instead of relaxing. Expect tenants to leave in the middle of the night and take the light fixtures etc with them.

My index funds are very low maintenance in comparison. And have made a lot more money. Pretty much all their profit is eaten up in upkeep. YMMV

iris lily

4-30-13, 8:54pm

dh and I are risk adverse. We do have a nice nest egg that we are too afraid to risk. I just saw a Frontline episode about Index funds and then did some research and noticed some of my RPP (retirement acct) has index funds. They seem the way to go if you don't want to pay for CEOs yachts and reflect the true market fluctuations

Index funds will show market fluctuations, but still I think they are a smart way to go for people like me who just want a general return, I don't care about beating the market.

I don't mind paying for "CEOs yacht" if that fund manager is making me money. Why ever not? But the devil is in the details, and is the fund managers really making me any money? Don't know.

One of these days soon I will move more of my investments to index funds.

But as for rentals, I personally hate tenants and will not be a landlord. We solve that problem by just buying and fixing up very slowly tiny houses that will never generate income, but that is ok. Two of our tiny houses are in the ghetto and I can only imagine the kind of tenants we would get, no thanks. Mine is the textbook method of property ownership NOT to follow!

lhamo

4-30-13, 9:46pm

I used to think I was risk averse, but I surprised myself during the financial turndown. Our account values went down a substantial amount, even though we had a lot in cash equivalents. But I bit the bullet and didn't sell, and actually plowed a hefty sum into the kids college accounts during the downturn. As a result, our networth has skyrocketed -- well, part of that was a very well-timed real estate investment but the accounts are up nicely, too.

For me what has been crucial is to decide what I feel comfortable with as a safety net, and keep that in cash. Given our expat status and the somewhat tenuous nature of DH's job, that safety net is 2-3 years of current living expenses. Having that in accounts we can liquidate without too much forward planning/risk of loss is what allows me to sleep at night. It means we can pay the kids school ahead one year. It means we'd have enough to cover the mortgage and daily living expenses for enough time that we can take the time we need to figure out our next step without having to be stressed about where the money to pay the bills is going to come from. It means we have a sufficient stash to relocate -either elsewhere in China or back to the US -- if that is what we decide is best. Even in the worst of circumstances, such as a lengthy bout of unemployment for both of us, I am confident that we would be ok for the long term because we wouldn't have to panic. Heck, we could sell everything and move to Iowa or something and live off our retirement savings if we had to. Having that safety net is very important for our state of mind.

In terms of longer term investments, we have done well with putting things into target retirement accounts (for employer-based options) and index funds (for roths, at vanguard). Dollar cost averaging is really effective in terms of building a long-term stash. I am interested in the idea of rental property, but personally I would start with something like a duplex or triplex where you live on site and can be aware of/on top of any issues. I wouldn't start out with buying a rental in a sketchy neighborhood -- too risky in my book.

jennipurrr

4-30-13, 9:58pm

I have four rental properties. They were supposed to be an income stream, but I like to tell people we got a job stream instead. They aren't that bad but they are work...its always something. I read every book I could get my hands on before I bought a property and frequented several of landlording websites...probably for about a year before we bought our first property. I highly recommend doing that, covering all your bases.

We bought each property for its rent-ability and monthly income, not for appreciation (well, there is one I secretly hope we get a big payout one day but no time soon). There are various rules of thumb of purchase price / rent, etc...a common one is that the monthly rent should be at least 1% of the purchase price. Some people say 2% but I don't know what planet they live on. You should consider more than if the property covers the mortgage, because at that rate you will still be putting money in as you also have to account for vacancies, repairs, maintenance, etc.

We have had a variety of tenants...some good, some bad, a couple who I still keep in touch with. You learn as you go and you can also learn a lot from the mistakes of others on the internet and in books.

People can make money off just about any type of property. You have to figure out what works for you and your area. I made a decision when we started as property owners, if it wasn't a place I would have lived at in some point of my life, it wasn't for me. I don't do well with rougher neighborhoods and I stick to working class and above. I want tenants I can background/credit check and know they are going to more than likely pay the bills...in turn, I am going to be a property owner that fixes things promptly and is generally decent.

It is work...it is nothing like having a portfolio in the market. However, each month we pay a little down on our mortgages and our net worth goes up on paper. In less than two years we will pay off our first property and hopefully snowball from there.

fidgiegirl

4-30-13, 10:16pm

We have one rental property, our former home. But we didn't buy it for that purpose - it just made more sense to hang on to it at the time to see if the prices would go up. Because we had no other debt and lots of savings we qualified for the mortgage on our current home even though we already had the other one. Prices have gone up now, but our tenants are great. So one year into things, I'd say it's going well and we plan to keep them on for a long while - they've expressed interest in staying for a long while as well. We did tenant screening through a company and that helped us feel a lot better going into things.

SteveinMN

5-1-13, 9:51am

I have an investment property. To me it is less scary than the stock market, about which I know nothing.
:) I have an investment property (and considered buying more) and find it more scary than the stock market, about which I know a fair amount.

More seriously, the investment property is a house I rent to my mother. I wasn't looking to buy a house to rent, but she badly needed a place to stay and I had the money that many other Minnesotans would use to buy a little lake cabin. She actually was renting this place before the landlord let it go to foreclosure; I picked it up once it was put back on the market. That was still before the housing bust, though, so staying above water on the mortgage has been a bit of a challenge.

As others have pointed out, renting out property is a job stream. You may do some of the work -- not necessarily on a schedule convenient to you -- or you may have to hire it out (for example, the city I live in requires a biannual inspection of the furnace by a registered contractor, which I'm sure is the government just sticking their hands in my pocket since no one really cares if tenants are injured in a furnace malfunction, right? >8)). You will have to budget not only for repairs but for large maintenance projects (like replacing the water heater and roof every x years and the fence when it rots and falls down). I bought the property knowing there would be some fixes; we gutted the kitchen and have been improving the landscaping, installing energy-efficient doors, etc.

Examine the property carefully and consider who will want to rent it. Don't be surprised if a property in a sketchy neighborhood is slow to rent at the number you need to charge. If you can hang on long enough for the neighborhood to improve, great. If the rental market in your area is superhot, great. But renters aren't as tied to place as homeowners, so if the property isn't attractive enough to make up for its deficits (bad neighborhood, on-street parking only, ...) it may sit vacant while you're paying the mortgage every month. Similarly, think about the suitability of the place for roommates: is there space for both of them to share common areas? If the house seems optimal for a single parent and kid, is the place safe enough for a kid (fenced yard, less-busy street, near school bus, etc.)? Think about whether you are willing to rent to pet owners. Fish and gerbils are one thing; cats are another; dogs still another. But many pet owners consider their pets members of the family, so if they find a good place (fenced yard, etc.) they will be willing to spend a little more for your place.

You'll have to investigate tenants carefully. Some folks would have you believe that tenants are scum, but I prefer to believe more of people. Yes, there will be sketchy tenants, but if you make the effort to screen them carefully (where did they hear about the property, did they pass a credit check, have they been honest on the application), it should work out. But you have to do the homework and not just skimp on the $$ because you're hungry to fill the place or you figure no amount of investigation will "improve the breed". You can network to find people who are interested in longer-term commitments. Think about whether you'd go for a rent-to-own scheme for the right tenant.

It's a kind of complicated business, but if you have the financial reserves and the time and a positive outlook, it can be a good income stream. Otherwise, you're probably better just flipping houses (if you can in your area) and not dealing with people.

Mighty Frugal

5-1-13, 1:02pm

Thanks for all the advice. I know we won't make 1% of the purchase price-thinking around $400k purchase price (and this is in a dodgy area of the city-our housing prices are insane. I don't think it's a bubble as it has remained consistent for years and years. In my area it goes up every year) And the most we could get renting top and bottom is $2200-so a bit more than 0.5%

I hate turmoil. I worry easily. I'm like a squirrel, store, store, store and hide away:)

I will investigate index funds more closely. This may be a smarter choice for dh and me. We wouldn't have to gamble as much $ and wouldn't have to deal with midnight phone calls about broken water heaters.

Well, I'll keep learning and see where it takes me

Geila

5-1-13, 1:06pm

:) I have an investment property (and considered buying more) and find it more scary than the stock market, about which I know a fair amount.

I would love to hear what you know about the stock market! We've done pretty well in it despite our relative lack of knowledge.

It's a real shame that the finance forum is so quiet nowadays. It used to be really lively and informative. I learned a ton when I first came on here. I think it would be so great to hear what people have turned to now that the treasury bonds are so low. I suspect many people are doing index funds. That would make a great ongoing thread.

bae

5-1-13, 1:37pm

I have a fair bit of "investment property".

It is almost all commercial real estate, in the heart of my village. It all generates positive cash flows. When I bought it, it generated returns slightly better than bonds did at the time.

I did not buy these properties because of their speculative value. My only consideration there was that if inflation went through the roof, property values and rents might similarly rise, so it *could* be a self-adapting thing.

I bought them for the income stream, and to be able to control the types of tenants in my village, and the rents charged them.

I moved here from a lovely village that overnight went from a functional eco-system for humans to trendy-art-galleries-and-restaurants, and I didn't want that to happen here.

Owning them is work though, you need to keep tenants happy, find new tenants, keep the buildings in good repair, keep business-like paperwork, and all that nonsense. Plus, you are at risk - a downturn in the economy may lead to vacancies, cutting your cash flow. Buildings burn down or suffer storm damage. Etc.

I run my investments as a triad, loosely based on our Cold War nuclear strategy:

- stocks
- real estate that produces income
- private mortgages/business loans/local bonds

Sometimes you get a perfect storm in the economy, and all three categories take a hit, but my goal isn't maximum return, it's risk minimization while doing a certain amount of good for my local economy.

HumboldtGurl

5-2-13, 11:02am

iris lilies

5-2-13, 11:15am

iris lilies

5-2-13, 11:18am

We've had a residential rental property and I think that learning and staying on top of our stock market investments is a whole lot less work than dealing with the hassles of tenants. I never wish to own another one again,

I think investment property this makes sense when it is your job. My uncle was a professional landlord, it was his job that he went to every day. He always had a list of fixes and maintenance jobs to do. I grew up listening to stories about tenants and their craziness. But he was calm about it, it was just a job, stuff had to be done in the workday, and in the evening he was home with his family.

Landlording is different when you think of it as investment only because it is hardly passive.

SteveinMN

5-2-13, 2:46pm

:)...You'll have to investigate tenants carefully. Some folks would have you believe that tenants are scum, but I prefer to believe more of people.
If you mean me, ok! Steve, you are renting to your mom, a different situation than my potential tenants. Although as I think about it, that might be a bigger PITA than tenants who didn't birth you (the generic you) cause moms can be pretty cwazy and demanding. In fact DH has been working the past 6 months on two properties owned by very well-off friends who are rehabbing old houses, one for each of their moms to live in. One mom was unhappy with her condo that her son bought for her and wanted a house. Now that is demanding!
IL, I think people in general are not your thing, but, no, I meant landlords in general. Before I bought the house to rent to my mom, I read a lot of landlord advice sites and forums. And there are many landlords out there who seem to hold very low opinions of tenants. Some of that -- undoubtedly -- is deserved. In fact, some previous tenants of the house my mom is in decided one day to light a bonfire ... in the fireplace. :0! Understood. But I also saw a lot of "good enough for rental property" talk -- cheesy repairs, crummy appliances, lackadaisical customer service; they'd never tolerate that in their own homes. And it's my experience in life that people react the way they're treated. They know when someone acts like they're doing them a favor. If the landlord doesn't care about a property, why should they?

On our block, we have a mix of long-time owners/retirees; two relative newcomers (including us); several long-term renters; one family that was running two illegal daycares in the house they owned (the house which, the neighbors believe, they intentionally torched when they were forced to shut down); and one owner that decided to move and quit paying the mortgage, leaving his renters surprised when the sheriff showed up for the foreclosure. Granted, our block is a subset of the real estate world. But real estate is hyperlocal. And the problem here does not appear to be the renters; it appears to be the owners.

Oh, and my mom watches entirely too much HGTV and reads too many Menard's and Lowe's circulars and has all kinds of grandiose ideas of what "we" could do with the house. One year I finally had to show her a spreadsheet that made it clear that the rent she's paying does not leave us rolling in clover for all kinds of showstopping home improvements. We're progressing slowly, but I do feel badly about always being the guy who unsheathes the pin that bursts her home-improvement bubble. That would be easier with a non-relative renting.

Mighty Frugal

5-2-13, 4:37pm

I think I have been convinced to buy Index Funds instead. I don't think I have the stomach for this!