Rental Properties?

[fidgiegirl]

My DH and I keep being lured by the thought of rental properties. On one hand, I don't want to get involved in a business that is going to suck a lot of time, energy, and worry. But we keep thinking that if we would want to get into it, now would be the time to obtain properties. There are some foreclosed condo units that are attracting us right now.

One reason we like the idea of rentals is because we are both teachers. We are comfortable now, but it would be nice to have a back-up income in case one of us is let go, burns out, if we have a baby and one wants to stay home, etc. Plus every bit gets us closer to FI.

Reasons not to would be the risk, the debt, and that it puts us further from our goal of paying off the mortgage on our current home, plus the life energy invested in screening applicants, dealing with maintenance and accounting, not to mention if something bad happens and having to try to evict or cleanup bad damage.

Is anyone into rentals? What lessons do you have? What resources are good? I can Google 'til my fingers fall off but the best resources always come from people in the know.

Even if we don't go for it, our recurring conversations would be better informed with some research.

Thanks in advance to my SLN friends!!!

[iris lily]

You have to run the numbers to see if it is a good investment. Know the market. What can you really get for rent, realistically, and not an approximate amount some real estate agent tells you that you can get. Most properties are NOT good rental investments. Are you going to amke money soley on appreciation? That's a crapshoot. Will the rental cash flow provide income?

Generally speaking, I would not buy a condo to live in or to, especially, rent out. I don't think they are good investments in most cities (with the exception of very large cities.) In the midwest--nope. Single family houses apprecate best in the midwest, condos do not.

A basic problem in condo complexes is that if many are in forclosure there is not enough money to pay upkeep. Then the complex goes further downhill. Our realtor friend says: don't buy in a complex of less than 12 units because if there is a deadbeat or two, there are still enough paying owners to keep the place up.

I also would be just generally leary of a place that has condo forclosures. They are all over this neighborhood and those associations are struggling.

Even in boom times before the housing plunge I heard way too many stories of financial trouble in the condo associations. I just wouldn't touch one. I don't want a lot of people who know little about building maintenance to be spending my money. They wont' spend it on the things I want done.

Traditional wisdom says that a 4 plex is the minimum unit you should buy to realize sustained positive rental income.

[bae]

I do quite a bit of rental property, but, it's all commercial, not residential. My first job as a teenager was in a property management firm that handled residential rentals, and I saw how easily that can go wrong with a bad tenant, even if the tenant starts out fine with good history.

And as usual, location is everything.

[flowerseverywhere]

The problem our friends have had with their rentals are not the properties but getting good tenants. One got a call on NY Eve at 11:30 pm that a window was broken. He went out and it looked like they had locked themselves out so broke the window to get in but of course denied it. They've had to evict several people. In a rental across the street from a relative they never took the trash out so when they were finally evicted the bathtub was full of trash, trash bags in the corners of rooms etc. A real mess.

Before I had a rental I would get a second job.

[heydude]

This topic comes up a lot. And, from all the posts on the internet, it seems like a bad idea for the amateur landlord. It seems it only pays off (and even then, just barely) if you have a large building where good tenants can potentially weigh against all the bad ones. If you are just buying one place, for one renter, your chances of success are slim. You cannot rely on the income being there (rent will not get paid and not on time) and just a few months of going without rent or without a tenant can set you back to negative numbers. Rental laws are in favor of the tenant (for better or worse). If you cannot do the maintenance yourself, then you are not going to come out ahead. It will suck up a lot of time and energy. If you are wanting this as a back-up plan for income, then seek other backup plans; as you will not be able to rely on this, far from it. You'd actually need a backup plan for your backup plan because your back-up plan will need resources probably from income from what you are doing now.

From what I have read, you would be better off just investing your money.

[heydude]

Don't you have to pay back-dues on those foreclosures?

[iris lily]

Start here, with posting the numbers.

How much rent will you realistically be able to get each month? And then, figuring unrented months, what's the average annual income?

How much are you paying out in dollars each month? How much is the lost opportunity cost the money you've got in equity?


What is a realistic appreciation cost? Over 2 years? Over 5 years?

How much out of pocket in repairs will you be spending each month? When a tenant leaves ?

Then there are the non-financial issues:
Are you willing to devote 1 day a month to this? 2 days a month? You will have showings, repairs (some of them emergency repairs), regular maintenance, paperwork, inspections. You may need to get involved in the condo association if it makes deicsions that aren't beneficial to you. Do you have someone who can back you up when you are out of town?

DH does a lot of work for people around here who are landlords. He has keys to many of their properties and they know that he will usually do their emergecny work "same day."
It's hard for me to believe that they are making much money on these places. I see how often they turn over. And then, our freinds who went into the rental business 2 years ago buy buying 8 units in 3 separate properties are losing the butt and are having to slash prices to keep the palces rented, and then taxes went up hugely on one of the properties (zloned commerical) and that killed any positive cash flow. They are trying to unload this property, but in this economy, there are no takers.

[jennipurrr]

Lots of good thoughts here. You must research your area. You must over project your expenses and make sure to have accurate vacancy numbers. Do not count on appreciation. Tenant quality is EXTREMELY important. You must run a background/credit check on every applicant. The ones that give you a bad feeling that you can't explain will come back to bite you.

I have one long term residential rental and 3 short term rentals. Three are local and one is about 4 hours away. Since they have opposite peak seasons I have the grand idea to one day live in them at alternate times of the year. Who knows if we ever will, but its an option. They are condos, but our short term market is odd...I can rent a condo out for about the same price as a single family, but we paid $200K less. So, that is why they work for us. HOAs have been some what annoying and difficult to deal with. One of our HOAs has a nutcase that has been suing the board since 2007...ugh. Crazy random stuff.

We took a year+ to research and had LOTS of folks tell us our numbers were crazy...well, if we can't find a property that works with the numbers we set out to make money, why would we buy anything? Its ridiculous the things you hear from agents and others in the biz trying to sell you something. A very quick and dirty estimate is that a residential rental will need to return 1% a month in rent to make it worth your while. This doesn't exactly work for condos with association fees, or high tax states like TX. Then you have a totally unpredictable event like an oil spill come along and wipe out all your peak season income one year, so all the calculations are out the window.

If you are conservative with your numbers it can work. We are not going to get rich off of these things, but we are very slowly snowballing the extra money and will have the first one paid off in a few years. Then our plan is to keep the snowball going and eventually have another source of income.

All the money stuff aside...if your marriage is not strong it will not survive being landlords and/or renovating property. If you want to test the strength of your marriage I highly recommend purchasing a property that needs lots of renovation! We have gutted two of our properties and it is incredibly stressful! I feel like DH and I have a strong relationship but we still cussed each other out in the cabinet store one day last year, heh. Its been a lot of work, and we are not seeing any tangible returns right now but I feel like eventually it will be worth it.

[Jonathan]

Bad idea in my opinion. However, MN has a department of commerce you can tap for various publications. You will probably want to set up an LLC (yet more expense) for lots of reasons.

Also check with the cities you plan to buy any rental in - they will have rules and regs to follow, and they are all different. When I looked into this way back when, I quickly came to the conclusion my life energy was worth more than the struggle dealing with just one bad renter would likely entail.

All that said, you can avoid most of this by hiring (yet more money) a professional rental company to manage the renters and units. But I'm not sure how this would impact your cash flow or profit (if any). Finding a good rental company is yet a different story...

[kib]

I have to say that the one rental property I made amazing money on was a co-op. The co-op association was responsible for basically all repair and maintenance except tiny stuff I could do myself. The huge caveat: this unassuming little apartment was within walking distance of the train and a very reasonable commute to NYC, where rents are stratospheric.

Something else to consider on the downside: many condos and co-ops have limits on rentals. 1. They may have an approval process for the tenant, 2. they may have a time limit or other strict rules. Mine wanted owner occupancy for the first five years, had reasonably stringent requirements for tenants, and insisted on one year leases.