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Real Estate Investing => Managing And Investing In Physical Real Estate => Topic started by: WengerTodd on December 04, 2019, 11:57:21 PM

Title: Owning a Rental Home...
Post by: WengerTodd on December 04, 2019, 11:57:21 PM
So, I was going to reply to the other post asking this question, but it said,

Quote"Warning: this topic has not been posted in for at least 120 days.
Unless you're sure you want to reply, please consider starting a new topic."

... so here I go. I'd debated on how deep I wanted to go into this response, but the question "is it worth it owning a rental" cannot be answered by others, it's really a deeply complicated question based on your level of risk, effort, and goals. Certain questions need to be asked, and the answers and commitments need to be understood before going into it. This really is best answered by one of those decision trees, with 50 "no" answers, and one "yes" answer.

Here are some general thoughts I have about the DOs and DON'Ts of renting:


DO BUY A RENTAL IF:
- You can get the home significantly below market value, or there is a belief the home will increase in value over time and plan to keep it
- You can afford to maintain the home. Expect at least 1 major catastrophe per year. e.g. a burst pipe, a whole new HVAC, a leaking roof
- You want a long-term appreciable investment
- You are emotionally unattached to the home
- You've done the research on the home and the area you intend to buy
- You know you can get at least 15-20% return above your expenses.


DO NOT BUY A RENTAL IF:
- You plan to rent to friends / family
- You plan to not sign an official lease w/ first and last, + security deposit downpayments
- You cannot handle stress
- You are financially strapped
- You don't know anything about home repair and what things cost (even if you have no intention of doing it yourself)
- You are emotionally attached to the home
- You would be upset when the home gets damaged
- You expect others to care for the home the same as you
- You plan to rent to a bunch of separate people who are not part of a family unit



There are property managers, and I use one. But sometimes you even have to manage the property managers because they'll often become complacent. Likewise... you may have good and bad renters. The higher the quality and expense of the home, the less likely you're going to get deadbeat renters. It's just the law of averages. In a lower income area, you're going to get renters who have never owned their own home, or grown up in a home that was owned, so they never learned to respect the home they're living in. Likewise, in the wealthier area, you're far more likely to get renters who are both concerned on the appearances of a messy / damaged house, and are concerned for their own credit scores and potential for court judgements.

I've only had two renters, one was horrible where I did everything wrong, and the other was pretty good... and even they did stuff they shouldn't.

First renter was a former college roommate of my wife. Recently divorced, we felt bad for them and were moving. I let her rent the house at a substantial discount, paying only the cost of what we paid in the new place we rented. I essentially continued to pay the mortgage as it was, but really, I was losing about $80 a month on the deal. She'd never lived on her own before, let alone taken care of her children without the father, and they trashed the house. $10k worth of damages.

I ended up moving back into the house and completely renovating it, putting about $55k in renovations (did them all myself, so really what would have been $125+ in renovations).

I moved again for work 3 years later and got a new tenant within a week of moving out. With the new renovations, and the appreciation of the neighborhood and the excellent school district. I named my price, which at the time was $2,800. Current renters are much better, again... comes with the increased cost of the rent. They keep the place spotless, and they've done some upgrades, even though I told them not to. So, you will have to contend with that. They tiled the backsplash in the kitchen, installed a top of the line garage door opener with Android mobile control, and a bunch of other things. Unfortunately, they also walled off my wetbar, which I wasn't happy about. Literally just a piece of drywall over it, and then textured it and pained it like it never existed, except it's still there. 3 years later, the home can now easily command $3,200 in monthly rent (my mortgage is $2,200), but I keep it low because the renters are decent, and I'd like to keep them. But... should they decide to leave, I can easily get $3,200 probably in a couple of weeks.


So there is a good and bad. The old adage, "it takes money to make money," is absolutely true in this situation. Don't expect to go buy a dumpy shack and start raking in the cash. You have to buy a home in a good school district, make improvements, and be selective about who you rent to.
Title: Re: Owning a Rental Home...
Post by: Sam on December 15, 2019, 07:28:44 PM
Good thoughts WengerTodd. I would say, my physical rental properties are the ones that have caused me the most stress on my passive income journey. Dealing with HOA members, rules, bad tenants, plumbing issues... they are all doable when you are young and looking to build your nut.

But as you get older and wealthier, rental property just feels less and less appealing, hence REITs and crowdfunding.

I'm at the point where I'm happy to keep a second home empty and just use it for friends and relatives instead of renting it out. So many vacant properties due to onerous rules and PITA tenants.
Title: Re: Owning a Rental Home...
Post by: Kendall on December 16, 2019, 01:42:40 PM
Quote from: WengerTodd on December 04, 2019, 11:57:21 PM
There are property managers, and I use one. But sometimes you even have to manage the property managers because they'll often become complacent.

When I rented my condo, I assumed the property manager was looking out for my interests. I learned that he was mainly interested in protecting his business. To top it off, all the appliances that the tenants broke provided his workforce with plenty of billable hours.

Always think about the incentives of the counterparty
Title: Re: Owning a Rental Home...
Post by: WengerTodd on December 16, 2019, 08:48:11 PM
Quote from: SteveGood on December 12, 2019, 10:35:39 PM
Hi,

Which is the best own house or rental house for salaried people?. If the rental house is best why? Please share your thoughts.


There's a few articles on this, and in order to answer that question, there are more questions that have to be asked. Generally speaking, for a home to become financially worthwhile to live in (assuming you don't make any improvements on the home), you typically have to live in the home for at least 3-5 years... depending on area. It could be much longer in some areas.

So the questions would be:

1 - How long do you intend to stay in the home?
2 - How will this affect your ability to make a career move?
3 - What is the rent to mortgage ratio in your area?


Quote from: Sam on December 15, 2019, 07:28:44 PM
Good thoughts WengerTodd. I would say, my physical rental properties are the ones that have caused me the most stress on my passive income journey. Dealing with HOA members, rules, bad tenants, plumbing issues... they are all doable when you are young and looking to build your nut.

But as you get older and wealthier, rental property just feels less and less appealing, hence REITs and crowdfunding.

I'm at the point where I'm happy to keep a second home empty and just use it for friends and relatives instead of renting it out. So many vacant properties due to onerous rules and PITA tenants.

Yeah, I've looked into the crowdfunding aspect... mostly, those are the sites where you contribute funds for a guaranteed return on a flip, right? I've invested in REITs in the past, but I dislike the swing these funds have. It's hard for me to say what's a better risk. With physical property... you could lose money, but you can also gain a substantial amount. But, you retain complete ownership of the house and will eventually get some of your money back. REITs are the least risk and you can pull out any time, but they also give the least gain of the three options. Crowdfunding has the most risk (you can literally lose your entire investment and there's nothing you can do), and usually provides moderate returns.

The stress has been far less, but I have a pretty decent tenant right now. My opinion will probably change again if I get a bad tenant.



Quote from: Kendall on December 16, 2019, 01:42:40 PM

When I rented my condo, I assumed the property manager was looking out for my interests. I learned that he was mainly interested in protecting his business. To top it off, all the appliances that the tenants broke provided his workforce with plenty of billable hours.

Always think about the incentives of the counterparty


Yes, that's very true...