News:

To return to the forum homepage, please click the banner at the top of your browser.

Main Menu

Is owning rental homes worth it?

Started by Super Bub, September 09, 2018, 07:04:55 PM

Previous topic - Next topic

Super Bub

Lots of books, blogs, and websites recommend that people buy homes (1-4 family) to rent them out at better than 1% of the purchase price.  If  tenants stayed forever, that would be ideal.  However, I read about horror stories where a tenant will trash the place or not pay rent for several months or whatever.  This kills cash flow for a year or more and makes it not so worthwhile. 

Is single-family home/multi-family home rental even worth it?  Or should I just focus on syndications - crowdfunded or otherwise?

Personal Finance Guy

Hey Super Bub,

Really interesting question! I think it's entirely dependent upon the individual. I made the decision several years ago to jump in with both feet on the real estate game. I have 24 units across 11 properties, and assembling my rental property portfolio has without a doubt been my best performing investment. In my case, it's also required very little time as I outsource management to a property manager who really handled almost all of the operational nuts and bolts. That said, it's not for everyone. There are vastly different levels of involvement / work that could be required from an owner, depending on the willingness or ability to outsource the various areas of management.

It's an extremely broad topic and depending on where within the rental property spectrum you'd potentially be playing (low income apartment buildings, blue collar single family homes, higher end condos/town homes, etc.), you'll think differently about what kind of returns you can generate and whether or not it's worth the effort. For me personally, the labor intensive properties where tenants don't pay tend to be in lower income areas where appreciation is tough to come by as well. So, I've settled into going after single family homes that generally attract highly qualified tenants.

Investing in real estate is the best financial decision I've made, but it's definitely not right for everyone. Best of luck to you!

Katana15

hi Super Bub,
There is no yes or no answer to your question :)
Owning rental real estate is an experience unto itself. It also depends on what part of the country you are.
As with every business come headaches of rentals too.
Tenants can be good and bad but for most part u have to accept that it's not their property so they r not going to take care of it like one's own house.
If after paying all expenses it give you some RoI than it's worth giving a try.
Be prepared to take risk of paying expenses out of pocket when it's not tenant occupied.

Sam has published some good articles on subject u may want to check out.

Sam

Super Bub - I think owning your primary home is worth it because you went to stay NEUTRAL inflation. You're only really long real estate if you own more than one property.

You are SHORT real estate if you rent. And given real estate and the stock market generally moves up and to the right, I wouldn't rent forever if you know where you want to live.

Check out the Buy Utility, Rent Luxury concept: https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
Regards,

Sam

LVITBR

#4
First, let me say that I've enjoyed Sam's posts over the years and look forward to participating in this community.  I'm going to beg to differ with Sam on rental real estate.

I have yet to find a compelling argument to own rental properties.  Here's why:

* Illiquid asset with high transaction costs.  One can punch out of an ETF at any time.  Realtors I know that had multiple rentals in the Northern Virginia suburbs have gotten rid of them for various reasons. 

* Except for a few areas (like the SF Bay area), real estate has not kept up with the broad US stock market over the long haul.  Think about what you or your family paid for a house or land, consider what it's worth now, and then do a comparison back test for an index or class of equities at https://www.portfoliovisualizer.com/backtest-asset-class-allocation (https://www.portfoliovisualizer.com/backtest-asset-class-allocation)

* Tenants that don't pay their rent on time, or at all.  A friend with a rental condo had to take a tenant to court.  Sure, there may be a small percentage of deadbeats, which is why you want to run a credit and employment history check, but overall it's not a headache you want to deal with.

* Maintenance costs and property upkeep.   Wonder why Lowe's and Home Depot stock are doing well? 

* Returns: in the DC suburbs, you're looking at 0.5% of purchase price for rent on a single family home, and that includes property taxes of roughly 1% of home value.  (In other words, you'll be lucky to get $3,000 a month on a $600,000 home, and you'll be footing the bill for $6,000 a year in property taxes at very stagnant prices).  I'd be interested in what the math looks like for other parts of the country.

That said, I would be more willing to consider an LLC with other investors to own a rental property.  Shared risk, shared reward, but what happens when you have a member dispute? 

Sam

Definitely a lot of downsides to owning rental property. In my response to the question, I talk about at least owning one's primary residence to stay neutral inflation, otherwise they are short by renting.

I sold my SF rental home in 2017 after 3 years of landlording it for many of the reasons you stated (https://www.financialsamurai.com/why-i-sold-my-rental-home/). Time is too valuable as a father for me now to stress over maintenance issues and the occassional PITA tenant!


Quote from: LVITBR on September 10, 2018, 07:07:34 AM
First, let me say that I've enjoyed Sam's posts over the years and look forward to participating in this community.  I'm going to beg to differ with Sam on rental real estate.

I have yet to find a compelling argument to own rental properties.  Here's why:

* Illiquid asset with high transaction costs.  One can punch out of an ETF at any time.  Realtors I know that had multiple rentals in the Northern Virginia suburbs have gotten rid of them for various reasons. 

* Except for a few areas (like the SF Bay area), real estate has not kept up with the broad US stock market over the long haul.  Think about what you or your family paid for a house or land, consider what it's worth know, and then do a comparison back test for an index or class of equities at https://www.portfoliovisualizer.com/backtest-asset-class-allocation (https://www.portfoliovisualizer.com/backtest-asset-class-allocation)

* Tenants that don't pay their rent on time, or at all.  A friend with a rental condo had to take a tenant to court.  Sure, there may be a small percentage of deadbeats, which is why you want to run a credit and employment history check, but overall it's not a headache you want to deal with.

* Maintenance costs and property upkeep.   Wonder why Lowe's and Home Depot stock are doing well? 

* Returns: in the DC suburbs, you're looking at 0.5% of purchase price for rent on a single family home, and that includes property taxes of roughly 1% of home value.  (In other words, you'll be lucky to get $3,000 a month on a $600,000 home, and you'll be footing the bill for $6,000 a year in property taxes at very stagnant prices).  I'd be interested in what the math looks like for other parts of the country.

That said, I would be more willing to consider an LLC with other investors to own a rental property.  Shared risk, shared reward, but what happens when you have a member dispute?
Regards,

Sam

Leigh

I can only share my own experience. I bought a house in the downturn for 180K, in the shadow of a major University and hospital. The house is brick, solidly built and in a stable neighborhood. My house has doubled in value in six years. My tenants never cause issues and take good care of the yard. I don't know anywhere a landlord is seriously getting 1% of house value. That would be 1800 per month of a $180000 house and that's not happening where we live. I make a solid profit every month and intend to sell it within three years, take the profit and buy a house for cash where the taxes are lower but rents are the same.

So for us, it was an excellent investment.


Jon Sharpe

These are all good thoughts and I would just add that you want to take taxes into consideration. One of the big benefits of rental properties is that if you meet the criteria, you can depreciate the property and deduct it from your taxes. In an ideal situation, you would be making cash profit each year, but have paper losses for your taxes. If your other income, e.g. Job, is too high, then you cannot deduct the depreciation.

My job pays "too much", so I'm not owning any rental properties now for that reason. I'm thinking about picking some up once I retire and my income is lower. Then I can take advantage of the tax benefits.

Eric

Definitely worth it - but a good property manager is key.

I had a broker/property manager referred to me from a friend. The key part is finding the sweet spot of where the best returns are in the market.  The broker set up the searches, told me which ones to consider buying and then helped me through the process. He, as property manager, collects rents, chases after late payments and handles repairs. Having someone do that is well worth the hassle.

You also need to think of this as an investment and take the emotion out of it. How much would you get as a "yield" or a cap rate on the investment after all costs.

Benefits of depreciation - and also related business deduction are huge benefits. If you buy it in the city you visit for vacation, you can write off your flights as long as your trip meets certain purposes (collecting rent checks is one).

Yes - it's less liquid than an ETF. It's also tax advantageous and has less complications than crowdfunded (waiting for partnership distributions, or paying large management fees)

My real estate investments have performed much better than expected (long bull market) and is a nice diversification from the stock market.

numbers

Agree with LVITBR
As I read this I am sitting in a rental property that I own.  I am selling it. Buyers appraiser came today, with any luck this property will be history before month end. 

Just too many hassles over the years. I am at the point now where I just want my brokerage account, need money write a check.

That said there was some benefit, the renters paid for the bulk of the asset.

Bonsai

I read the posts and wonder if any one has any recommended reads for evaluating real property, primarily single family housing.  I have used The Income Stream by Robert M. Goodman but, published in 1998, it is a little dated.

Sam

#11
Quote from: numbers on September 11, 2018, 07:29:50 PM
Agree with LVITBR
As I read this I am sitting in a rental property that I own.  I am selling it. Buyers appraiser came today, with any luck this property will be history before month end. 

Just too many hassles over the years. I am at the point now where I just want my brokerage account, need money write a check.

That said there was some benefit, the renters paid for the bulk of the asset.

The hassle was really the killer for me. I got annoyed when any time was taken away from me trying to take care of my boy.

Also, once I discovered online real estate, as in earning money online, physical real estate lags in comparison

See: https://www.financialsamurai.com/real-estate-versus-blogging-which-is-a-better-investment/

Regards,

Sam

jsmooth

We bought a house before the peak back in 2005. Moved overseas about 18 months later. It's been a rental ever since. House value was down about 40% at one point but has now since recovered and then some. We've thought about selling a few times but have been lucky with a decent property manager and a series of good tenants to help pay down the mortage. It has always been break-even or cash flow positive, which has been really helpful.

Would we do it again? Probably not.

Was it good to keep paying the mortgage despite the wild price swings? Absolutely. In the same way suffering can make you stronger, having a chunk of debt helps focus the mind when it comes to working. This is something Sam has said many times!


kiquos

Hey Super Bub, all of these post are good, and all are personal experiences.
Background: I owned several Single Family Homes (SFH) in the Orlando FL area. Then the bubble 2007-2008 hit and I sold most of them, this will not likely happen again for 20+ years (after they forget).
The main thing you have to think about is TIME, the more properties you acquire the more time it will take from you. If your kids are grown then its not so bad. It's definitively a personal decision based on your current situation. If you are retired, and have the time, great! If you have small kids, then dont do more than 1 property.

If you have a decent income, Real Estate can eliminate your personal Income tax. I stopped paying taxes, and carried over negative each year for a few years, in this aspect RE is phenomenal.
If you start and buy 1 SFH, manage it yourself, and spend good time in Vetting the renter, and this will save you the issue of bad tenants.
I have had students, and they are the best. the stories about parties is not always true! Students pay by room, their share is much less, say 4 bedroom ($1500/4=$375 each) which is easy for each, versus a family, when there is 1 bread winner, that pays the full $1500. My students have paid on-time for 4 years, and don't complain on yearly rent increases. they are not the cleanest, so I included in the rent, a cleaning lady every 3 months, and she acts as my spy.
This topic is very broad, and its dependent on your situation.

in my opinion its worth it, its tangible, you cant loose the value like a stock or mutual fund (unless of a sinkhole etc..) and its insured, it goes up in value (if its not in a warzone), you can depreciate it in your taxes, you build equity, and you can select a Property Manager to deal with the tenants for 9-10% of rent.

My opinion, its a great investment, and like anything requires some work!! You can 1031 Exchange it to something bigger, like a down payment in an apartment complex in the future or alike. You can pull funds from a Self directed IRA and buy a SFH, rehab it and sell it and put the money back into the IRA (as long as YOU dont do the work, part of the IRA rules [there is more to it that that], but an option). 

You can house hack, where you say buy a quad (4 apts in a 4 unit bldg) and move into 1 of the unit and rent the rest. there is just so much you can do.
It's awesome. Now if you are on the fence between SFH and/or Apts, choose the apt route. you need no experience in SFH for apt investing. a slight more work but 10 fold the profit.

Good luck

Howard312

This is a great topic and with great responses. It's my humble opinion that real estate is by far the best investment option for most people. I do not consider your personal home as an investment. In fact it is a depreciating asset and has a consistent outflow of money. We live in homes because it is a very nice way to live and you can park equity in it. However my definition of a conservative investment that can deliver great returns is income producing real estate. Even a SFH that is rented out can produce significant returns if bought correctly. The statistics show that investment real estate over a long period of time has a similar return to the stock market. However most of those statistics ignore the cash flow derived from real estate which makes real estate a more consistent asset with less volatility over the long run. Yes, real estate is not a liquid investment but considering that most people buy the stock market at the top and sell at the bottom liquidity can be your worst enemy.  there are even options for totally passive, income producing opportunities for those who don't want ownership issues to interfere with their lives.   

SwordGuy

Quote from: LVITBR on September 10, 2018, 07:07:34 AM
* Illiquid asset with high transaction costs.  One can punch out of an ETF at any time.  Realtors I know that had multiple rentals in the Northern Virginia suburbs have gotten rid of them for various reasons. 

True.   Real estate is definitely that.

Quote from: LVITBR on September 10, 2018, 07:07:34 AM"Realtors I know that had multiple rentals in the Northern Virginia suburbs have gotten rid of them for various reasons."

I know people who have gotten out of the stock market for various reasons, too.  Doesn't mean that I won't recommend stock investing...

A lot of property in NVA has gone up in market value a whole lot.   If the market price leaps upwards it can make more sense to sell the property than rent it as rents often can't keep up with the price increases.  That doesn't mean that renting the property before that was a bad idea.

There are four ways to make wealth on real estate in the US:

1) Rent (Cash rent)
2) Appreciation (Sale price of property goes up)
3) Equity (Tenants pay down the mortgage)
4) Depreciation (Tax advantages)

All four are valid approaches.  Renting (which provides wealth via #1, #3 and #4) is perfectly valid whilst waiting for #2 to provide a big payday.


Quote from: LVITBR on September 10, 2018, 07:07:34 AM* Except for a few areas (like the SF Bay area), real estate has not kept up with the broad US stock market over the long haul.

Correct.  And only relevant if one's money making strategy is #2, appreciation.

The correct measurement on rental property is return on investment from rents, equity and depreciation, not potential property sale price.

If I buy a rental property for 25% down, my tenants pay the remaining 75% of the mortgage debt.  They provide cash profit from rent.  But it gets better.  If housing prices go up 4%, I only paid for 1% of that growth.  My tenants, paying the other 3/4ths of the mortgage, paid for the other 3/4ths of that growth in property value.   Ditto for the depreciation.

This thread, https://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-returns-vs-stock-returns-the-maths/, covers this topic in quite some detail.  It's a long read and well worth it.

Please note that in the above thread, the assumption is that the real estate investor paid full market price for the property.  In the market I invest in, I buy a distressed property for far less than the full market price of the property and repair it.   This allows me to get even better returns.   Right now my rents are about 1.65% of the repaired property cost per month, or about 20% of the repaired property cost per year.

Quote from: LVITBR on September 10, 2018, 07:07:34 AM
* Tenants that don't pay their rent on time, or at all.  A friend with a rental condo had to take a tenant to court.  Sure, there may be a small percentage of deadbeats, which is why you want to run a credit and employment history check, but overall it's not a headache you want to deal with.
First of all, I include the cost of a property management firm in the rent.  So I rarely have to deal with any of this.   I spend about 2 hours a year per property on repair or tenant issues the property management wants my input on.    That works out to an hourly rate of around $2,500 an hour...   At that pay rate for that little work, it's not a headache.

As for "A friend... had to take a tenant to court."  So what?  People who invested in the stock market have had to take companies to court, too.   Scum is going to be scum.  The costs of business should be priced into the rent, and not paying is one of those risks that should be factored in.  Ditto for "Maintenance costs and property upkeep."  If you're doing this right you're collecting that repair money IN ADVANCE OF THE REPAIR by factoring in those costs into the rent.

Quote from: LVITBR on September 10, 2018, 07:07:34 AM
* Returns: in the DC suburbs, you're looking at 0.5% of purchase price for rent on a single family home, and that includes property taxes of roughly 1% of home value.  (In other words, you'll be lucky to get $3,000 a month on a $600,000 home, and you'll be footing the bill for $6,000 a year in property taxes at very stagnant prices).  I'd be interested in what the math looks like for other parts of the country.

So, don't invest in rental property at those prices and rents!   Invest where the numbers are better.

At the moment, my properties are averaging 1.65% per month of the purchase and initial repair cost of the property.   That's good money.   I can't hope to consistently buy stocks at below market value, but I can choose and learn a real estate market and do so.  I know people who do much better than I do, too.   My purchase and initial repair cost have been working out at about 60% of after repair value.  And yes, that does mean that I have some time invested in fixing it up to keep dollar costs that low.  It's a one-time investment of 2 to 4 months of weekend work for a $5000 a year raise in perpetuity (which will also keep up with inflation) and an immediate jump in my net worth of 60-70% of my investment.   

I hear a lot of folks talk about rental horror stories and how they didn't make any money.   When I quiz for details, it's generally because they bought a house for themselves and then couldn't sell it, so they rented it out to the first set of stumble-bums that applied.   That's like buying a sports car to drive around in, then complaining that it's a horrible moving van, and then complaining that the guy on the side of the road with a "will work for food sign" that you rented it to didn't pay...

A good investment property is chosen because it's cost and characteristics and potential rent will make money.  It's only a happy coincidence when a house one buys for oneself to live in meets that criteria long after it's bought. (It's smart thinking if it meets that criteria BEFORE it's bought!)

For those who are interested, www.BiggerPockets.com and the real estate section of the MrMoneyMustache forum (https://forum.mrmoneymustache.com/real-estate-and-landlording/) have great info.  In particular, the latter has some sticky threads at the top on book recommendations and how to evaluate a rental property.


SwordGuy

Quote from: Katana15 on September 09, 2018, 07:47:33 PM
It also depends on what part of the country you are.

Or on which part of the country you invest in.  They don't have to be the same!



Engineer

Like most things it's how you approach it. I have found it to be both a headache but also worth it. I also made just about every landlording mistake I could. I bought a property immediately on graduating college then sublet two rooms while living in the third - PITI was $828 and rent was $1,000 while I was also living there. Now I have 10 rental properties that bring in $8,145 per month and I owe about $5,100 per month on them.

The return on the properties decreases with leverage on them. My first property is paid off and return after expenses divided by purchase price (it's worth more now than I got it for so it's not quite a good comparison) is only 7%. While I purchased one recently for $230,000 that rents for $2,700/month with a PITI of $1,600/month. After vacancy and maintenance allowances it has a return just shy of 12% (meaning rent after expense and debt service divided by cash down).

I've also moved continents every year the last 6 years. Real estate investments definitely play different rules depending on where you are. Someone mentioned D.C. earlier - a $400k house there only rents for $2k/monthish the one I described above is in Texas.

rujerro

We've been landlords for 2 years now. Here's out take on the issue:

1) Our 401k was earning about 3-4% while the housing market was creeping up over 10%.
2) We bumped into a guy who wanted to sell his condo that was located near a university. An inherited tenant wanted to sign for 2-3 more years. The guy was desperate and offered a price we couldn't refuse. We paid cash for it.
3) We don't have much in way of retirement accts or stocks. Just regular jobs and the kids are older. So, we wanted to build wealth and decided to give it a go.

We've been quite lucky with this rental and ended up getting another one. Since owning the 1st rental, its value has gone up 60%. Our home has doubled in value and we took a chance on buying another condo, near a university, with its value going up 12% so far. We haven't been disappointed.

Doing this we've learned a few things:
1) If it's out of your price range, make an offer anyway. It can always be countered by the seller.
2) Treat the tenants by way of the Golden Rule- as you want to be treated. You'll get better results that way.
3)Don't get too emotional with these rentals. You're not marrying them, only dating them.

JMHO......


CJ

Writing from the Caribbean where market conditions are different but I'm sure general principles hold true.

I crunched the numbers on a property I purchased in 2013 and have been renting out since 2015. I'll finish paying it off next August. Taking into account rental income and the total I've spent on the mortgage, initial renovations, insurance, services and repairs (which NEVER stop), I would not break even if I sold anytime soon. I consider it a good long-term investment but have pretty much changed my mind about purchasing another rental home next year. It really sucks up a lot of your cash and since reading this blog and its community comments I'm beginning to worry about the opportunity cost of tying up so much of my monthly income in property-related expenses. That said, I'm sure the older me will be glad I got this done during my 30s.

Looking forward to learning from you all about how to accelerate my investing starting next September!!!!