Author Topic: Is owning rental homes worth it?  (Read 12752 times)

Sam

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Re: Is owning rental homes worth it?
« Reply #20 on: October 01, 2018, 08:08:24 AM »
What's the property tax rate in the Caribbean? Sounds like a nice place!

The property tax of 1.24% in SF, forever, really started bumming me out. I don't want to pay $23,000 a year and more for the next 25 years. $600,000 in property taxes, although deductible, is a ridiculous waste of money so I sold.

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!!!!
Regards,

Sam

Cheezus

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Re: Is owning rental homes worth it?
« Reply #21 on: October 29, 2018, 09:03:05 AM »
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!


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?

I just sold all 4 of my rentals.  I couldn't agree more that time is just too valuable.  And with crowdfunding options like RealtyShares providing BETTER returns than I was getting with tenants, I see absolutely no reason to continue on as a landlord.

Of course, the markets are strong where I am now, so it was very compelling to sell my properties for healthy profits as well and re-invest.

Cheezus

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Re: Is owning rental homes worth it?
« Reply #22 on: October 29, 2018, 09:04:32 AM »
What's the property tax rate in the Caribbean? Sounds like a nice place!

The property tax of 1.24% in SF, forever, really started bumming me out. I don't want to pay $23,000 a year and more for the next 25 years. $600,000 in property taxes, although deductible, is a ridiculous waste of money so I sold.

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!!!!

I pay about $25,000 right now in property tax on my primary.  Not a day goes by that I don't think about selling it and buying something much smaller/cheaper simply because of the obnoxious taxes.  I know the feeling.

toocold

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Re: Is owning rental homes worth it?
« Reply #23 on: October 31, 2018, 05:04:36 PM »
My suggestion is to buy and try it out. 

Three years ago, we decided to diversify our assets and go on an adventure of owning an investment property.  Currently, we own 5 SFHs.  After managing our properties to learn, we started transitioning it to a good property management company, and they currently manage 3 and we manage 2.  So far, no huge issues despite couple of rental churns.

We've paid off 2 and will likely pay off the other 3 soon.  The intent is to create a passive income that mimics a pension that will go up with inflation. 


mensaman

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Re: Is owning rental homes worth it?
« Reply #24 on: November 06, 2018, 04:04:34 PM »
I would have to say not yea, but hell-yea! Rental property's have made me a multi-millionaire. ( at least in equity) I currently own 17 rentals, and have a passive income of over 12k per month.

BUT- It isn't as easy as it sounds. There was a lot of struggling to get there, and it took the better part of 20 years.  However, I learned a lot in those years, many good lessons. Yes, they will trash your places.
Yes, you may lose on some. Yes, there are a lot of headaches. Yes, it can be a pain.
But, in the long run, if you persevere and are focused and dedicated, it is well worth the effort for financial independence.


BTW, that's 12k per month FOR LIFE.  Additionally, I can sell the property's and get the equity out of them if needed.

Not a bad deal, in my opinion...

RandyP

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Re: Is owning rental homes worth it?
« Reply #25 on: November 12, 2018, 05:36:06 PM »
I have a similar question. I can buy a few houses and cash flow (I live in a low cost area) but making an additional few hundred dollars a month doesn't seem like it's worth the effort. It seems one should either go big or not mess with it.

Is that the wrong attitude?

Money Ronin

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Re: Is owning rental homes worth it?
« Reply #26 on: January 22, 2019, 09:39:57 PM »
I've been building my real estate "empire" over the last 9 years but only met with success in the last 5 years.  I'm 50% in stocks and 50% in real estate.  My net worth has increased 2.5x in that time, primarily because of real estate investing and leverage.  This is what has worked for me:

1. Leverage.  If you are adverse to debt, real estate doesn't work.  Just invest in a REIT or the stock market.  I take on as much debt as the bank will lend to me while maintaining positive cash flow and a margin of error. 
2. Location.  I invested in the Midwest where people didn't want to live.  I lost money.  I bought in CA where building new product is extremely difficult to build and people keep coming to CA.  I made money.  Also being an absentee landlord is a recipe for disaster.
3. Lifestyle:  I started making money in real estate when I was laid off in 2013 and could dedicate my time to it.  There is no way I could do this while working a full-time job because I'm too lazy mentally.  I actually don't spend more than a few hours per day on it--the rest is caring for my kids--but the "real job" held me back.  My wife works full-time and has nothing to do with the real estate or investing.
4. Business-sense: Real estate is a team sport.  You'll be dealing with property managers, sellers/buyers, inspectors, lenders, tenants, real estate agents, contractors, etc.  They're all in it to make money, sometimes at your expense.  It helps to be business savvy, analytical and persuasive.  As careful as I am, I am frequently ripped off due to other people's incompetence or greed--it's a cost of doing business.
5. Guts: I've had many nightmare tenants and long vacancies.  Late payers, hoarders, vandalism, fires, floods, pest infestations, etc.  You've got to be able to stomach these sometimes disastrous events.  Thankfully I was good enough with the numbers such that these weren't financial disasters, but they can be very stressful even with professional management.  Can you stand idly by while someone literally destroys your property with little to no recourse?  I've had no financial compensation from tenants for any damages they've caused willfully or through negligence.  Again, cost of doing business.

When I look at my friends, former co-workers and even my spouse, the biggest factor for success or failure with real estate investing is #5.  It's not a lack of brains, cash or opportunity that differentiates people.  Most people just don't have the ability to stomach the bad with the good--even if the final outcome is significant returns.  I am not immune to these stresses.  My "empire" is no longer expanding because I've hit my limit in how much stress I'm willing to endure.  It's much easier to sit back and put money in a mutual fund.

groovydude

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Re: Is owning rental homes worth it?
« Reply #27 on: June 02, 2019, 07:55:52 AM »
Good thread! I've had a few rental homes over the last 10 years. Just like any real estate investment, the success depends on the details. I've made money in all my deals, but the hassle factor is moderate (and I've had mostly great tenants). Make SURE your lease is iron clad and gives you every advantage that your state laws allow! Leverage isn't necessary, but if you're averse to swinging a hammer it is. If you're buying a turnkey house it's hard to imagine there's much profit without some leverage, but of course the payments will eat into your cash flow. Of course, the loan process is a serious pain in the rear. The tax advantages are fabulous either way. Once you have a tenant, the time factor is pretty minimal, but of course there's always that call in the middle of the night that a pipe has burst to possibly deal with. Be prepared for a month or two of no cash when a tenant moves out and that's when most of the time suck happens. One advantage no one has mentioned to being the only owner should be obvious, you can liquidate when you want to and not have to rely on someone else's decision. Of course, if you need the cash and it's a down market in your area then you'll take a hit. I think if one were to do it the best strategy would be to own several homes in the same, middle-class or college neighborhood with lots of bedrooms, and find a bank that will work with you.

One factor in favor of this is the flood of older millennials with good jobs and high college debt into the rental market. They don't have the credit to get a decent mortgage but they do have have decent income and are looking to settle down into family life, or so I've been told. Places like Phoenix where there is a fast growing blue-collar job market and sfh prices are still reasonable might be a good bet. Also, buying in an opportunity zone and rolling recent gains into the purchase could be a big win down the road, but I don't know anything about the reporting requirements to qualify for these advantages.

Personally, I've moved away from being a landlord for now. I prefer multifamily for housing, I hate dealing with banks and mortgage brokers, and I like the diversity that syndications give me.

Cheezus

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Re: Is owning rental homes worth it?
« Reply #28 on: June 17, 2019, 03:20:30 PM »
One advantage no one has mentioned to being the only owner should be obvious, you can liquidate when you want to and not have to rely on someone else's decision.

It's not always that easy to just liquidate a rental.  For example, you may be selling to a person who doesn't want to rent it out.  Then you have to deal with kicking the tenant out, which could mean offering incentives or having to wait out the lease.  And who knows how long to sell the unit.  I'd hardly suggest real estate is easy to liquidate, it's probably one of the more difficult asset classes to get your money out of.