Buying a Rental?

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sandrark
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Buying a Rental?

Postby sandrark » Sat Oct 20, 2012 7:46 pm

Anyone want to give some thoughts on buying a rental house? We're considering it as a way of diversifying our portfolio - we have income, a pension, retirement savings, and a chunk of cash that we'll be getting from selling our current business.

We're in our mid-40's, no kids, DINKs.

We're interested in the idea of passive income, as DH has been self-employed and a business owner since 2001. So the idea of re-investing his business cash into something like a rental is quite appealing.

Pros/Cons/Thoughts would be appreciated.

dontgopoor
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Re: Buying a Rental?

Postby dontgopoor » Sun Oct 21, 2012 6:25 am

Buying a rental is covered in many, many books. Check out a few at the library or Amazon. Then, talk to a few people that own rentals.

It's not a "passive" activity (in the real world sense, not tax law sense). You'll need to spend a lot of time looking for a great buy - much harder today than it was a year ago when foreclosures were more plentiful.

For one or a handful of rentals, you'll make more money if you enjoy performing household repairs and willing to become proficient.
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LeRainDrop
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Re: Buying a Rental?

Postby LeRainDrop » Sun Oct 21, 2012 7:16 am

Hi, sandrark. There was a good post about being a landlord on the GRS blog just the other day: http://www.getrichslowly.org/blog/2012/ ... -worth-it/

sandrark
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Re: Buying a Rental?

Postby sandrark » Sun Oct 21, 2012 9:14 am

dontgopoor wrote:Buying a rental is covered in many, many books. Check out a few at the library or Amazon. Then, talk to a few people that own rentals.

It's not a "passive" activity (in the real world sense, not tax law sense). You'll need to spend a lot of time looking for a great buy - much harder today than it was a year ago when foreclosures were more plentiful.

For one or a handful of rentals, you'll make more money if you enjoy performing household repairs and willing to become proficient.


I was trying to be brief, but you're right - more info.

DH and I have re-habbed our two personal residences over the past 20 years. We've done wiring (he's an electrician), plumbing, sheetrock, general construction, tiling, painting, etc. So yes, we're proficient.

And passive to me means something that eventually will provide income in excess of the monthly carrying cost. I didn't mean no work or no risk. ;)

sandrark
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Re: Buying a Rental?

Postby sandrark » Sun Oct 21, 2012 9:15 am

LeRainDrop wrote:Hi, sandrark. There was a good post about being a landlord on the GRS blog just the other day: http://www.getrichslowly.org/blog/2012/ ... -worth-it/


Thanks, LeRaindrop. I read that post, and found it very basic. I was hoping for a larger discussion and more personal experiences in terms of how to identify the locale, scale the risk, the bumps in the road, etc...

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Re: Buying a Rental?

Postby DoingHomework » Sun Oct 21, 2012 12:36 pm

sandrark wrote:Thanks, LeRaindrop. I read that post, and found it very basic. I was hoping for a larger discussion and more personal experiences in terms of how to identify the locale, scale the risk, the bumps in the road, etc...


We own a property that we rent out on a short term basis. That's not quite the same as a long term rental in many ways. But there are some similarities.

In some areas rent is cheaper than owning. In those places you will likely have trouble making money. In other areas it s cheaper to own and rents can be high. Even in the same area this can change very rapidly. You must be able to do a very careful (and correct) analysis of the math, including taxes. A small mistake or misunderstanding of the tax rules can cost you thousands of dollars a year.

You should also be familiar with rental laws. In most areas they are very favorable to renters. It's generally not that hard for a renter to decide not to pay and stay in your place for 3-12 months before you can get them out. Be extremely careful screening renters.

Also realize that you must respond quickly to maintenance issues. If the heater breaks during a snowstorm while you are on your winter getaway in the Bahamas, realize that you are either going to be paying triple the normal rate for an emergency repair or putting your tenants up at the hotel of their choice (undoubtedly a Four Seasons).

If you are able to do repairs yourself that is definitely a good thing.

Overall, I know it is entirely possible to make money from rental properties. If you can buy now at low prices and low interest rates you will be that much more ahead. But be extremely careful that you have considered everything and done a good analysis. You can shoot from the hip but that often leads to serious errors. Remember, it is a business and should not be about emotion. You are not buying a place you think is cute. You are looking for a place to make you money.

Good luck.

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Re: Buying a Rental?

Postby sandrark » Sun Oct 21, 2012 5:54 pm

DoingHomework, thank you. I appreciate the additional info.

We are building a spreadsheet, and working on the math (I'm good at it - I'm CFO at work, so this is something I like). :D

Your point about tenant laws is EXACTLY why we did not turn our first house into a rental - we live in CA, and the city we first bought in is notorious for its tenant-friendly/landlord-hatin' ways.

And you also nailed it - we're looking at a vacation rental property, where the rental would be short-term, instead of leases - and the paragraph above is one reason for that.

Our initial assessment is that the weekly rent should be equivalent to the monthly mortgage. That gives us wiggle room for repairs and maintenance. Do you pay a management company? Or manage it yourself?

I'm hoping we can do a little more in this forum about sharing experiences on this so newbies can learn a little.

Do you have a reading list or recent book you can recommend? Many of those on Amazon are pre-2006, so I don't trust them. :)

Thank you!

williams
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Re: Buying a Rental?

Postby williams » Wed Nov 14, 2012 11:37 pm

If you getting a house on good price then it's always better to buy a house rather than renting. Buying house is like investment as you can good cash back when you going to sell even in the future but paying rest is not an investment, it's only comes in expenses.

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Re: Buying a Rental?

Postby Northern light » Thu Nov 15, 2012 12:27 am

williams wrote:If you getting a house on good price then it's always better to buy a house rather than renting. Buying house is like investment as you can good cash back when you going to sell even in the future but paying rest is not an investment, it's only comes in expenses.

Buying is not always better than renting, and above all - it is not an investment since buying a house a living there will not bring you revenue. Buying a house and renting it to someone brings a revenue. That makes it an investment, but not necessarily a good one.

Answering the question if it is better to buy or rent, or if it is a good investment to buy a house and find a tenant takes calculation - not gut feeling or historical data.

If house prices increse with 10% when inflation is 2%, income in general increse 3% per year and mortgage interest is 4% it is vastly profitable to buy a house with borrowed money. On the other hand, if houses increse 8% on top of inflation, that mens the house would double in real value nine years, triple in 14 and cost 500% more than today in real terms after 21 years. Who would buy a house in 21 years for five times in real value of today, if income during that time increse by 23% (1% per year on top of inflation). The answer is no one. The most extensive statistics on house prices (from Amsterdam, from 15:th century to this day) show that they track income very closely. The exception seems to be the time of massive credit expansion of late 1990:s up until 2008. Never expect houseprices to increse faster than income in general.

Since mortgage interest rate in a sound economy (few parts of the world are today) will always outrun the pace of increasing income (to limit inflation), buying a house financed with >85% debt will surely bring a net finance cost. Add to that the running cost and maintenance of the house. Owning a house means a risk, more so if you have a mortgage. Those risk you avoid by renting, wich should transfer to a bit higher monthly cost.

I rent a home for $143 per square meter and year, including heating and maintenance. The actual running cost and maintenance cost (the landlords financial statements is public) is something like $60-70. Now, buying a home like the one I rent around here cost something like $4.500-5.600 per quare meter. That means I pay the equivalent of 1,3-1,8% interest rate on the potential value of the home. Given interest is 30% deductible in Sweden, the actual figure is 1,86-2,57%. Pretty good deal.

scout
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Re: Buying a Rental?

Postby scout » Thu Mar 14, 2013 8:36 pm

My husband and I bought our first rental almost 2 years ago and so far so good! There are companies you can use to do backgound/criminal checks and many contracts online (we got our from our realtor and modified it - its about 15 pages long total). Make sure you have a good insurance policy (I'd recommend an umbrella in addition with 1 million liability limit - you never know who will decide to "slip and fall" and sue you for all you've got).
It sounds as though you are handy which will make repairs much cheaper. All in all I've found it to be very profitable, but we bought it when the market here was at its lowest.
Good luck!

ThriftGenuity
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Re: Buying a Rental?

Postby ThriftGenuity » Wed Mar 27, 2013 1:58 pm

Based on my experience, one thing I would say to really do your homework on is a management company, should you choose to use one. I had one for the first year on my rental. They found great tenants but "found" the most ridiculous things to have fixed. I ended my contract with them and have had no issues with the tenant or property since then.

I am getting ready to buy another and just passing along things I have heard - look for places near hospitals or other areas that might have young professionals not ready to put down roots, strongly consider a multi-unit, like a duplex to diversify the rent income, and get as much information as you can about the area's demographics and press the current owner on vacancy rates, rental prices, condo fees, and so on.
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Michaelrichardson
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Re: Buying a Rental?

Postby Michaelrichardson » Wed Nov 25, 2015 4:29 am

DoingHomework wrote:
sandrark wrote:Thanks, LeRaindrop. I read that post, and found it very basic. I was hoping for a larger discussion and more personal experiences in terms of how to identify the locale, scale the risk, the bumps in the road, etc...


We own a property that we rent out on a short term basis. That's not quite the same as a long term rental in many ways. But there are some similarities.

In some areas rent is cheaper than owning. In those places you will likely have trouble making money. In other areas it s cheaper to own and rents can be high. Even in the same area this can change very rapidly. You must be able to do a very careful (and correct) analysis of the math, including taxes. A small mistake or misunderstanding of the tax rules can cost you thousands of dollars a year.

You should also be familiar with rental laws. In most areas they are very favorable to renters. It's generally not that hard for a renter to decide not to pay and stay in your place for 3-12 months before you can get them out. Be extremely careful screening renters.

Also realize that you must respond quickly to maintenance issues. If the heater breaks during a snowstorm while you are on your winter getaway in the Bahamas, realize that you are either going to be paying triple the normal rate for an emergency repair or putting your tenants up at the hotel of their choice (undoubtedly a Four Seasons).

If you are able to do repairs yourself that is definitely a good thing.

Overall, I know it is entirely possible to make money from rental properties. If you can buy now at low prices and low interest rates you will be that much more ahead. But be extremely careful that you have considered everything and done a good analysis. You can shoot from the hip but that often leads to serious errors. Remember, it is a business and should not be about emotion. You are not buying a place you think is cute. You are looking for a place to make you money.

Good luck.


Hey

As you have mentioned in your post that we need to familiar with rental laws. so I want to ask you something related to this.
Actually My relatives rented a apartment few months back and at the time of making final deal with the owner, he promised to give all facilities.
But now my relatives are facing problem with the water supply and asked the owner to fix, but he refused .
So I want to know if there is chance of suing owner??? is there any law related to this?

DoingHomework
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Re: Buying a Rental?

Postby DoingHomework » Wed Nov 25, 2015 11:10 am

Michaelrichardson wrote:Hey

As you have mentioned in your post that we need to familiar with rental laws. so I want to ask you something related to this.
Actually My relatives rented a apartment few months back and at the time of making final deal with the owner, he promised to give all facilities.
But now my relatives are facing problem with the water supply and asked the owner to fix, but he refused .
So I want to know if there is chance of suing owner??? is there any law related to this?


Where specifically is the rental located? How long was the rental term for? Do they have a written lease?


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