Any Landlords in the Creek?

[Rich Riddle]

We are looking at purchasing rental property. What amount do you consider a good return on your investment? I have been reading different opinions and they tend to say between 5% - 10% cash annually is a sound investment return. Thanks.

[Rich Engelhardt]

Hi Rich - - the answer is the infamous - depends...




There's all sorts of different ways to calculate your ROI.
A basic example of such would be our oldest rental.


We paid $89.9 for it in 2002.
To date, we have collected (hang on, I have to call up the spreadsheet)...$95,701 in rent.
We paid out taxes at a rate of $1200 a year - for ~ $15K and have sunk maybe another $15K into repairs.


Our estimate cost basis for the house becomes $119K - which is very close to what the accountant puts it at ($115K IIRC)


Now here's where it gets fuzzy.
We collect $700 a month in rent.X 12 months = $8400 a year.
Let's take out $119K figure and use that as a basis for our "investment".
We have $119K invested and we get an $8400 return. That's what, 13%?


However - - since we paid for the place all up front, we are in essence paying ourselves the "finance" charges.


That's just the tip of the iceberg.


The tax savings on rentals are nothing short of obscene - thank God!!!:D :D :D


The year prior to us buying or first rental, we had paid off our mortgage and had no deductions. We bit the full bullet for taxes and ended up paying an additional $7,000 in federal taxes. After we bought our rental, our tax liability fell like a rock. Instead of owing $7k, we got back (IIRC) about $4K. That's an $11K swing!


Not to mention the fact that I equipped my entire shop out of tools that were and are 100% deductible & it'a a 100% legitimate deduction.




Like I say, the real answer is - - it depends....


A good basic rule of thumb is to look at the cost of the property, figure out the overhead (taxes & upkeep & finance & repairs), then see what the local rents bring in & establish a positive cash flow of some sort. The more the better.
You can depreciate the property over 28 years for maximum tax avoidance and then calculate the residual value of the property after a certain number of years.


Ex:
An $80K house that needs $20K of repairs = a $100K initial investment.
Ongoing costs are $1500 a year taxes and insurance and upkeep.
The cost of the note to finance the property is $650 per month.
You're on the hook for $9300 a year.
You need to rent the place for - $800 a month to more or less break even.


That's fine if the market rate is $800 a month or more, but, what if it's not?
If the going rate is only $700 amonth - you either go in the hole every month - - - or - - -you are having someone else pay the bulk of the cost for you.
It depends on how you look at it. Your out of pocket expenses for that property comes to just shy of $40K over a 30 year period.
You just bought a $100K property for - $40K.
You "made" $60K on your investment. Which amounts to what, percent wise?


Bear in mind these are super simple scaled down for the sake of room answers ok?
I'd be happy to answer any questions you might have if you want to call me.


I can PM you my home and cell numbers and feel free to call any time.

[Rich Riddle]

Rich,

I am looking at realistically investing about $67K and getting about $14K a year in rents. That includes an apartment above a 2 car garage and a three bedroom house on the property. The purchase would be cash. Taxes on it would be about $600 a year and insurance a bit more. Thanks.

Rich

[Mike Henderson]

I had a couple of rental houses. I can't give you figures, but we used the rent to pay off the mortgage. Once we had the mortgage paid off, we had a nice stream of revenue each month. I was working so we could use the rental income to pay off the mortgage and I did essentially all the maintenance on the properties.

We were able to depreciate the properties which reduced our taxes. Finally, I took another job in a different state and we sold the houses for a nice chunk of money and the taxes were not too bad (capital gains rate).

If you're handy and you really screen your renters, you can do pretty good. One thing I recommend is try to get property close to your home. That way, when you go there to fix something, you don't have to go far to get the right tools for the job. And it's easier to keep an eye on the property.

Mike

[Rich Engelhardt]

Rich,
That's a sweet deal.

Our most recent buy ran us $81K and to date we have about $32K on top of that sunk into the place.
We'll rent it for $900 a month or $10.8K a year. Taxes run $200 a month and insurance is $55 a month.

Our projected payoff date is about 3 years, after which, as Mike points out, you have a nice steady stream of cash coming in each month.

BTW one neat thing about that nice stream of cash is the .gov doesn't consider that as income. ;).
(not if you don't incorporate).
I can collect all the rent I want each month and as long as it's not paid to me by a corporation, Social Security doesn't consider it (earned) income and they don't tag me for it.


One thing I recommend is try to get property close to your home.I'm a huge fan of that line of thinking myself, after having been burned by owning a property 57 miles away.
However - like everything else in the rental game, there's fans of buying property regardless of where it's at.
The same holds true for pets, smoking, handicap access, section 8 (HUD) and a whole bunch of other things.


One thing I strongly recommend is hooking up with a local landlords association.
We belong to one & the $180 a year we sond for the membership is well worth it.

There's safety in numbers......plus.... a good association has a good reputation which rubs off on the landlords. The local magistrates are frequent guests and frequent guest speakers at our monthly meetings. Once they see your face a few times, they sort of associate you with a good organization when they see your face in court - - if you catch my drift..

[Mel Fulks]

Rich, soliciting such advice is prohibited in the Monopoly game rules. Do not pass GO

[John Goodin]

I am a fan of not trying to bleed every penny I can when setting the rent. The property we currently have rents for 1375 but I could have got 1400 or even 1425. That is a difference of 300 or 600 dollars per year. On the other hand, I had multiple applicants to chose from and the current tenants take care care of the place. Previous tenant did too. Both signed two years leases. The property sat empty for only four days between tenants and it only took two days to get it ready. Neither have never been a day late on the rent. So while it does not appear that I maximized my income I think I may have by keeping it rented and minimizing the repairs by having good tenants.

[James Gunning]

The comment John made about good tenants is a key point. Very carefully screening your tenants is vital. My mother owned several rental properties and she did OK financially, but just OK. Unfortunately, she was the kind of person that tended to do business on a handshake basis. That came back to bite her with bad tenants several times. Also, this was some years ago and the ability to get information on prospective tenants is much better now. The other factors that were negative was the properties were in New York state and the taxes and insurance were sky high. My brother and I sold them asap after she passed.

[Mel Fulks]

Some of my family members own rental property. All have been burned on rent. Judgements don't mean much in collecting. There are talented employed crooks who ask their bosses not to comply with garnishment and get that cover.
Way of life.

[Andrew Joiner]

Here is a picture of my first income property. I bought this one in 1976.
http://photonet.hotpads.com/search/listingPhoto/Buildium/13581-35619/0001_536432755_large.jpgI got very lucky being a landlord. I bought this building for the tax benefits. It has a big walk-out basement with attached garages so it was perfect for my woodworking business. At the time I was making good money and was shocked at my income tax savings after I bought and restored the building. I paid $17K and sold it in 2005 for $460K. In those days you got even more tax benefits than today and you could easily find properties with cash flow. I paid $500 down for the property but 2 days after closing I collected almost that much in rent. My payment was $210 a month so I made $100 a month after all expenses and got a "free" place to live and a huge shop! I fixed up the existing apartments and added 3 so my rents went way up but my expenses stayed the same. It worked so well I bought other properties.
I sold my income properties in 2005. I was surprised at how much taxes I had to pay for selling them. My tax man said "yes, but you avoided lots taxes owning them".

Yes, I had a few "tenants from hell" over the years. I also met a few who became life long friends.

The upsides I can think of in my 30 years of landlording:
No social security tax on rental income.
Find a property with postive cash flow at the start and you'll be better off.
If you make an improvement you get paid for it and get to keep it! Think built in cabinet vs selling a cabinet. A set of nice cabinets gets higher rent every year in most years. A set of cabinets sold you pay taxes on the income.

[John Goodin]

As far as collecting rent there are many online rent collection services. I use erentpayment.com and it automatically debits their account and credits mine. Best of all there is no "must be lost in the mail" conversations. Also automatically adds late fees too. Total cost is a whole three bucks a month.

[Rick Potter]

My toughest problem with rentals is finding a good 'get ready' company to clean up and fix up after the previous tenant leaves. I am 73, and cannot do all the fix up I used to do, so recently I hired a company to fix up a place, and they did the crappiest job imaginable. Absolute terrible quality, paint runs, didn't wash kitchen first, new screens don't fit, overspray on everything imaginable. My wife and I have spent the last week trying to correct some of the problems the clean up crew caused. Ever see anyone try to use an airless without a tip??

We will get it done though, and next time I will be a lot more careful selecting more than just the tenants.

[Andrew Joiner]

Lot's of good info here. I wanted to add the reason I got out of the rental business.

Things started to change around 2001. Since 1976 I had minimal vacancies and rents went up almost every year. Insurance, utilities and other expenses were low. By 2003 I had vacancies even after dropping my rents. My costs for insurance and utilities were rising and out of my control. By 2004 I found out why rents were still dropping. At the time people could buy a new town home for little or no money down because of the building boom. Why pay a $1500 deposit and $1500 first months rent to live in a rental when a $1500 mortgage payment got a similar size new place to eventually own? Luckily I had owned my rentals a long time and got a good price selling.

So here's my list of the downside of landlording.

It's liability, regulations and market changes. Tenant problems can happen, but aren't a big downside. What business doesn't have people problems?

1-When I started my insurance was cheap, even on old buildings that needed total restoration. No one inspected, they just wrote the policy. I guess people didn't sue as much back then. Now it's expensive and the insurance company will inspect and turn down properties that need work. Less than 4 units or owner occupied is less strict.

Everytime I see a meth lab in a house on the news I'm so glad I'm out of the rental business!

2-Government regulation is adding costs and potential costs. At one time I had to verify in writting there was no lead paint in any of my old historic properties. How could I be sure? By signing I had to take a risk.

When I sold my commercial rental I had to pay a state qualified inspector to come and verify that there was no toxic waste, buried tanks, asbestos and anything else on the property. Not only at the time of sale but EVER since the property was platted! I told the state I never saw any toxic inspection report when I bought the property. They said " yes, it's a new law making you as the owner legally responsible for any and all toxic misuse that ever occured on the property".

Landlords always had a disadvantage in court in my area. The courts feel landlords have an advantage by being in the business( I call it experience). I sued bad tenants a few times and eventually stopped. Even when I won it was to time consuming and collecting was almost impossible. Of course always have an lease in case you do go to court.

Now some cities are passing laws to make rent increase and vacate notices 90 days rather than 30 days.
An investor buying a rental today has no idea how new laws can hurt them.

3- Markets change. Right now in my area rents are at record highs, but property prices are near record highs. When I got out the rental business rents were near record lows, but luckily property prices were high.

I still tell young friends who ask - buy a duplex or 4-unit to start out, but live on the property to manage it. That has many financial advantages over buying a single family house to live in.

If you have a lot of energy, can do your own repairs and can get a good deal on a property that will "pencil out" landlording may work for you.

[Mike Hollingsworth]

In my experience tenants are the winners in duplexes and single family homes. Numbers don't make sense to me with less than three units, at least in Southern California.