With the housing market in one of the biggest slump in decades, I’m contemplating the possibility of buying an investment property. Those who know me will probably think that I’m nuts because I don’t even own a primary residence but let me explain the reasons why I haven’t bought a house in more detail.
Current Living Environment
I just got married in February and moved into a gorgeous apartment. There are lots of free amenities and activities for residences that we truly enjoy. The rent is not cheap but at least it is still affordable and we decided when we moved that it was worth the extra cost. In fact, the apartment turned out better than we originally thought. After we moved here, we were both happier and found ourselves enjoying life much more.
It is impossible for Emma and me to afford buying a house with all these amenities in our current financial situation, so if we buy a property, we will in effect downgrade our quality of life.
The Unused Space
We currently live in a one-bedroom apartment and although you can argue that we can use a second bedroom, the space we have is plenty for the two of us. If we buy a place, we will at least get a 2-bedroom, if not a 3-bedroom condo/house because we don’t plan to move when we have kids.
This means that we will just be paying extra property tax for the unused space until we can grow into the house.
Renting Part of the House
Many homeowners in California rent out unused rooms to help pay the monthly mortgage. I thought about buying a home and doing this too but since I work on my blog so many hours of the day, I don’t want to run the risk of my tenants causing distractions when they are in the house.
Why an Investment Property Seems to Make Sense
Since I convinced myself that buying a house might not suit my circumstances, I thought about buying a smaller piece of property and renting it out. The reasons below seem to make this a sound choice.
We are in a Housing Slump
Most people are much happier buying a house when the market is going up but all we end up doing is overpaying for the properties. I remember hearing stories of bidding wars in California where people were putting in bids of 15-20% over asking price in hopes that they will get the property.
The story is completely different these days. Realtors are begging potential home buyers to look at houses and buyers who are interested are putting in bids as low as 40% below asking price. It is in these markets where a first time home buyer like me can take my time and pick a good location.
Practice Makes Perfect
This investment property will be a smaller and less expensive place than my primary residence down the road. If I can use this time to learn what I like and dislike about houses and sharpen my skills in the home buying process, it will only benefit me down the road.
Long Term Investments
Unlike my primary home where the emphasis will be on livability, the emphasis of an investment property is return on investment. As long as the rent is generating a positive cash flow after expenses, I can ride the highs and lows of the market and still come out ahead.
Alternative Investments
There are so many other options out there for my money like stocks, bonds, CDs, and even investing in businesses. Why am I thinking about real estate?
Real Estate versus Stocks
I currently own some stocks, but it is almost a part time job keeping up with them. I want to get into a more passive approach and something that will generate an income for me. If I buy any individual stock, I run the risk of it never recovering. If I buy the index fund, I don’t get the income.
Another major benefit is that I won’t check my property performance like I would my stocks. This will keep me from being emotional when the market tanks so I can focus on my other day-to-day operations (like writing on my blog).
Real Estate versus Bonds or CDs
Since this is a long term investment, I need something that gives me a higher rate of return. Bonds and CDs are great for safety but the return on investment when my time horizon is taken into account is unsatisfactory.
Real Estate versus Investing in Businesses
This is an interesting alternative but I will definitely want to be involved with the business if I ever invest in one. This is the total opposite of passive.
Real Estate versus All
It is a nice feeling to own a piece of real estate since it is an asset that you can actually see. Furthermore, there are amazing tax incentives in the United States for owning real estate. I believe the specific rule is tax free capital gain for the first $500,000 as long as you have been living in it for 2 out of the last 5 years. So if we are lucky enough to pocket some gains on this property, all we have to do is move there for 2 years and then sell it.
What Do You Think?
Even though in theory this all make sense, it does not mean that it’s necessarily practical. Does anyone agree with what I’ve said or can anyone think of something that I’m not seeing? As a next step, I will start looking at the closing and renting prices of various properties to see if I can generate a positive cash flow. I will keep you updated and I look forward to hearing your thoughts.
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{ read the comments below or add one }
I agreed when you stated that return on investment is the priority of an investment property. That’s probably why my friend is looking for investment properties for sale. He wanted to invest since it can generate a positive cash flow.
It helped when you mentioned that it is important to know what will suit you the best. My cousin mentioned to me last night that he is planning to reinvest but he doesn’t know where and what is the best option to do. Thanks to this informative article, I’ll be sure to tell him that it will be much better if he consults a trusted investment properties company as they can help him figure out what is the best option for him.
Concerning commercial rental properties , it could be a gamble . A high percentage of small businesses will fail within 5 or 6 years . But if you own a property that has a franchise as a tenant such as Dunkin Donut , Burger King or McDonalds , it is a pretty safe bet that they will survive and continue to pay rent . They are carefully overseen and controlled by the Franchisor , they have to abide by the rules , cleanliness , quality food , good service , etc.
Many small restaurants and businesses lack the knowledge , perseverance and skill in order to succeed .
Think bigger. I prefer being a cash flow real estate investor rather than a capital gains investor. If you buy a large enough multi-unit property (30 units or more) your property can generate enough monthly income to pay all it’s expenses, a manager to run it and all your personal bills too. That frees you up to immediately “retire” with 90% passive income.
You don’t need to save and invest for 40 years to earn a million or two and then try to live off the interest. With REAL inflation running nearly 10% a year right now (ShadowStats.com) your savings and investments will never hold their purchasing power.
If you study the current events in the world economy, you can see the trend is for higher taxes, more bank bail-ins, the conversion of retirement accounts into US treasury bonds to feed the desperate and broke US Government, the dollar continuing to be worth-less as the Fed Reserve counterfeits trillions to keep things afloat, and the unsustainable stock market and historically low interest rates returning to reality. All of these trends are working against savers.
On the other hand, when you buy just one large enough multi-unit residential income property you control a cash-flowing property and get a secure monthly income. Rather than working 40 years to save enough to generate a passive income stream, why not just self-educate yourself on how to BUY that passive income stream today?
A great place to start is Creative Real Estate Online (CREOnline.com). I studied their hundreds of free how-to articles and success stories and learned enough to buy a 32-unit mobile home park with just $1,000 down.
There is good debt and bad debt. Bad debt takes money from your pocket. Good debt puts money IN your pocket. My tenants pay my property mortgage, all park bills, a manager to run the park and all my personal bills too. My mortgage is good debt. I learned much about cash flow and good debt from Rich Dad Poor Dad’s first book “What the Rich Teach Their Kids That the Poor and Middle Class Do Not.”
Other advantages of buying multiple units rather than individual homes:
If you own one unit and you lose your tenant, you’re 100% vacant. If you own 30 units and lose a tenant, you’re only 3% vacant.
The monthly cash flow on a single home is very small. This doesn’t provide enough income to pay someone else to collect the rents, make repairs and fill vacancies. You just bought yourself a job.
It’s just as difficult to buy one single family home as it is to buy a 30+ unit property. Why not put in the same effort for a larger return that allows you to retire NOW, rather than 40 years from now?
The tax deductions on larger properties are such that most taxes are legally eliminated. Any taxes you do pay, are paid for from the income provided by your tenants.
Because you are not looking to sell the property for capital gains, there is no capital gains tax to pay (15 to 23%) when you sell. If you DO decide to sell, you can use a 1031 exchange to buy a similar but larger property and push your tax liability to the new property, which can avoid paying the tax forever (until you die).
Multi-unit residential income properties sell for about 10 times net operating income. This means that for every one dollar you increase profits, the value of the property goes up by ten dollars.
Passive monthly income is your goal. You’ve been fooled into thinking the only way to generate this is to save a million and live off the interest. With interest rates so low, millions of seniors — who have saved and invested for 40 years — still can’t retire. Why make their mistake when with a few months of self-education, you can use your existing retirement accounts to just BUY the income streams you say you want?
Paper and digital savings accounts, investment accounts and retirement accounts are only a promise to pay. If the party that holds your money is unable to pay (even if they desperately WANT to pay) they will be unable to pay you. If they fold or the dollar collapses, you’ll get nothing.
A property you own is already in hand. If tenants don’t pay, you find new tenants. If inflation starts eating you alive, you raise rents, cut expenses or buy another property. If you’re afraid of a dollar crash, purchase some physical gold and silver to back up your mortgage. During a crash, gold and silver will skyrocket in dollar value, allowing you to repay your property mortgages at pennies on the dollar. With no mortgage, you could afford to lower rents or barter with tenants who were financially destroyed by the crash.
Far too many people don’t financially educate themselves. This forces them to trust others with their money. That ignorance has a cost and that cost is 40 years of working and saving and investing and still not being able to retire.
Multi-unit residential income properties are the one way to retire now, save those 40 years and gain the freedom to live the life you imagine right now.
MoneyTree
Will, great answer! For what it’s worth, I recommend a ratio of 1.25 or more, and so do many banks. It’s true that some money is made when you buy rather than when you sell, but long term, your success will be defined by your property management performance.
In a way, no purchase at any price is a good deal or a bad deal — it becomes good or bad depending on your performance over the 5+ years that you own it. Major rent increases, low vacancy and proper maintenance budgeting dictate your success much more than the purchase price.
Real Estate investing is not for everyone. Do your homework and make sure you know the risks. Study the market you are buying in. Don’t buy a property in a neighborhood you wouldn’t live in. Make sure your rent ratio is above 1.0. Don’t let emotion guide you into a bad purchase – you make your money when you buy a property, not when you sell it. (If you don’t understand that statement, don’t buy).
Still reading? You are young. you have the money, you can do the math & sniff out a winning property. Go for it! You’ll learn if RE Investing is something you like. if it is, you can make some serious change. if not, you’ve learned a lesson, you are wiser. and if you did what I said above, you still made money.
Best of luck to you!
I have been a landlord since 1963. My rentals are in three different states. The units were purchased when I had the down payment not on any other basis, sometimes the mortgage rates were high sometimes they were low. The first rental I bought was a triples in Southern California. The market was so over built that newspaper ads were offering first and last month’s rent free, a free TV and they would pay your moving expenses. Each one of my three tenants moved out. I had a 100% vacancy factor. Those empty apartments allowed me to completely redo them, re landscape and within 3 months I was 100% rented. The doors have touch pad locks eliminating key problems and expense. Tenants deposit their rent in my checking account of a National bank. No “lost in the mail” envelopes, no question about late payments.
The mortgage interest is deductable, one trip a year to that state, all repairs, depreciation on the structure, and best of all the tenants pay the mortgage off.
One thing I found out early from another small rental investor. Single family homes are not as sure a thing as apartments because people who rent a house are often living beyond their means – or they would be paying a mortgage instead of rent.
I keep my rents low which greatly reduces vacancy. That triplex has not had a vacancy in 19 years. And I treat my tenants with respect. I encourage them to tell me right away if anything needs to be fixed and I take care of it. Renters have renter mentality, that is they don’t want to be bothered with stuff that doesn’t work but they want everything to work.
I am well off because of my rental investments. Trading properties costs more than its worth. I have my first rental and don’t plan on selling it. In California I am under that famous Proposition 13. The taxes on my triplex is about $600 a year. I pass that saving on to my tenants, that’s why they don’t move. We all get ahead!
Keep in mind:
1) Replacement cost is not an accurate estimate of value; rather it is a ceiling, not a floor. An area can get overbuilt or demand can drop, pushing down rental prices and values below replacement costs.
2) Some larger development receive government subsidies of some type – state-guaranteed loans with lower interest rates, free infrastructure, or discounts on property taxes for many years. They can therefore build and sell or built and rent their units at prices below your costs.
3) A building can become dated or even functionally obsolete. I have a 4/2 condo, built 20 years ago as part of a student-oriented apt complex for students who wanted to save money. The university is now much more selective, resulting in more affluent students who are more demanding and don’t want to share their home with 3 random people. Rents have actually gone down as unit owners compete for a smaller market. I am financially ok because I bought it for so little, but many owners are not.
4) Neighbor hazards: Especially in condos, behavior of other investors’ tenants can damage your place. For example, cigarette and cigar smoke goes through walls.
5) Condo association fees can rise, making your property cash-flow negative even when rented. In some cases, increasing property taxes and association fees can exceed the rent, meaning net operating income is negative. In my area, condo fees are often over $200 on units that rent for $500.
6) Condo associations may not fix problems. In my 4/2 condo, the association took 4 months to fix a leaking roof, despite numerous reminders. I ultimately found the contractor myself. The repair costs $500, meanwhile I had been paying the $298 monthly association fee for a place I could not use or rent.
Whether to invest in real estate is your decision – make sure you do your homework.
Back in 1983 I thought I would like to invest in multi family rental properties . But before I dove in , I first read books about being a landlord , bought C.D.’s and attended a couple of 2 day conferences on getting started in rental properties . I started buying in 1984 into mid 1987 in Providence , Cranston and Central Falls , R.I. Bought 9 buildings , a total of 19 apartments over that 3 year period. My goal was actually 15 buildings but prices had more than doubled in that time frame. Some other investors laughed at me when I said the prices were irrational and would no longer buy. Two years later in 1989 the market crashed and property values fell considerably . With that rents also had to be lowered because of all the new construction . I did not have to lower my rents , in fact I always kept my rents about 10 % + lower than any comparable apartment . When I had a vacant apartment , I would put an ad in the classified section of the local newspaper on Friday , Saturday and Sunday stating the size of the apartment , the monthly rent , the address and state that I would have an open house on Saturday 9 A.M. to 1 P.M. and Sunday from Noon to 4 P.M.
I personally would interview anyone interest in renting , have them fill out a rental application and then have a company run a credit/criminal check on the top 4 or so applicants . I would not trust a realtor to rent it out for me , they are only interested in renting it out as quickly as possible and getting their commission . I was fussy as to who I would rent out to. If the apartment was in poor condition , rugs , paint , appliances , I would renovate the apartment so that even I would be comfortable living there. I wanted happy tenants and therefore I had little turnover. The only reason that I no longer own them is because slowly each and every neighborhood , undesirables moved in and the crime rate goes up. At the first sign of any of this ilk , I phoned the realtor to put the property up for sale. I got out at top dollar and within a couple of years the neighborhood went DOWN hill. Crime and Drugs I had 15 year mortgages which would have been paid off by the year 2000 . If I still had them , I would be clearing about $ 200,000.00 a year , very sad. The last 3 years there were BARGAINS out there in real estate . [ Florida ] I would have jumped in and bought big time but am now almost 80 years old , if I were 10 years younger I would start again. I enjoyed it .
Arminius, There are still plenty of good deals all over FL right now and you are not too old to enjoy the opportunities! Sounds like you’re right in between my husband’s and my age – old enough to have plenty of experience and wisdom to offer! Our health is pretty average for our ages but our attitudes are definitely young and going strong! Anything too strenuous for us is passed on to younger folks. We all bring value to the table – physical energy and experience/wisdom – a great combination! The younger and older generations partner up well making money while improving neighborhoods and helping others plus even have some fun! If you (or any other reputable etc. readers) are interested in doing a little real estate in FL, leave a reply to my comment.
I’d be interested, Florida Lady. I’m in SWFL and just getting started… or at least researching before jumping in!
I’d like to partner with the wisdom. Your idea sounds great. I live in MI with a full time job. Will this be still possible for me to invest in FL with you, Florida Lady?
I am a retired carpenter & all around handyman. In that capacity I buy vacant land in areas that are just ahead of being developed for housing tracts and any other industry. Thus I have deep pocket developers installing all the utilities and roads while I ride along on their tail coats. Right now I am in an area that is installing solar electric paneling by the thousands for the Los Angeles county and a very futuristic huge housing development already approved.
Heavy equipment and construction crews are all over the place, this I call an impending event, land prices are still very low but not for long. Buying some land now will see your investments multiply. Move a mobile home onto the land and rent it out to the construction folks that have to commute for two hrs from LA will provide an instant cash flow. Better yet become one of the construction crew yourselves and walk to your job site.
Any advice here is greatly appreciated, so I’ll keep this short:
I have $150K in a savings account, 10K debt in student loans..
I move a lot- don’t meet the 5 year rule
I used to work as a carpenter, remodels would be less of an issue than for most..
Where would you invest?
Started buying rental properties in Rhode Island back in 1984 . I first read a number of books on real estate , attended weekend conferences , etc. My goal was 15 multi family homes . By mid 1987 the prices had more than doubled and I stopped buying . I had 9 multi family houses . Donald Trump and the Japanese were still buying , I couldn’t understand why . Well by 1989 the market crashed [ as in 2007 ] and they lost out BIG TIME . When I had a vacancy , I had a OPEN HOUSE on Saturday 9 A.M. to 1 P.M. and Sunday 11 A.M. to 3 P.M. Put an ad in the paper on Friday , Saturday and Sunday and personally took applications . Would then have a credit check run on the most obvious good tenants . I never would allow a Real Estate firm to rent it out for me . They would often rent out to borderline or scum. I was fussy to whom I had as tenants . I also finally learned how to evict people and to take them to court if necessary . It was EASY . The lawyer charged me $ 1000.00 each time before I learned how to do it. This is a great time to invest in rental properties , there are bargains out there . But educate yourself before you start. I would only buy in GOOD working class neighborhoods . I prefer small towns to big cities. P.S. I never rented out an apartment that I would not live in or be ashamed of . I also did not try to get top dollar in rent , therefore I had less turnover .
My advice is this.
The numbers do not lie!
Your strategy should suit your
1. lifestyle
2. your financial means (can you afford to pay if not rented or renters not paying!)
If you buy, buy low….. buy quality….. where you or other good tenants would want to live so you can move there if you cant rent it (for whatever reason).
Fix a low, repayment term for as long as possible. This is so the mortgage reduces over time negating the possibility of negative equity or high interest rates.
Be brave but be safe too, it can be done.
The paragraph titled Real Estate versus all discusses the 2/5 year concept where you live in it for 2 out of 5 years and then sell with a $500,000.00 tax free profit for a married couple. That was true until 2009 when the amended the 121 law. As of 2009 the amount of the profit that is tax able is determined as a ration of the time it was unqualified use (rented) over the time you owned the property. For the basic example cited this is 2/5. Thus 40% of the $500,000.00 is subject to long term capital gain tax. Look forward to any contrary information.
Scott Burn’s latest article talks of a great transfer of wealth. He believes today’s low interest rate loans will eventually be viewed as a very valuable asset for today’s young home buyers (and those who refinance now). Buying a rental property would work the same way as long as you get a fixed loan. Prices are edging up –maybe or maybe not– but the interest rates are a steal!
Before you get too far along this path check out the landlord/tenant laws in the province/state you are considering purchasing a rental property in. If you are in a region where you can’t collect a security deposit forget it. Same if you can’t kick someone out within a short period of time for non-payment of rent. You may never need these hammers, but having them in your tool kit prevents a lot of problems.
You guys realize that this is almost 4 years old, right?
You do realize that the need for real estate is as old as the Earth, itself, and except for the Saudis, nobody is making new real estate. 🙂
VERY BAD IDEA ! let me explain why?. first off, you need to evaluate rental as a % of investment. If you do this, it will be 2 to 3 % of the property value. & on top of all this, the base value of the house can & will go down. + tentant nuisance issues + legal problems + House maintaince costs + Property tax (i cannot in this world unstd why the hell i should pay so much to buy a house & then pay tax !) + if the house collapses for any reasons, u will be cooling your heels in Jail – LOL !!
I recommend you buy where you may want to retire or a place you visit often. Back in the early 2000s when real estate was booming I borrowed from my primary home and bought a duplex and remodeled it. I’ve had it rented out since 2005 and had great tenants and horrible tenants. Over all I’ve made money. In early 2007 I sold my primary home in Southern California and moved to Colorado. I avoided most of the downturn and the sale paid off my investment property. The duplex is in another state where my mother-in-law lives. Now when we go visit her we can also check on the rental and write off our travel and hotel expenses going to visit Mom. I also no a guy who bought his future retirement home, spent a lot of money to remodel it and rented it out for 10 years prior to retirement. He wrote off all his improvements.
Tony – I believe I understand your reason for wanting to buy a
multiple type investment property. In your opinion, though, would some of the
same principles that go into a singular rental property be applicable to a
multiple one?… George
Just FYI for tax purposes–any gain on the property will be allocated between the time the property was your principal residence, and the time that you owned it but did not use it as your principal residence (ie rented it). Any gain attributed to the period the property was not your principal residence is not eligible for the $250,000/$500,000 exclusion and would be taxable. For example, if you owned the property for 4 years and lived in it for 2, you would only be able to exclude half of the gain.
I love buying investment properties and I would think that when the market is in downturn is the time to buy. We have bought 6 properties in the last 10 years besides our own place, and have sold a few on, all at profit. There have been a few bad tenants, but that really only happened when we property managed those houses ourselves. Now we let the estate agents do that, and the threat of the ‘bad tenants register’ here in Australia keeps most tenants on the straight and narrow. The main things to consider in buying a property to let are: worst house in best street, it will cost less but be easily rentable; buy a house in good condition; make sure you can repay the loan if the house is untenanted for a while; buy in a popular spot. What makes a place popular can vary between being close to a large town/city, close to public transport, close to unis/schools, areas that have a good name/reputation. We all know the suburbs that don’t and if you’re not sure of a suburbs quality, check before you leap. If I was able to obtain loans in the US which I believe at the moment (feb 12) are about 0.1% I would be jumping. Our borrowing rates are around 7%+ but rents are also high. Good luck
Consider a vacation rental…
My husband and I have wanted to live outside the US for several years, but because his child from his previous marriage lived with us half-time, we needed to stay put. Now that child is off to college, and we have sold our house (in two days after putting it on the market). This summer we found a great apartment in Vancouver that we love, had a massive yard sale, and moved there in September. We are planning to live there half the year, which we can do as visitors/US citizens. We are fortunate in that his job in the States involves traveling and his company mandates that he work from home, wherever that is, when not traveling–they don’t really care; and I am a writer, so I can work from anywhere.
To keep a permanent address in the States, we also bought a fully furnished rental property that is our primary residence when we are there for the other half of the year in November. We found a gorgeous place with everything we wanted for a great price, and our agent saved us even more. And the best part is that it’s at the beach, in a responsibly developed resort community. We plan to rent it by the week in the spring/summer. We have a rental management company to handle most of the work, and it’s totally worth the fee. My husband is a handy guy so we take care of any major maintenance type stuff when we are there in the fall/winter. We have put away some funds to pay the mortgage until summer, when we expect to start renting and hope to save enough during the season to cover the mortgage for the following year. We are also considering renting out our apartment in Vancouver for executive stays while we are wintering.
So there are other options besides buying a house and renting it out to a single tenant for months at a time.
For families or individuals who have to move alot, buying a house to rent out once you move can be a great call. Like everything, it is a risk. Remember always to live below your means, what ever the bank offers, buy a house at about half that cost. This gives you flexibility for slow months. Also, a rental agency charging you 8% can be a deal, especially if you are going to be far away. Also, it insulates you against your tenants. My wife and I own 4 houses, the last one we are currently living in and the others are all rented. Make sure to keep paying down the mortgages as fast as possible while still having a nest egg for unforeseen issues.
Good luck!
Everyone keeps mentioning “if you have a bad tenant” It all depends on the quality of the home and how well you screen your applicants. I develop homes in “transitioning” neighborhoods that are close to walkable neighborhoods. I find a lot of young singles or couples who want to live in the neighborhoods, but can’t afford them or don’t want to live in a 1br apt and buy homes just outside those areas. I put just a tab more into the homes then the surrounding area, but make sure I keep the 1% rule. You should be able to generate at least 1% of the home in monthly rent. I’m handy, but hire subcontractors who are licensed and I make sure the home is in tip top shape. I was able to rent out my homes within 1 week, yes 1 week of putting them on the market. Because I made sure the homes are in good condition I haven’t had any 3am calls either.
Lastly, I’ve been able to buy some of the properties for less than replacement value. It’s a great time to buy and I’d buy more if I had more capital.
I am 26, and I recently decided to buy a property as an investment. Simply because my mortgage is affordable even if I am not able to find renters for a month of two. I fell in love with a house that I wouldn’t mind moving into. Besides liking the house, I love the area it’s in. It is in the heart of the city where everyone wants to move in. I quickly decided to make an offer. Because my mortgage is going to be half of what I can easily rent it out for. Just like everything, it is a risk. But life is about chances. This blog helped me alot because I am reading feedback from some of you and you guys are experienced and know what you are talking about. That’s why I like to listen to the pros and cons.
My wife and I think that it’s a great time to invest in real estate. We took the plunge. It will be a challenge but it should be fun. Vacancies scare us though. The other thing is bad tenants. We’ve heard stories of properties being destroyed by tenants and big money being lost. I think this is the exception.
@Prior Year Tax Returns – Most people have always been broke. I wouldn’t say that it has anything to do with the economy, either. For those of us who have the money though, now is a pretty good time.
If you have got any money left after this downturn, now is the time to wade in and gobble up as much real estate as you can get your hands on. Prices will rocket soon.
Time to go shopping.
If you buy that investment home and rent it out, then please save yourself a lot of hassle and engage a real estate management company to manage the rental situation for you. In many areas, the management company will charge you around 8% of the rent as their fee, but they will check out potential tenants, collect the rent, manage the upkeep and repairs, and be the bad guys when someone needs to be evicted. It is well worth the expense.
Absolutely NOT ! After paying your monthly mortgage cost , your property taxes , your general maintenance and upkeep costs , if you are lucky that 8 % or 10 % would be your profit . The R,E. management company will rent to anyone even if they are borderline financially secure or borderline civilized . There only concern is to put a warm body in YOUR property so that they can collect their 8% or so. I put an ad in the newspaper on Friday , Saturday and Sunday describing the apartment , how many rooms , the address and the rent . I write
” Open House ” from 9 A.M. to 1:00 P.M. on Saturday and Open House on Sunday noon to 4:00 P.M. I sit there and take applications and then run a credit check on the top 3 or 4 applicants . The idea of course being to eliminate the dead beats , those deeply in debt and those with a criminal record . If you know what you are doing , it is a fairly easy way to become financially secure over the years .
I just don’t think many folks can stomach the downturn. If you can then jump into the market.
” Many people can’t stomach the downturn ” …..? ? …..?
As the old saying goes , Buy LOW , sell High . Back in 2006 and 2007 I saw people rushing to buy at irrational prices . I wondered how can people be so dumb ? Since 2010 , it was the perfect time to BUY . You could make a ridiculous offer and some people would accept it . I know , I did . The majority of the Fools follow the crowd.
It is a great time to buy you just have to have the stomach for it. Unfortunately, most people don’t.
Great article and discussion. Real Estate is literally on sale across the country now, particularly in CA, AZ and FL. Get educated and learn how to take advantage of this great opportunity.
If you have got the money then pull the trigger. Just make sure that you plan on sticking it out for the long term. Prices may vary over the short term but in the long run you will be OK.
Great time to buy…you may have to hold onto it for several years. Just make sure that you buy at a good price and you see long term appreciation in the property. You should make out just fine.
In some areas of the country you can buy property that is cheaper than the cost to build. At some point normal economics will come back in line. People don’t realize what a great time to buy this is.
If you can do it I would suck it up and buy now. Some people are still scared and we could see more foreclosures and more downside. But in the long run this should be a great time to buy.
It is a great time to buy real estate. Just make sure that you want to be a landlord. Many people got into trouble with the past bubble and most of them didn’t have the desire to be landlords. Just make sure you have the ability and desire to deal with tenants.
I think this is a wonderful idea. I have been saying this to young friends for the past few years. I watched the real estate boom in Fl very closely and although I am not an economist or real estate expert, I have to say that I predicted the Rise and Fall of the Real Estate Empire. I listened to people who had never dabbled in real estate talk about flipping, and making a killing in pre-construction investing. TRhat was the wrong time. The right time is now. And if the property can become a vacation home, that would be an added plus. So just do it. My first adventure in real estate investing came unexpectedly when I was 25, newly divorced and with a baby. I rented the house and moved in with my parents. Thirty-two years later, here I am…I still own the house and several other properties, and I don’t regret a thing. One word of advice: live beneath your means. Most people cannot do it; but that has been my mantra and it has worked out just fine. Take it from this old timer.
As someone who owns rental properties, you need to make sure the numbers work out, accurately accounting for vacant periods (I use 10%), and that there are often expenses such as plumbing, showers, etc that sometimes come up each month. Make sure you have enough in the bank to cover at least 4-6 months of mortgage payments for the property should it become vacant for an extended period of time.
Buy where you can cashflow. Properties in AZ and NV are starting to look attractive now.
One of the most important points is to find good tenants. Don’t skim and think that you rather fill the property and pick a not so good tenant. Bad tenants can cause a lot of sleepless nights.
Never buy a property that you have to maintain (such as residential rental) in an area far from where you live unless you can afford a management company and unless you can afford to pay someone for repairs.
If you’re financially strapped with an apartment, buying real estate isn’t the place to put what money you have. You have to be able to pay the mortgage on the rental plus do all the maintenance and repairs and have enough cash to cover expenses if you don’t have a tenant.
If you have a bad tenant, you may have someone living in your house and not paying the rent while you have to go through eviction proceedings, and trashing the property to boot.
Real estate isn’t an investment unless you know what you’re doing, and it doesn’t sound like you do yet.
I recommend building a cash reserve (emergency fund) of 3-6 months of expenses in a money market account. Pay off any debt you currently have, then start saving cash for the purchase of your primary residence (20% down, 15 year fix-rate mortgage that doesn’t take up more than 25% of your take-home pay).
Then invest for retirement. After retirement is fully funded, invest for kids’ college, pay off the house early if you can, and then build wealth after you have no big payments.
You’ll also need to have cash savings for buying cars and other things. Debt is a huge risk. So be very careful whenever you look at an investment that costs you money up front. If you had a paid off house, would you get a mortgage on it to invest in other properties? I hope not.
Good luck and may I suggest a growth or value stock mutual fund that isn’t an index fund? Small and mid cap funds do much better than the overall stock market.
Sherri
Like any risky investment or deal where you have little experience, just be prepared to lose your shirt 🙂
As others have said, if you can afford the payments without any tenants, that’s a good start.
It’s not a good time to buy yet if you’re a beginner. Valuations are still going down, so you’ll be buying into a dropping market.
This is not a decision you should make quickly. You’re not hurting right now, so take six months or a year and do some serious research. Then when (or if) you decide to go for it you’ll be able to make a much better purchase.
If you’re okay with buying an investment property, you’ll also be simultaneously building and investing in a business, which was one of your other goals. If you incorporate and purchase other properties, hire employees, etc., you now have a true business with a value that exceeds simply what the basic assets are worth.
I’ve been tempted into purchasing an investment property as well here in the UK with prices currently so cheap in some areas.
However I’ve decided it’s just too much hard work. Plus the fact that you can get much better returns from shares in my opinion.
Property prices generally double every 7 years on average, but there’s some fantastic companies out there, particularly miners and oil companies that have fallen a lot in the last few months, that could well double in price a lot quicker than 7 years.
1. It’s a good time to buy. (my opinion)Buy a minimum of 2 bedrooms, 3 or more is better as it allows more folks to be able to rent it, and you to move in more easily when the time comes. Buy something you ‘could’ live in, should the need arise. It’s your backup plan for hard times.
2. Be very careful with the tenant background check. Once a meth lab moves in, you’ve totally lost your investment.
3. Buy in the best neighborhood you can afford, but not the best house in the neighborhood. Most important features (I feel) are that the foundation is solid, the electrical is up to code, the septic tank and drainfield are adequate (if applicable), and that the roof doesn’t need replaced soon. Most everything else will be cosmetic and less cash outlay to repair.
4. Be a handyman – especially be able to paint and do minor plumbing/carpentry. Or have a good relationship with your service providers for those things.
5. The property should have a positive cash flow, plus put something into your pocket or extra for paying down the mortgage. Make sure you can cover ALL the expenses if the place is not rented for 6 months 🙁 Eviction for non-payment of rent can take awhile if you have to go thru legal proceedings.
6. Once the property is paid for, try carrying the land sales contract when you sell it. I’m carrying an old contract now for 11% interest…better than I could be making most other places. And as I sold it to my renters of many years, the payments have been most regular.
7. A duplex or triplex is great – more income plus if one unit is not rented, at least something will be coming in.
8. Limit or ban inside pets. You’ll never know the full “JOY” (major sarcasm there) of being a landlord until you have to scoop a foot of dog/cat feces out of a basement… Yuck.
There’s nothing passive about this type of income – but it can be a great money maker, especially once the properties are paid for. And then when the sell time comes, I usually sold on a land sales contract for better than average interest. I am still carrying one property at 11% interest – over 20 years now – that’s a very good return on my money 🙂 and that’s passive 🙂
Do your research, and if you’re comfortable with it, go for it 🙂
From: Been there, done that – Many times 🙂
The thing that turns me off about rental real estate is the lack of diversification as well as the amount of work involved in maintaining the place. I don’t know how to deal with this.
I don’t believe that rental real estate is a passive income generation approach at all for those reasons.
I own real estate investment trusts ( REITS). That way there’s someone else unplugging the toilets and changing roofs. I only collect my dividends monthly or quarterly.
In addition to that most reits own a variety of properties – apartments, office buildings, restaurants, stores, malls across the US.
One advantage of rental properties that I see is leverage. If you can buy a property where the monthly mortgage payment is $400/month and yet you manage to rent it out for $800/month, you can do pretty well. Of course if the property becomes a money pit and you spend $1000/month to maintain the premises, then you could be in a bad situation..
REITS work well if you want passive income. Real Estate also offers some considerable tax advantages. Between depreciation and tax deductability of mortgage and property taxes, the income you receive may be more than tax free, but be considered a tax loss (You make money, but it shows up as a loss on your taxes offsetting some of your other income). That is how some of the 1% earn millions a year, but pay no taxes. Another way into the market is by buying into a Tenant in Common. You buy a property with a number of other people and institutions. The property is rented, used, whatever for a set period of time determined before the deal takes place. The property is sold at the predetermined time (with some flexibility based on the desier of the “Owners”). Once the property is sold, the procedes are distributed to the investors.
Another way to go is a NNN income property. You buy a commercial property with a tennant in place. They have agreed to rent the place for a number of year (15, 20, 30, whatever) with a rent increase every year, 5 years, or whatever. They assume the expense of property tax, property mainenance, so on. They just send you a check for your rent. They take care of the rest.
You can also do a Land Lease. You own a piece of land and rent it to a business who builds and owns the building. At the end of the term (25 years, or whatever), the land reverts to you with the building on it. They are responsible for anything and everything on the property while they are tennents, you are responsible for the ground under the building. A key benefit here is that once they have a physical presnece, and a lond tradition in a location, they are heavily vested in renewing the lease, and now you own the building.
It could be a great time to buy in many markets right now, and real estate can prove a solid investment. Just don’t forget the worst part about being a landlord- you’re a landlord. When you have good tenants in place, an investment property can be a dream- however, if your tenants aren’t great, it can be a terrible nightmare, and dealing with a bad tenant can wipe out any gains you may have made. Unless you contract out your responsibilities to a property management company (which reduces your earnings), renting a property is anything but passive.
If you’re handy at fixing things yourself and can deal with collecting rent on time and dealing with trouble tenants, go for it. If not, one of the other options you suggest might be better suited.
The thing is – before you invest in real estate ask yourself why you want to do it and what you want to get from it. If you’re investing and don’t plan on selling right away, now might be the perfect time to do it. If, however, you don’t want to carry an inventory of properties and you’re living in an area hit by the economy, now probably isn’t the best time to invest.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com/
You say , ” If you don’t want to carry an inventories ” ….? ? ? Why then would you get involved ? If you are living in an area hit by the economy ………might be an excellent time to buy because that might mean that the prices are lower [ unless you are talking about Detroit with their high crime rate ] . I always charged about 12 % to 15 % less rent than a comparable apartment . I therefore had less turnover . My goal was long term , let the tenants pay off my loan over the years and build equity . The rents would pay the maintenance , property taxes and I was happy with a small profit . Back in the mid 1980’s I paid about $ 60,000.00 for a 2 or 3 family house and charged about $ 500.00 rent MAX . Now that same building would sell for about $ 200,000.00 + + + and the rent would be about $ 1000.00 + .
Perfect for long term financial success . Don’t get Greedy trying to squeeze out Max dollar for rent . Also when I bought a building and the apartments were run down , I would renovate so that my tenants were comfortable . Always said , if I would not be willing to live in the apartment as is , I would fix it up . It paid off BIG TIME .
It’s worth looking into.
Two reasons I’m not interested in real estate investing for myself:
1) it can be a lot of work – finding the place, getting renters, problems with the house etc.
2) lack of diversification – even a cheap house is a huge chunk of most portfolios.
Mike
Back in 1984 I started buying 2 , 3 and 4 family houses in Providence and Cranston , Rhode Island . But before I got involved , I read numerous books , listened to C.D. ‘s and took 1 or 2 day courses in Real Estate investing for about a year . Once I had the knowledge necessary in order to succeed , I started buying cautiously . I would advertise in the Friday and Saturday newspaper that I had a 2 / 3 bedroom apartment for rent , gave the address and when I had open house for people to check it out . Saturday 9 A.M. to 1 P.M. and Sunday noon to 4 P.M. I personally would be there to interview people and to take applications . I would then run credit checks on those interested [ took 2 to 3 days ] . Had a company check people out to see if they were credit worthy and to see if they had a criminal record . It cost me about $ 45.00 for each credit check but was well worth it . Would check out the top 3 or 4 applicants . I was VERY fussy who I rented to . Interview the applicants yourself , Real Estate companies will rent out to anyone including the SCUM of the earth as long as they get their commission . My goal was 15 buildings but I reached 9 in mid 1987 . When I started buying in 1984 , I could buy a 2 or 3 family house for $ 55,000.00 to $ 65,000.00 . By 1987 the price more than doubled to about $ 145,000.00 . I stopped buying and then in 1990 the market crashed . I seldom had a problem with tenants but when I had to evict someone , I had an attorney take care of it , it cost about $ 1000.00 each time until I went to court with him one day and found out it was EASY to do it. After that I did it myself . If you are” knowledgeable “, it is an easy way to make money .
Some friends and I are in the same position. We feel like this is an excellent time to enter the housing market, but it’s definitely a hard decision to make if you weren’t planning on buying a house right now. It’s a great opportunity we’d love to take advantage of, but we’re also young, and aren’t sure if we’ll want to live in this city forever. Tough call. Sounds like you guys have a great situation going on where you currently are, though.
I think buying real estate is a great idea. I have one rental property that provides steady income and I’m about to move out of my house and convert to a 2nd rental property because it will be paid off. My advice would be that if you buy a property and expect the rental income to pay the mortgage, you really need to have a downpayment of >20% to be safe. You have to plan on repairs and some damage between renters (screen them well), which can erode your profit. However, you do have new tax write offs like mileage and repair expenses that can help even out the revenue vs cost.
Another piece of advice would be to purchase raw land in an area where you believe growth will occur. For some states, the government will allow exemptions for trees, animals, farms, etc. that reduce the taxes to a much lower rate. Additionally, raw land will likely increase in value over time and is usually less maintenance than dealing with renters.
My suggestion is to have both rental property and raw acreage to provide a balanced real estate portfolio……safer than the stock market if you’re wise.
Unless that raw land is ripe for commercial/residential development, actively supports agricultural purposes, or is being acquired for later donation for tax purposes to a land bank activity, you may want to think about the holding costs vs timeline for payback of investment.
Raw land has a couple of big drawbacks too. Interest rates on raw land are high (relatively speaking), and you can’t deduct the interest. Any 2nd home or investment property must have a bathroom and kitchen to be able to write off the interest.
I first came down to Florida after I got out of the Navy in the mid 1950’s . There was a lot of vacant land all along a major road , U.S. # 1 . I remember Stuart , Florida [ a small town on the East Coast ] , there was very little in the way of businesses , mile after mile . About 25 years later the whole highway was back to back businesses . Land that was Extremely cheap was now insanely expensive . But to this day there are stretches of land along U.S. # 1 that are still vacant . As far as I am concerned , rental properties are a sure winner as long as you do NOT buy in a run down area of town . I always bought in a working class neighborhood and avoided poor subsidized housing areas . These people have NO respect for your property ………They are sub human SCUM .
I have bought in “run down” areas before with great success. Nothing is a sure winner in this world. It takes hard work to be a successful landlord. Good luck.
With much respect.
BD
One key item when considering something like this is would you be able to cover the property expenses without a tenant in the property? We rent out 3 rooms of our home and have experienced times where it has been 2 months trying to find a tenant for one of the rooms. We spread our risk out by having the 3 renters, so at any one time we have no more than 1 room normally unused.
One option you might consider is a two-flat, which allows you the privacy of not sharing your home with someone else, but you’ll be able to keep an eye on your property easier.