buying rental property

[Galen]

Laleo-

"Galen, speaking of renters (forgive me, Long Gone), I'm sort of tossing around the idea of buying another house, and using this one as a rental. Or maybe the other one. I mean, as an investment, our house, modest though it is, has appreciated in value much faster than any of our other small investments, so I'm thinking that we might do well to buy another one. Maybe. My husband is no Mr. Fixit, and I'm even less so. Has it been worth it to you? How much of a headache is it to be a landlord?"

I will upset people with this. But you asked:

1. a single family home will cost X [mortgage, insurance, sewage, repairs, maintenance], you will never be able to charge X for rent. It will not happen 95% of the time. It is a rarity that the going rate of rents in an area will match X. What does this mean? To rent out a single Family Residence [sFR] will lose money.

2. To be a landlord, you must be a handy-man, or be willing to learn to be handy. If everytime a toilet stops, or a roof leaks, or a furnace mis-fires, or a water heater needs a new thermo-couple; if your calling a repairman then your in the red. That repairman's $85/hour is going to eat up your $50/month 'profit' very quickly.

3. We do MFRs [Multi-Family Residences]. 2 units worth of income to cover the mortgage, and at least a third unit so you have money left over each month for sewage, and insurance bills. MFRs cost less than the same exact square-footage in a SFR would cost. Once a building has been used for 'rental' it's market value drops a lot. Also rents depreciate, so on the books their value is less, if you sale it later for a marked up value, then your taxable profit is more, thus you pay more in taxes but dont clear any more.

4. We set our rent at 80% of the average going rents in the area. Normally when talking to banks, or realtors, or rental management offices; the industry expects each unit to be empty 20% - 30% of the year. Whatever you imagine your Gross to be immediately subtract 20% - 30%, just to match how everyone else does business. We dont do that. We set our rents lower, and then we rarely have an empty unit. If someone does need to leave, they often bring their freinds by asking if their freinds can move in the same day they move out. Our problem has been usually in getting each unit to be empty for a week, so we can clean and re-paint them.

If someone's rent is low, they know it. Everytime they talk to their friends and neighbors, they are reminded of how low their rent is, what a good deal they got. It goes a long way in tenant relations.

5. We have always bought run-down slums. I keep a clipboard with a list of what repairs I am making. If I go around each month, I show each tenant my lsit of planned repairs. I ask them if there is anything else they would like added onto my list. I ask them which of those items they wnat to see done first. I beleive that this 'empower's the tenants and makes them feel like they have control over their building. I tell them that I can only make one repair this month, you chose which one. They love it.

6. My parents taught me, long ago, when a renter does go bad. Once you finally decide that he has to go. Cut your loses quick. Go get a month's rent in cash, and offer them: "Look your leaving. You know it, I know it. You can milk this out for months while I do the legal stuff, and you will never get a decent refferal from me. Or right here I have one month's rent in cash. I will give you this money cash, on Friday, if this apartment is empty. I dont care where you go, you find a place, but this money will be yours." This tactic works everytime. Once we had to go the full 8 months trying to evict a couple, wow what a mess. They had stopped paying rent. They admitted that they were never going to pay anymore rent. They told the court. But it still took 8 months. And the court kept setting up mediators to meet with us, to set-up negotiations, to work-out how they were going to stay the apartment. What finally did get them out was, I paid them to leave. We never did get the courts to assist in evicting that one couple. Hundreds of dollars in court fees, and court appearances, and this and that...

7. On the other hand, there is no better investment. We buy them with no-money-down, we move in and collect the first month's rent before the first mortgage payment falls due. We live in the buildings ourselves for 'free'. Their tax write-off fully shelters all income that I ever make. [well, I need to clarify that one. Since 1985, Bonnie and my incomes together have never been enough to overcome the tax-sheltering of our MFRs. We have had years where our gross was pretty good, but the tax shelter of the MFRs had always covered us from taxation].

We get 30-year mortgages, to arrange the lowest possible monthly payments. You never know when a transmission will blow-out or some other stupid emergency is going to happen, so keeping our budget as free as possible helps. Then most months when no emergency does happen, we make an extra principle payment of around $200. Play with a mortgage calculator and that seperate principle payment is getting real good interest. The last time, we worked it out we were getting 16% on that money. Granted it is the only time that any of our money goes to the mortgage. After all mortgage paymetns are what rental money is made for.

Does that help?

Of all the things that various leaders of TWI gave us grief over, they never did say anything negative about us collecting MFRs, and owning our own homes.

:-)

[LG]

quote:

Once we had to go the full 8 months trying to evict a couple, wow what a mess. They had stopped paying rent. They admitted that they were never going to pay anymore rent. They told the court. But it still took 8 months.

Wow! In Texas, with a written lease, an eviction usually takes less than a month from the time of delivering the notice until (if necessary) the Constable shows up to force the tenant out. Even without a written lease, the whole process usually takes no more than two months. The difference is the required time between delivering an eviction notice and filing suit. The time from filing the suit until actual forcible eviction, if necessary, is usually about three weeks.

A clever tenant, who knows and is willing to use a rather obscure technicality, can extend the time by about a month.

[Galen]

That time it was a 'couple', soon after they had moved in he quit working to go onto un-employment then she got pregnant. As soon as she was pregnant was when they stopped paying. They were getting couched from their parents. and they knew that here in Ct a woman with child or pregnant is treated differently by the courts. So each for court appearance the boy friend would go stay with friends, and she would be in tears that her boyfriend had left her. A single 'mom' is a landlord's nightmare. Returning home from the courthouse, he would be there in their apartment. It was all a setup.

We strongly felt that they were 'plotting' with the help of their parents, so I tapped the phone lines and was able to at least anticipate some of their plots. One night the boyfriend went outside with a hammer and a tin pie pan. He sat down of the ground between his car and mine, and began pounding on the tin pie pan. His parents were in a parked car across the street with a camera and a cell phone ready to call the cops. they wanted me to comeout yelling at him, about beating on my car, so they could take pictures and call the police on me. However having heard all about their plan via our phone-tap, I never stepped outside. I did call the police though. They questioned him and sent him into his apartment. Fortunately at the time I was working as an MP, and had just recently done some phone-tapping for my job. It is also fortunate that 'something' some eiry feeling caused me to strongly suspect that they were about to do some harm against me, which caused me to setup the phone tap in our building. Obviously it might not have been legal enough to bve presented as evidence in a court, but it helped keep me out of trouble.

[Galen]

We never had those kinds of problems with the MFRs in California, nor in Scotland, nor in Washington. Just that once in Ct.

:-)

[laleo]

Thanks, Galen.

I don't think my husband heard much after I read him #2, so this whole thing definitely bears more thought. Not sure either of us are looking to make a career out of this. Actually, our neighbors would shoot us if we turned this into a rental. But I'm not so sure I like the idea of buying and maintaining a multi-family unit, either, especially as a slumlord.

Good information, though. Thanks for taking the time to answer.

The part that surprises me is that you live in one of your units. So when you had all those foster kids, were you in an apartment?

As far as the eviction process, I know that takes months and months here. The laws definitely favor the tenant.

[lindyhopper]

Where you make the money is in equity and resale. At least if you are in the right market, which is a shrinking one at the moment. Although, in B-more certain areas are still shooting way up. My sister in-law's house is going up 50K a year. Ours is going up 25-30 and this is a cheap house. We are in the process of renting it out and I would say we should still make money on it off of the rent for a few years. It is in good condition, so it won't need a lot of repairs for now. We have a management company that is doing the leg work for us right now and they will do all the dirty work when it is needed. Even with the % the management company will get we should make a little off of it this year from the rent then quite a it more from the equity.

I would imagine that this is because we bought almost two years ago so our morgage payment is not what it would be if we just bought a place and rented it out right away. ALthough in our neighborhood there are some people buying up any of the ones that go on the market so that they can rent it, because many believe the developement is going to shoot way up in the next couple of years. Some also turn the basement into studios that they rent out.

This is a townhome BTW.

[lindyhopper]

I shold have said that is 25- 30% a year on those homes. Not bad.

[Galen]

laleo:

"Thanks, Galen."

Your welcome.

"... The part that surprises me is that you live in one of your units. So when you had all those foster kids, were you in an apartment?"

We we ahve really gotten used to living in apartments though, we ahve done it for so long now. It is kind of different when you own them though.

:-)

[Galen]

lindyhopper:

"Where you make the money is in equity and resale."

I agree with the first part.

You do make good money in terms of the equity.

A business that costs me nothing to start, nothing to run, that provides my family with a home to live in and builds equity is not bad, add to that the fabulious tax-sheltering and now you really have something.

We sold the California property [my parents were co-signers and they wnat me to buy them out or sale. Buying them out would mean that I have to pay them 1/2 of the accumulated equity, I had no money. So we sold.] The washington place was costing us a fortune in management and repairs, without beign there to fix it myself it was losing too much money, so we sold it. Now we just cashed out the equity that we built in this place, and use that money to buy our new Maine property and I will spend most of this summer up there building.

I dont see profit in resale. I do know that many say there is profit in resale, but when we talk about the details of their 'profit' often they break even on the expense of the repairs that they made, or they only clear a little and it gets taxed unless you roll-it-over in 'like' property. Bahh!! There is just no good tax angle to resale.

"... We are in the process of renting it out and I would say we should still make money on it off of the rent for a few years. It is in good condition, so it won't need a lot of repairs for now."

Not making repairs each year? Ouch that will bite you.

"... We have a management company that is doing the leg work for us right now and they will do all the dirty work when it is needed."

You are paying someone else? AND making a profit WOW !!!

Very well done.

That is rare.

:-)

[lindyhopper]

Oh we will repair things as needed, I am just not anticipating anything major. But of course, I could be wrong. Let's say I am optimistic about it. It is a good property and has many new and newer appliances that were put in just before we bought it. But the normal wear and tear won't be much.

When we went to the management company we figured in all the expenses including the management % so that we might break even. She told us the going rate for a place such as our in our neighborhood was still more. Its not rented yet, but I think we have a few bites and it should go soon.

[Galen]

lindyhopper:

"... But the normal wear and tear won't be much."

Okay fine.

:-)

We have seen that when we live in the premises, the 'normal wear and tear' is less. When we live elsewhere the 'normal wear and tear' is more.

"Youngs rule of being a landlord Number 1" clearly states that: resident landlords make less repairs, and renters 'feel' safer and more secure.

Fortunately it is all a write-off.

:-)

"... She told us the going rate for a place such as our in our neighborhood was still more."

You are fortunate.

"... Its not rented yet, but I think we have a few bites and it should go soon."

"Youngs rule of being a landlord number 2": The higher you set your rent, the longer you wait for renters and the quicker they will leave. As you set your rates lower than the 'going norm' your units fill faster and the renters stay longer.

:-)

Just trying to help.

[Galen]

A week ago, I posted a thing on a different BBS that I frequent. It kind of goes along with this discussion so I will paste it here too. You may find this interesting:

quote:

I looked at Friday's paper 'Bangor Daily News'.

They listed:

a. Du-plex $130k

b. Tri-plex $140k

c. 4-plex $275k

d. 4-plex $209k (ad says they Gross 2400/month plus have a big manager apartment)

e. 5-plex $250k

f. 12-plex $750k

Looking through the same paper, I see rents ranging from $450 to $850, with a median around $600/month.

I then used an on-line bank website's mortgage calculator, using their current 30-year rates.

a. the Duplex should gross $1200 its mortgage payment would be $697/Month. It has a monthly slush of $503 for taxes, maintenance, repairs and the buyers pocket. NOT MUCH

b. the tri-plex would gross around $1800 it's M.P. $751/M. it’s slush is $1049 for those expenses, hmm, better.

c. the first quad grosses $2400 it's MP $1476/M. This guy’s slush is $924, hmm dropped.

d. The 2nd quad grosses $2400, it's MP $1121/M. Here you have slush is $1279, okay better, plus a free home as a side benefit.

e. the 5-plex grosses $3k, it's MP $1342/M. this one’s slush is $1658, looking better.

f. the 12-plex grosses $7200, it’s MP $4026/M. And finally we have a slush is $3174, nice. Granted it is not going to break any bank soon, but for zero down. It is still not bad.

Now these are not listed by any realtor-thief. They are just listed in the paper, hiding in plain view.

:-)

[simonzelotes]

Galen,where are you getting your financing where you put no money down?...Does it have to be owner/occupied,like HUD,or something like that?...Out here,most investment properties,including 'seller financing' usually want 20% down..Even if you get the seller to carry the 20% down payment and a bank to finance the rest,you're left with two payments:the primary new mortgage and the seller carry-back,which could exceed the rents...Plus,I've found that interest rates are higher for second properties,unless,of course,you can show the lender that you really don't need the loan in the first place...

[Galen]

simonzelotes:

"Galen,where are you getting your financing where you put no money down?...Does it have to be owner/occupied,like HUD,or something like that?"

'First Time Home Owners Loan' through FHA, I beleive that Fanny-Maes also do them.

We have always bought 'slums' in low income neighborhoods.

Owner-occupied, and once we even had to sign a contract that for the first year we would only rent to 'low income' families [we rented to military and they were well below the 'low income' limits].

So long as you only own one property in that state, then you qualify as a 'first-time home-owner'.

We have done it in Ca, and Ct, and Wa.

We did get a HUD loan once. It was a loan to make repairs with. Our neighborhood was under some Federal designation so that owner-occupied MFRs could get funding to make repairs with. They gave us $50k, we brought in a Fire Marshall, building inspector, and Housing Inspector; made one combined list of repairs, and they supervised completion of those repairs. We made payments on 50% of the loan, over 5 years. After we paid 50% of the money back [at zero interest], then we waited an additional 5 years and they removed the lien. So in total they gave us the money to make $50k in repairs, and we only had to repay $25k. HUD is cool.

I think that HUD also required that we rent to 'low income' folks. No sweat.

"...Out here,most investment properties,including 'seller financing' usually want 20% down..Even if you get the seller to carry the 20% down payment and a bank to finance the rest,..."

Same here. [here? I mean East coast and West Coast that is]

"...Plus,I've found that interest rates are higher for second properties,unless,of course,you can show the lender that you really don't need the loan in the first place..."

I dont know. By there stndards, I have never owned a 'second' property, that needed financing.

:-)

Each time that we have done it, we were looking at our new 'Primary home'.

It is weird how each industry has and uses a different vocabulary. To the banks, the primary home may well be where I am currently recieving mail. To the IRS, they focus on where you sleep >180 days of each year.

:-)