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Thoughts On Becoming A Landlord
Posted by: chopper
Date: August 24, 2014 11:27AM
The house next door to us is for sale. I'm considering putting in an offer on it and renting it out. The purpose would be to use it as an investment.

It's a nice 3 bedroom colonial, lived in by a single minister now. The asking price is $165k.

Looks like houses in the town I live in rent from $1000 to $1500 per month.

Would love to hear some feedback on these numbers and this situation from someone who has been down this road.
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Re: Thoughts On Becoming A Landlord
Posted by: Acer
Date: August 24, 2014 11:52AM
IMHO, single family homes are harder to make your money on in rentals. Families have tremendous inertia..a bad one can be hard to get rid of. Lot of upkeep, too, for just one rental check. Is your neighborhood conducive to making it into two apartments, or renting to several singles (e.g., a university students sharing)?
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Re: Thoughts On Becoming A Landlord
Posted by: Mike Johnson
Date: August 24, 2014 12:26PM
Looks good on first blush. $1000/mo should cover your mortgage, insurance, and taxes. If it needs work, though, it's more complicated.

Buying a house you're familiar with can be a smart move. Buyers typically have no information before making an offer, so you have a leg up. Renting out a house next to you can go either way.
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Re: Thoughts On Becoming A Landlord
Posted by: Robert M
Date: August 24, 2014 12:43PM
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 12:50PM
Quote
Robert M
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
Why assume there's going to be a mortgage?




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Re: Thoughts On Becoming A Landlord
Posted by: Uncle Wig
Date: August 24, 2014 12:57PM
Quote
Black
Quote
Robert M
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
Why assume there's going to be a mortgage?

Because it's safer to assume a mortgage than assuming Chopper buys $165k houses with cash?

Chopper, do you have a giant wad of bills burning a hole in your pocket?



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Re: Thoughts On Becoming A Landlord
Posted by: freeradical
Date: August 24, 2014 01:06PM
Quote
Black
Quote
Robert M
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
Why assume there's going to be a mortgage?

There wouldn't be any point in paying cash for an investment property.
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 01:09PM
Quote
freeradical
Quote
Black
Quote
Robert M
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
Why assume there's going to be a mortgage?

There wouldn't be any point in paying cash for an investment property.
This makes absolutely no sense.




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Re: Thoughts On Becoming A Landlord
Posted by: freeradical
Date: August 24, 2014 01:22PM
Quote
Black
Quote
freeradical
Quote
Black
Quote
Robert M
Mike,

I don't see how you can say $1000.00/month is going to cover mortgage, taxes, insurance, etc. Chopper didn't offer any details about the expenses he'll face upon purchasing the house. For example, in NY Metro area, just the mortgage alone will be nearly $800 per month. Factor in taxes, insurance and other expenses and even $1500 per month may not cut it. But, that's in the NY Metro area. Based on the details of the house, he lives in an area where real estate is _much_ less expensive. So, while the mortgage payment may be similar, everything else will be different.

Robert
Why assume there's going to be a mortgage?

The whole point in buying an investment property is to have someone else pay for it.

There wouldn't be any point in paying cash for an investment property.
This makes absolutely no sense.


The whole point in buying an investment property is to have someone else pay for it.
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Re: Thoughts On Becoming A Landlord
Posted by: JEBB
Date: August 24, 2014 02:11PM
My experience is that owning rental property is nothing but headaches. If you think that there is money to be made in real-estate I suggest investing in a REIT. That way there will be no calls at 3am complaining about a toilet overflowing or missed rent payments. Also there is no assurance the value of that property will increase.
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Re: Thoughts On Becoming A Landlord
Posted by: Robert M
Date: August 24, 2014 02:29PM
Free,

Exactly and going the mortgage route isn't just because it's an investment property. Interest rates are still extremely low. Maybe not quite as low as a year or two ago but still very low and some of the least expensive money someone can buy right now. Mortgage also equates tax benefits.

If I remember correctly and I doubt this has changed over the years, people can deduct the interest on the mortgage. That can be hugely significant come tax time. This is on top of the equity built while paying the mortgage. If an investment property, I believe there are additional deductions, i.e. business expenses.

One of the key factors is the owner of the property gets the benefits while the tenant pays the bills. That brings to mind a factor I didn't account for in my post... Profit. The rent should cover mortgage, taxes, insurance, cash towards maintenance and repairs and profit. Some people are fine with just breaking even. Others want to make some money off the deal.

Definitely a reason to consult an accountant prior to making the leap. He/she will offer appropriate guidance. For example, a real estate investment trust (REIT) may prove key.

Robert



Edited 2 time(s). Last edit at 08/24/2014 02:31PM by Robert M.
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Re: Thoughts On Becoming A Landlord
Posted by: Mike Johnson
Date: August 24, 2014 02:45PM
I'm figuring $800 mortgage, $120 taxes, $80 rental property insurance. It's all going to depend on mortgage rates, and insurance costs, and property tax rates, obviously, and as I said, anything like replacing the roof complicates things. Still, using 180 is pretty conservative. Multiply $1000 rent by 180 and you get $18000. If the house cots more than that to buy, it would make more sense to rent. If a house costs less than that, it would make more sense to buy it. If you're thinking of investing, you would add upfront costs to the purchase price, and figure 6% of the purchase price as the realtors' take. So, at $165,000 it looks good at first blush.

19 times out of twenty, somebody is asking whether to buy or hold a house as a rental, and you can just do the basic math and say no, it doesn't pencil out.

I don't own rental properties. Several times I've been asked to invest in a property, and done the projections, and said no.
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 02:48PM
Quote
JEBB
My experience is that owning rental property is nothing but headaches. If you think that there is money to be made in real-estate I suggest investing in a REIT. That way there will be no calls at 3am complaining about a toilet overflowing or missed rent payments. Also there is no assurance the value of that property will increase.

We're talking about one dwelling/one tenant here. Good way to get a taste of whether landlording is for you, and not very frequent 3 A.M. calls. And it's the house next door.
As to the mortgage thing-- not sure where all this silliness is coming from.
If you can have even a hundred dollars left over each month after taxes/insurance/etc. than your return on your money is a zillion times greater than anywhere else your money could be sitting, even if the property ends up not appreciating at all. Most likely scenario is that the OP would clear at least $6-800/mo based on the information provided.
I would guess more forum members than not have at least a couple hundred grand sitting in the bank not doing much for them.




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Edited 1 time(s). Last edit at 08/24/2014 02:50PM by Black.
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 02:53PM
Quote
Mike Johnson
I'm figuring $800 mortgage, $120 taxes, $80 rental property insurance. It's all going to depend on mortgage rates, and insurance costs, and property tax rates, obviously, and as I said, anything like replacing the roof complicates things. Still, using 180 is pretty conservative. Multiply $1000 rent by 180 and you get $18000. If the house cots more than that to buy, it would make more sense to rent. If a house costs less than that, it would make more sense to buy it.

Assuming you meant 'finance?'




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Re: Thoughts On Becoming A Landlord
Posted by: thermarest
Date: August 24, 2014 02:58PM
Buying known property next door is generally a very good thing, imho. I have a couple rentals within two blocks and a couple more two miles away. The proximity has many benefits.

I have [knock on wood] never gotten a 3am phone call and I've not had missed rent payments. Very few repair calls of any type, actually and only one or two urgent calls (water leaks). Whatever issues do come up are bound to be much fewer and less severe when you live next door.

As mentioned by others, would need to know how much down payment and taxes etc to offer a detailed opinion. $1000 vs. $1500 is a big difference, but at first blush that range and purchase price seem fine.
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Re: Thoughts On Becoming A Landlord
Posted by: Robert M
Date: August 24, 2014 03:02PM
Mike,

Under $1500.00 per year in taxes??!?!?!?!?!?!?!? I know that outside of the NY area property taxes can be low but I can't imagine them being _that_ low. Wow!

Robert

P.S. Black, mortgages aren't silliness at all. The only silliness I see is that you think there is anything silly about them.
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 03:08PM
Quote
Robert M
Mike,

Under $1500.00 per year in taxes??!?!?!?!?!?!?!? I know that outside of the NY area property taxes can be low but I can't imagine them being _that_ low. Wow!

Robert

P.S. Black, mortgages aren't silliness at all. The only silliness I see is that you think there is anything silly about them.

Robert,
Odd combination of losing the thread and arguing as if your life depended on it. The silliness is suggesting that there would be no reason to pay cash for an investment property.

Also, in my neighborhood, taxes on most properties are under $2,000 a year, and 165k would be a typical value. It may just be that this is not one of your stronger areas of knowledge.




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Re: Thoughts On Becoming A Landlord
Posted by: chopper
Date: August 24, 2014 03:21PM
I'm a neophyte in these waters and thank all for the guidance.

An issue is that a house several doors down turned into a semi bad section 8-level rental and I don't want to see that continue. Lots of issues at that place, etc. The houses in this old neighborhood are very close together. If that happened next door my wife would probably commit suicide. So I am trying to save my corner of the neighborhood and also basically break even financially. I have kids that can mow lawn shovel walks and paint stuff.

I know the house very well and it needs nothing for day to day life.

If someone called at 3:00 AM--I already have insomnia. So BFD.
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Re: Thoughts On Becoming A Landlord
Posted by: freeradical
Date: August 24, 2014 03:45PM
Quote
Black
Quote
Robert M
Mike,

Under $1500.00 per year in taxes??!?!?!?!?!?!?!? I know that outside of the NY area property taxes can be low but I can't imagine them being _that_ low. Wow!

Robert

P.S. Black, mortgages aren't silliness at all. The only silliness I see is that you think there is anything silly about them.

Robert,
Odd combination of losing the thread and arguing as if your life depended on it. The silliness is suggesting that there would be no reason to pay cash for an investment property.

Also, in my neighborhood, taxes on most properties are under $2,000 a year, and 165k would be a typical value. It may just be that this is not one of your stronger areas of knowledge.


The more highly leveraged you are, the greater the return on your investment.
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Re: Thoughts On Becoming A Landlord
Posted by: Acer
Date: August 24, 2014 03:51PM
Here in an otherwise-reasonable-cost-of-living suburb of Pittsburgh, that 164K house would approach 5K in taxes. I have the stubs to prove it. And remember that investment properties don't enjoy homestead discounts.



Edited 1 time(s). Last edit at 08/24/2014 03:52PM by Acer.
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Re: UPS - they suck
Posted by: Robert M
Date: August 24, 2014 04:03PM
Black,

First, nobody is arguing here. People are discussing the topic. Mortgages are a part of it and far from silly since they are a common means by which people get the money to use for the purchase of real estate. Second, don't put words into my mouth. I never once said anyone should go with a mortgage instead of paying cash. Maybe you should've mentioned to Chopper cash as an option (assuming he has $165k handy) instead of calling mortgages silly.

Robert



Edited 1 time(s). Last edit at 08/24/2014 04:04PM by Robert M.
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Re: Thoughts On Becoming A Landlord
Posted by: C(-)ris
Date: August 24, 2014 04:07PM
Here in MN it is typical to have property taxes in the $1500 range on a $150k house in some areas. Also typical to have them be over $3k. Just depends on where you live.



C(-)ris
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Re: Thoughts On Becoming A Landlord
Posted by: Ombligo
Date: August 24, 2014 04:45PM
Can't speak to Taxes in Florida because they are all over the board. Two identical house, next door to each other can have a difference of several thousand dollars in taxes. One might be $1000, while the other is $3000.

That is because in the early/mid 90's Florida froze property tax increases to 3% per year. When a home is sold it is reassessed to the current value. The argument was that it would save Grandma Widow from losing her paid off home to a tax bill. In reality it has kept many homes far below a fair tax rate (but in Florida, no one wants to pay any taxes at all). There is also a tax exemption on the first and third $25k of a homes value (so a home valued at $75k pays taxes on $25K, while a home valued at $100k pays taxes on $50K; 150k = $100k, etc..)

I've lived in my home since 1991, it is valued at around $175k; but taxable value is $80k -- my taxes are around $950/yr including a $50 trash assessment and a $25 neighborhood lighting assessment. If I bought the place today, taxes would easily be double that amount.

Florida - where nothing is simple (except the politicians)



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-- François de La Rochefoucauld
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Re: Thoughts On Becoming A Landlord
Posted by: BernDog
Date: August 24, 2014 04:45PM
Quote
chopper
I'm a neophyte in these waters and thank all for the guidance.

An issue is that a house several doors down turned into a semi bad section 8-level rental and I don't want to see that continue. Lots of issues at that place, etc. The houses in this old neighborhood are very close together. If that happened next door my wife would probably commit suicide. So I am trying to save my corner of the neighborhood and also basically break even financially. I have kids that can mow lawn shovel walks and paint stuff.

I know the house very well and it needs nothing for day to day life.

If someone called at 3:00 AM--I already have insomnia. So BFD.

One issue that hadn't been brought up was the hit to your own property value by living next door to a rental. Sounds like that's already in your neighborhood, and you'd actually be improving the property value situation by proactively buying the house yourself. At least you'll be more hands-on in taking tenants than a professional landlord or property management company might be. More of a vested interest. You're just beating some other buyer to the punch and keeping them from chopping the place up and slumming it out. Sounds pretty smart to me, assuming you can get good tenants and you can keep the place rented. The only other concern would be if you can manage making the payments if the place is vacant for a while.
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Re: Thoughts On Becoming A Landlord
Posted by: Mike Johnson
Date: August 24, 2014 05:04PM
Quote
Black
Quote
Mike Johnson
Multiply $1000 rent by 180 and you get $18000. If the house cots more than that to buy, it would make more sense to rent. If a house costs less than that, it would make more sense to buy it.

Assuming you meant 'finance?'

No. Sorry, I wasn’t clear at all. And it should have read $180,000, durr.

The 180 thing is really the old Rule of 15, for gauging whether you should rent a house for your family, or buy one. You multiply a year’s worth of rent times 15, and if you can buy a similar home for less than that, you should. 180 is simply 15 * 12. So, if you’re renting a house for $1000/month, and an identical house next door goes on the market for $200,000, just stay put. Six months later when they reduce the ask to $165,000, it makes financial sense to buy it instead of renting your place.

Every neighborhood has its own threshold. If rents go up, or prices go down, so that price/rent drops below that threshold, owner-occupied single family dwellings will turn into rentals. It’s investors coming in, or old lady Semple dies and her kids decide to hold on to her house, or the Smiths move to a nicer house but keep their starter home and rent it out.

The opposite happens, too, of course, as landlords decide to cash out. Old Lady Semple’s kids get a call from a realtor telling them home prices are up 20%, and they boot the tenants and put it on the hot market.

It’s counterintuitive but house rents and home prices don’t correlate in a straight line. Sometimes the slope of the line actually changes from positive to negative; an jump in median home price can even correspond to a drop in median rent. What’s more, landlords, renters, and potential buyers don’t always act rationally. But that’s how most of the money is made and lost in real estate. Somebody paying $1000/month in rent sees home prices going up up up, and buys the identical house for $250,000, because they’re scared of getting priced out of the market. Well, in reality, they’re likely buying at a high point and at serious risk of ending up underwater. Because when the ratio gets that out of whack, for example, smart investors won’t buy rental properties in that market, but will unload them.

I don’t like invoking the Rule of 15 by name for three reasons. One, the Rule of 15 is really more about renting vs buying, not investing. Second, it has been abused by people hawking investment properties. Third, it’s been stretched into the Rule of 17, the Rule of 19, the Rule of 20.

Still, some family is looking to rent a house for $1000/month. Theoretically, they should instead buy the house for sale at $165,000, but they may not have the credit or the down payment or the certainty they’ll live in the area for more than a couple years. So you buy it and rent it to them.
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Re: UPS - they suck
Posted by: Black
Date: August 24, 2014 05:06PM
Quote
Robert M
Black,

First, nobody is arguing here. People are discussing the topic. Mortgages are a part of it and far from silly since they are a common means by which people get the money to use for the purchase of real estate. Second, don't put words into my mouth. I never once said anyone should go with a mortgage instead of paying cash. Maybe you should've mentioned to Chopper cash as an option (assuming he has $165k handy) instead of calling mortgages silly.

Robert

You have completely lost the thread. Get some rest.




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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 05:08PM
Quote
Ombligo
Can't speak to Taxes in Florida because they are all over the board. Two identical house, next door to each other can have a difference of several thousand dollars in taxes. One might be $1000, while the other is $3000.

That is because in the early/mid 90's Florida froze property tax increases to 3% per year. When a home is sold it is reassessed to the current value. The argument was that it would save Grandma Widow from losing her paid off home to a tax bill. In reality it has kept many homes far below a fair tax rate (but in Florida, no one wants to pay any taxes at all). There is also a tax exemption on the first and third $25k of a homes value (so a home valued at $75k pays taxes on $25K, while a home valued at $100k pays taxes on $50K; 150k = $100k, etc..)

I've lived in my home since 1991, it is valued at around $175k; but taxable value is $80k -- my taxes are around $950/yr including a $50 trash assessment and a $25 neighborhood lighting assessment. If I bought the place today, taxes would easily be double that amount.

Florida - where nothing is simple (except the politicians)

Same basic system here in Chicago-- I wouldn't assume it's some sort of local insanity.




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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 05:12PM
Quote
Mike Johnson
I don’t like invoking the Rule of 15 by name for three reasons. One, the Rule of 15 is really more about renting vs buying, not investing. Second, it has been abused by people hawking investment properties. Third, it’s been stretched into the Rule of 17, the Rule of 19, the Rule of 20.
Thanks.




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Re: Thoughts On Becoming A Landlord
Posted by: eustacetilley
Date: August 24, 2014 05:22PM
Quote
chopper
I'm a neophyte in these waters and thank all for the guidance.

An issue is that a house several doors down turned into a semi bad section 8-level rental and I don't want to see that continue. Lots of issues at that place, etc. The houses in this old neighborhood are very close together. If that happened next door my wife would probably commit suicide. So I am trying to save my corner of the neighborhood and also basically break even financially. I have kids that can mow lawn shovel walks and paint stuff.

I know the house very well and it needs nothing for day to day life.

If someone called at 3:00 AM--I already have insomnia. So BFD.

Forget about all the other investment and tax blatherings. You obviously have it in you to be an excellent Land Lord.
This takes a lot of responsibility. I've known only a couple of Good Landlords. I've known far too many of the other kind. The other kind concern themselves only with investments and taxes. They dread that 3:00 AM call, because... because.
Being an owner of property that is let out to whomever is a risk. If you care only about money, it is a risk maybe very well taken, without much effort. (Maybe not these days in certain places, but historically valid nonetheless, which is why there are still Landlords.)

I wouldn't be a Landlord for all the green cheese on the Moon.

A Good Landlord works pretty hard. They not only have their own domiciles to keep on top of- they have others, all of which need to kept in tip-top condition. A Good Tenant helps out of course. It's all part of a Good Deal between Landlords and Tenants.

I come from generations of Tenants. Yes, I have my own home now; how I got it is quite a story, best told elsewhere.
But I clearly remember the time when my Parents invited their Landlord over for Tea and a little bit of unsettling news. We were moving, to a house in the Suburbs, a house with a FHA loan.
He offered a deal- his House, all the acreage, the barns... everything for $28K. About $4k less than the Suburbs.
No deal was made; FHA would almost certainly have disapproved, so we moved. It turns out that the Landlord's eldest Daughter took over after us, and since the Landlord had two other daughters that eventually needed homes of their own, the barns came down, and two little houses went up.

We kept in touch for a time. We had had many landlords, but in this case, we were this Landlord's only non-family Tenant in that house. We were most mutually fond of each other.
Last year, I dropped by. It had been a while, and a whole lot of Housing had happened in the neighborhood since.
The little boy who answered the door was a little confused, but his Mother wasn't. She was a Grand-Daughter of the original Landlord.
Apparently, we had left quite an impression.
My very best to the "Colvin Clan", if any of you happen to drop in.

(Since this thread was labeled "Thoughts On Becoming A Landlord", I thought that it may be apt to give my own Thoughts, as immaterial as they may seem.)

Eustace
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Re: Thoughts On Becoming A Landlord
Posted by: Mike Johnson
Date: August 24, 2014 05:22PM
Quote
Robert M
Mike,

Under $1500.00 per year in taxes??!?!?!?!?!?!?!? I know that outside of the NY area property taxes can be low but I can't imagine them being _that_ low. Wow!

Robert

P.S. Black, mortgages aren't silliness at all. The only silliness I see is that you think there is anything silly about them.

I don’t know where Chopper lives. You’re absolutely right, he could live in a state like Texas where it’s 1.8%. If you rank the states by property tax rates, Maryland falls in the middle at 0.87%. I had to look that up just now, and I’m not going to import it all into Excel and weight it by population, but I stand by guesstimating it as a smidge under 1%.
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Re: Thoughts On Becoming A Landlord
Posted by: Black
Date: August 24, 2014 06:34PM
Quote
eustacetilley

(Since this thread was labeled "Thoughts On Becoming A Landlord", I thought that it may be apt to give my own Thoughts, as immaterial as they may seem.)

Eustace

I think this time you may have come closer to sticking to the OPs actual question than anyone else :-)




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Edited 1 time(s). Last edit at 08/24/2014 06:34PM by Black.
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Re: Thoughts On Becoming A Landlord
Posted by: MarkD
Date: August 24, 2014 07:59PM
You have gotten some good advice about the financial end of buying the house. Your motive is more about helping keep the neighborhood in good shape without losing your shirt (or pants). Real estate is very local and I would encourage discussion and exploration of the local facts in addition to the general and specific financial information here. Libraries & bookstores should have great material looking at these issues.

Keep in mind that if you don't have a tenent, you still have to pay pay all the expenses. Depending on the eviction laws, you may be paying while the tenants continue to live there.

You want to make sure you have something there is a market to rent. Someone who fits into and might even help the neighborhood--remember they do live next door! I think every landlord needs to screen to find the right tenant.

My parents bought a condo for my brother and his wife in the 70's in a big college town--around Texas A&M specifically. Of course the real estate guys told 'em it would greatly appreciate and be a great investment. After they moved, and the housing market took a dive, he found a great tenant, an employee of the university, instead of a bunch of college students. When he left, he recommended a couple that rented the house for a long time while they were buiding their own house. He worked with them and I am not sure if the rent was raised more than once or twice over a period approaching 20 years or more. The renters, handy with tools, did the repairs they could and my parents reimbursed the parts cost. This is an example of the Good Deal between Landlord and Tenant that Eustace described. The condo appreciation was limited because of competition from new construction. The parents ended up with some extra money with little hassle while helping some tenants achieve their dream.

I hope your plan works.
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Re: Thoughts On Becoming A Landlord
Posted by: DinerDave
Date: August 24, 2014 08:31PM
Several years ago I had the chance to buy a vacation rental but did not. We rented two weeks a year there as the kids were growing up, I used to think about what I would do to improve the place. When the owner passed away, his estate wanted to sell instead of rent, as they lived far away. All renters had first crack at buying, was afraid to pull the trigger, regretted it ever sense.
Every story, every situation is different, and the only thing keeping me from investing in rental property right now is liquid $$$.
Mortgage (less than a year left, phew!!), but still have home equity, 0% interest loan for new heat pump, business loan, two kids out of college, but we are helping them with loans, until they are on their feet better, the list goes on. So, if you have the means to do this, I vote that you do it chopper.
Think carefully, weigh both pros and cons, but don't wait too long to decide as I did.

Dave



Welcome to Dave's BBQ!

Many have eaten here....

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Re: Thoughts On Becoming A Landlord
Posted by: rz
Date: August 25, 2014 09:55AM
We have two rentals, one is a few miles away, the other is a few hundred miles away. If I had to do it over, I wouldn't get involved again. It can be a lot of hassle. The one that's local isn't as bad. But there have been issues with tenants in the past. The one that's further away is managed by a company that's local. They haven't always had the greatest luck in finding tenants when it's vacant. And we had to deal with them nickel and diming us on all sorts of questionable repairs. At least the new management is aware of this and now informs us in advance when they feel a repair is necessary and asks us what to do.

Because of the housing crash, the far away rental is still underwater. We're not quite breaking even on it when it's rented. Based on what we owe and the prices there, we're hoping to sell it in the next 2-5 years, which is when we estimate it to sell for enough to cover what we owe plus realtor fees.
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Re: Thoughts On Becoming A Landlord
Posted by: Wailer
Date: August 25, 2014 11:33AM
I've been a landlord for over 20 years. Landlording can be a great inflation hedge investment, but it depends on your skill set and your personality. It definitely is not a "easy way to get rich" and it can be full of headaches and pitfalls that can ruin you financially if you don't know what you are doing. It's no different than running a small business. The key is not so much solving problems but rather avoiding them.

If you have the skills and temperament then it all comes down to, like any other investment, to numbers and liquidity.

I don't like the numbers I'm hearing so far. To keep things simple, assume you paid $165k cash for the property and rented it for $1k/mo. That's 7% return BEFORE expenses, vacancies, taxes, etc. You're probably looking at a 4 or 5% return if all goes well (I never count on appreciation and if you have to hire a property management company or leasing agent, forget it!). Not a great return unless you're in an area where homes are easy to sell, land values are high, and there are lots of tenants. I can get 2.4% with a 10-year treasury and have zero headache and liability and a ton of liquidity (however, inflation will kill my bond whereas the rental should do fine). Obviously, if comparable homes sell for $200k and you can pick it up for, say, $150k, it's probably a good investment regardless of the numbers.

As for all the nonsense about mortgages vs cash, it really depends. If I can borrow cheaply at a fixed-rate for a long term, I'll do that. If I can pay with cash that would otherwise be sitting idle and get a discount on the purchase price, I'll do that. Interest is nothing more than a fee to use money. Renting is a form of letting others use your capital for a fee. Why not borrow at 3% and earn at 10%? Conversely, why borrow at 6% and only earn 4%?

Lastly, if you have other assets, you need to protect yourself from lawsuits. When I started, I didn't have anything, so I just held the property in my own name. If you have something to lose, then you really should use a limited liability entity. Look like a pauper and vet your tenants very carefully; getting 90% of the market rent from a great tenant trumps 110% from a marginal one.
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Re: Thoughts On Becoming A Landlord
Posted by: Bill in NC
Date: August 25, 2014 07:43PM
?

A LLC (owned by you) won't protect you from being sued personally.

And the contingency-fee attorney working for the tenant(s) will almost certainly haul you into a deposition where you'll have to disclose all your assets.

Why not add an umbrella liability policy instead, hold personally, and skip the expense of setting up and maintaining a LLC?

Quote
Wailer
Lastly, if you have other assets, you need to protect yourself from lawsuits. When I started, I didn't have anything, so I just held the property in my own name. If you have something to lose, then you really should use a limited liability entity. Look like a pauper and vet your tenants very carefully; getting 90% of the market rent from a great tenant trumps 110% from a marginal one.
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Re: Thoughts On Becoming A Landlord
Posted by: Wailer
Date: August 25, 2014 08:34PM
Let me make it clear that I would never be the managing member or GP for an LLC or LLP.

Having a C corp with a minority interest as the liable party is the standard today in asset protection. I have yet to see any entity set up this way successfully frivolously sued. I have also yet to see any limited partner/member from losing more than their investment in a lawsuit with merit. LLCs and LPs with no attachable assets rarely even get sued as most lawyers know that they can't draw blood from a stone.

Black swan events occur and everyone should carry ample insurance. However, if you own more than a few units, even a multi-million dollar umbrella may not be enough to protect you from, say, an injury-causing fire. It's not suits from a legitimate torts or negligence that worries me. I'm worried about the contingecy-based lawyers that are just looking for an easy settlement. If they go to the county records and see that I personally own a few properties free-and-clear, I'm going to get sued more than I want. I could spend my life defending these knowing that I'm right or I could take steps to prevent being a target. I don't want to be low-hanging fruit, so I don't keep my assets reachable.
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Re: Thoughts On Becoming A Landlord
Posted by: Bill in NC
Date: August 25, 2014 09:41PM
You're keeping them concealed from 'slip & fall' scammers, but assuming you're not going to lie at deposition all your assets are still reachable for more serious PI claims.

As for C corps, well, I've seen a C corp majority shareholder have their personal assets attached on a multi-million PI suit because they didn't keep up with the formalities like regular board meetings - even though she had parceled out some stock to long-term employees, the majority owner still ran the business essentially as if it was a DBA.

Someone has to make decisions (upkeep, etc.), on the property, and since they'd be the responsible party, legally, to whom is majority interest in "a C corp with a minority interest as the liable party" assigned?

A property management group with generous liability coverage?

Quote
Wailer
Let me make it clear that I would never be the managing member or GP for an LLC or LLP.

Having a C corp with a minority interest as the liable party is the standard today in asset protection. I have yet to see any entity set up this way successfully frivolously sued. I have also yet to see any limited partner/member from losing more than their investment in a lawsuit with merit. LLCs and LPs with no attachable assets rarely even get sued as most lawyers know that they can't draw blood from a stone.

Black swan events occur and everyone should carry ample insurance. However, if you own more than a few units, even a multi-million dollar umbrella may not be enough to protect you from, say, an injury-causing fire. It's not suits from a legitimate torts or negligence that worries me. I'm worried about the contingecy-based lawyers that are just looking for an easy settlement. If they go to the county records and see that I personally own a few properties free-and-clear, I'm going to get sued more than I want. I could spend my life defending these knowing that I'm right or I could take steps to prevent being a target. I don't want to be low-hanging fruit, so I don't keep my assets reachable.
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Re: Thoughts On Becoming A Landlord
Posted by: Acer
Date: August 26, 2014 12:46AM
That T-bill looks better the longer this thread goes on.
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Re: Thoughts On Becoming A Landlord
Posted by: Bill in NC
Date: August 26, 2014 06:54AM
Forget the T-bill, go with a REIT.

Quote
Acer
That T-bill looks better the longer this thread goes on.
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Re: Thoughts On Becoming A Landlord
Posted by: Wailer
Date: August 26, 2014 10:28AM
I'm not disagreeing with anything you are saying but you seem to confuse liable party with likelihood of being sued. I also feel like you greatly underestimate the frequency of frivolous lawsuits when you are a deep pocket with lots of insurance and reachable assets. If you've ever been sued, like I have, you know what life-sucking activity it is. It's one thing to defend yourself when someone has a reasonable claim and it's a totally different animal when the other party is just trying to squeeze money from you to make them go away. Even with ample insurance, it's a waste of productivity and not how I want to spend my time and focus my energy.

If your income property (or any small business for that matter) is set up properly, you greatly reduce the risk of being sued. Period. You won't even get to discovery or a deposition as it'll cost at least $20k out-of-pocket to get to that point. If the suit has merit, you are in a much better negotiating position if your assets are, say, limited partnership units that cannot be liquidated since you are not the managing partner or member. Which of these statements do you disagree with?

My whole original point is that there is more to owning rental property than "buy it and rent it" and that it can very easily cost you more than your initial investment. If you take the right precautions, you can greatly reduce some risks. However, you have to ask yourself this effort plus the other issues of income property, ie illiquidity, tenant issues, etc. are worth a 4 or 5% return versus compared to a 2.4% 10-year bond.
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