Educate me on rental properties.

I think there's a golden opportunity right down the street from me. I live in a nice, quiet, middle class neighborhood of 100 year old houses. Half of the people on my street have lived there their entire life. It's a dead end street bordering a huge forest/park. In the last four years three houses on my block have sold ranging from $72k to $105k. Now there are two foreclosures selling for $25k and 36K that just hit the market. The $25k one had a family renting it for the last two years, and when they moved out the owner basically let the bank have it. I helped them move furniture out, so I know it's not trashed. The $36k house was for sale 3 years ago for $76k. It was on the market for a few months when they decided to rent it out. Those renters were kinda shady, and when they left it also got foreclosed upon. I took a tour of that one before the shady renters went it, and it was pretty nice then. I've seen recent pictures, and it doesn't look like they did too much damage.

Now here's my position. In seven days my house will be paid off. My house payment was $500 a month. If I get a 30 year mortgage on both of these houses it will be about $260 a month total. I'm used to paying $500 a month, so that won't kill me at all, even if they sit empty. If I make sure to get mortgages with no penalties for early pay off, I can pay more, but if one is between renters the payments will be cheap. Insurance and taxes will be about $1500 a year each, so $250 a month for both. So that comes out to $510 a month total for two house payments and insurance/taxes for both houses. So even if they both sit empty, I'm pretty much in the exact same position (financially) as I am now, but with three houses. Houses around here rent for $600-$900 a month. So even if I rent them for $600 each, I'm clearing $690 a month. And I'm two and four houses down from them, so it will be very easy to keep an eye on them.

Here's my plan. Set up a separate account for the houses. The rent money goes in, the expenses go out. Don't touch it otherwise. Every year there should be a pretty good sum accumulated. The plan would be to keep a set amount in the account for maintenance and repairs, and put the rest toward the houses. Even if I decide that being a landlord sucks, both of these houses should flip pretty quickly for $50k or more with some minor clean up.

What am I missing? There has to be a down side, but I really don't see it. How can I go wrong?

separate account is a must.

make sure you can get a mortgage without a signed rental agreement with a tenant.

i paid 5k cash for a house a few months ago and i'll be ready to rent at the end of the summer, but i need to put out the $ to fix it up so i can get a favorable appraisal for a mortgage.

Oh, and I can do just about anything to a house. Plumbing, electrical, roofing, siding, drywall, etc. The only thing I don't know a lot about or have the tools for is HVAC.

Three houses to take care of? Sounds like a lot of work. Are you ready for that? And the headaches of renters being stupid? If you are, then it sounds like a cool opportunity. Good luck!

I have a rental property I am trying to sell. It sounds golden, but in reality, it sucks. The biggest problem is the housing market is stagnate or going backwards, and money going out is flushed.

It also sucks to get calls in the middle of the night when something is wrong, or when there is storm damage, or when renters damage the seemingly impossible. Right now, they current renters have broken the window sills, the window sills! Two of the window sills are broken completely off.

Some repairs are very costly and can take years of rent to make back. Have you priced HVAC units lately? Forget installation, just the price of the units? They you have roofs, privacy fences, flooring (which are sure to be destroyed when the renters move out), painting, plumbing (a main water line broke last year and was over $800 to fix), and the list goes on and on. Some of it is tax deductible, but keep a tab on the laws, they are changing much of it.

It also sucks when they can't pay rent, so you need to make sure you can cover ALL the costs if no rent is coming in. And there will be times when it sits empty.

My parents have 8 rental houses, and I can go on and on with horror stories. Unless you really like this kind of stuff, I STONGLY suggest to move on. If the housing market were better, maybe it would be worth it, but I use the term maybe on purpose. And did I mention my rental is in a great part of town? Tenents are few and far between that will treat rental property with any kind of care.

Also, go to the trouble of setting up an LLC to own the houses. Should one of your tenants do something stupid or go after you, you want your personal assets protected.

patgizz wrote: separate account is a must. make sure you can get a mortgage without a signed rental agreement with a tenant. i paid 5k cash for a house a few months ago and i'll be ready to rent at the end of the summer, but i need to put out the $ to fix it up so i can get a favorable appraisal for a mortgage.

I might be putting the cart before the horse, but I haven't check to see if I can get a mortgage (or two) yet. Worst case scenario is I get a $61k mortgage on my house (since it's paid off) and pay cash for them.

That sounds cheap for insurance, but then again we are in NJ and carry an additional umbrella policy.

Yeah, my rental mortgage went up $200 a month this year, mainly due to rising insurance costs because of last year's tornados. They also vastly increased property taxes this year.

5 years ago, the mortgage was about $450 a month, now it is pushing $700, almost all of it due to insurance and taxes.

funny... I am in the opposite boat. I am a renter with a slumlord. If I did not do all the maintance, this place would have fallen down around my ears years ago

racerdave600 wrote: I have a rental property I am trying to sell. It sounds golden, but in reality, it sucks. The biggest problem is the housing market is stagnate or going backwards, and money going out is flushed. It also sucks to get calls in the middle of the night when something is wrong, or when there is storm damage, or when renters damage the seemingly impossible. Right now, they current renters have broken the window sills, the window sills! Two of the window sills are broken completely off. Some repairs are very costly and can take years of rent to make back. Have you priced HVAC units lately? Forget installation, just the price of the units? They you have roofs, privacy fences, flooring (which are sure to be destroyed when the renters move out), painting, plumbing (a main water line broke last year and was over $800 to fix), and the list goes on and on. Some of it is tax deductible, but keep a tab on the laws, they are changing much of it. It also sucks when they can't pay rent, so you need to make sure you can cover ALL the costs if no rent is coming in. And there will be times when it sits empty. My parents have 8 rental houses, and I can go on and on with horror stories. Unless you really like this kind of stuff, I STONGLY suggest to move on. If the housing market were better, maybe it would be worth it, but I use the term maybe on purpose. And did I mention my rental is in a great part of town? Tenents are few and far between that will treat rental property with any kind of care.

I don't know about the OP, but you have convinced me to never buy a house to rent out.

On the one hand, it sounds like a gigantic pain in the ass.

On the other hand, getting rich isn't supposed to be easy, and letting renters accumulate equity for you seems like a pretty solid path to wealth.

Except right now there are better ways to accumulate wealth. If the housing market were going a different direction, it might be different. In our area, we have a fairly strong market compared to others, but my rental has still lost $10 to $15k over the last 3 years. Combined with the costs of repairs, you are losing money every month. And with the increase in mortage payments, I can barely charge enough in rent to cover those, much less any repairs.

Not to sound too negative, but there is a reality here that can greatly affect you entire life if you do this.

I don't own rental properties, but have thought about it, and one fact not mentioned that would be a huge plus factor is you know the properties and they are just down the street - that makes a midnight repair issue much more managable, AND, you can keep an eye on who comes and goes from the rental units.

klb67 wrote: I don't own rental properties, but have thought about it, and one fact not mentioned that would be a huge plus factor is you know the properties and they are just down the street - that makes a midnight repair issue much more managable, AND, you can keep an eye on who comes and goes from the rental units. Oh, and one thing I forgot, no matter what, never, ever, ever allow pets of any kind!!!!!!!!!!!!!!!!

It sounds good in theory, and mine is a block away, but by law you cannot tell a renter who they can have visiting. Fortunately I've never had a crack house or brothel set up, and for the most part the renters have been calm, but the damage can be bad and unseen. I still do a quarterly walk through and on occasion drop by for unannounced checks. And nothing makes a midnight repair less sucky.

dyintorace wrote: Also, go to the trouble of setting up an LLC to own the houses. Should one of your tenants do something stupid or go after you, you want your personal assets protected.

The issue with an LLC is getting a mortgage. Unless the corporation has a history of doing business and a credit history getting the mortgage will be very hard. Any mortgage you did get probably wouldn't end up being a traditional mortgage and would have credit card rates.

Getting a mortgage for 2 homes without you having a history of renting could be problematic even if you do it in your own name and credit history.

Loans can be too small for lenders to want to make them. Typically loans below $40K and investment loans are the toughest to get and have the highest rates.

They say you should buy low and sell high so that makes now a better time than most to buy property.

I'd say go for it. You're buying low with a prospect of selling high. With a positive cash flow in the meantime! And if the cash flow goes negative (say, a house is empty for a few months) you've got the ability to carry it. You might even consider paying higher payments on the mortgage to get them paid off. You're getting two houses for the price of a new BMW.

Sure, the housing market sucks right now, but this is a long-term play and you would be buying them right with instant appreciation and probably more to come.

You just have to be willing to commit to the work involved, which will mean doing all the repairs yourself, as well as keeping tenants in them.

Sounds like a great opportunity. Good luck!

racerdave600 wrote: Except right now there are better ways to accumulate wealth. If the housing market were going a different direction, it might be different. In our area, we have a fairly strong market compared to others, but my rental has still lost $10 to $15k over the last 3 years. Combined with the costs of repairs, you are losing money every month. And with the increase in mortage payments, I can barely charge enough in rent to cover those, much less any repairs. Not to sound too negative, but there is a reality here that can greatly affect you entire life if you do this.

Housing at a 3-10 year low sounds like a reason to buy, not a reason not to buy. That whole buy low sell high thing.

Oh yeah, the one for $36k has a new roof. The other one's roof is nice and flat, looks like it only has one layer, but the shingles are showing their age. It will probably need to be shingled in the next 10 years, but if it's only got one layer I can do it myself in a weekend.

Well it sounds like you are getting a good deal, maybe you could flip the houses?

I rent out my house right now because I moved and am way underwater on it. I have a prop management company dealing with the tenants, which are college kids since the house is next to the school. I have to say I would rather not rent it but I don't have a choice and at least i can get renters in there. Even with a prop management company i still get the phone calls about a pipe bursting in the house and flooding the living room and kitchen, or a few weeks ago someone broke into the house through the back window which i had to replace out of pocket since the high deductibles.

Owning rental properties sounds really good in theory but the guys making big money without the hassles of rentals are the ones flipping properties.

racerdave600 wrote:

klb67 wrote: I don't own rental properties, but have thought about it, and one fact not mentioned that would be a huge plus factor is you know the properties and they are just down the street - that makes a midnight repair issue much more managable, AND, you can keep an eye on who comes and goes from the rental units. Oh, and one thing I forgot, no matter what, never, ever, ever allow pets of any kind!!!!!!!!!!!!!!!!

It sounds good in theory, and mine is a block away, but by law you cannot tell a renter who they can have visiting. Fortunately I've never had a crack house or brothel set up, and for the most part the renters have been calm, but the damage can be bad and unseen. I still do a quarterly walk through and on occasion drop by for unannounced checks. And nothing makes a midnight repair less sucky.

I wish my landlord did a walk through so I could show him the issues. I mail him a cheque every month... I have seen him 5 times in the past 5 years.. and one of those times was at the store when I ran into him

Go for it now. You're young, you're close, later in life you won't want to.

g/f's dad has a rental property, rather than random inspections, he comes by and checks the smoke detectors and changes the air filters in the a/c every month so he can keep an eye on things.

now is the time to buy, if you look at what the prices were before the bubble inflated, (60-75k? not the 100k they might have gone for before the bubble burst) you stand to roughly double your money once the market rebounds if you keep the places kept up and rented until then.

your challenge will likely be getting a loan that doesn't have a huge rate, and after that it will be keeping them rented and fixing the damage between tenants. a good tenant background check will minimize the damage from tenants. also if you look back at previous rental property threads, you will likely about break even if your tenant changes every year, so you need to keep tenants for at least 2 years to turn a profit. who knows you might get lucky and have someone that moves in and lives there for 15 years and pays off the mortgages for you.

Refi your own house, the one you live in. Get favorable rates on mortgage for a house that you live in.
Pull all that refi money out and use that money to pay cash for rental houses.
Purchase those houses in the name of an LLC as suggested.

Worst that happens here is that you have to walk away from the rental properties by letting the LLC get crushed and then you have to continue to make payments on a house that you have bought once already.

Strizzo wrote: g/f's dad has a rental property, rather than random inspections, he comes by and checks the smoke detectors and changes the air filters in the a/c every month so he can keep an eye on things.

yep.