As has been discussed, lets start an investment property thread. As Fatwallet Finance readers have likely seen , I am a BIG FAN of buying and owning investment property. However, unlike with the 5.25% fixed rate Netbank loan (where almost everyone agrees that is a great deal), NOT everyone will agree that owning investment property is such a great thing.
There are legitimate pros and cons, so its not clear cut that owning investment property is right for everyone. Location, your financial situation, and many other factors determine whether it is a good strategy.
Some Reasons TO BUY investment property: 1. Its how many of the most wealthy people made their money, Almost everyone who is a multi-millionaire my family knows is not from the Internet boom, but from buying real estate and holding onto it. 2. It can provide a steady source of income in later years after mortgages are paid off and you stop working (especially if you havent set up a retirement account) 3. A GREAT time to consider becoming a landlord is when you are considering selling your current home to move to another one. As long as you can get enough rental income to pay the existing mortgage on it, Why pay the realtor's commission, and other costs, when you likely now OWN a great piece of rental property! 4. Rents tend to go up each year, while the mortgage on the investment property remains fixed...thus, more CASH IN YOUR POCKET as the years go by. 5. You can claim a HUGE tax deduction for rental property! (I am not a tax expert so I will let others better qualified elaborate on that one) 6. It plain feels good to own a lot of property. Its the AMERICAN DREAM. 7. I can go on and on...
Some Reasons NOT TO BUY investment property. 1. It can be a headache dealing with problem tenants and problems in the house. 2. There may be some months you will take a loss for repairs, finding tenants, etc, and you should be in a position to be able to weather these losses. 3. Well, thats about the only 2 main problems I can think of.
TIPS AND TRICKS:
If starting out, you want to find property where you will break even or possibly earn positive cash flow, meaning that the rent you will receive will exceed the mortgage payment, taxes and insurance. This way, owning the investment property will not be a current burden on your budget, as it "pays for itself" or even makes you a little money each month.
CAUTION: If you tell you realtor you are looking for properties that will get you the most positive cash flow, they may show you "ghetto" properties" that can be more trouble than its worth. Do your own research on what rents are in the area, and how much the mortgage, texes, etc. will cost.
As with all property, LOCATION LOCATION LOCATION. And what "kind of landlord" do you want to be?
SLUMLORD: Some of the most money to be made is in the ghetto, in areas where you can buy houses and apartments for $20k and under and rent them out to people on govt. subsidies for 3-400/month. But the problems associated with that come as well. Most people who are successful doing this own a number of these properties (they make money by volume), and also have a network of people who collect rent, harass and intimidate tenants, etc. And theres that stigma of being a slumlord.
"NON-SLUM" APARTMENTS/DUPLEXES/CONDOS: again, there is a lot of money to be made here, the downside is you will have lots of tenants (and more tenants usually means more headaches), and the people who reside in these places are not as stable
SiNGLE FAMILY HOUSES: I personally prefer to rent single family houses in nice areas. The tenants you will find for these residences are more stable, and nice houses appreciate more than ghetto houses or duplexes....Fewer tenants= fewer potential issues.
AVOIDING problems: I have chosen to have my properties managed by a professional management company. The quality of these firms vary greatly by area, a good idea is to talk to realtors in the area, as many own managed rental property themselves, and may get a "bonus" or discount on their own management for referring new business. They usually handle all dealings with tenants, from finding and screening tenants to collecting rent to maintenance, etc. They typically charge between 6%-10% of the monthly rent. They are especially useful if the rental property is not in your area, as it may be more difficult to manage rentals in other areas.
I also choose to maintain a HOME WARRANTY on the properties. A home warranty covers the electrical, plumbing, and appliances in the home for about $30-40 month. There is usually a service call fee of $35-50. This way, I do not have to worry about there being a $1000 repair any given month, and as soon as a problem develops, they can call a 1-800 # 24 hours a day and someone will be right out to fix it. This eliminates anyone calling me and bothering me.
Of course, since there is not one clear cut "best" way to own rentals, there will be people who will disagree with my strategy, and I encourage anyone else to share their tips and strategies on their investment property!
Users like you can add images, links and other relevant information about this topic.
Oct. 26, 2013 @ 11:38a by FWjunkie2
posted: Dec. 4, 2001 @ 8:30p
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In general 1% rental income before expenses should be the minimum criteria to buy a rental property so a 100k house should fetch 1000$ a month of rent, or more four-plexes will make you 2% or more!
NOTE: Information below should not be mistaken for the absolute answer. Make sure to contact a legal representative BEFORE getting involved in the process. Please also realize that information can change drastically from region to region.
Q: Does anyone have any recommendations on books for basic landlording, property management?
A: LANDLORDING by Leigh Robinson How To Pick Up Foreclosures, by Wade Cook recommended by MaxMojo How To Buy Foreclosed Real Estate, by Theodore Dallow recommended by MaxMojo
Q: How do I find out if an area is good for being a rental property?
A: MaxMojo said: Try the local Chamber of Commerce, Realtor Board, or gov to try and find current housing stats. You're looking for a low vacancy rate, low new housing starts, population growth, and a strong local economy.
Q: What should I be looking for in a house?
[Q=Aaniel2218] It ultimately depends on all the variables. Just because there are a lot of apartments for rent doesn't necessarily indicate less demand. At the peak of the rental market in Seattle, for example, about two years ago the classifieds were full of listings but decent quality apartments were still renting very quickly. Also, just because there are 50-80 duplexes in your neighborhood, isn't necessarily a negative. What I would do is call and pretend I'm a prospective tenant. I investigate all the variables (see below). If you do that to 8 properties in every area you are interested in, you will then have excellent data to extrapolate potential income & expenses, and most importantly you will be confident in your decision.
VARIABLES I WATCH FOR:
(1) FIRST and FOREMOST, exterior appeal. When a prospective tenant takes a drive by, will they keep on driving??? Is it attractive enough that they could see themselves living there? What do the surrounding properties look like? (Best house/duplex in worst area, etc.) Just because a property doesn't look good upon purchase doesn't mean it can't look good when you get done with it, with minimal expense. View the property with potential in mind, not just it's current status.
(2) INTERIOR ATTRIBUTES: What's the size of the apartment/house. Size of the bedrooms, living space, etc. In the case of a duplex-4plex, 1 BR apartments should be at least 600 sf or larger. 2 BR's should be 800sf and up. If it is too small, for example, you can assume that you will not get the couples, only solo tenants. This means your rent will not escalate as fast (shared expenses means less impact on their bottom-line, thus they can absorb more rent increase before needing to move).
What's the condition of the house/apartment? Needs new carpet? bath remodel? dirty? smokey? Condition of kitchen? I've done probably 40 cosmetic remodels and can pretty accurately guess what's it's going to cost after walking through an apartment. Other things: Is there existing laundry? is the plumbing copper or steel? Has the electrical been upgraded or is it the old knob & tube? Roof condition? What's the heating source? Who pays the utilities? etc. etc. The more you observe the better educated decisions you will have.
(3) NEIGHBORS WITHIN THE PROPERTY/NEIGHBORS ON THAT STREET: A telltale sign is the cars in the driveway. If you see lots of junkers, you have a pretty good idea it's a rough area. Also the condition of the yards, landscaping, etc.
VERY IMPORTANT: Real Estate Confusious say: the quality of the apartment/house will dictate the quality of the tenant and, in turn, the quality of tenant will dictate your monthly Advil bill.
What metrics should I use to determine whether a house is worth the investment?
A: MaxMojo said: The "1% Rule" is simply a quick monthly way of the viewing Gross Rent Multiplier, and it suffers from all the shortcomings the GRM has. BTW 1% monthly figures out to a 8.33 GRM.
For example; It doesn't take into account the down payment, taxes, the upkeep, interest rate, debt servicing, comps, location etc., etc.
It is simply a crude "you must be this tall to ride this attraction" bar of entry that can be used to quickly filter out the overpiced stuff.
Do a few simple property analyisis with your figures and see what ratio you come up with that fits your situation. It may be .75%, 1.2%, whatever. If the prop passes the 1% rules, then it merits a deeper look-see.
Q:Where do you landlord folks get your forms from and what forms are needed?
A:MaxMojo said: There are many differing opinions on the ideal length of a mortgage. My preference is to stretch it out as long as possible, provided that you put the money you don't put into the mort payment into a good investment.
A benefit of taking a longer mort is taht when you're flush with cash you can make extra payment towards principle buy-down, but if things get tight you can just pay the lower minimum.
Q: Owner occupied clause?
A: SUCKISSTAPLES said: Re: Owner occupied - this is a gray area, the rule is ambigous specifaclly becuase peoples' circumtances change, and there are several ways to satisfy the requirements....keep in mind a lender has little incentive to start trouble if you are paying them every month, as they know you will likely stop paying entirely if they cause problems...whichever way you choose to go depends more on your personality, if you are willing to put up the fight if the need ever arises, like whether you try to claim every IRS deduction you can get, knowing that you may have to support your deductions if they trigger an audit...(chances of which are slim).
Q: If I am married is there any advantageous/disadvantageous to putting the house in one's name or ther other?
A: SUCKISSTAPLES said: Another hint if you are MARRIED is to (if possible) buy properties IN ONE NAME ONLY AS SEPARATE PROPERTY. This of course means you can only use the income from that 1 spouse to qualify. The advantages are that EACH of you can buy a property, and the debt wont be counted against both of you on credit reports!
Q: what appliances are typically provided in a rental home?
Foreclosure shopping in most states is broken down into 3 markets:
1. Pre-foreclosure, where you bargain with the owner after they receive their notice of default, but before the property goes up for auction.
2. At the auction.
3. After the auction, where you deal with the bank, or lender, who got the property back at auction when nobody else bid high enough.
All three have their pluses and minuses. #1 involves dealing with people, usually when they're in a difficult time of their life. This requires lots of people skills and can be very time consuming, however under the right conditions can require very little of your money.
#2 is easy, just bring a wad of cash and bid. This also has the added convienience of the senior foreclosing loan needs to be bid upon and purchased, but most all junior lien are wiped off by the foreclosing auction! In other words if a first loan of $100k forecloses, a junior second of $25k is simply wiped out, the winning bidder is no longer responsible for it. The downside is that others, including a junior lien holder protecting his position, may bid against you. And there aren't that many deals that make it all the way to auction, but they do happen.
#3 is fairly easy, but does take some detective work. Also most banks are pretty savy and they have local brokers market repos (know as REO's) in the retail arena.
Q: Should I get Home Warrentee?
A: Daniel2218 said: A general thought about MAINTENANCE: I personally don't use the maintenance contracts. I think they make sense if you have one or two properties, but one can pretty easily find handymen at $12-15 an hour who will do work with minimal supervision. ...
MaxMojo said: A management firm usually charges 6 - 10% for their basic services, 50% months rent to fill a vacancy, and al la carte as different problems pop up.
Q: What Home Warrentee company should I use?
A: SUCKISSTAPLES said: As far as HOME WARRANTY companies go, they usually are state-specific, and only provide coverage in certain states. ... Do a search for home warranty on Yahoo, and there are several sites which compare and list home warranty companies in your state.
Umbrella Insurance is the way to go for liability.
Q: What should I know about trusts?
A:MaxMojo said: Besides placing any income properties in a LLC or Corp, you may also consider placing them in a trust. Although a trust does not offer any legal liability protection, it does do a good job of "hiding" the asset.
For example, if somebody decides to sue you personally, an ambulance chasing contingency lawyer will run a simple search which will reveal all your property holdings (equity). However if your assets are in trusts you will appear to own nothing, therefore the lawyer might tell the client that he will take the case only on a per hour basis. This alone will stop many lawsuits cold.
If they spend enough effort they can easily force your trustee to reveal the benificiary of the trust (you) but there's a good chance they may not get that far. Think of a trust as your first line of defense. It should not replace a proper business entity and a good amount of insurance.
Your trustee should be someone who does not share your last name, lives out of state, is trustworthy, and has some common sense. Your otherwise useless lawyer brother in law is a good candidate.
Trusts cost only a few bucks to establish, have no effect on your taxes, are legal, cost nothing to maintain, are simple to manage, and do not trigger the due on sale clause.
You can also have fun with their names. Try something like "The Thailand Christian Girls Orphans Trust", or the "Keep You Greedy Paws Off My Fat Wallet Trust".
I just reviewed 224 pages on this thread searching for LLC (limited liability company) posts. Here is the summary of my findings: 1) If you only have 1-2 properties, most posts recommend just buying an umbrella liability insurance instead of setting up a LLC. Only allow top quality renters, keep good relations with them, and offer a remedy to any issue quickly and sincerely which will reduce lawsuits in general. One poster stated their tenant was injured slipping on icy walkway and gave them credit of one month rent which not only appeased the tenant, it avoided a lawsuit and did not cause any increase in insurance premium because no claim had to be made on the umbrella insurance. There were a few posts stating their search for lawsuits against owners with umbrella policies did not find any million dollar type settlements. High dollar lawsuits were in the $100K range. If you think about it, that must be true because premiums for umbrella liability policies are quite inexpensive. The only way they can be inexpensive is if they don't payout much in claims.
2) if you do set up an LLC there will be some issues to be aware of: A) If you have a mortgage on the property, the bank could, in theory, demand full payment of mortgage because of the change in ownership. No one posted an experience that it happened. But if interest rates rise and you have a desirable low interest rate, one poster stated he would demand payment if he was a lender so that he could get the funds from you to lend out at the higher prevailing rate. So, beware. B) if you plan to buy a new property with a newly established LLC then you will likely pay higher interest rates than a residential loan to an individual. You will likely have to sign on as a guarator of the LLC to secure a loan, which means you name will be linked to that property (which is contrary to one of the purposes of setting up the LLC). C) Some insurance companies will not insure a property with LLC ownership. But one poster got around it by getting a policy with his own name, then instructing the agent to add the name of the LLC. But, again, your name is linked to that LLC on the insurance policy. D) LLC helps in terms of limited liability when a tenant of that specific property sues. The LLC usually will limit losses to that specific LLC property. BUT if you, personally are sued, for example, because of a car accident you caused, then any asset you own, LLC or not, is at some risk to that lawsuit. It may be more difficult to find the LLC properties, but not impossible.
A frequent method posted of using both LLC and trust: Establish a trust, put the LLC as beneficiary. One poster stated put the LLC as trustee and yourself as beneficiary. So this requires more searching for the correct method. Don't use your name within the naming of either the Trust or LLC.
3) Several posters with numerous rental properties for years stated they do NOT have LLC because of the costs in money and time (tax prep). They have had no issues with lawsuits. They have ample umbrella liability insurance.
4) Trusts: may help is "hiding" ownership because the name of the trust can be difficult to trace. Does not have the anual costs of money and time as an LLC. But is not a vehicle for limiting liability the way an LLC will.
5) When you register your property at the County Registrar, the name of trust and trustee will be shown, but not the beneficiaries. Thus select name of trust that does not disclosed anything about the property or your association to it. Thus select a trustee whose name is not associated with you. Besides umbrella insurance, you should have "landlord insurance" instead of "homeowner insurance" for rental income property. Landlord insurance is also known as liability insurance. Some novice rental property landlords will turn their former primary residence into a rental but neglect to change the property insurance from "homeowner insurance" to "landlord insurance" because it costs more for the latter. It is worth the additional cost for liability protection.
Q: Who can I pick as my renters?
Anyone, as long as you do not pick based on a protected class (age, sex, religion, etc.). See Landlording for a more thorough explanation. Note this book recommends using a 'scorecard' approach to ensure that a consistent approach is used to qualify renters (i.e. 5 points for no negative remarks from prior landlords, -1 point for 1 negative remark, -7 points for 2, etc.).
Tips and Tricks
Daniel2218 said: LENDER FLEXIBILITY: Lenders consider any property up to four units as a single-family residence and thus the requirements are the same as buying a house, including owner-occupying. While you will be looking at a marginally larger purchase price (and thus down payment) compared to a standard 2BR house, there are more benefits (IMO). (Any property with 5 units requires commercial financing and thus a downpayment of 25% or greater, depending on net operating income.)
MORE BANG: On a 4-plex, for example, you have more opportunity to raise rents, minimize turnover costs, reduce downside exposure when you have one vacancy (25%) vs. a house (100%), spread expenses over more tenants, not to mention headaches are under one roof rather than running around all over town. All this potentially equates to more positive (or less negative) cashflow.
DaveHanson said: Another point in favor of Daniel's strategy: you can rent 1-3 units out, and save the 2d-4th unit as owner occupied (second place, guest pad for friends, whatever) and get the better finance terms. Might be a NICE way to go if you then want to sell your main house and need a place to crash while moving into the new place.
SUCKISSTAPLES said: The main reason I have stayed away from multiple family units is that if you have a fourplex, you have 4 ovens, 4 dishwashers, 8 toilets etc, which can result in higher maintenance costs...buying a home warranty also would cost 4 times as much...but if you have an hookup on maintenance, it shouldnt be a problem. Also, in the areas I rent, you tend to get a better quality tenant in a SFR than in neighborhoods with plexes...
I am in the process of reading through this entire thread and I will update this summary with commonly asked questions as I do. Edit as needed to make shorter. Just finished page 20 OrayoflightO
Message edited by: zULuGriD on 2006-07-27 21:04:50 CDT <a href="http://costoflifeinsurance.info"><b>Cost of Life Insurance </b></a>Cost of life insurance ultimately depends on many factors including your age, gender, weight, if you're a smoker, the amount you wish to take out, the period you plan on taking it out for, whether you're a healthy weight, have an illness (terminal or not) and whether or not you work in a hazardous environment. <a href="http://costoflifeinsurance.blogspot.in/ "><b>Cost of Life Insurance </b></a>Cost of life insurance ultimately depends on many factors including your age, gender, weight, if you're a smoker, the amount you wish to take out, the period you plan on taking it out for, whether you're a healthy weight, have an illness (terminal or not) and whether or not you work in a hazardous environment. <a href="https://costoflifeinsurance0.wordpress.com/ "><b>Cost of Life Insurance </b></a> :-Cost of life insurance ultimately depends on many factors including your age, gender, weight, if you're a smoker, the amount you wish to take out, the period you plan on taking it out for, whether you're a healthy weight, have an illness (terminal or not) and whether or not you work in a hazardous environment.
Message edited by: mrpresidentusa on 2012-12-09 22:47:11 CST
Added a tax link at the top, added renter question and fixed some typos above.
Message edited by: robby152 on 2013-03-22 14:31:11 CST
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Senior Member - 6K
Jul. 15, 2009 @ 11:09a
posted: Dec. 4, 2001 @ 9:49p
Thanks for the thread! Some related questions to kick-start discussion:
Any suggestions on good home warranty companies? Or are you with an outfit local only to SF?
Any good suggestions on good mortgage/refi sources for investment (non-owner occupied) properties? I talked with BofI.com's mortage guy about this for a while, and while they do loan on investment properties, you're looking at .6-1.0% higher rate on these.
Suggestions on scoping out good investment property candidates, anyone (other than the obvious--keep your eyes open for good places with motivated sellers, know some good agents, etc.)?
How does one deal with legal liability issues when one becomes a landlord? Will umbrella homeowner coverage help, or is more needed?
Suckisstaples, I'm really looking forward to this thread, thanks to you and all the others in the Netbank thread I have recently become a property owner (and soon to be landlord). I had been a lurker for a while, but that thread convinced me to join the FW community. Anyway, I'm planning on using a management company (charging me 9%), for the first year at least, and have a warranty for the 1st year as well. It's a single family home in a good neighborhood, so hopefully I'll get decent tenants, I definitely don't want to be a slumlord
Any advice from you and others is greatly appreciated.
I've found it easier to just buy high quality REITs...more liquidity and no overhead/unforeseen costs. Although then again I've never owned property, but the headache of all the paperwork, legwork doesn't seem to make the payoff worthwhile...unless of course you got the $$$ to spend.
I'm very interested in this as well. I have about $50k saved up, just dropped out of school, and I was thinking about doing real estate to make some money. I enjoy negotiating and I like the idea of being a landlord anyways. I have a perfect but short credit history of maybe two years with no late payments or anything like that. What would be the best way for me to get started? I'd rather not be a slumlord, but $50k isn't enough to buy a real house. I'm also afraid that because I don't have a job banks won't want to lend to me.
Have to agree with boden11. Owning a house for yourself? Yes. Owning a house to rent out? Not for me. If I want to invest in real estate, I prefer REITs. Liquidity (potentially bad for some people though), less hassle plus no "illusion" of actual returns.
I am 28 years old and live in a rural community(South Carolina) where most homes fall in the 40-100K range. Most are 50-150 years old and in nice neighborhoods. My strategy is to buy a reasonably priced one, do some inexpensive cosmetic repairs while living in it for a few years and then look for another, move in and rent the first one and repeat the process.
I would strongly encourage anyone that wants to do what SUCKIS and I have suggested is get your REAL ESTATE LICENSE. I have mine and have learned a great deal about the entire process and have more than made the $500 it cost for the class and test.
For income verification lenders count 75% of the rental income you take in as actual income to pay your current debt.
All Real Estate Licensing Law is handled at the state level so I can only comment on my state of SC.
I took a class which consisted of 40 hours of lecture,practice tests,etc. After completing the class I received a completion certificate which permitted me to take the licensing test administered by the state. There are two parts to the test, one is state specific laws and the another is general real estate terms,ie escrow accounts, commissions,and so on. The test is fairly simple as long as you prepare and take the practice tests. My instructor was a former teacher for one of the largest licensing schools in SC and he opened up his own school-nice guy.
Once you past the test(which you can take numerous times)you are given a provisional license which is good for one year. You must do continuing education of 15(?) hours before the prov. license expires and then you will be given a permanent license. Every year you must take 5 or 6 hours of contining education to keep your license active. Most continuing ed classes cost about $30-90 and the 40 hour class cost $500.
I would definitely do it the same way again because I have learned a great deal of useful info about the entire real estate process, my rights as a buyer and a seller that a regular joe may or may not know.
One final note SC Real Estate Commission did pull a credit report on me. You must show creditworthiness to receive a license and explain in expicit detail any negative info on your credit report.
sounds like a pretty easy, inexpensive process really.
But what does the license allow you to do that helps you in owning rental properties (or anything else?) You mention the increasing your knowledge/education point, which I understand, but of course someone could do that just boning up on real estate law...?
<< you don't need a real estate license to buy a home, and u dont need one to sell a home IF YOU OWN IT. >>
That is very true but if you are buying(especially) or selling property why pass up the opportunity to earn part of the commission on the sale or purchase? Once you are licensed for five years you can take a class and state test for your BROKERS license and earn more commission from the sales.
My current broker-in-charge gets 45% of the eligible commission and I receive 55%.
If I buy a property from another listing agency(not mine), My broker and I receive anywhere form 3%-5% of the contract price to split at the about percentages.
This is a great side profession if you are a people person.
<< But what does the license allow you to do that helps you in owning rental properties (or anything else?) You mention the increasing your knowledge/education point, which I understand, but of course someone could do that just boning up on real estate law...? >>
Good point about real estate law, but the main reason I did it is for the $$$$$$$$$$$$. I also am active in alot of community activities(ie Chamber of Commerce, County Historical Society, City Planning,etc.) where I encounter numerous people that could be or have been clients of mine. Everyone likes a familiar face.
More like a side job with the potential to make more money. I certainly agree with SUCKIS about owning investment property but I also like the ablity to SELL real estate whenever possible. I have tons of extended family and friends that I can represent in the home buying process and make a little cash too.
By the way, my primary job is as a personal and commercial banker with a large financial institution on the east coast.
Good point, sheabird. And once the word gets out that you're a no-hassles realator, you can make some pretty good $ pretty easily I bet.
BTW, does being a true realtor/licensed to sell this give you easier access to MLS? If you do get MLS listings, how to you manage to do it on the cheap (or is there no way?) On another thread, SIS and others made the point that they think this access is almost always worth what you pay. I've only done FSBOs myself, but assuming their point is valid, getting this access should save some real $.
In order to have a license you must have a broker-in-charge who oversees your transactions, escrow receipts,etc and assumes the repsonsibility of your business practices.
MLS listings in my small rural town is a photocopied listing put out once a month by the local Board of Realtors chair. In larger cities the internet paves the way for access. The Broker-in-charge(who splits my comission) has all eligible properties put on the above list. I think it costs about $100-150 a year.
Ok, this is really interesting. I'm a new homeowner in a 2BR place, I'm considering renting out the second room. Since this would be owner occupied, what sorts of tax breaks can I claim here? I like the idea of somebody else paying for my mortgage.
Also: how can I determine a good price to rent out at? In my area, a 1BR apt goes for about $600+. can I expect that much? or less, because of shared resources?
As far as HOME WARRANTY companies go, they usually are state-specific, and only provide coverage in certain states. Do a search for home warranty on Yahoo, and there are several sites which compare and list home warranty companies in your state.
Umbrella Insurance is the way to go for liability.
As for the RENTAL TAX DEDUCTION, as I stated I am not a tax expert,
While the types of properties you choose to buy vary depending on region, I like to buy newer homes (10 years or less) that will still be fairly new when the 15-year mortgages are paid off. I like homes with tile roofs and stucco exteriors for easy maintenance.
Yes you can definitely also make money by buying, rehabbing and selling property, but this thread is geared to keeping rental property long-term. Here is an example of my property's figures last year:
A 3 bedroom, 10 year old house in Central California, worth $125k: Rent received: 1100/month Management Fee, Home warranty: 100/month Mortgage, Tax, Insurance: $950/month I just about break even every month in the real world, considering the occasional service calls, and misc. etc. but I showed a $7k loss on my taxes, so I ended up gaining approx $2400, or $200/month for year 2000.
In 15 years (thanks to Netbank) this property will be paid off. I will then be making much more net income from the property, and will be little (if any) loss. Then I will be getting (approx): Rent: 1500/month (very conservative) Management, Home warranty : 200/month Tax and Insurance: $200/month $1100/month NET INCOME
I went from 1 -4 properties in the last year, and plan on having 10-20 properties by the time I'm done. When all are paid off, I should be receiving $10-20k NET each month. The phantom losses will still be there, so taxable income will be MUCH lower than taxes on the actual $100-200k profit. In 15 years I will be 42 years old. Time to retire.
If I choose to sell them at that time, even using conservative estimates, I will receive anywhere from 1-4 million in my pocket, after taxes, for doing VIRTUALLY NOTHING except collecting rent and making peyments, shuffling money from one place to another..
I do not have a real estate license, but if you are really interested in this, that sounds like a good idea, then you can probably get half the commission of the properties you buy!...
Regarding RENTING OUT A ROOM IN YOUR OWN HOUSE: see this thread:
While this is a great way to make extra money, I have a few more concerns related to privacy and security ..see peoples comments there....to find out value of a room, look in the classified newspaper, there is usually a section for room rentals (if the city is fairly large)..if not, look on the internet such as on yahoo or classifieds2000.com, and keep in mind a room will get MUCH LESS rent than a 1bd apt will....probably about 1/2
I've got a question that I hope folks don't think is too out of line here, as it affects me potentially getting into the rental property game. Yesterday, I received notification of my approval for a $200k HELO from Netbank that will pay off my current mortgage and leave me ~$55k for putting down on another house. Yesterday, I also received a counter offer from a seller that I think I can live with. It feels like things are just falling into place for this rental venture. However, I found out in the disclosure statement that the house I'm thinking about buying has aluminum wiring in it (built in late 60's). Does anybody have any opinions on how major a deal this is, and any ideas on how much it may cost to fix? I understand replacing the whole shebang with copper is going to cost several thousand dollars, which I don't think I would want to do. Anyone know how much it would cost to do an alumcop retrofit? Assuming all the outlets and fixtures currently in the home are rated for aluminum wiring, I'm not terribly concerned about what's already in place. However, I would want to install a whole house fan and a swamp cooler and I'm wondering about the ramifications of having aluminum in the house.
I'm opposed to playing fast and loose with the "owner occupied" clause--though your point is well taken about legitimately changing your mind. Might it be relatively easy for a mortgage co to claim fraud if someone did this more than once or twice in rapid succession? It's pretty easy to establish actual (if not intended) residency history from credit records, etc, and my wife would be very irked if allegations for fraud of some kind could plauibly be leveled against us (even if unwarranted).
ROFL: Aluminum wiring- my parents house has it, no probs in 40 years except after about 30 years we had to replace one main line for about $600, never any other problems...if its working dont worry
Re: Owner occupied - this is a gray area, the rule is ambigous specifaclly becuase peoples' circumtances change, and there are several ways to satisfy the requirements....keep in mind a lender has little incentive to start trouble if you are paying them every month, as they know you will likely stop paying entirely if they cause problems...whichever way you choose to go depends more on your personality, if you are willing to put up the fight if the need ever arises, like whether you try to claim every IRS deduction you can get, knowing that you may have to support your deductions if they trigger an audit...(chances of which are slim).
Re: Wife getting irked: Another hint if you are MARRIED is to (if possible) buy properties IN ONE NAME ONLY AS SEPARATE PROPERTY. This of course means you can only use the income from that 1 spouse to qualify. The advantages are that EACH of you can buy a property, and the debt wont be counted against both of you on credit reports! Example: If I am married and we both work, but I buy a house as separate property, say I have a $100,000 loan on my credit report. If I am making 30-40k a year it is difficult to qualify for ANOTHER house on top of that debt. But if I bought it as SEPARATE property, my wife has NO debt on her credit report, and can buy the house as HER separate property. This assumes a lot of things, that you both make decent money, have 0 other debts, wife wont get suspicious why you are buying as "separate", etc....It also makes a good argument for a married couple buying 2 "owner occupied" properties, that you were intending to separate for a while and live in the new house, but then reconciled and rented the property out instead....=)
Ganja: Yes I am counting the mortgage on the rental property...
Waterman: I am "fairly" sure rental property rules are NOT the same as "business activity" rules, where you must show a profit 3 out of 5 years. I believe you can show a loss (up to $25k) every year. Some rentals just do NOT make money. Hopefully the tax experts can clarify this one...or you can always send an email to the IRS from their website, they answered my questions within a week...
Thank you Suck. We're submitting the accepted counter-offer tomorrow morning. Inspection is set for Monday morning. If anything horrible surfaces, we'll back out then. I'm looking forward to moving into a bigger house and trying my hand at rental property.
For the uninitiated, what appliances are typically provided in a rental home? A range and dishwasher seem like expected items, but how about a refrigerator and washer & dryer? I'm wondering how much up front costs there will be if I pursue this venture.
Suck, Can you recommend a good city to buy rental property? I live in the Bay Area and the houses here are way overpriced(IMO). Most of the homes are very old and cost at least $400k+ a pop. Where are you finding homes for $125k that rent out for $1k/month? If thats the case, I'd much rather buy 3 homes than 1 old shack.
SUCKISSTAPLES, nice suggestion on the seperate ownership thing, I'd been mulling over that possibility myself. Seems like you could very easily do at least a joint house, one in my name, and one in hers without raising lots of questions, provided the income to qualify is there.
A related question: have you (or others) considered setting up an LLC or Subchapter S subcorp for rental property purchases? I know very little about this, but was wondering if it would allow for additional flexibility or tax advantages.
I am planning a business partnership with a first-rate general contractor to buy one or more properties that he will be able to fix up. My current thinking is that our strategy will be to find properties that bring in significant positive cash flow on a rent - mortgage basis once the repairs are done, with the thought that we might eventually offer them up for sale once the market firms up around here (and once I get a RE license, perhaps.) I teach at a university where housing has been increasingly tight, so I'm leaning towards renting to students. Should be relatively predictable, easy money if the tenants are carefully screened. Anyone have any thoughts on this I might be overlooking?
The tax benefits to all this are truly impressive.
This is a great thread and I would love to throw my .02 worth in:
As a property manager for commercial, industrial, and multifamily properties in the Seattle area for the last six years, I'll throw out a couple of observations.
First, buying houses for rental purposes is a lot more attractive in a buyers' market. This may sound obvious, but for example in the Seattle area, the average home is $285K+, and the upper end rent for a typical home is under $2k, you'll end up dropping $200-$400 per month, depending on expenses.
Because I own apartment buildings (8-20 units), the time & effort of renting out houses is not as cost-effective to me. However, if I were starting out right now I would look more toward a duplex to four plex. Two reasons: lender flexibility and more bang for your buck.
LENDER FLEXIBILITY: Lenders consider any property up to four units as a single-family residence and thus the requirements are the same as buying a house, including owner-occupying. While you will be looking at a marginally larger purchase price (and thus down payment) compared to a standard 2BR house, there are more benefits (IMO). (Any property with 5+ units requires commercial financing and thus a downpayment of 25% or greater, depending on net operating income.)
MORE BANG: On a 4-plex, for example, you have more opportunity to raise rents, minimize turnover costs, reduce downside exposure when you have one vacancy (25%) vs. a house (100%), spread expenses over more tenants, not to mention headaches are under one roof rather than running around all over town. All this potentially equates to more positive (or less negative) cashflow.
Furthermore, (IMO) apartment rents will increase faster in less time. I've find that (for example) four 1BR apartments going for $600 each will go to $700 faster than rent for a house will increase by $400. In my area, 1BR apartments are the most desireable and thus have gone up the most over the last three years.
Finally, it is my experience that these properties will accrue in value just as fast as any rental house. Whenever real estate becomes the "in" investment, as it has in Seattle over the last 4 years with all the microsoft $, the desire for small income producing properties is always very high, ESPECIALLY for properties that an investor can by without having to put 25% down.
corporateclaw said: So I am an attorney, but I don't do transactional stuff so I know very little (nothing) about this, plus I do litigation, so all I ever see is when stuff like this goes sideways, so I think it makes me overly skiddish. Here is our situation:
Wife and I owned outright a duplex in the city of St. Louis. The market for this kind of property in STL collapsed and just will not recover. About 3 years ago we transferred it to an LLC and were renting it out. After a number of issues (and a job relocation out of town) we decided to basically sell it for whatever we could get. The best "deal" was a contractor that had done some work on the property agreed to rent the whole thing from us for a reduced rate for 2 years and then buy it for an agreed upon price that had us only losing like 20-30K on the house in the end (he's renting it out and maintaining it, etc.). The agreed upon date for closing is about 1 year away.
The contractor contacted us to say that he is trying to figure out a way to keep his costs down and deposit requirements down with his bank and wants to do the transaction as a "refinance" with the bank and to do that, they are requiring a "seasoning" period where he's had his name on the title for 12 months before he can "refinance." We asked him to see if it would count if we just sold him the LLC (since all it owns is a bank account and the house) then he'd own the LLC that has owned the house for ~4 years at that point. They said that that would not work.
So, basically, he's asking to turn this into an owner-financed mortgage as far as I can tell. I don't think this is completely insane, but wanted to see what you guys thought and figure out what all I would need to do to get this right. My biggest concern is that basically, this house is a sizeable chunk of our assets and has just been an albatross of horrors for me and my wife and I just want, more than anything in this world, to not own this house anymore. The only real dangers I see in this are (1) obviously if he stops paying, then a foreclosure is much more difficult than an "eviction"; and (2) If I don't get the mortgage and lien correct, then the house becomes a recoverable asset in a lawsuit. I think I can probably get the paperwork right to not worry too much about #2 (but don't really know how to do this) and I'm willing to take the risk of #1 to be done with this thing.
So, what am I missing? And what has been your experience with doing a transaction like this?
I'm not really sure this even makes that much sense. The reason the costs of a refi are lower is because you don't have purchase price fees involved such as a re-issue on a title policy and no owner's coverage on title insurance. Plus there would be no deed recording fees, just the mortgage recording. As him to show you a GFE with the refi vs the purchase numbers. To get to the refi state, you'd have to pay those fees to begin with. I don't think it's a big amount and if you're feeling nice, maybe you just offer to make up the difference or if it's just a few hundred, not even bother because what he's asking is somewhat of a big project for your end.
My other guess is that he's trying to do a cashout refi and you need to have one year seasoning before you can do it, otherwise they go by the purchase price. Sounds like he's trying to have his cake and eat it too. He's basically trying to stack the deck so that everything is in his favor and you want to dump the place so maybe it's in your interest to help him.
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