Posted by Natalie-VA on March 31, 2006 at 17:40:30:
rent was $850 - I should have mentioned that.
Buy and Hold-Is it really worth doing? - Posted by bob
Posted by bob on March 31, 2006 at 01:26:10:
I have been doing a lot of thinking lately about my 2 rental houses I own. Is being a landlord really worth doing? Obviously there are many, many variables that will determine your rate of return.
Here is a question for anyone to think about: What rate of appreciation would it take to get you to consider a buy and hold strategy? I am thinking(guessing!) my area may be at 5% for the next few years. When I do the math it just never seems to make sense. Stocks look more attractive. Of course, cash flow makes a difference too.
So anyway, I am strongly considering cashing out since the juice just doesn’t seem worth the squeeze.
Re: Buy and Hold-Is it really worth doing? - Posted by David Krulac
Posted by David Krulac on April 01, 2006 at 14:57:48:
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the appreciation has been above average in a bunch of places. Here in Pa. 2-3% yr was normal, lately appreciation has been much higher.
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most people can buy a house if they want to, with all the financing options available, therefore the rental market has shrunk and the cream has been skimmed off the top.
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rents have not kept pace with inflation. somebody said to me recently, “why don’t you just raise rents?” were it so easy. the rental market is competitive and if your rents are above market you will either get short term tenancy, or people with poor credit that have been rejected elsewhere.
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that being said there are some people who are classic renters: new high school and college graduates, divorced people, foreclosed people, bankrupt people, singles with ot without kids, people new to area, etc. One tennat that I have had owned 30 rentals in another state, got a job transfer and planned on going back home in 3-4 years. They were ideal tenants. They took extremely got care of the property always paid on time and understood what it was like to be a landlord.
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I’ve been renting properties for 4 decades and rentals have been very, very good to me. An attorney firend of mine has 30 rentals and makes more money from rent than being an attorney. Other friends of mine have retired in their 40’s and live off their rentals.
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Sure rental propeties were cheaper in the 70’s, 80’s, 90, and even last year, but you have to start sometime. Rentals can be a retirement plan, a send the kids to college paln, a pay for kids wedding plan, a vacation club plan, or whatever purpose you want. Rentals can be an income supplement to you full time or part time job or it can be your full time job. You get to decide.
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How many times have I heard? “But you can’t do that today.” WRONG. Another friend of mine just bought a 2 unit, where the gross yearly rent is 50% of the price. Its real hard to wrong with this deal.
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Some properties make excellent rentals. Some properties make lousy rentals. Some properites that are good for re-sale are lousy for rentals. I bought a house that had dead bodies in it when I bought. Non-human of course. It was dirty, filty, and overgrown. New carpet & floor covering, new landscaping and new paint did wonders for this house. Its a beautiful house on a cul de sac street. Its quiet, peaceful, & private setting. Its a lousy rental because tenants thinks its in the middle of nowhere, because the supermarket/drugstore/home center/gas station/fastfood is a whole 3 miles away. Its ifficult to rent, but buyers love it. The point is that not every property is a good rental. Just because ONE rental property is a lousy rental property, doesn’t mean that all rental properties in general are lousy.
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Be selective, buy right. It you buy at the right price its so much easier to make money in rental property
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Being a landlord is not a lot of fun. the most comprehensive resource for being a landlord is the book “Landlording” by Leigh Robinson. It costs about $27.95 and is worth thousands.
Re: Buy and Hold-Is it really worth doing? - Posted by ken in sc
Posted by ken in sc on April 01, 2006 at 11:25:38:
This question can only be answred by you as you know your market, your goals, your other ways to invest money, etc. I have long term rentals, and I like them for the basic reasons:
- Good return via leverage.
- Tax advantages.
- I can buy property below market and rather than sell and pay taxes, I can take that profit into an asset.
As a full time REI, I don’t have 401K and the like. So, I must do something to save for retirement. Now, I have some stock funds, and every quarter I get my statement and see how I did. But I have no control over that. I have rental houses that make a great return because of leverage. If you have 10K invested in a 100K house (hopefully that you bought for 80K or so), and it appreciates 3%, pays down the mortgage $1,500 dollars this year, breaks even in cash flow, and saves you $500 in taxes you would have paid - if we add that up that is $3,000 appreciation + $1,500 principle reuction, and $500 in taxes saved = $5000 on a $10,000 investment. That seems good to me. A 50% return with no taxes. The difference is obvious - you are controlling a 100K asset with 10K cash, thus the higher return on actual cash invested. For short term I dont think rental do as well, as the closing costs will kill your return - you must stay the course for at least 8 to 10 years IMO.
I think free and clear rental houses are weak wealth producers. Most people I know make between 4 and 9% if you do the math without leverage. But coupled with proper leverage, they make a good return.
That being said, there are good years and bad years. Currently in my area, rents are low and taxes went way up, so my cash flow has sufferred. But I do know this, had I not started buying rentals 12 or so years ago, there is just flat out no way that I would have the net worth that I have today. And, I see the light at the end of the tunnel. I have some houses with only 7 or so years to go and I am 42 years old. If I hold on and ride this out, then I think that I will be happy I did. I may exchange into different property, but I don’t think I will sell.
So, I guess the question is, what would you do with the after tax money you get if you sell the rentals, would it create a better return, and what is you goal for the money? Rentals are great for wealth creation as I desribed, but for cash flow to live on it is a long road to get there. I have a business that buys and sells houses, as well as some RE development. That business feeds my family today. My rentals I do not count on for cash. They are long term holdings and as that they do better then average.
Re: Buy and Hold-Is it really worth doing? - Posted by RogerTX
Posted by RogerTX on April 01, 2006 at 08:01:00:
Since I found where I can get 18% interest annually for real estate investment, I have little desire to be a landlord. Is it any wonder I’m trying to sell my marginally appreciating, often vacant, tenant abused rental property?
I mull this stuff over everyday. - Posted by Jeremy FL
Posted by Jeremy FL on April 01, 2006 at 07:28:32:
I own 3sfh and 2 duplexes. They all cash flow, some more than others. I have thought about cashing out many times. I have thought about selling the 3sfh and paying off the duplexes since the appreciation game is slowing a bit. I could sell them all and have a nice nest egg. There are endless scenarios and no clear answers for me. I must admit there are worse problems to have.
Tried this short term strategy? - Posted by Jay
Posted by Jay on March 31, 2006 at 16:07:35:
Trying to stay within topic, what about this: I do not want to landlord so if I find a place in my town,(college town) that has room for additional bedrooms and an increse in rents I buy it. Then I add the beds, increase the rents, get it rented and re-list it based on the higher monthly income. Just a thought, what do you guys and gals think???
Re: Buy and Hold-Is it really worth doing? - Posted by Sean
Posted by Sean on March 31, 2006 at 14:13:21:
Appreciation is just icing…
I live in an area where only in the BEST of times you can expect a 5% appreciation rate… generally its only a few percentage points… but you know what… when you buy and hold it doesn’t matter.
I buy a house today, lets say it costs me 50k, and I pay it off in 15 years… and during the payoff I average $150 a month true profit after all expenses… then after its paid off I average $500 a month after expenses and I own it for 30 years, and at the end of 30 years I sell it for 50k (0 Appreciation for 30 years)
1215015=27,000
+1250015=90,000
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50,000
167,000
Now, 167,000 of total income over 30 years, assuming EVERYTHING stays the same… no increase in value, no increase in rent… nothing… Now if I buy this property with no money out of pocket, or better yet, put money in my pocket when I bought… I’ve averaged about 5500 per year of profit from owning this property over those 30 years…
Now the question is, is dealing with the occassional headache that comes from owning this property worth 5.5k a year? Given that I’d say I don’t spend more than 10 or 20 hours a year on any given property … that’s a payday of $225 to $550 per hour…
Not too shabby…
Yes I know this evaluation leaves out inflation etc etc… but turning $0 into 167k isn’t a bad deal.
Re: Buy and Hold-Is it really worth doing? - Posted by Natalie-VA
Posted by Natalie-VA on March 31, 2006 at 09:23:03:
Bob,
I would take a look at each house individually and crunch the numbers. You can look at how much cash you have invested in each one and what return you get on that cash. For example, I have a rental that only cashflows $120 per month. BUT, I only have $5000 invested in it. That’s not a bad return.
On the other hand, if I sell it, I will walk away with around 45k after taxes. I can do a lot more with that 45k than making $120 per month. I would make more in a money market account without all the hassle.
Just wanted to give a couple different ways of looking at it. By the way, I’m selling mine.
–Natalie
Re: Buy and Hold-Is it really worth doing? - Posted by jeffnc
Posted by jeffnc on March 31, 2006 at 09:15:26:
I echo many of the above comments. I grew up in a “buy and hold” family, and started on my own about 12 yrs. ago. I look at this strictly as my retirement strategy. Any positive cash flow goes into reserve for future repairs (roofs, HVAC, etc.) or purchasing the next one. It’s not quite as cumbersome for me as it is for others because my JOB is owning a property management company.
It’s not easy, or quick, but I have watched my parents live comfortably off rental income for the last 20 yrs. That’s with a mixture of residential and NNN commercial property. That is only possible because they did not sell earlier.
Wholesaling, flipping, etc., IMO, are not truly INVESTING…unless you are plowing some of the proceeds into something long term. Otherwise, in 25 years, you still need to flip, wholesale, etc. Don’t misunderstand–they’re still great strategies for INCOME NOW. Use buy and hold for building assets and “mailbox money” in the future.
Just my opinion.
In m
Not if you want to make Quick bucks - Posted by Frank Chin
Posted by Frank Chin on March 31, 2006 at 08:20:20:
Bob:
It depends on your time horizon, and what you want to do.
For instance, many doctors, dentists, professionals do real estate as a retiremnt plan. They structure the deals so the rent will carry a 15 year mortgage for instance. If they buy one a year, starting this year, 15 years from now, one house becomes mortgage free every year, and a good retirement could be had with a few “free and clear” houses.
How does this compare to someone making quick bucks doing flips??
My brother in law is the doctor in the family, and had been at it for around 20 years. With a lucrative profession, a name in the field, why would he trade a 250K/year practice in place of knocking on doors, in strange neighborhoods, talking to folks in foreclosure?? Why go into debt going to medical school if you’re going to do this??
Real estate is a long term retirement plan for him.
Buy and hold can be most “lucrative” if held really LONG TERM, like two generations. A customer of our business came in to chat this morning, and he was a buyer in the Supermarket business here, and retired recently.
Said he worked for a gentlement who owned 23 supermarkets, but since retired, and the sons took over the business. They owned most of the properties where the stores are free and clear, and little by little, “got out of running supermarkets”, and gone into Real Estate.
For example, a “Rite Aid” down the street rents NNN for $35,000/month. Now, that’s around 400K rent a year. NNN means the owner does nothing but collect the rent.
With the exception of eight supermarkets which they still run, they and with market rents of 30K a month, they collect millions in rent per year. That’s 30K a month on 15 supermarkets they rent out.
Give you a better example.
My dad bought a small commerial property in 1963 for around 25K, assuming a 20 year mortgage with 15 years to go. He bought it off some flippers who got it for 23K, and let it go for 25K when they held it for about 2 years, and didn’t get the 30K they wanted. They made about $2,000.00
Rents for the building runs around $6,000 to $7000/month today, with an annual rent roll of about 80K. At current valuations, where propertied sell at around 12 times RR, the property is worh around “a million”.
My dad and I often muse about it.
He’s comfortably retired with the property. We often wondered what happened to those guys who made the $2,000 on the place. My dad did nothing but sit on it all those years.
We often wondered if he did better, or those guys that made a quick $2,000.
Frank Chin
Re: Buy and Hold-Is it really worth doing? - Posted by Anne_ND
Posted by Anne_ND on March 31, 2006 at 07:37:23:
Bob-
If you own only two properties and they are cashflowing (or close to it) I wouldn’t suggest you sell unless you have something better to put your money into. You should not have too many problems with tenants with just two properties.
You might want to tweak your property management system to increase cashflow or reduce vacancies.
As the others have mentioned, you should be sure to take advantage of all the benefits of owning rental properties: cash flow, appreciation, depreciation and equity build-up. In addition, if you incorporate there are many benefits you could enjoy- have your corp pay your phone bill, or buy your car for instance.
Anne
yes it is, if… - Posted by lukeNC
Posted by lukeNC on March 31, 2006 at 07:08:46:
If you buy right, cash flow is awesome. I dont think being a landlord is worth it though.
I’d buy WAY under value or take over a really really good mortgage, then set it up with a good management company and collect your cash flows.
What I consider a good deal: 25% of the rent or less goes to the mortgage payment.
Before owning rentals have at least $25k in the bank or immediate access to $25k.
If you are not making that kind of money now, I’d sell out.
Cant lose there.
Re: Buy and Hold-Is it really worth doing? - Posted by dutch
Posted by dutch on March 31, 2006 at 06:58:01:
Hold on there Kemosabe. You base an real estate investment decision on appreciation only? You need to go back to school and also get a new accountant.
Did you forget about the “free” equity build up as someone else pays down your mortgage?
Did you forget about the huge tax deductions that each property affords via depreciation, repairs, etc?
What about risk? Even if you house burns to the ground, it’s value in would never go to zero, and unless you’ve done something really stupid, would actually pay off close to full value.
Add all that up and compare that to the stock market. Do stocks give you tax breaks? Do stocks go up in value even if they don’t appreciate? Can stock go to zero value?
Not saying you should be in the business. But your math needs a little “addition”.
Dutch
Re: Buy and Hold-Is it really worth doing? - Posted by rm
Posted by rm on April 04, 2006 at 15:52:20:
“Some properties make excellent rentals.”
What are their characteristics?
Re: Buy and Hold-Is it really worth doing? - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 01, 2006 at 16:15:52:
Yup. Agree 100%. It’s the single best wealth building tool. But it IS long term.
Re: Buy and Hold-Is it really worth doing? - Posted by bob
Posted by bob on April 01, 2006 at 09:16:46:
Please share Roger. How is it you get that return? Financing mobile homes? Thanks, Bob.
Re: Buy and Hold-Is it really worth doing? - Posted by bob
Posted by bob on March 31, 2006 at 22:30:19:
Wow, if you are clearing 500 a month on a free and clear property you are are getting an ROI of 12%(assuming the property is worth 50k) . That is pretty spectaculer. Where are you investing and how many properties do you own?
You are really good at management only spending 10-20 hours a year on these propeties. I just might sell my 300k property, move to your location, buy six of these houses, rent out 5, live in the 6th with a roomate, collect about 2800/month, and work 2 hours a week.
And just think if I got some icing.
Re: Buy and Hold-Is it really worth doing? - Posted by Wayne-NC
Posted by Wayne-NC on March 31, 2006 at 15:23:17:
Hi Natalie, just for curiositys sake at this point, if you sold that house, would the new buyer cash flow at $120/Mo? Or am I making an incorrect assumption somewhere from your info. Please elaborate.
Re: Not if you want to make Quick bucks - Posted by bob
Posted by bob on March 31, 2006 at 09:10:39:
Good answers Frank. You dad’s property worth maybe a “million” has been a gold mine over the years. The return he is getting now based on the dollars invested years ago is awesome.
But what if he sold? Could he replace or even increase his return investing those proceed elsewhere? Just a thought.
I think the problem for me if I don’t have the right buy and hold mindset to hang in there for years.