Casual “Investors” becoming Landlords

[patb]

better be a good judge of horse flesh.

Rent to the wrong tenant and they will trash the place.

[Ren]

Agree with answers so far. I think many people believe that there is more to it – that either it can’t be as easy as it seems, or that it’s TOO difficult/risky. The truth is somewhere in the middle. The naysayers can be stubborn as hell about it, too – wifey was in that camp but I convinced her. We’re pulling the trigger next month, probably Orlando. Phoenix suburbs are actually still a decent buy.

I know a lot of part time landlords. If you ask all of them what their experience has been, the ones who give a glowing review of landlordship are the ones who bought at a good price and rent below market. The ones who warn you not to do it bought during the peak and think they have the best house in the neighborhood, which is their excuse to price it too high, which results in bad tenants (the good ones are getting a better deal from the aforementioned happy landlords). If you get a landlord story from someone, good or bad, get ALL the details.

Of course I look at the rate of return, but never count on appreciation. That’s just not the point – income is. I like to view the entire rent as adding to it. Someone else will buy me multiple properties – paying the PITI and maintenance for 30 years and then funding my retirement (not to mention my primary residence, the kids’ college, and all our car payments).

Oh and that depreciation deduction is huge.

[SD Realtor]

“Oh and that depreciation deduction is huge.”

Yes it is… however it is recaptured by the IRS, (whether you take it or not)

[Ren]

Isn’t that what a 1031 exchange is for? I would never sell it, unless it was to buy other property.

[SD Realtor]

Yep 1031 exchanges are exactly for that purpose. We will run ours out all the way and either exchange during our life or pass them on when we croak to the kids. Currently the basis gets reset on the day you die which is fantastic for your heirs.

[spdrun]

By the time it’s fully depreciated, it’s almost paid off. Why not borrow against it (assuming favorable rates) and buy another property? As Angelo Sangiacomo (infamous landlord of SF said) “never sell.”

[bearishgurl]

[quote=Ren] . . . Of course I look at the rate of return, but never count on appreciation. That’s just not the point – income is. I like to view the entire rent as adding to it. Someone else will buy me multiple properties – paying the PITI and maintenance for 30 years and then funding my retirement (not to mention my primary residence, the kids’ college, and all our car payments). . . [/quote]

I have to question a few things mentioned here. Firstly, Ren lives in Riverside County, CA, no? If he is considering buying investment properties in these rather lower-end, “investor-type” areas in the (transient) cities of FL and AZ that he mentioned, he will attract marginal tenants, IMHO. He will also likely need to pay a local property mgr (10%?) of the rental proceeds on top of PITI for each property. If he gets 30-yr mortgages on them (at non-owner-occupied rates, no less) and he is currently past 30 years old, he will be 60 or older before these loans are presumably paid off by tenants, assuming he never refies them back to 30 years. This is true only IF they are all actually occupied each and every month and don’t end up vacant 1-6 months per year awaiting qualified tenants.

If I read his post right, he will then expect to send his kids to college, pay off his cars, his primary residence and retire on the proceeds from sale of these properties, lol. IOW, even though he stated otherwise, he is obviously expecting not only to hold them past 30 years but make substantial profits upon their sale in order to accomplish these goals.

Sorry, but I just don’t see this constellation. PHX and Orlando really haven’t gone up that much in the last 20 years. Especially Orlando. I have relatives who purchased in both Orlando and nearby Vero Beach over 20 years ago and neither of their properties are worth today what they paid for them … and both of them have been owner-occupied the whole time and NOT rentals! My Vero Beach relative even installed a pool with waterfall which added virtually zero value to their property.

Ren seems to be forgetting that if his kids are already born, they will have long finished college in 30 years and his cars might still be running but will have long been paid off by then.

Perhaps the proceeds from the sale his rental properties could be deployed for retirement purposes, but like SDR said, he will need to allow for “recapture upon sale” at that time. If he 1031’s his rental properties at the time of or past the time of his retirement, he won’t be able to later “retire” in one of his 1031’d properties without paying the capital gains tax on it as it has to be traded “like for like.” For AZ and FL properties, I just don’t see much of a “profit” after taxes, if any, even if a profit was made upon sale …. sorry.

Also, if Ren is currently in “family raising mode” and still wants to move to SD County, as he has stated before here, I wouldn’t get more than ONE rental property if I was him because his lender for the residence he buys in SD is not going to count more than nine months of annual rental income even on a “seasoned” rental. This “artificial deficit” applied to his “Schedule C biz income” will be magnified with each additional rental property he buys with a mortgage.

I don’t know if I believe it, but my RE newsletter subscription “First Tuesday,” predicted this week that prime 30 yr-fixed mortgage rates will go up to 4.5% in SoCal by October/November 2013.

Practically speaking, and knowing how much it costs to raise kids these days, I just think Ren’s rosy prediction is a bit over-the-top and doesn’t take into account all that can happen to him and his family members here in CA between now and then, while his cash is deployed elsewhere and he undoubtedly finds himself robbing Peter to pay Paul for carrying costs on multiple properties and “between-tenant” fix-up expenses.

Now, if Ren was currently an able-bodied 55-65 yr-old cash-paying investment property shopper, that is a completely different story. I’d then tell him to pack up his pickup/SUV/RV with his ladders and diagnostic tools and head east with his clipboard and blank “earnest-money (cashier’s) checks” made out in $5K increments and get back to me in 2-4 weeks with his “results” :=]

Nothing personal, Ren. I’m just using the scenario you described as an example here … for discussion purposes 😉

[spdrun]

If he’s buying with a mortgage in AZ or FL, he may be able to grab a 5+ unit property that quals for commercial financing at a reasonable price. Whole different ball game since as long as the borrower is credit-worthy, the property is vetted more than the borrower. i.e., as a mortgage broker told me, if the deal makes sense — income less vacancy rate is 1.25x expenses at prevailing mortgage rates, then he’ll find someone to finance the deal.

[bearishgurl]

[quote=spdrun]By the time it’s fully depreciated, it’s almost paid off. Why not borrow against it (assuming favorable rates) and buy another property? As Angelo Sangiacomo (infamous landlord of SF said) “never sell.”[/quote]

spdrun, your “friend and mentor” Angelo S. can say that, as can the rest of his brethren in SF whose taxes on multiple income properties have been set artificially low by Prop 13. They would all be fools to sell under current CA law.

HOWEVER, SF is NOT the “AZ” and “FL” we have been discussing here. SF has a never-ending “captive audience” of both prospective buyers and tenants and this will never change. Yes, I meant “never.”

It is what it is.

spdrun, even though you are likely Gen Y and are trying to purchase investment property with a mtg, you fall into my “over-55 prospective all-cash investment-buyer” category. Correct me if I”m wrong here, but based upon your posts, you are single, don’t have children and don’t have a large monthly overhead of “living expenses.”

Not only do you have the “flexibility” that the “Rens of the world” don’t, you have plenty of time to recover from evicting non-paying tenants and tenants who trashed your units more than their deposit could ever cover and then fled, never to be found. You are also far more open-minded than most Piggs and will shop for and make offers on investment properties in any area that makes financial sense.

I see you getting lucky in closing at least 1-2 “distress sales” is SD in the coming year and using them to build a portfolio of rental properties for your eventual “retirement.”

You seem realistic and practical and VERY persistent to me. In the current market, the early, quick and persistent offeror who refrains from “overthinking” eventually gets a worm :=]

[bearishgurl]

[quote=spdrun] . . . i.e., as a mortgage broker told me, if the deal makes sense — income less vacancy rate is 1.25x expenses at prevailing mortgage rates, then he’ll find someone to finance the deal.[/quote]

I don’t doubt that an individual non-resident investor shopping in AZ or FL can find financing for a 1-4 unit property or even a small apt complex. But if I wanted to buy another personal residence for my family in the coming years, I would be concerned about my out-of-state rental unit(s) being dinged as “negative cash flow” by my lender which I showed as “depreciating” on my tax return, even if they actually had a net positive cash flow.

Can you rephrase your statement which I bolded, spdrun? And by “prevailing mortgage rate,” do you mean the actual mtg rate of the mtg currently encumbering the rental OR the current prevailing rate on another mtg the investor is trying to take out? I don’t fully understand what you’re trying to say here.

[spdrun]

Predicted gross income has to be at least 25% greater than the sum of:
(1) Property taxes
(2) Predicted maintenance expenses
(3) Predicted utility costs
(4) Insurance costs
(5) Mortgage payment at the rate the lender does

Basically, “if the property cash flows well, we’ll lend on it.” And remember that having the property held in the name of a corporation becomes easier with commercial loans.

[Ren]

[quote=bearishgurl]
I have to question a few things mentioned here. Firstly, Ren lives in Riverside County, CA, no? If he is considering buying investment properties in these rather lower-end, “investor-type” areas in the (transient) cities of FL and AZ that he mentioned, he will attract marginal tenants, IMHO.
[/quote]

There’s nothing humble about your opinion, BG. Arrogance is your calling card.

Do you know what your problem is? I mean besides pompous social ineptitude? It’s that you assume too much. You assume everyone who doesn’t agree with you is an idiot. You assume we didn’t do any homework whatsoever – in reality, anyone who goes 6 months without a tenant did everything wrong, beginning with location. It is possible to mitigate risk, you know.

For someone who spends such an inordinate amount of time here, you’ve got a lot wrong about me, including something I posted in this very thread. Even after reading that I have no intention of selling for a profit, half your rant was about that very thing (with liberal use of lol’s and smilies to make sure you put me in my place after my imagined misstep).

It isn’t about appreciation or selling – it’s about having the available income and cash to put a lot down on a lot of property (we do), cash flowing well beyond PITI, maintenance, vacancies, and management (if applicable), being smart about what, where, and when we buy, being smart about renting those properties, and living below our means. Selling property in 30 years won’t make a student loan or car payment when it’s needed, but cash flow will, if the numbers make sense before we buy. We also have no intention of buying when we move back to the coast.

Your endless, insulting, bizarre posts are the sole reason I don’t visit here much anymore, and I’m guessing the same holds true for others. I’m sure many would appreciate it if you found another hobby.

[bearishgurl]

[quote=Ren] . . . It isn’t about appreciation or selling – it’s about having the available income and cash to put a lot down on a lot of property (we do), cash flowing well beyond PITI, maintenance, vacancies, and management (if applicable), being smart about what, where, and when we buy, being smart about renting those properties, and living below our means. Selling property in 30 years won’t make a student loan or car payment when it’s needed, but cash flow will, if the numbers make sense before we buy. We also have no intention of buying when we move back to the coast. . . .[/quote]

Ren, you were talking about purchasing several investment properties with mortgages to eventually pay off your residence, vehicles, children’s education and retirement. Since you will supposedly never sell them, you won’t be able to get the kind of cash flow you’re thinking of to do all of these things, IMHO. And if you DO sell properties in those areas you mentioned even after holding them for 15+ years, you may or may not make a profit. A typical profit from sale of residential RE in those states isn’t what it is here …. and buying in “better” areas is more expensive. And you won’t be able to buy as many properties in “better areas” (to attract your “better tenant”) as you could in mostly rental areas.

Of course, you “know all this” and have already figured everything out.

There are GOOD REASONS why residential RE is so much cheaper to buy and also rent in AZ, FL and even RIV County than it is in SD County. If one is thinking investing in rental properties out of state and doesn’t understand the fundamental reasons why the RE sales/rental markets are as they are in those states, then they don’t understand these markets well enough to invest in them, IMHO.

I’m not saying that’s you. Only that investing in distant rental RE can be perilous for someone simultaneously trying to raise a family and hold down a FT job 500 or 3000 miles away from it. It’s better suited to folks who have deep pockets, less daily responsibilities and perhaps be self-employed or retired so they could easily make an impromptu trip to the locale if needed.

I also don’t think it’s that easy for an inexperienced investor (even with good credit) to get repeated non-owner occupied mortgages … at acceptable terms, anyway.

I’ve never had any problems here telling it like it is. If you personally don’t wish to read my posts, feel free to “ignore me.” It won’t bother me a bit.

[bearishgurl]

If PHX and its surrounding areas continue to have new construction units come on board at the rate they are today, this building boom could very well leave 1-6 month … or even longer rental vacancies in many areas, IMHO (yes, “humble”).

It won’t matter if it’s a “nice unit” in a “nice area.” They will undoubtedly take longer to fill again, especially if the owner is “picky.”

These PHX builders (and the PTB who approved the permits/subdivisions) are obviously assuming that there will be buyers/tenants for every one of the units that are currently being built and slated to be built.

PHX was “grossly overbuilt” when builders returned to that market in the last ~year. What if a large percentage of the buyers of new construction coming online there are actually locals? If so, they will vacate the home they sold or rented when they close escrow on their new home. If they were tenants, one more rental unit is added to the mix. If they rented their previous home out instead of sold it, one more rental home is added to the mix.

This “displacement” of population from existing housing to new housing is creating vacancy, the same as it did all over CA during its “building boom” of 2000-2007. This would be a long-term concern of mine if I were thinking of investing in rental property in the PHX area.

SK, if you are around, can you tell us if you think Phoenix’s growth rate will be high enough in the coming years to absorb all that is currently being built and slated to be built there, as well as a good portion of the current resale inventory and rental vacancies?

Your opn would be appreciated.

[spdrun]

Also, US Scare is merging their corp HQ with American and moving shop to DFW.

[Author]

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