Home › Forums › Financial Markets/Economics › Rental Economics Sweet Spot
- This topic has 5 replies, 5 voices, and was last updated 12 years, 7 months ago by (former)FormerSanDiegan.
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June 1, 2012 at 11:26 PM #19839June 2, 2012 at 7:16 AM #744832EconProfParticipant
Your questions touch upon several areas, so I’m not sure what to address. Most of the choices you make once you own a rental property are obvious–pick tenants carefully, learn all you can about maintenance & landlord-tenant law, keep good records, etc.
I’d add an often-overlooked rule: think long-term rather than short-term in all your decision making. That will often force you to take less profit now for a much greater gain later on. For example:
1. Don’t scrimp on maintenance, especially when turnover occurs. You’ll attract a better tenant, somewhat higher rent, and a higher price when you sell.
2. Pick a neighborhood with a good future and good demographics over one with problems and seemingly better cash flow.
3. Spend time before investing reading up on what you are getting into, talking to other landlords, penciling out “what if” scenarios with various alternative investments. Write down your assumptions and projections and save them. Revisit them in a few years and have a good laugh.Other items: minimize the down-time of vacancies in every way possible–it will absolutely kill your profitability. For example, when a vacancy approaches, know in advance what it needs for fixup, line up the materials and any workers, go into overdrive to get it perfect and on the market fast. Blitz Craigslist with carefully worded ads and pictures, prepare to show at a moment’s notice. If not rented quickly after several showings, your rent is too high.
A lot of new landlords are buying for cash because non-owner occupied loans are such a hassle and come with a discriminatory interest rate (and because buyers get a far better purchase price with cash). Another route is to buy a rental property as a homeowner with today’s fabulous interest rates, move in for a while, then rent it out. Our Piggs that are agents or brokers can give you more advice about that approach.June 2, 2012 at 9:04 AM #744835CoronitaParticipantdeleted
June 3, 2012 at 11:26 PM #744942(former)FormerSanDieganParticipantMatt-
It depends on your goals, time horizon and individual circumstances.For example, if you are 20+ years from retirement thats one thing. If you are interested in income that’s another. If you are above income levels where you can deduct losses against regular income that’s another factor. If you are buying a property to lock in for potential future downsizing that’s another factor.
What are you trying to accomplish (maximum gain overall 20 years, reducing taxes, maximizing cash flow, minimizing risk) ?Personally, if you are in the accumulation stage (early -mid career) I think its optimal to aim to achieve zero after -tax cash cash flow. This allows you to put the minimum down, minimize impact to your lifestyle and maximize long term return.
Put enough down to allow your tenant to buy your property.June 4, 2012 at 10:43 AM #744987no_such_realityParticipantYes, the sweet spot is 1%
What 1% you might ask, 1% as monthly rent. i.e. Your target is to get to 1% of the homes purchase price as monthly rent. Until then you will lose money.
As for losing money, well, you don’t really want to lose money. You want a paper loss but real money income. In other words, you want depreciation to push you to zero or near zero. If your real tangible expenses put you negative, you don’t even have a tax advantage unless you’re a real estate professional.
If you can keep the actual rent, including vacancies & losses covering expenses: mortgage interest (not principal), insurance, maintenance, taxes, advertising, legal, etc. Then you’re getting the home for your time.
If not, it’s ironically one of things of value in the rich dad series: how many of those deals can you do where you’re lossing money?
June 4, 2012 at 2:02 PM #745013(former)FormerSanDieganParticipant[quote=no_such_reality]Yes, the sweet spot is 1%
What 1% you might ask, 1% as monthly rent. i.e. Your target is to get to 1% of the homes purchase price as monthly rent. Until then you will lose money.
As for losing money, well, you don’t really want to lose money. You want a paper loss but real money income. In other words, you want depreciation to push you to zero or near zero. If your real tangible expenses put you negative, you don’t even have a tax advantage unless you’re a real estate professional.
If you can keep the actual rent, including vacancies & losses covering expenses: mortgage interest (not principal), insurance, maintenance, taxes, advertising, legal, etc. Then you’re getting the home for your time.
If not, it’s ironically one of things of value in the rich dad series: how many of those deals can you do where you’re lossing money?[/quote]
If you can get 1% in our current interest rate environment that is phenomenal. However, that 1% rule of thumb made more sense when bond rates are in the 4 + % range. In a world where long-term bonds pay 1.5%, 12% gross rates might be a signal that that particularly property carries more risk.
I do agree with the point about getting positive / neutral actaul cash flow, but neutral (or maybe slightly negative) phantom tax loss (whether taken or carried), is a good position.
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