Author Topic: Rental Properties?  (Read 4289 times)

lisg

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Rental Properties?
« on: January 06, 2018, 05:39:13 AM »
I'm exploring the idea of buying homes to rent. My initial thought is to use a property manager for many reasons including my lack of expertise and time. I'll be satisfied with approximately breaking even month to month with the payoff being when the loan is extinguished. To cover my risks, I'll get an umbrella insurance policy. Before I jump in to the business, would any rental home owners care to share if this is an attractive place to invest?


globalfinancepartners

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Re: Rental Properties?
« Reply #1 on: January 06, 2018, 07:46:05 AM »
I'm sure others will chime in as well, but it really all depends on your local market and what you can find, close on, and what the economics of those actual properties are.  It can be a good business and there is a lot of bank leverage available.  I would say to shoot for better than "break-even" on monthly cash flow though.  Build in a margin of safety like anything else.

Vish_ram

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Re: Rental Properties?
« Reply #2 on: January 06, 2018, 10:02:29 AM »
Never ever use a property manager. You need to do this yourself, get a feel of the market, get to know the tenants, know the screening, eviction process etc.

I got so screwed using a property manager, who came with excellent referrals and reviews. He brought a criminal as a tenant and I didn't get a single month rent. I just went through eviction with loss of around 10K.

DTEJD1997

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Re: Rental Properties?
« Reply #3 on: January 06, 2018, 11:30:56 AM »
I'm sure others will chime in as well, but it really all depends on your local market and what you can find, close on, and what the economics of those actual properties are.  It can be a good business and there is a lot of bank leverage available.  I would say to shoot for better than "break-even" on monthly cash flow though.  Build in a margin of safety like anything else.

I also can't emphasize what globalfinancepartners says.  Every market in the USA is different...some markets are good, and others I think are terrible and a disaster waiting to happen, and of course most are somewhere in between.

One thing is that you will have a lot of unforeseen expenses, problems & issues.  Therefore you need to shoot for a bit better than breakeven at a minimum.

Also, you might get a property that is breakeven at the beginning, but maybe 2-3 years later you lose a tenant or have major repairs or the market moves, and now your breakeven investment is a solid loser.  Better to start with an 8% income that goes down to 2% vs. breakeven that goes to -6%.

I can also suggest that if you use a property manager, they are going to eat into your profits significantly if you are not careful.  If you are going to get more properties and make this a significant investment, I would go the "do it yourself" route.  You need to get the knowledge & experience if you are going to scale up.

LC

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Re: Rental Properties?
« Reply #4 on: January 06, 2018, 11:43:24 AM »
Agree with vish_ram. This is a type of business where you need to be involved: tenant screening is very important, and you can save a lot of cash doing basic tasks/repairs yourself. Also setting up the property to be tenant-friendly is important. That is, limit the amount of potential damage they can do.
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tombgrt

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Re: Rental Properties?
« Reply #5 on: January 06, 2018, 02:39:23 PM »
What is the equity to loan ratio you guys are looking at when going for rent = loan payments or better?

Here that is very hard unless you take very little leverage.

globalfinancepartners

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Re: Rental Properties?
« Reply #6 on: January 06, 2018, 03:46:58 PM »
Can't speak for others in other markets, but we usually finance 80-75% of the total (purchase price plus renovation cost).  With 5 year, 20 year amortization commercial loans it is 25/75.  30 year conforming financing is much better, but we can't always get it.  You can, of course, "create" equity though renovation and reappraisal, which can allow you to be a lot more creative with financing / refinancing.  Commercial bankers in my market are a lot more amenable to using your excess equity on other properties you own (and they finance) as the "equity" component of another deal than they are to doing any type of cash-out refinancing.  You can take cash out, but they don't like it and the rate is usually 50 basis points higher or something like that.

I would go for better than rent = loan payments.  A simple spreadsheet with actual property taxes (including any reassessment resulting from your purchase / improvements), actual insurance, flood insurance if applicable, an estimate of vacancy percentage (less on multi family, more on one or two unit properties), an estimate of ongoing maintenance costs, landscape maintenance, etc etc...  Shoot for at least some cash flow positive after all that and try to make it an acceptable return on the capital you will have tied up in the thing.

Sometimes you have to get creative in competitive markets.  Some of my friends in New Orleans are selling properties in New Orleans (which have appreciated to low cap rates) and swapping them into multi-family properties in other markets - usually with tax-free (defferred) exchanges.

What is the equity to loan ratio you guys are looking at when going for rent = loan payments or better?

Here that is very hard unless you take very little leverage.

chesko182

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Re: Rental Properties?
« Reply #7 on: January 07, 2018, 03:25:29 PM »
can anyone recommend some good books on real estate investing?

thanks
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Cigarbutt

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Re: Rental Properties?
« Reply #8 on: January 07, 2018, 04:49:28 PM »

bizaro86

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Re: Rental Properties?
« Reply #9 on: January 07, 2018, 06:38:55 PM »
I would make sure you buy with a margin of safety, breakeven isn't good enough. I think you actually need two different types of margin of safety when you're buying a rental property. Margin of safety based on the current value of the property (or possibly a realistic post renovation value) and margin of safety based on income.

I'm pretty glad I insisted on both, as I bought a lot of properties (relative to age/income/net worth anyway) in my hometown from 2009-2013. But my hometown is Calgary, and oil prices tanked shortly thereafter. Happily I sold a bunch in in the subsequent years, but the ones that I held are way down from the peak, both in market value and in rents. If I had bought breakeven properties, I would be losing a pretty material amount of money every month, instead of being breakeven now.

It's worth noting that basically everyone you talk to about this only gets paid if you do deals. That means your Realtor/Mortgage Broker/Property Manager/Lawyer/etc all have an incentive for you to do more deals. Its worth keeping that in mind, because its better (in my opinion) to buy less properties and get better deals.

Value investing still works in real estate, and there are no called strikes.