Real Estate Archives

Don’t Buy Rental Property, It’s Not Worth It.

Buying rental property, it’s like playing a real life version of monopoly! I put the houses on the board and when the Scottie dog lands, I get big money!

The realty of being a landlord and owning rentals, not so much. There might be a Scottie dog involved, but it probably will be be an unapproved pet in one of your rentals that keeps the other tenants up every night with its yapping. Added bonus, odds are as a landlord, you can’t do anything about that unapproved dog. The tenant has rights you know, and you’ll probably have to cut off your nose to spite your face to get it resolved.

Being a landlord is filled with problems both with people and potentially financial. The bottom-line is that rentals almost are never worth the effort, especially if you don’t put a lot of money down.

I have often considered buying a rental myself in fact, but I just have no faith in people. I cannot trust people with my finances.

Do not be tempted by low interest rates. If anything, low interest rates should scare you, because if interest rates ultimately go back up 10 or 15 years from now, the equity in your property might be drained.

I’m from a family with rental experience. Everything from “My garbage disposal doesn’t work because my kid sticks his toys down there” to “the buildings on fire so I called you … not the fire department.” Even though it was my parents who owned them, the imagery of what people will do to your property is forever burned into my memory. I remember cleaning up a rental house where the children had stacked trash so high on the counter that they ended up flipping over the drawers to walk up them like steps to toss more trash on top.

Cincinnati is filled with neighborhoods (some good and some bad), and honestly I wouldn’t own a rental where I was personally willing to live. Far too often though, I find that those areas I would live in have high taxes and not high enough returns to justify getting involved. Trust me when I say, I’m the guy who runs the numbers. I have calculators, spreadsheets, and dozens of pages of paper filled with scribbles of numbers.

I think with most rentals in good areas of Cincinnati, it would be optimistic to get a 7% return with 20% down. I would also argue that there is much more give than take in that optimistic estimate.

Landlords:

  • Over-estimated what they make
  • Under-estimated their costs
  • Under-estimate how much time is spend on their rentals
  • Over-estimate their tax benefits
  • Usually forget that houses and apartments are “used up” every single year (roof, windows, furnace, etc.)
  • Usually only have major gains if the housing market is appreciating
  • Downplay that taxes, insurance, and maintenance costs increase every year
  • Commonly downplay how much opportunity cost they are losing with the equity/money they have in the rental

Let’s also not forget some of the other problems

  • You buy a $500,000 complex? If you bought it through a realtor or broker and it is the fair market value (through a realtor), you just lost $30,000 instantly (6% exit)
  • You are legally obligated and legally responsible to/for those tenants
  • If you get a bad tenant, they can wipe entire years of profitably out (and then some)
  • You are counting on appreciation, but housing could easily depreciate
  • That 3 a.m. phone call that there is no hot water (or that the roof fell in)
  • You want to avoid people? Going to have to pony up some serious dough for a good management company, that might wipe out your margins
  • You may receive worse financing if it is not owner-occupied
  • You should establish an LLC, that might not be insurable (check with your insurer)
  • You probably will need a lawyer and potentially an accountant
  • Rising interest rates = hurt your equity and overall profitability

I’m here to say, if you are young and don’t have more than 20% to put down on a rental, don’t do it. If you are determined to do it anyhow, run the numbers assuming the following.

  • Reasonable vacancy rates (be conservative)
  • Conservative maintenance costs
  • Factor in the cost of property management (this is a worst case scenario, but run the number anyhow)
  • Run the numbers assuming absolutely no appreciation
  • Factor in opportunity cost of your down payment (if you think you can get 5% return and you put down $20k, it costs you $1k a year)

Here is my view. The only way to get a good return is to own in places that landlords are hesitant to own, and praying for appreciation on your properties. That’s a lot of risk and creates a lot of “what-ifs.”

Odds are you will run the numbers and you will see only a tiny 4-10% return. I was up 12% last month and I’m currently up 10+% this month without toilets and tenants. Without transaction fees, apartment showings, LLCs, lawyers, without phone calls in the middle of the night, and without the overall headache.

If you are putting down 20% or less (and not buying in a bad neighborhood), I am confident you could beat that return in the stock market with just a little bit of knowledge.

Consider learning about writing cover calls, a conservative stock position that can easily net 10%+ a year.

In fact, cover calls are extremely similar to rentals without as much hassle. Buy 100 shares of a stock, sell a cover call and get “paid rent” every month (article to follow).

Just think twice before taking the rental plunge.

 

 

 

 

 

I have an affordable house, but I still want to sell my house. Just how affordable is my house? Well it’s full disclosure time.

My monthly payment is $918.25 a month. This includes:

  • the mortgage payment,
  • the insurance, and
  • the taxes for my home.

My itemize tax benefit is $1493.25 a year. $1493.25 / 12 = $124.43 a month

Making my “net payment,” $918.25 – $124.43 = $793.82 a month.

I also get approximately $175 a month of equity per payment.

Making my “net payment,” $793.82 – $175 = $618.82 a month.

And finally, I work at home for my full time career and I can reclaim my City of Cincinnati tax (2.1%), which should work out to almost $900 a year, or $75 a month.

Making my “net payment,” $618.82  – $75  = $543.82 a month, for a 3 bedroom / 2.5 bathroom, double car garage, island kitchen, fenced in yard house in one of the better school districts in Ohio (rated 1,068 in the national, 42nd in state as of May 5th, 2012). If I was to rent this house, it would approximately $1200 or $1300 a month.

Yet, I still want to sell my house.

Why in the world would I want to sell my house when I am paying literally less than half what it would cost? Some reasons why.

  • Walk-ability of my home is zero. Completely car dependent, I hate it.
  • Yard-work is an unpaid labor of love for your house
  • Maintenance isn’t free (think roof, windows, ac, furnace, etc.)
  • Updating your home isn’t free (“I want hardwood”)
  • Things break (the thermostat isn’t working, washer isn’t spinning, etc.)
  • The commute downtown is a bit much, and I find myself avoiding things in downtown Cincinnati because of the traveling time.
  • I am “done” rehabbing this house, and feel it is time to move on to the next project.
  • I have a couple of neighborhoods closer to the city that are absolutely 100% calling me, whether it be renting or owning when I get there.
  • Who doesn’t like flexibility? Owning a home can make you feel trapped.
  • Because of such a good payment, I can be very picky on my selling price.
  • I should walk with a solid $25,000 – $30,000 in cash from the sale of my house.
  • My neighbor just sold her house for an amazing price, which makes a “comp” for my house to sell.
  • Interest rates rebounding could result in very painful losses within the housing market in the long-term.

The decision to consider selling my house isn’t a “spur of the moment decision,” and I am certain I will end up over-thinking it further in the near future. That being said, I plan on meeting with a broker most likely by the end of 2012 or early 2013 to figure out my exact options and potential payouts.

I think the ultimately reason I am leaving though, is I don’t see myself in this house 5 years from now and I feel it is time to “reset.” The amount of equity I build each year is not enough to justify staying another 1-5 years (would be about $11k in 5 years).

Have a story about your home purchase? Share it in the comments.

Buyers Market Real Estate 2012Thinking of buying a house in 2012? It is still a buyers market, and time to be aggressive with pricing.

The seeds have been planted that the housing market is finally showing signs of a recovery, but don’t let it fool you. It is still a “Buyer’s Market,” and if you realtor doesn’t agree, you need to find another realtor.

Despite a constant stream of media influence saying the housing market is finally okay, there are some major reasons the housing market is looking bad for 2012 and onwards. I can do nothing but laugh while reading NAR (National Association of Realtors) reports and Homebuilder opinions in the news. I equate it to asking an apple orchard owner who has put 20 years of his life into his apple orchard, if his apples taste good enough to buy. The conflict of interest is oozing out of the constant “good news.”

Being a homeowner, I hope that America is buying into the fact the housing market has at least bottomed. I however have many concerns about the future. The biggest concerns I have are inflation and interest rates.

If your house appreciates 1.9% in a year and inflation is 3.0%, you have lost 1.1% of your homes value in a year.

If interest rates go up from 3.67% (30 year) to say 5.67%, buying power drastically decreases. The only way the future buyer (who finance at the new rate of 6.5%) can get the same payment as you, is if they pay drastically less for your house. The general rule is a 1% increase in interest rates equates to about a 10% purchasing power loss.

  • $100000 @ 3%, 30 year = $421.60 a month
  • $88250 @ 4%, 30 year = $421.32 a month

That means your $200k house would have to cost $176,500 (-$23,500) for the same payment with a 1% increase in rates. Your $200k house also would have to cost roughly $157,500 (-$42,500) for the same payment with a 2% increase. Noting that a two percent increase historically isn’t much at all.

Crazy to think your $200k house could be worth roughly $42,500 less with rates going roughly from 3.7% to 5.7%. Now of course if interest rates are increasing, you have to hope that the economy is improving to mitigate your loss. Regardless you have any idea how many years of payments it would take to recover $42,500? About 9 or 10 years. Live there a decade and have no equity to show at all.

Buying a Home in 2012 has more potential long-term risk than reward. It is very unlikely that we will return to the pre-housing growth levels, but it is possible that inflation and interest rates will drain your equity out of your real estate (directly and indirectly). So when you are thinking about buying a home, it is time to lowball. If another person comes along and outbids you, let them have it. Try not to get emotionally attached to a particular home, it can be costly.

If you are buying a house in 2012, lowball, lowball, and lowball. Eventually you will hit that person who needs out. The housing market is full of risk in 2012, and don’t let some temporary bias news and spring/summer housing numbers blind you to the fact that it is 100% a “Buyer’s Market.”

Saving Money with Gardening is Unlikely

Growing Your Own GardenIf you are like me, you are probably enjoying the benefits of growing a garden this time of year. The joys of growing a garden are vast, but the benefits are oftentimes overplayed. Saving money with gardening is not as easy as it sounds. Most likely, you will not save any money growing a garden. Does a garden have the potential to save you money in the long-term? Of course, but the typical garden setup is often very inefficient.

Imagine with me, that you want to grow a large quantity of tomatoes. Let’s imagine 20 tomato plants in a 10 by 10 plot. So what kind of costs should you consider for your tomato garden?

First off, you need the seeds or plants themselves to start growing your tomato garden, a cost that varies tremendously based on type of tomato (heirloom for instances) and age (seeds or small plants). You might have to rent or buy a tiller to till your soil. You may need some soil amendments (peet moss, top soil, etc. ). Odds are you will need to protect your investment from fuzzy adorable critters with some sort of wire fencing. Speaking of wire fencing you will most likely need wire fencing posts and wire tomato stilts.  You might need some hoses or hose attachments (I love drip hoses).  Last but definitely not least, you will need water for your plants.

What is the total investment for this tomato plot? About $100 up front and probably about $5 a month in water during the hot months. The math is as follows:

  • Tiller (Rental, 4hrs) – $40
  • Soil Amendments – $20
  • Fencing and Posts – $35
  • Seeds – $1
  • Hose and Attachments – $10
  • Watering – $5 a month

This is a very conservative estimate for growing your tomato garden, but it is easy to see that most likely you are not going to cut out $100 of your food budget with this tomato plot.

You can collect your own water and use a composter to drastically mitigate the costs, but rain collectors and composters are an added upfront cost as well. If you start talking about raised bed gardens, the cost is even worse.

Now of course there are more effective ways of getting your garden to pay out, but the long and short is that most people do not garden with cost in mind. Gardening is peaceful and enjoyable and that is the payoff for most individuals. Individuals who will spend countless unpaid hours tending to large gardens, breaking even or slightly ahead at best.

Best ways to make growing a garden more cost effective.

  • Economy of Scales – Larger crops usually reduce overhead
  • Composter –  You need to amend your soil with nutrients that are cost effective
  • Grow from seeds
  • Have land with good soil
  • Have a free water source
  • Variety of Plants can reduce your food budget. Having just tomatoes might take a chunk of your tomato budget, but why not grow some garlic and onions while you are at it?
  • Selling your garden, but be warned that permits are most likely needed.
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