Whew! It’s been kind of crazy around here lately. I decided to put our rental home and 4-plex up for sale and the whole process has been a bit hectic these past few weeks. Our tenants moved out of our rental home on Tuesday and since then, I have been fixing what I can. Next week, the contractors will take over and get it ready for sale. FYI, I manage the rental home myself and I have a property manager for the 4-plex.
Why am I selling our rentals now? Things are just starting to turn the corner on the cash flow front and we should make more money this year. Owning rental properties is a great way to generate wealth, so why sell? Well, the market is hot, so it’s a good time to take some profit. Also, I don’t think I’m really cut out to be a landlord right now. Let’s see my reasons for reducing our real estate holdings.
*Here is something new – I’m going to give real estate crowdfunding a try this year. I opened an account at Realty Shares in January and invested $8,000 in a commercial property in Arizona. The ROI for this project is estimated to be 17% annually over 3 years. That’s amazing and I’m anxious to see if they can deliver. This ROI estimate is quite high. Check them out if you want to invest in real estate, but don’t want to be a landlord.
Mrs. RB40 doesn’t support me
Well, she is supportive in general and she co-signs all the loans. However, I don’t think she enjoys being a landlord. She is a busy woman and being a landlord cuts into her time. I take care of all of the tenant interaction, but she’s stuck taking care of the kid while I run around.
She also hates dealing with the banks and real estate agents. It always takes a ton of time to go and sign those 80 pages documents. She is our record keeper and I have to bug her when we refinance or get a new loan.
Mrs. RB40 – It’s just annoying. I have other huge projects that I’m working on, and I’m also job hunting. I really don’t need another hassle right now, even if the mister says he take care of the tenant interactions. I’m also tired of hearing about how taxes are going to be so complicated. I’ve been trying to simplify our lives for some time now, and Joe never makes it any easier. I’m tired of it.
Time Crunch
Why do I have a time crunch? I don’t even have a job anymore. Being a stay at home dad takes up a ton of my time. I blog when RB40 Jr. is asleep or at school and that uses up the rest of my time. We went to the rental house to fix the screen door today and Jr. knocked a closet door off the rail. He just creates more work for me when he tags along. When he starts kindergarten, I’ll have more time to work on other projects. Right now, any project is too much trouble.
Stress
The bane of every landlord’s existence.Being a landlord can be stressful sometimes. I have been lucky and we have had pretty good tenants so far. However, even the best tenants create stress for landlords. Our tenants moved out earlier this week and they didn’t clean the place up that well. The toilet had hard water rings. The fridge and microwave interiors weren’t cleaned well. They ran the self cleaning cycle on the oven, but didn’t clean out all the crud left behind. These are all little things, but they add up and it’s going to cost money to hire someone. Anyway, we argued and they came back to clean up more while I was over there patching holes and painting. Once they cleaned up to my satisfaction, then I refunded their full security deposit.
I’m just not good at dealing with stress especially when it involves other people. I have had a headache for a week now and I’m hoping it goes away once the house is ready to be put on the market.
The nice guy syndrome
Yeap, that’s me. I want to be a nice guy and I usually forgive little infractions. The tenants’ check sometimes arrive a day or two late and I just send them a warning without charging them a late fee. They were long term tenants and I wanted to work with them. It’s probably better to be all business and do everything according to the book. If you’re a day late, you’ll be charged $75.
I’m not a great at DIY
I can fix a few small things, but I’m not great at DIY. It’s expensive to hire a plumber to come take a look at a leak, but I have no idea how to fix it. I also don’t want to drive 30 minutes out to the house and fiddle around with the toilet. We live in a small condo and don’t have space to store a lot of tools. That’s one side benefit to being a landlord, by the way. You can build a nice tool collection and charge it to the business. Anyway, as a result I hire out most of the repairs and it’s costly.
Liability
I really don’t want to be liable for tenants. I try to keep the rentals safe, but you don’t know what your renters will do. One family in our 4-plex must have been watching Treehouse Masters because they decided to build a huge tree house in the backyard. Luckily, the neighbor in the back reported the eyesore and we asked them to take it down. The 4-plex also has a small creek running behind it and I know kids play in there in the summer. I don’t even want to know who would be responsible if someone fell in or something like that. The creek is not part of our property.
A tree house is a liability lawsuit waiting to happen.Not patient enough to wait for cash flow
The properties probably will generate a small positive cash flow this year, but I don’t think it’s worth it. I can invest the money in dividend stock or REITs and receive similar cash flow. The stock market is a lot less work and I know I can handle the volatility. I’m sure the properties will cash flow much better in 10 years, but I’m a little too impatient. I’ll take the profit now while I can.
Market Timing
The real estate market is HOT right now. Houses stay on the market for only a few days and many of them have multiple bids. That’s a huge difference from just 3 years ago. As we all know the housing market is cyclical, but we don’t know when it will turn south again. Once it turns sour, we won’t be able to sell at the price we’d like. We might be stuck with those properties for 6-7 years until the market booms again. See how much your house is worth now at Zillow.
Liquidity
I would like more liquidity at this point. The stock market is at an all time high and I think we’re due for a correction in the next few years. It would be nice to have some liquidity ready for a bear market. Currently, the rentals locked up about 30% of our net worth. That’s a high percentage to be inaccessible.
Luck will turn at some point
As I mentioned above, I have been very lucky with tenants. The ones I deal with directly have been reasonable and mostly trouble free. There are a ton of nightmare stories out there, though. I feel like my luck is about to turn and I’ll get a crazy family. You can’t be lucky forever. Things are been going relatively well for too long now. Of course, you can mitigate a lot of the problems by screening the tenants very carefully.
Lessons Learned
Well, what do you think? Real estate is a great way to build wealth and many people became millionaires that way. It can be a lot of work, though. I just don’t need the hassle right now. Perhaps when I have more time I’ll consider being a landlord again. Here are the lessons I learn.
- Make sure of the property cash flow. Don’t invest in anything that doesn’t make money every month.
- Location – Next time, I’ll buy something closer to where we live so I can keep an eye on it.
- All business – Hire a property manager or tell the tenants that I’m just a property manager. Do everything by the book.
- Raise rent minimally every year – We signed a 3 year lease at the rental home and the tenants balked at any rent raise. That’s another reason why I’m selling. They decided to move out and it’s a good time to sell. It’s better to raise rent just a little bit every year.
- Repair and maintenance will cost more than expected – There will be things that need to be fixed. If you have a lot of time, you can DIY or else you need to have a repair fund ready.
Anyway, being a landlord isn’t too bad. When I have more time, I might consider picking up another rental again. It’d have to be during a downturn, though. It’s practically impossible to cash flow in our market at the current price.
Are you a landlord? Would you consider selling if the price is right?
Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!
Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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Is anyone a landlord living on the same property as the tenants? I have a relative who is a landlord and we’re living on the same property as the tenants, good lord, what a nightmare when things go wrong, they go wrong! We’ve dealt with tenants who refuse to pay the rent, got into legal trouble with parole officers showing up, and I had a shouting match with them.
My god, if you are going to be a landlord, NEVER DO IT ON THE SAME PROPERTY YOU’RE LIVING ON!!! Sorry for the caps but I just felt it was necessary. I can never be a landlord as I’m too much of a nice guy, I would need to put my foot down and even up.
You have to be very choosy if you live on the same property as the tenants.
Nice article. I am at a point where I am able to sustain a living directly from rental income, its very passive. Sure there are occasional hiccups but I generally get to deal with them on my own time within reason. I think the best way to cut down on stress is to find the right tenant in the beginning, and you just can’t be the nice guy. Its important to remember you didn’t get in this business to help people, your in it to build wealth. If you want to be a nice guy start a charity on the side but keep your business separate 🙂
I’ll never want to be a landlord in my life ever again. I bought a home in Ca 12 years ago. I put the unit for rent right after I got keys. My tenant lived there until April 2016. Twelve years of stress and headache. Late payment every month and sometime I gave a portion of tenant owe me for helping out her family. I guess some people just take advantage of me because their know I have soft heart. Tenant gave me only 13 days notice of moving out. I accepted without charge. Original security deposit $1,350 and I decided to return about $700.00 to tenant. I provided her invoices from cleaning to damage and broken items. I waive a lot of items and don’t want to count. I don’t know she agrees with it or not. I sent out an email with letter and pictures, but have not see her response. I hope I am doing the right thing. I wonder after 12 years renting does landlord have the right to deduct cleaning services from tenant security deposit. Please advise.
I think you are thinking about this the wrong way. A 12 year tenant is a major win in this business. AS for deducting for damages and cleaning, if that was in your lease theres no reason to have any emotion, you just doing what was written, not to mention for 12 years they have paid a large portion if not all of the cost of the house. Id do some minor upgrades, and try to rent it out for another 10 years. Your in california Im sure your property has increased in value as well. Happy Investing!
One thing there really isn’t much on out there in the Internet is living in a multi-family and renting out the other floors. Because of the housing stock in our area and our nontraditional jobs, we ended up buying a multi-family. I don’t like living with tenants, even though my husband does most of the landlord responsibilities. I feel like I have no privacy and like my house is not really my own. It’s not as simple as “laying down the rules,” because we inherited the tenants, so every change is accompanied by moans and groans. They spend hours banging on their car in the driveway, they put their laundry to dry up in the yard, they have this ugly tent-shed thing in the driveway that my desk looks out onto, they’re always in the yard or the driveway, which are both right outside my windows, and the set of tenants who do not have rights to the driveway had a friend’s truck parked on our side when I brought home groceries. On blogs, everyone’s like, “well, they help pay the mortgage,” but not really – they help pay their share of taxes, water, common utilities, insurance, and interest. There’s not much left over for the principle. If you consider repairs, depreciation costs, and income tax we have to pay on the rent, we lose money. They pay on time, so my husband doesn’t want to let them go, but I am so tired of having to share my home. I almost liked it better when we were renters.
Sorry to hear that. It sounds tough to share your home. I probably wouldn’t mind it if I have the right tenant. I guess it’s just the luck of the draw. Mrs. RB40 probably wouldn’t like it much, though.
I forgot to say, I’d rather just downsize my house.
I have lots of extra space I don’t need or use. Why am I paying for this???
Everything you wrote above is why I’m so apprehensive about being a landlord. I don’t even have any kids, but I do have a full time job and I don’t want to be stuck running over there all the time and dealing w/ all the b/s that comes along with it.
After working all day at my regular job I don’t have the patience.
Some people can be a landlord on top of a full time job, kid, and sideline jobs. I have no idea how they can do it.
Hi Joe, here in Taiwan, I’m told that if you own a commercial rental property, you can take a %age of the business’ earnings as part of the rent. As the undergrads used to say during my sort-of-recent grad school days: “SwEEEEEEEEEEEt!” (assuming the business does well, I guess).
Oh: I’m told I can’t invest in REITs over here due to not being Taiwanese! Bummer.
That’s nice. I haven’t heard that before. I wonder how they do the accounting, though.
I’m sorry to hear you have to sell Joe. To answer your question.. I would never sell, but it comes down to buying right and having systems in place to relieve stress. Would you reconsider selling if your can have positive cashflow with a property manager?
Bought an 11 unit complex in 2005 and had it with property management from the start. Now going to take over management of it myself. Property managers do not take care of it like I do and they like spending my money too freely. Just recently they charged $100 to turn off the water to a burst water heater and call a plumber. The plumber only charged $102 to repair the work, on a Sunday. Another issue was I was quoted $500 to do a job but the final bill was almost $1,000. Also heard from tenants that many repair issues are simply ignored. I do not trust property managers.
It helps that the complex is only 1 mile from my home so I can more easily take care of it. Add to that I am retired and something to do helps. Also enjoy DIY projects and have a couple of friends who also enjoy these projects so help is available when needed.
Unfortunately, I was retired earlier than expected and didn’t have the reserves you recommend, or that I needed. With time, I have been able to improve the units, get the tenants I want and am working on my emergency fund.
Have been examining my expenses and cutting them as I go. For now, property management is just something I can no longer afford.
Without the income stream from the units, I would not be able to do the things I want. Right now, the units are taking up most of that income and the time will come when there is extra. For now, I enjoy improving the complex and am able to do it.
Good luck with the apartment. It sounds like a lot of work. My property manager also don’t take care of the place like I want. It’s hard to monitor them. I’m sure in 5 or 6 years, the rental income will be much better.
I gave up on my property managers after 6 years.
The bullet list of lessons learned at the end is perfect. Owning real estate would be much easier if every landlord (including me) learned them perfectly before buying any rental properties.
I’d add two points:
– buying investment property for cashflow is pretty difficult with condos and single family households. Even 4-plex units are too small to generate much passive income. It really needs to be small apartment buildings, storage facilities or other multiple unit properties. Although those scares most people because you’re now dealing with commercial loans, it reduces the financial risk considerably and gives you a much bigger upside.
– the reason real estate generates significant wealth is long-term tax-free appreciation.
Cashflow is nice and generates some spending money, but ideally you would never sell an investment property without immediately reinvesting via 1031. You’ll never find that type of return in REITs or any other professionally managed investment vehicle. Unless you start buying real estate at age 20, it probably won’t help you retire by 40 but could certainly make you very wealthy by age 50 or later.
Both of our apt buildings are cashflow positive. That was the prerequisite for buying them. We also had a really small area we were looking, near a college. Never have problems w not paying rent and we put effort into maintaining them so not a lot goes wrong. I think we’re lucky too.
The idea of rental income sounds awesome! But it’s so easy to forget all of the reasons why it might not be a good idea. I don’t think I would make a good landlord myself. I’d probably hire a property manager to take care of my properties.
I am with your wife on this. Being a landlord is too much hassle. I have 3 brothers and all 3 have rentals. For two of them, it is due to the fact that they bought their current houses near the bottom of the Great Recession, which were good moves. But they couldn’t sell their old houses for what they paid for them, so they decided to rent. They both have good tenants now, but one started out will college students who thought growing pot in the garage was a good idea. My brother kicked them out before the police did.
I get taking some gains while the market is still hot, but what about hiring a property manager? It would eat into your earnings a little bit, but it would take away the worst part of owning rental property… managing tenants.
Right now, I’m renting out my old condo to some friends so I suppose I’m “managing” it myself, but they wont’ bug me much and pay within the first few days of each month so it’s not bad at all. It’s part of why I have a 7% cap rate right now.
I do know the good times will not last, but I LOVE the extra $550/mo in net cash flows (after all expenses plus $50/mo maintenance accrual that I set aside). I bought it for ~$95k in 2012 and I could probably sell it within 60 days for $130k+, but I’d rather have the cash flow than the $40k gain (mostly because I have no idea what I would do with an extra $130,000 if I were to sell.
I am positive I’ll need a property manager if/when my friends move out, which will probably cost $1.5k/yr, but I’d still get at least $400/mo in cash flows and have (almost) no headache.
Is the property still cash flow positive if you had a manager?
Yeah, it would still be cash flow positive even with a manager. Not much, though. I can get much better cash flow with REIT. I guess rent is too low in our area for the price of the property.
Go with a REIT. most pay a monthly dividend. They’ve been hammered price-wise over the last 12 months, but are rebounding. Your probably won’t get as much per month as your physical real-estate would bring you, but there are no tenants or headaches. I have O, ARR, WSR. (not an endorsement, just saying).
I’ll put part of the proceed into REIT. Actually, I think REIT will improve our cash flow. The rentals are not making much for me right now. There are just too many repair and maintenance issues.
I think for me the issue would be the time crunch and stress component involved. We do want to get into real estate at some point in time, but with the business we just simply do not have the time to adequately care for it. I know you can hire a property manager, but I’d rather not have that eat into the returns. That said, it sounds like you made the right decision for you at this point in time.
Never. I <3 true passive investing.
We’re going the other direction, Joe, and just now getting into rentals. But if I were faced with the option of cashing out some equity, lock in some gains, and also gain some simplicity, I’d be tempted. The best bit is that you know yourself, so you can make the decision that’s right for you and your family.
I still think rentals are great. The local market is too hot to get into now, though. Good luck!
While it’s your decision, I’m not sure how valid some of the claims are. A lot of them would be solved if you hired a property manager.
Properties should not take that much time to maintain if you have a property manager. They take care of all of the payments, finding tenants, and repairs. All you need to do is make sure the property is insured and make decisions when needed. The management fee is small (usually 5-8%) and for what it saves you in time, it’s worth it.
The cash flow concern depends on your situation, but good investment properties don’t always start cash flow positive. Sometimes they are negatively geared but have good capital gains prospects, which is another way to improve wealth. My first property isn’t cash flow positive, but doesn’t cost me a lot to hold and should go up over time, building my net worth.
Also, it shouldn’t matter how close the property is to you. As long as it’s a good investment, it doesn’t matter where it is.
Sounds like you’ve made your decision based on several factors, so good luck with the sale.
Thanks for your input. The properties in our area doesn’t cash flow very well. They seems to appreciate well, though. If you pick them up at the right price.
Joe,
I’m so glad you’re getting out of the landlording business, at least for a while. It sounds like you’ll be happier, and it definitely sounds like Mrs. RB40 is ready for the break. You’ll probably see better cash flow and a happier household by converting the equity into REIT and/or dividend growth stock investments.
I personally could never be a landlord, and for many of the reasons you cite. I’m about as handy as my girlfriend’s pet chihuahua, and doing a lot of DIY repairs sounds about as enjoyable as poking myself in the eye with a stick.
Best of luck with the transition! 🙂
Best wishes.
Yeah, Mrs. RB40 needs a little less stress at the moment. DIY is okay when it’s my home. When I have to drive 30 minutes to try it out, that’s a pain. Especially since I probably have to go back a couple of times to get it done right.
Still getting used to it. Since October 2013, besides completely re-doing the bathroom, we’ve done some light gardening, bought a snake and fixed a toilet clog, bought some roach bait, troubleshooted a non-starting stove, and filled in a hole left by work from a contractor when it rained. It’s definitely always something, but so far it’s been fun for me.
Fun for me too.
My single-family rental is up-to-date on nearly everything and needs very little. I am very handy and enjoy working with my hands.
I’m blessed that it’s 3 miles away, I write a good lease, and it makes about $200/month cash. So far so good.
There is no easy way to wealth! Anything less than an 8 units requires more work for less money. It is simple economics. Owning income property is a business and it should be treated as such. Your lessons learned is right on.
This is where my head is at….if I am going to have property, I should readjust the RE portfolio and pick up a multi unit when cash and personal time allow.
I am actually going through this exact analysis as I type this….
My current analysis says that I am getting 1-2 pts premium for the fact of having the physical property. However, this costs me liquidity and chews up some mental space. I could cash out and just put the money in a dividend portfolio….
Regarding tax benefits, depending on your tax situation, these can be minimal (I know as my tax situation has changed over the last several years). Keep in mind that depreciation recapture is taxed at ordinary income levels, annual gains are taxed at ordinary income levels and capital gain is taxed at LT gain rate….this is certainly different than a dividend paying portfolio (qualified) being taxed at the LT gain rate and any capital appreciation gains are taxed at LT rate (assuming you hold long enough).
All that being said, still on the fence and not sure what I want to do yet…..
Our tax benefit was minimal because we made too much money in previous years. For 2013, we didn’t make as much income and was able to take a big deduction. That’s nice.
I think you should try it and see if it’s a good fit.
All quite sane reasons for deciding to get out of landlording.
I’m a landlord and I deal with a lot of that stuff too. It can be a hassle for sure at times.
I’d certainly sell if the price was right. I’m in it for the money. But for now I’m sticking with it since we’ve got good cash flow and prospect for future gains are good.
All sounds very familiar. I’ve slept so much better since I dumped all my rentals. If I go in again, it’d be a higher end SFR or a condo. I couldn’t deal with entry level renter stock again. I think more expensive properties end up being cheaper in the long run.
No, I’d never sell my rental! I’ve owned it since college in 1989. It’s just a 510 square foot condo, but it’s located directly above one of Washington, DC’s convenient subway stations on Capitol Hill. I only lived there for 4 years before moving on to a larger home — just 2 doors away — so it’s been super easy to keep track of.
The way young Millennials are crowding into D.C., I’ve always been able to raise the rent. You could say that these tenants have purchased the property for me! Currently, the $900 mortgage is dwarfed by the $1600 rent I collect each month. I don’t remember ever having a “problem” tenant because at this sky-high rate of rent, you just don’t get too many losers. It’s on very “walkable” Capitol Hill, and located just across the street from 2 major grocery stores as well as a host of other stores. No car necessary!
Finally, it’s my intention to move back into this tiny condo when I retire (in 7 years, 18 months and 17 days). At that point, I’m intending to join HomeExchange.com and “swap” this little gem with those owning similar properties conveniently located in the city centers of Europe.
Lucky me, right?
Your condo sounds perfect. I think we’ll go for higher end next time as well. I don’t want to deal with entry level tenants anymore. Late rent checks are a pain.
Great post and interesting for me as I also live in the Portland, Oregon area, I own five rental properties (all are single family detached homes), and hey, my name is Joe as well 🙂
I’ve been very happy with my rentals and I agree with you that it does depend on the type of personality when owning these types of investments whether it’s a good thing or not. Probably stating the obvious here, but I think two of the most important things to make this work or not is buying at the right price and having the right tenant.
As for buying at the right price, all five of my homes have been purchased between late 2011 and the end of 2013. All five of my homes were short sales and they all have very similar characteristics. Again, they are all single family detached homes (no condo’s, no townhouses, etc). They are all located in one of the following cities: West Linn, Tualatin, Wilsonville, and Sherwood. They are all 3 or 4 bedrooms with 2.5 baths. They were all short sales, were in relatively good condition, and were purchased for between $203,000 and $222,000. They are currently valued between $275,000 and $305,000 (based on bank appraisals).
As for getting the right tenants, I try to do this by buying the right property to rent out. I choose these four cities because of their desirable school districts which means most of my prospective tenants have kids/families. Also, the rent I charge is high enough that the credit/background check gives me a good opportunity to weed out those that can’t afford the higher rent.
As for cash flow and investment purposes, two of the five houses are on 15-year mortgages. These two houses are about break-even right now for what I pay in mortage and insurance, maintenance reserve, and vacancy reserve compared to what I take in. However, the plan with these two houses are that they will be paid off in 15 years and I can then sell them to pay for my two kids (currently ages 5 1/2 and 4) college education if necessary (essentially these two houses are their college fund even though I also have 529 Plans set-up for both).
The remaining three houses are on 30-year fixed mortgages and they do generate positive cash flow.
The fact they they are also appreciating in value somewhat (but of course I don’t expect them to go up like during the housing bubble) is a bonus and will of course be a big bonus if/when I decide to sell.
Finally, as to maintenance, I am lucky that one of my best friends is a super handy-man and can take care of most problems. For larger maintenance issues, I have a good list of sub-contractors.
Great job picking up the homes at a bargain. That’s the way to do it. Thanks for sharing your experience. It must have been difficult to get mortgages for 5 houses. How did you do it?
Getting the five mortgages required a little legwork but it wasn’t to bad. I just ended up having to go to two different companies to get the five mortgages. I think it helped that I don’t have a mortgage on my primary residence as it’s paid off. I also think it helped that I had long-term leases on all five houses and the amount of rent was at a high enough value to make the underwriters happy.
The bigger issue I had was that my umbrella policy no longer covered my rental properties after having acquired the fifth home. I had bumped up my umbrella policy to $3 million after I got my second rental. However, my insurance company said umbrella policies will no longer cover any of my rentals after acquiring my fifth (it will still cover everything else). To alleviate any concerns, I just bumped up my insurance on each rental to $3 million. It does cost me more to have this higher coverage but I really don’t have any other choice if I want peace of mind. If anybody out there has an idea on this one, let me know.
Sorry your real estate isn’t working out, as it is one of the best ways to true wealth.
You must have the support of my wife, and as said before, that is probably the key piece. My wife and I have made the decision to invest in real estate together. For us, I do the detail work, but we make the big decisions jointly.
The first thing I get is that you don’t want to be a property manager. And honestly, neither do I, so I carefully hire people. Even if you do it yourslef, you need to factor in your costs for managing it. I have more than six times the number of doors you have, but spend less time on it that you seem to (and certainly have fewer headaches).
I haven’t run the numbers, but the Portland area doesn’t seem to be great for being a landlord.
– Tenant-friendly laws
– Expensive property to average rent. It would be interesting to look at your Pro Forma numbers and compare the difference.
Real Estate is dirty, unlike stocks and REITs. You see all the bad directly and have to deal with it. The same things happen when you own a REIT, you just don’t see it. But you are paying a large amount of money for someone to handle it, and you also suffer from other people’s bad decisions. And you will miss out on the massive tax advantages of being a landlord.
I would caution your on saying “never” invest in Real Estate, but I do agree that your current property doesn’t seem like a great fit.
When we move next (to Portland, ironically), we plan to sell our home here as it won’t make a good rental. It *may* cash flow, but not enough to cover the higher maintenance costs my current home has. If I didn’t own it already I would *never* consider it to be a rental, so best to cash out on the equity and use it in a different manner.
Neil
P.S. I like the paperwork and the massive frustration dealing with loan underwriting. I think it is a great “barrier to entry” that keeps most people out (and the profits in).
Normally, I don’t spend a lot of time on the rentals. It’s just when the tenant move out. We’ll probably hire a property manager if we get another rental. I’m just taking a little break from being a landlord. Once life is a little slower, I’ll probably try again. Yeah, properties are too expensive here. We’ll have to wait for the next downturn to get back in to rentals.
My dad was a landlord so I used to think it was a good idea. When I became an adult I quickly realized that I am not cut out for it. And that was before I owned my own house. I can barely take care of my own house; it seems that regardless of whether I do it myself or hire out, half of things I fix or get fixed, become un-fixed. I don’t think I could handle one or more additional houses with not only maintenance problems, but people problems on top of that.
Thanks Joe for sharing about rentals.
I realized early on that I just didn’t want to hassle rentals and extra real estate. In a way, it was poor thinking on my part because nearly all of my teaching colleagues have become multimillionaires in the S.F. Bay area from their rentals. On my part, I wanted to travel at every opportunity and explore the world. Eventually, we sold everything and still travel exploring the world at age 77, which we have been doing for the past 40 years, one way or another.
Now I see many of my wealthy friends unable to travel abroad. A few, who put it off until they retired, barely got off the ground (so to speak). Some have heart attacks, die on the golf course, cancer gets them, etc. etc. I found that living a simple life without the normal stress of the typical American culture has made all of the difference for my wife and I.
Living in a tiny, movable home (RV) and living off the grid, with solar power and a generator, next to a trout stream, lake or river surrounded by a natural environment, is as good as it gets for us. I think you will continue to do great with income from the Stock Dividends, blogging, and your other investments…plus the eventual social security.
Yeah, I envy people your age who lived in the Bay Area. The housing were a great opportunity back then. Now the price is too high for most people. Well, you enjoyed your life so I think that’s great. Putting off traveling is really a bad idea. My mom is only 65, but traveling is much more difficult now.
Good post, Joe, and encapsulates a lot of my reservations about jumping into the rental business. I think that the upkeep and constant thoughts of “is everything going ok?” offsets the potential gains for me. And then it all goes South if one isn’t making much money off rentals at all!
I’ll bookmark this article and refer back to it whenever I get another urge to buy a rental property =)
RB40,
If my tenants move out I’ll strongly consider selling too. All the varibles you lay out here make it seem like you are making the right decision. Many parallels to my feeling about landlording, and my wife’s. My property wasn’t meant to be a rental and is therefore not a great one, mainly because of the layout of the place. Selling it would simplify my life. I’d like to buy another eventually, but one that is easier to manage and is newer. Maybe I’ll just hire a mgt team.
I’d like one really close by so I try to DIY most of the repairs. I don’t want to drive 30 minutes to check on the place anymore. I’d tell the tenants that I’m just the property manager too.
30 mins away is too far away in my estimation, particularly if you were to get some needy tenants. You definitely need a property manager at that distance, which eats into your profits, so if the prices are high now take the profit in advance and run.
I’ve thought about if we’d sell our double if we bought another house, but the amount of rent we’re able to charge vs. the potential profit from the increased value seems to militate toward keeping it. The local rental market (NOLA) appears poised to outperform the stock market over the next few years, so that also points to keeping it.
Luckily, I haven’t had to drive out that often. Even once in a while is enough for me. I think our area is leveling off this year. It might keep going up or it might slow down a bit next year. Who knows.
I completely understand where you are coming from on this one. I’m looking to sell my house, and I’m getting a lot of questions about why I don’t just turn it into a rental. From a rental perspective, it’s a perfect property; should cash flow immediately, cute house in good shape, less than a mile away from a college. But, for all the reasons you list above, I’m not interested in renting it out. That, and I worry that the extra $$$ will get eaten up between maintenance and repairing damage caused by tenants. If I can’t get a good price for it, I may be forced to rent it out. But selling is my goal right now.
Being a landlord is good for your finance, but it can be a lot of work. If you’re busy, then you probably shouldn’t. It just make life more complicated.
One good thing if you don’t need to sell the house for the equity to buy your next residence, and you currently have a good interest rate on the mortgage, is that you can keep this lower interest rate compared to what you would have to pay if it was an investment property.
Very timely for me Joe. Along with two brothers, I recently inherited a farm house in central Illinois. We just had it inspected and are on the brink of fixing it up a bit to prepare for rental. But I’m nervous about being a landlord, and you only made things worse. 🙂
Good luck! It’s probably tough to be a long distance landlord unless you have a really good property manager.
I have that problem now. I now live about 500 miles away from the condo I rent out. For the time, I have tenants (which are also friends/acquaintances of mine), but when they leave I will either need to sell or get a property manager. I hope I can still own it and make money off renting. Cash is king!
You either hear landlords hate or love being one. I can see why being a landlord would suck when you are not handy and have to hire service. Services are expensive. We paid $125 for a garage repairman to spend 20 minutes servicing our garage door. Plus, you also have a bunch of upfront costs like closing costs that you wouldn’t have when you buy simple REIT ETFs.
You can leverage though. That’s the big advantage of being a landlord.
Treehouse… We had a tenant close-in the front porch for a bedroom. We also had one cut a doggy door in. Still, with the half dozen rentals as our bread and butter, I was able to “retire” at age 35. I like the fact that they’ve supported us these last 20 years and will continue when I’m 85…
That’s great! I know rentals work well for some people. It’s a great way to generate wealth.
In addition to our auto, home & life insurance we also have an umbrella policy. We have teenagers. Heaven forbid there is a bad accident involving others. My cousin recommended this after a passenger in her daughters car was seriously injured. The family had no recourse but to sue as the auto insurance would not cover all expenses. The umbrella policy enabled her to keep her home. Thankfully the friend recovered. NJ also has strict laws for partying teens at your home. I would definitely invest in that type of insurance for a rental. I would also have my attorney put a few clauses about brook in the lease & require renters have renters insurance. This policy helps me have a little more piece of mind & I feel it is well worth it.
Good luck selling, I hope it is quick & profitable! Happy wife – happy life
We have an umbrella policy as well. It’s a good idea when you’re a landlord. It’s also not that expensive. Thanks. I hope the transactions are quick and relatively painless.
A tree house? Who takes that liberty while in a rental?
The creek is a huge liability, especially if the backyard is not fenced in. I know in FL you are in the hook if a kid breaks into your backyard and drowns in your pool.
“…but she’s stuck taking care of the kid while I run around.” No working mother is stuck with their child during the little moments she gets to be with him. Remove the line before you get in trouble!!! 🙂
Yeah, the tree house is nuts. That was probably the moment I decided to sell. 🙂
The backyard is fenced in. The creek is just a little trickle in the summer, but it can be a torrent in the rainy season. I wouldn’t let my kid play in there without close supervision.
Being a landlord is not for me right now. I have a few friends who are in the rental business and it seems like they hate it. St. Louis may be a bad area for it though because all of my friends have never told me a good story yet.
I know a few people who are doing well with being a landlord. The DIY type does pretty well. You gotta be a little tough so you can deal with the tenants’ sob stories as well.
I read your first reason along with Mrs. RB40’s reply and said “time to get out”. If Mrs is not happy neither will you. All the other reasons are valid but hold a lot less weight in my eyes.
Yeah. She is too stressed out right now. Life is getting too hectic for her.
We own two rental homes and it really can be a huge pain. They’re part of our long-term early retirement plans so I’ve made my peace with it. We’ve been fairly lucky with renters aside from one family who left over $6,000 worth of damage.
They are a lot of work for sure. Mrs. RB40 hasn’t really made peace with it so that’s a big reason why we’re getting out. If I have more time, then I can handle more. Now is just not a good time.
Really good post!!
We plan on moving in the near term (not out of Chattanooga of course), and I constantly debate about whether we should sell or rent our current home. I think I would be in the same boat as you. I like to THINK that I could be a good landlord. In reality, I would probably hate it.
Yeah, it’s a tough decision. Maybe if you can’t sell it at the price you’d like, you can try being a landlord. You never know. You might like it.
Joe,
I’m with you on the residential property. I have a single family home that I was living in over the past 6 years and just started renting out last October. I’m not making any money on rent and just getting enough to cover taxes/mortgage which I’m fine with for now. The tenants are great and I don’t have a ton of issues with them – they’ve called me maybe 3 times in the last 6 months. BUT the house is always in the back of my mind and it’s another thing to think about. I signed a 2 year lease with them so unfortunately I can’t sell while the market is good.
However, I also have a 1,500 sq ft. commercial property that I rent out/manage and I get nearly double monthly rent for half the sq. footage of my residential. Plus the maintenance cost of my commercial property is much lower. My tenants have called me 4 or 5 times in the last 2 years I’ve owned it. Taxes are a bit higher, but the rent that I’m getting covers the taxes, plus I’m making about $500/month profit on it 🙂
I think commercial property is the way to go if you want to get into the business of property rental/management.
I heard commercial property works pretty well too. I’d probably go with an REIT for that so I don’t have to deal with the upkeep. A little less profit would be okay for me.
I don’t think I can ever become a landlord. I am too strict about furniture, accessories etc. they will piss me off, that’s for sure! No money worth my nerves!
Very timely post for me. I have an email in my inbox waiting for an answer. A partner and I have a prospective rental house we’ve been talking about buying. And this might be the first of many acquisitions. I vacillate back and forth between wanting a little more return on my money and not wanting to have any of the headaches you mention.
The property I’m looking at would cash flow immediately and yield 8% cash on cash if we pay cash, or 14% cash on cash if we finance at 5% and 70% LTV. But my half of the property would only be $50,000. Do I really want to squeeze out an extra few percent of return above what I can get from the stock market?
It sounds like I’m pretty busy with “life” (ie kids) like you are right now. Therefore I’m not sure if I need more headaches right now! But will I regret not making a purchase now when the market is still ripe for the picking?
I’d say you should try it and see how it goes. Maybe it will work out for you. You never know, right. It’s also highly dependent on the market. It’s tough to get much cash flow in our market, but the appreciation is pretty good.
I’ll be hoping that you’ll see a quick and easy sell 🙂 . I think landlording is fine for some people, and hell for others. I think both you and your wife will be very relieved when the amount of work and paperwork gets reduced by selling these rentals. Good luck!
I hope so too. The 4 plex is already pending. I just hope the inspection comes back relatively clean. I don’t mind further negotiation. Yeah, there are so much paperwork to do.
All valid reasons Joe. It sounds like REIT is a better way for you to get real estate exposure. I had no idea they didn’t cash flow when you bought them. It’s a good thing prices have risen enough to get you out. Hoping for a small profit for you.
It’s good you learned these things now. Stress can damage your health, and it sounds like this was really stressing you out.
-Bryan
I am a landlord and I rent out 2 rooms in my house to my tenants. I think since it’s my property and I care about it I get annoyed when they treat things like crap. I swear that sometimes I’m the only one that cleans the kitchen or bathrooms… But besides things that could be just personal taste (such as levels of cleanliness) when things break such as knobs fall off of kitchen drawers and such, I swear my roommates hide the evidence because they fear they might get charged for it. But when I discover that something is broken and they have already thrown out the parts it makes me angry. I can fix something where the screws came loose or a handle needs some wood glue, but if the part is missing then I can’t make a proper fix that looks like it should.
And I don’t even want to get into the burn marks on the rug from someone leaving the clothes iron on in their room…. At least I know who did that one, but now I will have to replace all the carpet. I was hoping I could eventually just sell my house with worn carpet that a new owner would have to replace, but with a huge burn mark in the middle of a room it just looks silly…
I want to simplify my life and get a smaller house where I don’t feel the need to rent out rooms, I just haven’t pulled the trigger on that one yet though.
Yeah, that’s what happen when you rent out a room. Unless they have their own bathroom, I don’t think they’ll clean much. Sorry to hear about the damages. A smaller place would probably work better for you. It can be aggravating being a landlord. The rollers on our screen door need to be replace so the tenant just put the whole thing in the shed. Of course, now the frame is bent so it’s much more difficult to fix.