The INVESTMENT / RENTAL PROPERTY thread!!!!!!



  • tribute to SIS
    As has been discussed, lets start an investment property thread. As Fatwallet Finance readers have likely seen , I am a BIG FAN of buying and owning investment property. However, unlike with the 5.25% fixed rate Netbank loan (where almost everyone agrees that is a great deal), NOT everyone will agree that owning investment property is such a great thing.

    There are legitimate pros and cons, so its not clear cut that owning investment property is right for everyone. Location, your financial situation, and many other factors determine whether it is a good strategy.

    Some Reasons TO BUY investment property:

    1. Its how many of the most wealthy people made their money, Almost everyone who is a multi-millionaire my family knows is not from the Internet boom, but from buying real estate and holding onto it.
    2. It can provide a steady source of income in later years after mortgages are paid off and you stop working (especially if you havent set up a retirement account)
    3. A GREAT time to consider becoming a landlord is when you are considering selling your current home to move to another one. As long as you can get enough rental income to pay the existing mortgage on it, Why pay the realtor’s commission, and other costs, when you likely now OWN a great piece of rental property!
    4. Rents tend to go up each year, while the mortgage on the investment property remains fixed…thus, more CASH IN YOUR POCKET as the years go by.
    5. You can claim a HUGE tax deduction for rental property! (I am not a tax expert so I will let others better qualified elaborate on that one)
    6. It plain feels good to own a lot of property. Its the AMERICAN DREAM.
    7. I can go on and on…

    Some Reasons NOT TO BUY investment property.

    1. It can be a headache dealing with problem tenants and problems in the house.
    2. There may be some months you will take a loss for repairs, finding tenants, etc, and you should be in a position to be able to weather these losses.
    3. Well, thats about the only 2 main problems I can think of.

    TIPS AND TRICKS:

    If starting out, you want to find property where you will break even or possibly earn positive cash flow, meaning that the rent you will receive will exceed the mortgage payment, taxes and insurance. This way, owning the investment property will not be a current burden on your budget, as it “pays for itself” or even makes you a little money each month.

    CAUTION: If you tell you realtor you are looking for properties that will get you the most positive cash flow, they may show you “ghetto” properties" that can be more trouble than its worth. Do your own research on what rents are in the area, and how much the mortgage, texes, etc. will cost.

    As with all property, LOCATION LOCATION LOCATION. And what “kind of landlord” do you want to be?

    SLUMLORD: Some of the most money to be made is in the ghetto, in areas where you can buy houses and apartments for $20k and under and rent them out to people on govt. subsidies for 3-400/month. But the problems associated with that come as well. Most people who are successful doing this own a number of these properties (they make money by volume), and also have a network of people who collect rent, harass and intimidate tenants, etc. And theres that stigma of being a slumlord.

    “NON-SLUM” APARTMENTS/DUPLEXES/CONDOS: again, there is a lot of money to be made here, the downside is you will have lots of tenants (and more tenants usually means more headaches), and the people who reside in these places are not as stable

    SiNGLE FAMILY HOUSES: I personally prefer to rent single family houses in nice areas. The tenants you will find for these residences are more stable, and nice houses appreciate more than ghetto houses or duplexes…Fewer tenants= fewer potential issues.

    AVOIDING problems: I have chosen to have my properties managed by a professional management company. The quality of these firms vary greatly by area, a good idea is to talk to realtors in the area, as many own managed rental property themselves, and may get a “bonus” or discount on their own management for referring new business. They usually handle all dealings with tenants, from finding and screening tenants to collecting rent to maintenance, etc. They typically charge between 6%-10% of the monthly rent. They are especially useful if the rental property is not in your area, as it may be more difficult to manage rentals in other areas.

    I also choose to maintain a HOME WARRANTY on the properties. A home warranty covers the electrical, plumbing, and appliances in the home for about $30-40 month. There is usually a service call fee of $35-50. This way, I do not have to worry about there being a $1000 repair any given month, and as soon as a problem develops, they can call a 1-800 # 24 hours a day and someone will be right out to fix it. This eliminates anyone calling me and bothering me.

    Of course, since there is not one clear cut “best” way to own rentals, there will be people who will disagree with my strategy, and I encourage anyone else to share their tips and strategies on their investment property!


  • Global Moderator

    Now we are rolling 🙂


  • Global Moderator

    I have done fine with rentals but am gone for 5 months during the winter so I have been selling rentals this year. It’s been a great year to sell. I have never enjoyed having tenants even though I almost always had great tenants. Now I prefer to buy fixer uppers, make them shine, rent for a year and sell them. I have been working with people just trying to get started in my area and it just reinforces that fact that everyone does it differently. I am not leveraged because debt makes me uncomfortable while some make bigger profits highly leveraged. Thanks to rufflesinc for starting this thread that I hope grows too long to read!



  • @cajundavid You might be interested in “Land Contracts”…

    They’re an ancient alternative to a mortgage, where you sell the house with seller financing.
    That way if the toilet/HVAC has issues at 2AM, it’s their house, plus they get to deduct the interest on their taxes.
    If they stop making payments, it’s supposedly a lot easier to foreclose then evict. (this is all state specific).


  • Global Moderator

    @ThomasPaine Thanks! A number of years ago I did a few land contracts when interest rates were high and I was able to go even higher. I actually made more money on the financing than on the re-hubs. If interest rates were to go up again I would consider it. At one point I was getting decent downpayments then 11% interest! I didn’t care if they ever paid it off as I had security that was fairly easy to “reclaim”.



  • I believe there’s still nothing stopping you from still offering 9.9% interest, and using interest+principal to “pricematch” the rent you’d typically offer. (slightly less, since they’re now responsible for property tax)

    As you know, there’s one of three outcomes (least to most likely)

    1. They will win the lottery, and prepay, leaving you with the full retail price.
    2. They will make all the payments, leaving you with nearly 2x retail value.
    3. They will want to move in a couple years, and find another person to sell to, or give the keys back to you.

    The only thing different now is Dodd-Frank… there’s a limit of only a couple originations per entity per year.


  • Banned

    Here’s a situation for yall experienced RE investors/landlords:

    Bought a 2/1.5/1300sqft condo for $360k two years ago (relevant because we won’t get hit with taxes if we sell and thus aren’t chained to it anymore). Just redid the upstairs bathroom with new tile, new bath/surround, new vanity, toilet was new so we reused it. Had hardwoods downstairs, and I put new ones in when we moved in upstairs so it’s 100% hardwood or tile now. Kitchen was redone a few years before we bought (granite, tile, backsplash, new SS appliances) Zestimate (yes, grain of salt, I know) says $400k. I totally disagree with that, and other estimate sites are a bit more conservative, in the $375k range. Rents for these kind of places are going for about $2500, give or take.

    We are thinking that we’ll rent the place out and add the condo to our retirement portfolio as we intend on buying a house within about an hour radius, within a year or two. That means we’d have been here for about four years at that point but it means we have about three years of rentability before we’re now chained to it from a tax perspective (2 years lived in of last 5).

    Rent or sell? Monthly nut is about $2900 PITI+HOA. If we rent for $2250 (to undercut the market and thus have a large tenant pool (hopefully)), we’ll about break even after taxes, I think. Any more than that is just gravy. I realize maintenance is a real expense, but I rationalize that by saying if the hot water tank blows up while we live here, we have to replace it. So the same holds true for that expense if we rent it out.

    In the lower NY area, I believe rental margins are significantly lower than most other places in the country. I’d be happy breaking even, since it means I’m gaining “free” equity. However, a positive cash flow situation is attractive, of course.

    Again, rent or sell?



  • @jaytrader The condo assn may hate you, but have you considered AirBNB? Comps should be easy to get.
    Many condo assns will lose abilities for financing from FHA if they have too many rentals, so they might force you to sell outright.


  • Banned

    @thomaspaine said in The INVESTMENT / RENTAL PROPERTY thread!!!!!!:

    @jaytrader The condo assn may hate you, but have you considered AirBNB? Comps should be easy to get.
    Many condo assns will lose abilities for financing from FHA if they have too many rentals, so they might force you to sell outright.

    I believe, per NYS law, they can’t force me to sell nor can they stop me from renting. At least, that’s what the president said at our last board meeting (I’m on the board) and everyone seemed satisfied with that answer. We only have one rental right now.

    I’d really rather not AirBNB it. That’s a lot to deal with when the comparable is to just have a 12+ month lease.


  • Global Moderator

    @jaytrader said in The INVESTMENT / RENTAL PROPERTY thread!!!!!!:

    Here’s a situation for yall experienced RE investors/landlords:

    Bought a 2/1.5/1300sqft condo for $360k two years ago (relevant because we won’t get hit with taxes if we sell and thus aren’t chained to it anymore). Just redid the upstairs bathroom with new tile, new bath/surround, new vanity, toilet was new so we reused it. Had hardwoods downstairs, and I put new ones in when we moved in upstairs so it’s 100% hardwood or tile now. Kitchen was redone a few years before we bought (granite, tile, backsplash, new SS appliances) Zestimate (yes, grain of salt, I know) says $400k. I totally disagree with that, and other estimate sites are a bit more conservative, in the $375k range. Rents for these kind of places are going for about $2500, give or take.

    We are thinking that we’ll rent the place out and add the condo to our retirement portfolio as we intend on buying a house within about an hour radius, within a year or two. That means we’d have been here for about four years at that point but it means we have about three years of rentability before we’re now chained to it from a tax perspective (2 years lived in of last 5).

    Rent or sell? Monthly nut is about $2900 PITI+HOA. If we rent for $2250 (to undercut the market and thus have a large tenant pool (hopefully)), we’ll about break even after taxes, I think. Any more than that is just gravy. I realize maintenance is a real expense, but I rationalize that by saying if the hot water tank blows up while we live here, we have to replace it. So the same holds true for that expense if we rent it out.

    In the lower NY area, I believe rental margins are significantly lower than most other places in the country. I’d be happy breaking even, since it means I’m gaining “free” equity. However, a positive cash flow situation is attractive, of course.

    Again, rent or sell?

    In my neck of the woods this wouldn’t be a winner. Rents are too low even before figuring in HOA fees, taxes, insurance, repairs, vacancies etc. Plus avoiding taxes nice is a nice plus. But the numbers are always regional and I deal in lower priced properties that often give us a larger percentage of return. In my case I would sell then try to find a rental that the numbers work on. Good luck!


  • Banned

    @cajundavid Was thinking the same thing. Perhaps a couple $100-150k properties such as smaller 750-1000sq ft apartments or something. But we already own this one, which is why I am still stuck on figuring out what to do. The goal was always to buy it, fix it up a bit (hardwoods, bathrooms, crown moulding, new base moulding, etc.) and either flip in five years or rent it out. We’re about halfway there, and most of what we wanted to do was done or will be done by spring 2018.


  • Global Moderator

    A few lower priced properties would spread your risk some. I specialize in 600 to 900 sq ft proprties. I love 2 bedrooms because I generally get only 1 or 2 good tenants so less wear and tear. I make out like bandit on those. I refuse to rent out larger homes and just re-had and sell ‘em!



  • @cajundavid : Concur on the 2bd properties between 700-900 sqft. Simpler rental scenarios that seem to lead to happier landlord/tenant relationships (with strong screening of course). In the right market, these have made excellent rentals for my wife and I (one condo in NoVA and two small detached homes in Denver Metro area) though one concern I have is as to how resale will be for smaller home if neighborhoods continue to prosper as I believe smaller homes might be tougher to sell.



  • @cajundavid do you have to compete with apartments of similar size


  • Global Moderator

    @rufflesinc I have been involved with both single family units and a small 24 unit complex. I find it’s a totally different market. Apt dwellers want everything done for them, snow plowed, drives swept, and usually won’t even pick up a piece of litter in the parking lot. SFH expect to do all of that themselves. I ran much less service on SFH. Most of my homes actually had less square footage than area 2 bedroom apts. I also find that turnover in SFH is a bit less.


  • Global Moderator

    One thing I have wondered about in different markets is the availability of bargain homes. I buy only screaming deals and drive a hard bargain. I haven’t found anything suitable in a few years. I bought 4 in 9 months then it kind of dried up. I have been successful in homes (not in the slums) that I collected 1.5 of my total all in costs* for rent every month such as a $38k home renting for $600. Maybe I am spoiled. Anybody have any comments on their market? I also am attempting to do something near my winter home on the gulf in or very near Diamondhead, Mississippi.

    *This includes purchase price and any and all renovations and repair costs.


  • Banned

    @cajundavid a 38k non slum home?


  • Global Moderator

    I have bought them for less. I like HUDS, REO’s and estates. I get them after they sit for a while. Most of them are not bank loan eligible. That eliminates 95% of the buyers. I never buy 1 I wouldnt live in myself. I look for absolute miracles and refuse to settle for less. Could by why I am having such a difficult time. There were recently a few great HUDS that I bid on but lost down around Biloxi.


  • Banned

    @cajundavid I wish you were up here, or me down there. I would love to join forces. Cash is required up here. On top of the know-how and energy to rehab shit yourself.


  • Global Moderator

    @jaytrader For screaming deals, cash is required here also. I am in Fond Du Lac, Wisconsin, a great, fun market. My winter home is on the coast. My costs are relatively low due to the fact that I do 95% of the labor on rehabs. It also moves the time line along greatly if I am not waiting on sub’s schedules.


  • Banned

    @cajundavid yeah but, there’s no such thing as a non slum $38k property/apartment in NYC area. You get even a studio for $38k, you better have all your shots up to date.


  • Global Moderator

    @jaytrader OH, I couldn’t afford a parking space in NYC. I am small time.


  • Banned

    @cajundavid did you miss where I said I bought a 1300sqft 2bed/1.5bath condo for $360k?



  • @cajundavid said in The INVESTMENT / RENTAL PROPERTY thread!!!!!!:

    @jaytrader said in The INVESTMENT / RENTAL PROPERTY thread!!!!!!:

    Here’s a situation for yall experienced RE investors/landlords:

    Bought a 2/1.5/1300sqft condo for $360k two years ago (relevant because we won’t get hit with taxes if we sell and thus aren’t chained to it anymore). Just redid the upstairs bathroom with new tile, new bath/surround, new vanity, toilet was new so we reused it. Had hardwoods downstairs, and I put new ones in when we moved in upstairs so it’s 100% hardwood or tile now. Kitchen was redone a few years before we bought (granite, tile, backsplash, new SS appliances) Zestimate (yes, grain of salt, I know) says $400k. I totally disagree with that, and other estimate sites are a bit more conservative, in the $375k range. Rents for these kind of places are going for about $2500, give or take.

    We are thinking that we’ll rent the place out and add the condo to our retirement portfolio as we intend on buying a house within about an hour radius, within a year or two. That means we’d have been here for about four years at that point but it means we have about three years of rentability before we’re now chained to it from a tax perspective (2 years lived in of last 5).

    Rent or sell? Monthly nut is about $2900 PITI+HOA. If we rent for $2250 (to undercut the market and thus have a large tenant pool (hopefully)), we’ll about break even after taxes, I think. Any more than that is just gravy. I realize maintenance is a real expense, but I rationalize that by saying if the hot water tank blows up while we live here, we have to replace it. So the same holds true for that expense if we rent it out.

    In the lower NY area, I believe rental margins are significantly lower than most other places in the country. I’d be happy breaking even, since it means I’m gaining “free” equity. However, a positive cash flow situation is attractive, of course.

    Again, rent or sell?

    In my neck of the woods this wouldn’t be a winner. Rents are too low even before figuring in HOA fees, taxes, insurance, repairs, vacancies etc. Plus avoiding taxes nice is a nice plus. But the numbers are always regional and I deal in lower priced properties that often give us a larger percentage of return. In my case I would sell then try to find a rental that the numbers work on. Good luck!

    I’d agree with CajunDavid. If the rents don’t cover the PITI+HOA and then some then it’s generally not a good candidate for a rental. Right now you have some appreciation but markets turn and then you might get stuck with an alligator.

    Must have positive cashflow and some cushion.



  • So it looks like while the new tax law allows immediate expensing of capital expenidutres for the next five years, this does not apply to the actual rental property? Anyone confirm?



  • Question for the experts. I purchased a rental property in 2017 and trying to figure out the home inspection fees that I paid before purchase of property, what would be the tax treatment for that? Am I able to amortize or deduct as expense?

    Thanks



  • @techy asked:

    What would be the tax treatment for home inspection fees paid before purchase of a rental property?

    Am I able to amortize or deduct as expense?

    From Intuit:

    “Closing costs on an investment property may fall into one of three tax categories:

    • Deductible as a current expense – These amounts are deductible in full as a rental expense in the year the property is purchased

    • Amortized over the life of the loan – These amounts must be deducted evenly over the total number of loan payments required at the beginning of the loan

    • Added to the cost basis of the property – These amounts must be added to the cost basis (i.e. the purchase price) of the property and must be depreciated”


    Fees for your inspections add to your cost basis of the property.

    Cost basis = the original purchase price + closing costs (e.g., legal fees, recording fees, title-search fees, home inspection…), and is used to offset capital gains when selling the property.


    According to the IRS:
    “Generally, deductible closing costs are those for interest, certain mortgage points, and deductible real estate taxes.

    “Many other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including:

    • Abstract fees
    • Charges for installing utility services
    • Legal fees
    • Recording fees
    • Surveys
    • Transfer taxes
    • Title insurance
    • Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions).

    Additional Information

    “Category
    Sale or Trade of Business, Depreciation, Rentals

    “Sub-Category
    Rental Expenses


    For additional information about how to report the expenses incurred during the purchase of your rental property, see this line by line breakdown of a typical HUD-1 Statement.


    Information from the IRS about general business deductions:

    https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses


    When you’re done sorting through all of the above, the best advice that I can give to you is:
    A CPA who is well-versed in investment properties is priceless…find and retain one!


 

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