Is landlording my best option for reliable returns?

Question

I've made enough money to buy a large multiplex house with lots of bedrooms. It's actually not that much, since I've found an area where housing prices are low and monthly rents are high. I want to rent out individual rooms, since the going rates for individual rooms here adds up to more than renting out the entire unit. I would be able to live off the monthly rents.

I know there are risks, and there is work involved, but all in all, the risks seem less and the dividends greater than securities investing (even with REITs), the work (and risks) seem less than starting other kinds of businesses, and the returns are definitely greater than with a guaranteed interest product like a treasury bond or CD.
	
	Also, in my experience, every landlord I know who owned houses and rented out rooms, continued to make money throughout the recession. Maybe a tenant lost their job and had to be replaced, maybe a tenant was late with payments, but the landlord never lost any money. At worst, they made less money for a time, but they were still getting checks coming in every month, and their expenses continued to be minimal, so their profits remained high. (They owned their properties outright, as I will.) Sure, it's possible that housing prices could be down many years from now when I want to sell, but that won't affect my monthly income, and I will have made plenty of money off the house over my period of ownership, so it's not like a lower selling price will be a loss. Even if rental prices go down for some reason, I can live off less than what the current rents would be. And I'll have insurance and an LLC to protect me from liability.
	
	So I just have to ask, am I overlooking something? Is there a different way I could make healthy, reliable returns that I should look at?

Rebecca Lebowitz · Answer

Personally, I got my biggest upswing in real estate at the peak of the recession using the typical buy and hold model of renting apartments (I have no experience renting rooms, personally).

My suggestion is try and seek out other landlords in your area that rent out rooms.  In my area, running boarding houses can certainly be profitable, but opens itself to LOTS of problems.  But it may be quite different in a large city, for example.

Just do your research, and be prepared!

Dawn Anastasi · Answer

What type of returns are you looking to achieve?  Sometimes I ask people that and they really don't have a concrete number in their mind, they just want to make money.  But it makes more sense to have true actionable goals than some vague objective.

Ewa Reza · Answer

Account Closed If you'd like to stick to one property to gain confidence and learn the ropes that's not a bad idea. BUT I would still finance it. And take the rest of cash and invest somewhere else. The cost of borrowed money will be much less than your returns from the other investments. It's not hard these days to make 10%+ on return simply by lending your cash to private investors. That would give you not only higher returns but also more flexibility.

Account Closed · Answer

Thanks for all your great responses! This is a nice community.

@Philip: What do you mean by "a couple of years until your llc can use the rental income?" Are you saying my goal should be to buy more properties, so I should not touch the income? Or are you saying I can't use the income for some other reason?

Also, if I have multiple tenants in one property, what is the increased danger versus multiple properties with one tenant each? All I can think of is disasters or defects with the property that I'd seek insurance against.

@Rebecca: When you say to "seek out other landlords in your area," do you mean to invest in, or to get advice from? What are some examples of the "lots of problems" you're thinking of?

@Dawn: I've definitely calculated the returns, given the prices on houses in the area and the average room rents on Craigslist for the same area. It's substantial, but I'd rather not get into specifics.

@Ewa: I may borrow to buy more houses at some future point, but I want to have the confidence of managing one property successfully before doubling or tripling the work and being in debt to lenders.

@Sam: Thanks for that. Yes, I'm willing to do those things. This makes me more confident that I can succeed.

Sam L. · Answer

You are overlooking that it takes time and effort on your part to:

A. Find a deal

B. Run the numbers

C. Buy the property

D. Be a landlord

E. Risk not getting reliable returns (ie. longer than expected vacancy costs you money)

Many investors are not willing to take all of those actionable steps to receive higher returns especially when buying stocks, bonds or othe investment vehicles are so easy today. Furthermore, if you have a large sum of money (say $500,000) that you are saving for retirement, it would take a considerable amount of work to manage the number of small multi family units that you would need to get the increased returns on this kind of money. Full-time professionals, retirees and many people do not have time or want to put that much effort into gaining a better return on their money. This is why someone like yourself who IS willing to take these steps can benefit from an increased ROI.

Ewa Reza · Answer

You're overlooking one huge thing. You're not using leverage!

You can probably buy 2-3 buildings using financing and I'm sure your ROI will be higher then.

BTW renting rooms seems like a lot of hustle. How many rooms are you anticipating? Be careful so it does't turn out to be a full time job ;)

Philip Williams · Answer

Well first it's perhaps a very dangerous Idea to put all your eggs in one basket. If you want to try your plan then by all means set it in action! I would advise continuing working at the same time though, perhaps for a couple of years until your llc can use the rental income and you can refinance and draw some equity out to keep investing. At the very least try and diversify and not sink everything you have into one property! Thats just my opinion.....

Is landlording my best option for reliable returns?

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