RE Investing - Is owning rental property worth the headache???

[Saran Mandhadapu]

Hello -- I am just putting an answer I found in Quora.com for the benefit of biggerpockets members. 

Someone asked a question "Real Estate Investing: Is owning a rental property worth the headache?" and someone replied the following answer. 

Let me give you an example of my first rental property. I purchased it about 5 years ago.

It was $65,000 and all I could qualify for was $70,000. I put $3,000 down and rolled the $2,500 in closing costs into the loan.

My payment was right at $500 per month. I rented it out 3 days after I bought it for $750 per month.

For the first year, I had no problems with the property. That means that I got back $3,000 the first year…a 100% ROI.

The next year, I had a roof leak that damaged the ceiling in the dining room. I paid someone to fix the roof ($250) and did the drywall and painting fix myself. But if I had paid someone it would have been around $500.

The tenant moved out. I got new tenants at $800 per month.

ROI (on the cash out of pocket) for the second year 75%.

Expenses for the third year: $100 fridge, $350 water heater, $250 miscellaneous.

ROI for the third year 76%

Fourth year. I got some bad tenants in the property, I should have evicted them much sooner than I did but they kept paying so I let them stay.

ROI for the fourth year 100%

Fifth year. The bad tenants quit paying. I had to evict them. It took 2 months and no rent received during that time. The property was totally trashed and I ended up having to do major work on it.

Repair bill $10,000. I did a lot of the work myself. I gutted the drywall, ripped out the kitchen, pulled up the carpet. I installed an ikea kitchen myself, installed the trim, bathroom fixtures and painted. I had someone else do the drywall and the carpet. If I had paid someone to do everything it probably would have cost me another $3,000.

The remodel took me two and half months. That means no rent for almost 5 months. When all was said and done, I re-rented the house for $900.

That means this year would have been a $13,000 loss.

ROI year five -$433%

So, at the end of 5 years, when all was said and done, I had a $2000 out of pocket loss.

That means after 5 years of ownership, with some big headaches along the way, I have spent $5,000 and gotten no tangible returns. Would I say it is worth the headaches? YES!

Why? Because of the equity growth.

In the last 5 years, the amount owed on the home has gone from $65,000 to $57,000. That’s a gain of about $8,000.

So that's pretty good news. That means that between the principal pay down and the month cash flow, I have about a $6,000 profit. That's a 200% ROI over 5 years, or about 40% per year…not bad.

But here’s where the really good news comes in…In the last 5 years the property has gone from a value of $65,000 to about $115,000.

That’s a gain of $50,000!

If I sold the property today, after fees and commissions, I’d receive a check for around $50,000.

My $5,000 out of pocket turned into $50,000 over the course of 5 years.

If I had managed my property better, I would have an even higher gain, and I would have had much less headaches (most likely.)

But I learned a lot and I still increased my net worth by 50 grand in the process. And as long as I do a better job managing the property, it will continue to go up in value, my loan will continue to be paid down, and I’ll have $400 cash flow coming in every month.

Is owning a rental property worth the headache? I cannot answer that for you. But I CAN answer it for me. This property has been a headache. But has it been worth it? Without a doubt.

YES!

Note: These are not my comments, I just put it here so someone who has the same question can make their own decision based on someone else experience.

Thanks,

Saran