Is it worth it?

Question

Jon Huber · Answer

@Jennifer Fernéz I know you are going to hate this answer... but no one can tell you the answer but you. Real Estate investing is definitely worth it to me, regardless of income, children, or external situations. But I do not have the same values as everyone. Other people may find the value in giving money to charity or to family, and I support their decisions. I want to create something that I can pass onto my children. Then again, other people may want to save their money and simply pass on money to their children and let them decide how to invest. It is complete preference.

As for me, I am not handy, and even if I were, I wouldn't want to be unclogging toilets. I have an aggressive property management company. I factor in their costs in eery deal I analyze, and if I still see a healthy profit, I move forward. Is it worth it? Well, someone else is paying a mortgage for me, and I build equity with each payment they make. Whatever is left at the top comes to me. I should add that my job does not offer a 401k, so I am planning on this for my retirement as well.

There are so many options (landlording vs hard money, etc)... but I think if you focused on the one that interests you the most, or the one that your personality fits to best, the answers would become more clear. I hope this helped.

Toby Bergstrom · Answer

When I bought my first rental property the seller mentioned in passing that that house had paid for his daughter's college education (cash flow...)

Do it for your family, but do it well. Read here on BP, listen to the pod casts, and join a local REIA group.

Larry Turowski · Answer

What are your talking about Jon?  I can answer that for her!  Ha, ha!

My first response, Jennifer, was going to be no--not if you are going to stop at one rental.  I don't personally sense a lot of passion in investing from your post--except for buying a nicer home for yourself.  Plus you don't want to be put all your liquid cash into a rental.

But then I remembered I didn't want to be a landlord and now I have 11 houses.  So maybe the better answer would be to try it out, but make 100% sure you buy right, meaning if you hate it you can sell the property without taking a loss.  If you can do that it may be worth the experiment.  The first house I bought was very cheap.  My intention was to put a renter in and flip it as a turnkey property.  That was at the end of 2008 and did not work out well.  I tried to focus on flips but ended up holding some.  Then I found that it was easier to have more properties than fewer.  If you have one and the tenant doesn't pay, it is a big problem.  If you have 11, it is and one doesn't pay it is a small problem.  If I get to 30 it will be a blip.

So, if you think you might continue and accumulate more if you find you like it, go for it, but buy right!

Jai Reddy · Answer

Since you seem to be looking for different perspectives, I will give you mine.

For me (in my current situation) it is not worth it beyond what I already make on my two SFRs.

My household tax bracket is the top rate and I qualify for the Obamacare surcharge on rental income. Unless my rental income is high enough for me to quit my full-time job, adding just another rental to increase my income by 10% (and lose 35% of that increase to taxes), is not worth the additional effort (law of diminishing returns for me). My best scenario would be to, in a short period of 6 months,  acquire several SFRs/multi units so that I can quit my current job (since rental income is higher than my active job). But I also want to stick to my rule that I will buy only when there is a purchase price very favorable for me (and not just because I want rental income).

Putting my personal situation aside, rental income is the best form of 'small business' - no employees (I hate dealing with people issues as I can be personally affected by them).

Depreciation rules allow you to essentially not pay tax on some/all of your rental income.

Rentals are a tangible asset. It is pretty hard to go from an asset of 100K value, down to a 0 value (unlike stocks).

Account Closed · Answer

@Jennifer Fernéz

Landlording is not a get-rich-quick scheme. Its very slow and steady. Depending on your market, property values and rental levels, you may only cash flow $50 a month, or $100 a month, or $150 a month... or $1000 a month. I don't know your market. You need to do the math and decide if its worth it for you.

You'll see a lot on the forums about the 1% rule. I won't get into whether or not this is a "rule" or whether it is a good measure of your success as a landlord. But to use a simple example, if you purchase a property for $100,000 and you rent it out for $1,000 a month, you meet the 1% "rule". Then comes the 50% rules which says that typically (it holds true across most markets) that half of that will be expenses (maintenance, property management, vacancies, taxes, capital expenditure, etc). So then your income in this hypothetical example is $500. Then you still need to pay your mortgage. The money left over is your cash flow.

This is an over-simplification, but find some properties on the MLS, go look at some houses that you would consider to be a "good deal" and then ... do the math (there's a great spreadsheet in the "analyze" tab above), put in real numbers (or as close to real as you can get) and then figure out if its worth it for you. Figure out if landlording fits into your short, medium and long term financial goals.

For me, I'm not depending on the income from my 2 rental units. I leave them be and have my property management company take care of them. Over time, the properties will appreciate in value and I can figure out if I want the continued income from that or if I want to sell. But, as a buy and hold investor, I have a long term horizon.

Johann Jells · Answer

My stock speech is this:

The main difference between rental RE and any other form of investing for us mere mortals who aren't hedge funders is that this is the only market we can take serious advantage of borrowing leverage. If you buy a rental with 25% down on a 15 year note that pays all it's expenses and mortgage the whole time, and nothing more, at the end of the mortgage you've made 9.4% on your 25% down.   That's considered great in most investments over that long. Had you bought a stock that didn't go up, at the end of that time you'd have lost a significant chunk to inflation. Now consider that rents usually go up over 15 years, as do values. Even if you have no cashflow at the start of the mortgage you likely will by the end.

Yes it's worth it, but I'm also very handy.

Randy E. · Answer

@Jennifer Fernéz, there is already a lot of good advice here.

1) As @Jon Huber said: "no one can tell you the answer but you." - Very true.

2) However, as @Dave  Fontana said: "It is the best thing you can ever do, for you and your kids." - I can attest to that.  I bought my first property when the youngest of my three children was 3.  I just got my third property, and should get #4 and maybe #5 later this year.  I can honest say that if it isn't the "best" thing I've ever done for my family, it's in the top two or three very best things.

3) To reiterate a bit, @Doug Minton was spot on with: "...it is worth it" - It is.  It is.  It is.  But to look back at #1 above, only YOU can decide if REI is for YOU.

4) Also very important is what @Wendy Noble said: "Landlording is NOT NOT NOT a get-rich-quick scheme. Its very slow and steady." - Okay, Wendy did not type "not" three times, and she didn't make it all caps, and she didn't underline it.  And you know what?  Some people might be able to make Real Estate Investing a get-rich-quick scheme.  I can't, and to be honest, I'm not trying.  My goal is not to be rich next year.  It's not even to be rich in ten years, if rich means driving cars teenage boys drool over and taking $10K vacations three times a year.  My goal is to one day in the not to distant future provide a comfortable living for my wife and children that will allow my wife and I to never work again outside of our real estate investments.  I'm well on the way to that, as are many many people here at BP.  Some are already there.  Some haven't started yet.  But I think we all have that goal in mind -- at least us buy-and-holders do.

BUT, Real Estate Investing is not an effortless, riskless, idiot-proof endeavor.  Do your homework.  Read/watch/learn as much as you can about being a landlord, from researching properties, doing comps, estimating repairs, evicting tenants, tax advantages/disadvantages, etc, etc, etc.  Oh, and save, save, SAVE your money to invest.

Then go out there and buy invest in something!

Good luck

Doug Minton · Answer

I've been a landlord for 10 years, and it is worth it. I used to have multiple units, but I am now down to one and I still reap the benefits from it. Appreciation, depreciation, and any other write offs on taxes. Plus I am making 11% cash on cash return. I am looking to buy more properties, and have been looking for a good deal where I can buy a multifamily and live in it while using my tenants as leverage to pay down my mortgage.

Don't worry about being handy. Just allocate at least 10% of the rent towards any repairs throughout the year. Find a good handyman to take care of the minor repairs if needed.

Another benefit I see with owning rental property has to do with cashing out on your equity. I did that after owning the property for a couple of years and ended up with a $30k check. Keep in mind that this is all tax free dollars, and the tenants are paying it off, and I get to write off the interest as well. I don't think you can get any better than that.

Account Closed · Answer

What about a compromise on your desires - like a duplex you live in and rent the other half out?  Or even a larger home with an in-law unit in it you can rent out?

This way, you're only dealing with maintenance on your own home - one roof, one yard, one exterior paint job, one driveway, etc.

Worse case scenario, you kick out the tenant and take over the building yourselves.  You'll find out if you want to be a landlord - or at least if you want to manage your own tenants.

Good luck!

Jimmy Campbell · Answer

Great advice throughout and I very much agree it is up to you and your comfort level.  We have invested in rentals and hard money both, and find benefits both ways.  Rentals more longer term but must account for all numbers (PM, maintenance, taxes, insurance, vacancy).  We would not do it without a PM simply because our tolerance for dealing with tenants is not there, and we surely do not want calls after hours and weekends.  Hard money is great short term money, but it is very short term and you always have to look for the next deal to keep your money earning good rates.  A new area we have ventured into is performing mortgage notes.  These can be structured for varying lengths of time and offer solid, steady return rates.  This way we invest in real estate in a very passive manner.  Notes are handled by a servicing company, similar to a PM, and any dealings with the borrower are through the servicer.  Why own the rental property when we can own the cash flow instead?  And oh, when investing through your self-directed ROTH IRA, earnings are not taxed.  Slick deal and something else you may want to consider.

Is it worth it?

Most Popular Reply