Why be a landlord?

Question

Hello, I have thinking hard about making the move into rental properties from doing rehab flips.  From my understanding, owning rental properties can be beneficial but the returns can be very low as well.

Here's what I am thinking:

Let's say you own 1 rental property and bought it for 50k and put in 10k and now you have a decent rental property rented for $1200/mo.  The yearly gross would be $14,400.

Let's say the tenant signed a 1 year lease and you expect to make $14,400 gross.

Now, the tenant leaves, and the house is in need of rehab.  Considering the tenant didn't trash the place, lets say it costs $7,000 to get the house remodeled again for the new tenant after year one.  Basically you would break even after the 1st year if they leave.

The returns seems very low considering you have to find another tenant and fix up the property for this new tenant.

Yes, I understand you get a security deposit, but even so, $7,000 would be the estimate if the tenant didn't trash the place, and if they did trash it, then it would be around $10,000.

Doesn't seem like a good investment to me.  Contract for deeds sounds better.

Any thoughts or advice would be great.

Thank you.

Mitch Kronowit · Answer

Hey Greg, looks like we typing replies at the same time (see above).

There have been plenty of discussions here on BP on whether to fix & flip, buy & hold, wholesale, invest in notes, etc.

People will continue to fight me on this, but the wealth building power from land-lording comes from a 4-prong approach:

1) Cash flow. Yeah $100/month/door... whoopie.
2) Tax savings. Writing off your passive losses against your normal income.
3) Equity build-up (mortgage pay-down). Even with ZERO cash flow, after 30 years, your tenants will have bought you a free & clear property. THEN we can talk cash flow!
4) Appreciation. No, it's not the same in every area, so don't anybody bore me with your nationwide statistics. Buying a good home in a good area in my state will outperform every other investment I can think of, but you have to be patient and wait for time to do its magic. The wealthiest people I have met in the real estate business made their money by buying and holding, not chasing the quick buck.

There you have it. Do you want a business that earns you money while you're sitting on a sailboat in the Caribbean or skiing in Vail? Or would you rather have a business that needs you there working deals every single week or else nothing comes in? I've made my choice.

Greg B. · Answer

Mitch Kronowit, yeah I do some landlording.  Not encouraging anyone to get into it.  Lots of negative assumptions about LL.  Less competition and more for me. ;)

Account Closed · Answer

Landlording is not for everyone, but I have to agree with Mitch it is a great way to build wealth over the long haul.

It would be a rare case for me (in fact happened only once) if I had to put 7K or more into turning a unit.  If I spent that much it is because the unit was trashed.  Typically I can get everything done for less than $300.

Greg B. · Answer

You are right, landlording is terrible.  You don't want any part of monthly income.  Better to stick to flips. ;)

Mitch Kronowit · Answer

Greg, you need to get OUT of the fix & flip mind set if you're going to buy & hold. Renters just want a clean safe place where everything works. You don't need to repaint every wall in the latest designer colors, swap out granite countertops with all new materials, and replace every appliance with the current top sellers between every tenant.

If the tenant left after one year leaving you with nothing more than nominal "wear & tear", you're probably looking at touching up a few walls where they got scuffed (from moving furniture most likely), replacing a light bulb or two, and making some minor repairs. What would that run? A couple hundred bucks if you had somebody do it for you?

Also remember, if they don't return the premises to you the way they received them, minus the "wear and tear", damages and cleaning come out of their security deposit. I love returning my tenant's ENTIRE security deposit. It means they left the place ready to rent the day after they left. The sooner we get a new tenant in there, the sooner we start making money again.

James H. · Answer

If the tenant didn't trash the place, what in the world would you be spending 7K on?

Joe Bertolino · Answer

Agree with Greg B,  landlording is terrible.  Nothing but plugged toilets and evictions.  Stick to flipping and let all of us buy and hold guys suffer.  I am a buy and hold investor in CA,  I must seek misery.

Account Closed · Answer

$7,000?  Wow!  Even when I flipped my home from my personal residence into a rental, I think I paid $500, which covered touch up paint, light bulbs, professional cleaning, and a welcome gift for my new tenants.  I also won't accept 1 year leases... My minimum is 2 year, max is 3 year.

Now, when I was doing Section 8 housing, my costs were WAY bigger, I spent like $1,200 after this horrible tenant vacated... Ok, I am being sarcastic here, but my point is, I won't put any money into a rental that I won't get out of it.  I am also a buy and hold guy in North Texas, so my experience may be different than your friend's... Or he is like Greg B. and Joe B. where he doesn't want you competing for his tenants!!!  LOL

Tracey Williams · Answer

Am with Mitch on this post 100%. 
The 4 approach Mitch explain is a thumps up for me any day. 
Flip is good to generate cash but there is nothing that can be compared to a property that cash flows very well every month.

Bill Mauldin · Answer

Your rent ready costs are way too high. I maybe have $600 invested after a good tenant has left. Also I always repaint the walls and do a once over clean up and I'll shampoo the carpets if there are any.

This is managing the properties myself. I usually paint and have my employee cleaning and touching up other things. Usually takes 3 days max on a 1200 sq. ft. house.