How long should you expect to keep rentals to make it worthwhile?

Question

I have been wanting to get into the rental game for a few years now, but needed my financial standing to be in the right place. We're at the place now that I could possibly pick up a single family dwelling or two, but we ARE thinking about relocating within a few years.

It seems that I could possibly make a go of this, as long as I stick to properties that would both be a good long term hold AND could make money doing a flip. But, since I haven't done any of this before, wanted to get opinions of those who would know better. I'm a believer that if you keep putting off things and wait until the timing is absolutely perfect you won't ever do it... so I don't want to miss opportunity if a good property shows up.

Tyler Gibson · Answer

@Matt Dittman I would think you would want to keep them forever or until the mortgage is paid off so 30 years. However I would think you would at least want to hold it for 5 years. but that is my personal opinion. Just because you plan to relocate doesn't mean that you would have to sell. Get a property manager or build a group of repair men and vendors you would need to be able to manage the property remotely yourself.

Dennis M. · Answer

Buy in cash then Sell the house owner financing to a qualified tenant and you won’t care about capex managing tenants or even appreciation . Why not Make a great return ( mailbox money) without the headaches of playing Johnny landlord

Aaron Taylor · Answer

I think I would disagree about it not being worth the hassle.  Just buying one to start, you'd get:

experience

very low risk

a stepping stone to the next one

a steady cash flow to buy another one if you buy right

I think Anthony's right, there won't be any appreciation most likely.  HOWEVER, I have seen it where towns with 20k houses reversed and suddenly jumped to $60k over 5 to 10 years with no population growth.  How?  Well basically through attrition, a lot of the cheap houses got tore down or became unlivable for people, so the housing stock shrunk.  As long as your town is not 'shrinking' in population, there's a chance this same thing could happen to your town.  If your town has a steady population and jobs then eventually it will probably happen as long as the quantity of houses disappearing exceeds the new builds.  There may be a way to check on that via county records.  Also, relative high rental rates relative to the cost of the houses suggests that you may have a tight rental market and vacancy may be very low.

Just getting started, regardless of what you do in a few years, would be a major step in my opinion.

Joe Villeneuve · Answer

5 - 7 years.  Why?

1 - Time to build up equity through appreciation

2 - Time to cash flow positive

3 - Time to get out before the CAPEX costs hit

4 - Moving money gained equals greater return.  Equity has a 1 to 1 relationship with purchased value and cost.  Equity used has a 5 to 1 relationship of purchase value to cost.

Anthony Gayden · Answer

I still don't think it's worth it. The problem is if he relocates in a few years it will be difficult to self-manage these rural properties long distance. He already stated there are no PMs out there. His best option after relocating would be to sell. It may be a longer and harder process selling this type of property as there are fewer buyers for cheap rural properties.

Also I wouldn't place any bets on appreciation, so it is likely that if he decides to sell in a few years, he will only get back his initial investment plus any debt pay down. This is a pure cash flow investment. I generally don't like the idea of investing in real estate solely for cash flow as it is a much slower path to building wealth than investing for both cash flow and appreciation.

In terms of risk, I actually believe it is more risky to buy real estate in a very rural area that might be very difficult to sell. He may even have to sell at a loss. The fact that the properties are inexpensive means that the tenant class may be relatively low and has the resulting wear and tear. One major problem on an inexpensive house costs the same to repair as a major problem on a more expensive one. Its hard to justify spending $6000 replacing the roof on a $15,000 house when you know that if you sell, you won't recover that expense.

Anthony Gayden · Answer

Let's do some rough math if you buy the home cash for $20,000 and it rents for $650/month. I am going to assume that expenses like maintenance, capital expenditures, insurance, and taxes will take approximately 40% of that rental income. That will leave $390 a month of cash flow. That means it will take a little over 51 months (4.27 years) to recover your initial investment.

You said the area is very rural, so I am going to assume very little (if any) appreciation. Also I am going to assume it will be difficult to sell these properties in a few years if you decide to relocate.

In my opinion it just isn't worth the hassle.

Matt Dittman · Answer

Honestly I would be thinking of mostly buying these outright, or having a very minimal mortgage only to free up extra capital. I have seen small houses go for around $16-20k in my town, with rents for similar houses being $550-650/mo.We are VERY rural, so we don't have property managers around here. I do have a few contractors I know personally I could probably lean on, though.

How long should you expect to keep rentals to make it worthwhile?

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