so WHY real estate after all?

Question

This post  is not about creative real estate deals.  I am the conventional "BUY HOLD  RENT IT OUT" long term investor.

I am terrified after reading the PROFESSIONAL TENANT FROM HELL sticky post. And on top of that, the 50% rule (which from my experience is very true) plus the hard labor that you need to put in dealing with tenants,  is it still worthwhile to get into real estate investments?

I am new here, please correct me if I am wrong. My understanding is that the 50% rule doesn't even include mortgage.  So for those who do not own the rental property outright,  there will be ZERO left for the landlord after making the monthly mortgage payment.

Since most people have a 15-30 year mortgage, that means most landlords will be working for FREE for 15-30 years before they start seeing some NET PROFITS on the rental ppty.  In other words, all that landlords can hope for is pretty much capital appreciation after 15-30 years of hard labor.

If that is the case, wouldn't it be easier to just put the money in REITS and earn 2-3% a year?

BTW,  the PROFESSIONAL TENANT FROM HELL stick post is really frightening. I read all the posts in that thread but I do not see a lot of recommendations as to how a landlord can preempt something like that from happening or how to cut the losses promptly.

I could only find 2 recommendations from comments in that thread:

1) do a better job screening the tenant - yes I agree.

2) take photos of the conditions of the ppty before tenant moves in.  Well this is fine in most instances, but when dealing with a professional tenant, I am not sure how this is going to help.  It sounds like if the tenant knows how to abuse the legal system, he can drag you through the mud for years before you even get to present the photo evidence to the judge.

It sounds like landlords are pretty much at the mercy of the professional tenants if they are unlucky enough to be stuck with one.

So am I missing something?  Why are people still so enthusiastic about becoming a real estate investor or landlord?  Are there other passive or semi passive investment options out there?

The reason I look into real estate is that I know I can't work forever, there will be a time when I am unable to work and will need to rely on some kind of passive income to support myself. But one bad tenant can wipe out everything you have worked so hard for. Are there other passive or semi passive investment options out there besides real estate?

William Bannister · Answer

I understand your skepticism its  a quality I call self preservation. Over the years I have become more a skeptic then an excited enthusiast when it comes to investments. It probably because I have weathered the storms of  bad investments, bad investment decisions, poor timing, stock market crashes, lack of experience, government taxation/regulation/corruption. These have all been things to add to my negative experiences in real estate investing.
    Having bad tenants was nothing compared to fighting city hall to keep one of my buildings from being torn down for example. 
   I have invested in hedge funds, gold silver,stocks bonds and various other business to include car lots,pizza joint,construction business,pawn shop,and other things i am to embarrassed to mention. 
   Real Estate is hands down the thing I have done over the years that has returned my labor more then others. I have come to be so negative about the stock market and government  and bank manipulation its almost gotten me frozen when it comes to paper investments. If you read the Book by Micheal Lewis The Big short you will understand why I am the way I am about the stock market.
   I lost money in 401k's because I could not get money out fast enough and ect. I am also a control freak when it comes to my finances.
    Your NYC market is a double edge sword for the educated buyer that does there due diligence it can be the best market in North America and your timing could not be better near the end of a bust cycle. night mare tenants come and go but wait and see what happens to rents after QE-3 hammers the dollar and the fiscal cliff becomes reality as the government inflates its way to paying for baby boomer ss and medical costs. Your NYC prices should go up to compensate for the lost value of the dollar.  Tell me paying 2 times the rent your paying now doesn't scare you? You can face the music like the rest of the US as a renter or locked in with a fixed pmt as the dollar slowly slides into oblivion. The largest monthly bill you will ever pay will most likely be housing. why not get into a fixed pmt or shop a great deal and move into something and be able to in 10 years from now look up when those 700k duplexes are 1.2 million and breath a sigh of relief. Just an example. I have no idea what prices are where u live. also shop long and hard and get a good deal;) 
   The things get good and they get bad but they keep going on I have noticed and over time adding real estate to my portfolio had added head aches but fewer headaches then a 9 to 5 job would add. I have been in the corp world and I dont like it. Things may get bad here in the US with slow growth but I dont want to be so negative. focus on your personal economic situation having cash reserves and down pmt and getting a good deal and the other bad stuff around you probably wont matter as much like the price of gas going to 5 bucks a gallon. at least if you own a building you have a little control ..that is if there isnt a rent control in place on that building....
   Personally I pay cash for real estate because debt is too risky for me and if I lived where you were I would be packing my bags for a cheaper city down south like the rest of the snow birds.  I also dont have 10 cool  ethnic restaurants within 1 mile from my house. Good luck,hope to see u on the buyers side being its the best investment I ever made.

Will Barnard · Answer

Example: Lets say you buy a home for $100,000 including closing costs and any repairs needed to bring to rental ready. Lets also assume you get $1000 in monthly rent which places your expenses at $500. Lets also assume you placed $20k down and borrowed $80k at 4% fixed for 30 years. Your mortgage payment would be $381.93. That leaves $118.07 cash flow X 12 months = $1,416.84 income divided by the $20k cash invested = 7% ROI. Not very good, but better than other options.
Now lets say you want more cash flow so you place $40k down rather than $20k.
Now your mortgage is $286.46 and cash flow climbs to $213.54 X 12 months = $2562.48 divided by $40k invested = 6.4% return. Did you increase your cash flow? Yes, but your ROI went down. In other words, you could have taken that second $20k, invested in another same deal and turned the additional cash flow into $236.14 of cash flow, had two properties with two potentials for appreciation and when one unit goes vacant, you are only at 50% vacancy since you own two doors rather than 100% vacancy owning 1 door.

Point is, placing more money down is not the best use of the money!!!!

Will Barnard · Answer

Mary Joe, welcome to BP Nation.

You are correct that the 50% rule only covers operating, capital, and vacancy expenses, it does not include debt service. However, with that said, buying in cash flow markets at good purchase prices will result in a mortgage that is NOT the other 50% of the gross income, but more like 30%-40%, thus providing some cash flow. Nobody will get rich on a couple of rental units. Two do so, you must axcquire quite the portfolio.

Using the target cash flow per door of $100, you would need at least 50 doors just to have a mediocre income stream and yes, that comes with some work of managing your rentals. Certainly you can use property managers to take on a majority of the burden, but you must still manage the managers and the finances.

Is RE the way to go for investing? Without anty doubt in my mind, RE is absoluately the best option out there in my opinion.
No other investment vehicle allows you to have possibility of appreciation, both time and forced, income (cash flow), leverage, tax incentives (depreciation, 1031 exchanges, etc), and the ability to buy at less than full market value.

In contrast, buying a stock, you must pay the full going value of that stock on that day. While you can use some leverage, it is dangerous and risky. You can get appreciation and you can get income via dividends, but you have no tax advantages and no ability to force the appreciation.

So in summary, buy correctly, manage responsibly, apply leverage responsibly, and plug away. Also, keep in mind that being a landlord is not the only way to RE income. You can invest in notes, you can flip RE and flip paper, you can purchase creatively and use OPM (other people's money).

James H. · Answer

For the purpose of the 50% analysis, I like to see a theoretical cash flow of 100 DP using 0 down payment. But if it makes 100/month after 20 percent down, I may consider that property, too - just depends on how much value I think there is in the property.

The lenders will typically require a 20 to 25 percent down payment. If you move in to each property before you rent it for a couple years, it could be less.

Michael Lauther · Answer

Mary Joe I share your concern for unmanageable investments. I pick a relatively narrow area to "farm" and in that way I become an expert in that segment of the market. I am able to retain reliable help as well as becoming known as a good landlord to rent from. I do not  use leverage at all with my acquisitions this is only partly because I own most of my real estate in My Self Directed IRA but even if I were to use borrowed money I would first evaluate the potential of a property on a cash on cash basis and then determine how much additional risk I am willing to add to increase my return by using other peoples money.

Jeff S. · Answer

Mary Joe everybody does it differently because they have different abilities, circumstances, priorities, ambitions and tolerance for risk. You need to study your situation and look at what others in your area are doing, and see if you can identify with anything you see.

Some people have tremendous organizational abilities and manage multiple properties while working, while others devote all their time to RE. You might buy 1 property and decide that is enough and hold it for life or you could decide this isn't for you. You could also discover you have found your calling whether it be in buy and hold or selling as an agent, maybe you like lending or just buying and selling. Maybe you see it as a part of a diversified investment scheme and are hands off with a completely managed property or turn key situation.

Don't let fear paralyze you. Good luck.

Wade G. · Answer

I share your thoughts and I have come to the conclusion that SFHs are not worth the time and work that is put into them.  I plan to keep the ones that I have but really don't plan to buy any more.  It's not passive and just not lucrative enough for me to keep spending my time on.  I just value my time too much as I get older.  I hate to sound negative because I use to strongly believe in it.  Now I find myself plowing as much money as I can into IRAs and I am entertaining the idea of REITS.  I am only speaking of SFH though.  Commercial and MF might be lucrative enough to spend the time on but I don't know since I have never invested in either one so I am not qualified to judge them.

Xing Zhu · Answer

In the last 12 years, the stock market hasn't been very friendly to investors. It has been great for traders though. A good trader should have  made a huge return during this period of time.
But there are also many armature traders who have lost most of their money in the same period of time. Hence everyone needs to have an objective assessment to his own ability in order to decide what to do.

Lynn McGeein · Answer

Mary Joe, my husband and I have been on both sides of your argument.  We used to own several rentals in the mid 90's, but my husband kept complaining about having to fix things ourselves on a weekend or emergency, but he didn't want to just let me hire people as it was more expensive, and he kept saying the stock market would make us much more money for less headaches, no chance of being sued by a stock, etc., so we sold all but one (liked that one too much to let him sell it), and invested heavily in the stock market.  And then you find that has its own issues.  You need to be very disciplined or you risk too much.  So, during the dot-com bubble burst in 2001 or so, then again with 2008, we saw that our little rental still trudged right on through, paying us every month.   We've learned that a mix of stocks and investment property is the better way to go for us, and started buying investment property again in 2008.  This time, he's agreed to let me hire people instead of always needing to do it himself, but we still inspect the properties and fix things we see at least once every year or two.  I would never say the professional tenant from hell thing couldn't happen to any one of us, but you take steps to lessen the risk.   Just like the stock market tanking ... you hope it never happens, but you take steps to alleviate the damage if it does.

Mary Joe · Answer

Thanks Ryan.  I agree to a certain extent and I won't rule out commercial space in my portfolio.

The problem is that commercial space can go vacant for years before they get filled.   Plus if I purchase commercial space, I will not rent to WET businesses such as grocery store or fast food etc,  they tend to generate a lot of problems with rodents, sanitation issues, etc.

so WHY real estate after all?

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