Originally posted by @David Krulac:
@Daren H.
I mentioned the
13 year tenant previously who wanted their kids in a particularly fine school system, who then moved as soon as the kids graduated. That tenant was
commuting 70 miles one way to their high paying job. When the kids graduated, they BOUGHT a less expensive house much closer to work, but in an inferior school district. They could have bought a house anytime during the 13 year tenancy but chose not to buy.
[...]
I rented a house, here, to a landlord who had 50 houses in ARK. They had 3 years to go to retirement, still had all their houses in ARK. , and were going back to ARK when they retired in 3 years. They chose to rent rather than buy. Life changes though and while here he got a promotion and ended up staying 6 years then retiring back to ARK.
My tenant had MORE rental houses than I did!
I've rented group homes, some of which has rented for 14 years to over 20 years. Their business plan is that they NEVER buy real estate, always rent houses and they have 30 or 40 houses that they rent. Its a business decision to rent. For one thing they don't have to come up with down payments, which in their case would be at least 20% down, probably 30% down. They don't have to pay closing costs, and they don't pay real estate taxes. Their business plan allows them to not have dead equity tied up in properties and allows them to operate more house. Its a business decision and imo is a very good decision. Obviously they can't qualify for VA, FHA, USDA, or any residential mortgages, which plays into their business decision.
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Sure there are people who rent because they have no choice, but there are many more people than you realize, who could buy but chose to rent rather than to buy!
David, so many excellent points in this post and the follow-up one, thank you! "Schools, crime, location, unemployment" seems like a simple formula for long-term success. A high percentage of owner-occupied properties is likely a consequence of the above four factors, and it could also be a great proxy for measuring the attractiveness of a deal in light of these non-financial aspects of an investment decision.
A few interesting things stood out to me:
- 140 miles daily times 13 years is just madness. That's about 437,000 miles total or $245,000 dollars. Not to mention close to two years' worth of life. I don't know their specific circumstances of course, but there should be plenty of chances in 13 years to optimize this situation. On the other hand, positioning yourself as a landlord to offer a property with good schools to tenants who will likely enjoy long-term stability (keep kids in same school til they graduate, etc), is a great strategy.
- Hearing about the landlord with 50 properties is funny - that's exactly where I want to be in the future. In my mind, investing the capital elsewhere for a higher return, and renting my primary residence is a great way to go - including owning rentals while renting your house.
- The point about dead equity is important to understand. "Paying down your mortgage" means that your rate of return decreases over time (effective returns of having a place to live, divided by the capital tied up) . Compare that to taking that same money and investing it every month - your income will be increasing over time as you contribute to the invested capital, and re-invest the proceeds.
To the last point, I would say there are three categories (in order of increasing preference as a target tenant):
- people who rent because they have no choice
- people who consciously chose to rent
- people who unconsciously choose to rent because they think they have no choice.
The people in the first category may be living paycheck to paycheck, and any unforeseen expense can get them in trouble, and really work that vacancy allowance that you built into your budget (right?) The people who are conscious renters, are more likely to be in it primarily for flexibility and convenience, and will probably move eventually. The people who I'm calling "unconscious renters" will more likely be financially steady enough to pay rent on time for 10+ years, but are trapped by their own pre-conceived notions of money, spending, and life. They are giving themselves the shaft, but providing a great return to the landlord - your tenants who drove 18 times around the globe in their 13 years with you, are a prime example.
Thanks also to the OP for a thought-provoking topic, which generated some very insightful responses!
Cheers
-D
