Owning a Rental Property -- Good Investment or Nightmare?

[pryncess527]

Dh and I are getting ready to move to another state. We are trying to decide between selling our house or keeping it as a rental property.

After paying a Property Management company, our mortgage on the house, taxes & insurance into escrow, it looks like keeping our house as a Rental would net us $600 a month. Some of that (I'm estimating $150 of it), we'll probably need to put in savings against future repairs on the house, netting us $450 a month in profit.

Downsides:
The downpayment on a home in our new city will be drastically smaller (20% instead of ~60%)
Feels random and strange to own a rental property in a state where we have no connection, no family, etc

Upsides:
It's a good rental market, housing prices are expected to continue to rise steadily in our area for the next few years, and we are fortunate that we do not HAVE to sell before we can buy. DH thinks it's crazy to give up $450 in "easy" income. I'm a bit more wary of being so non-liquid, but I admit the idea of a rental income stream is very attractive . . .

What I'm really looking for though, are things I have not considered about the risks/rewards of owning a rental property. I figured there's no better place to go to find out the 100 things you are overlooking, or all the ways your idea is stupid, than the Dis!!

 

[gottaluvPluto]

It can be a nightmare. My mom just sold her rental home because it became too much for her. The guy renting her home stopped paying rent and it took 6 months to evict him. In that time, my mom still had to pay her mortgage on the home. The guy destroyed the house and my mom had to pay to fix $8,788.00 in damages.

I have a rental home and so far so good. It really depends on your renters. We rented to a couple of Millennials and they were very demanding. They wanted new kitchen cabinets, new hardware throughout the house, new tile floor. They were only in the home for a month when they started being demanding. They just wanted new things.

 

[mnrose]

We own three rental homes. Two of them are managed by property management companies (they are in different states so different companies), and the third is occupied by my MIL....she's a good tenant...LOL. No worries there.

In terms of profitability, we own all three homes outright,and still are in (at best) a break even proposition or perhaps a small income. Nothing fantastic, that's for sure. It is ALWAYS something with a rental property. This year, so far, we've had to have the stove repaired, the sink faucet repaired and replaced, the bar refrigerator repaired, and then the big kahuna....the guest bath shower had a failed shower pan. The tile work is being ripped out now, the pan replaced, new tile, and then new carpet for the bedroom where the leak showed up. Fortunately, no mold developed (phew!!), but it is costing us nearly the entire year's profit from that house to fix the problem. Plus, the tenant wants one month concession on the rent for putting up with the inconvenience of dealing with the repair mess. So, the fix is costing us a ton. We can carry this cost readily without borrowing, so that's good. I would say, therefore, that you better be able to handle BIG TICKET issues without borrowing or going into debt as a condition of going into the rental market.

And, as I say, it's ALWAYS something. Last year, same house, we had a rat problem (not unusual for the area the house is in). Cost quite a bit to clean that up. And, some trees needed to be removed from the property because they posed a risk to the roof. Cost us $5000 for that one.

The houses we've owned have appreciated nicely in value. And, from that perspective, they've been "good" investments. But, not from a cash flow perspective...keeping in mind that we have no mortgage on any of them. Sure, there are some months when we get the "full" amount (rent less property management fees), but I would say MOST months we do not.

Also, what about yard maintenance? The advice from our property management people is to INCLUDE that service to make sure it is done in the proper way. Not every tenant cares about that sort of thing, and your "nice" rental property can quickly turn into the neighborhood eye sore. There goes more money.

Finally, we've had some VERY bad tenants. Truly awful. Who did a ton of damage to the house (holes in walls, broken windows, etc), and the damage deposit covered only a small percentage of the damage. And, while you "technically" can sue them for the difference, most of them are essentially judgment proof....can't get blood from a turnip.

Most of our tenants have been wonderful, and left the house in as good of shape as when they got it. But, you've got to be prepared for the occasional TURKEY (and I do mean really bad stuff). Also, bear in mind that even under the best of circumstances, houses will need a new coat of interior paint and carpet every 4-5 years....far more often than you might do it for your own home. A tenant moves after a couple of years, your property management firm will likely be recommending a fresh coat of paint and new carpet (at the very least a GOOD carpet cleaning) to make the house as "rental attractive" as possible.

Given the parameters you outline, I'd assume you'd make little or nothing on the home. If that's ok with you, AND you've got good financial reserves for the annual "BIG" repair item, then go for it.

 

[DiannaVM]

It is a good idea and to me it sounds like you've put some good thinking and working out into it. Definitely setting money aside for repairs is a plus because sometimes people tend to overlook that. Keep in mind that the property management company you hire is a good company that will look out for your interests, since you won't be in the area to check out the house every once in a while. I would probably ask them if they feel there is anything you should do to the house before renting it (keeping in mind that you MAY not get a return on that investment) to keep the house attractive to potential Tenants and also to avoid any big issues in the close future.

Also I would just say that you should keep in mind that really and truly, you never know what kind of Tenant you will get. As per experience with commercial rentals (I assume its not much different with residential though), a Tenant is not going to keep and maintain the house the same way you do, so beware that when you have a changing of Tenants you may need to put some more money into fixing it for the next one (and hopefully you will accumulate enough that you won't have to pay too much out of pocket, but still). Also I am not sure about U.S. real estate laws and regulations, but I would look into it further mostly to avoid you headache and grief over a troublesome Tenant or a Tenant that is not paying. I say this because, at least in my country, you can't kick out a Tenant from a residence without going through the court system, which in our case it can be quite lenghty and costly. And not because you are the owner and they have violated their Lease means that the court will necessarily side on your side either, at least here it doesn't because of the whole can't make people homeless thing, so just a thought.

Not trying to freak you out lol, but just my thoughts from working in real estate. I know residential and commercial rentals can be quite different, but its definitely an eye-opener. One thing I learnt for sure is people will delay paying bills at all costs if possible, and alot of times that includes rent, eventhough not paying their rent risks them having their business shut down by the Landlord. It happens more often than I think it should honestly :/

 

[elgerber]

My question is, will you really be "netting" that much? Won't the payment on your new house be significantly larger without the larger down payment, offsetting some of the net?

 

[ariel71]

My question is, will you really be "netting" that much? Won't the payment on your new house be significantly larger without the larger down payment, offsetting some of the net?

That's the first thing I thought of too. Down payment of 20% vs 60% means twice the mortgage. It's hard to believe the difference between those monthly payments would be significantly less than $450 (if $450 is even a "good" estimate), especially if the income stream is the only reason you find it attractive. While you say you could swing a 20% mortgage on a new property, does that minimize your savings and liquidity below what's wise (emergency fund, lowering retirement contributions to "replace" savings or fund maintenance at both houses, etc.)? In other words, will you be house poor? Also, you need to consider the intangible value of peace of mind. Having a rental property can be stressful, even with professional management and good tenants.

 

[pryncess527]

thanks, this has given me a lot to think about.

Our financial reserves are solid, but I don't want to keep this house just for the sake of keeping it, you know? If this would be a wise use of those funds, then I'm all for it -- but if not, I'd rather just find a different type of investment and park it there.

Adjusting from a 60% down payment to a 20% down payment will definitely mean a higher mortgage, I had considered that. It would not make us house poor though. We are already looking at a mortgage significantly below what the bank thinks we can afford, and in a low cost of living area, but the rental income would get eaten up by the difference in mortgage (the numbers I just ran though do suggest that the lower downpayment would only up our mortgage by $350-400 though. which may also suggest that my % were off, I used actual dollars in my calculator. I estimated % here)

All in all though, I think you have provided me with a lot of good information, and I'll probably use most of this to try and talk DH out of wanting to rent. We always thought we'd keep it as a rental if we moved locally, but when we decided to move to another state, I just assumed we'd sell. DH asked me to get some numbers to compare the options, which I did today, so that we can sit down and discuss our options.

Thanks for all your feedback! This has been very helpful

 

[Jennabeth]

More things to keep in mind, when we converted our old house into a rental, we lost the homestead exemption for our property taxes. Without that, our taxes doubled! You will need insure the rental and homeowners insurance on rentals is a lot more expensive. The mortgage on our rental house ended up being a few hundred less than our current mortgage, even though we owe double on our current house.

We had a renter in there for 3 years. It was supposed to be a rent-to-own situation. We thought this would be good because she would take care of the house better. We were wrong! When she finally moved out (because her credit was shot to heck and she couldn't get financed) we had to put so much work into the house. I had to repaint many rooms. We had to replace appliances and refinish (and repair) all of the wood floors and fix numerous holes in the walls. We had to fix all of the landscaping (it was so overgrown) and power wash the outside of the house (her son would empty the spit cup from his crewing tobacco outside the window, so gross). We had to replace closet doors and all of the blinds. Again, these were people who supposed to buy the house.

I looked at my taxes and since we had repairs every year (roof blew off in storm, air conditioner stopped working, garage door broke) we never made money. I dreaded whenever that number came up on my caller id. I swear everything happened whenever we were on vacation.

The only way I would think of having a rental is if it were a 'neutral' property. One that I never lived in and didn't have an emotional attachment too. This was the house I brought my babies home to. When I saw how they treated it I wanted to cry. We put a lot of work into it when we lived there and were proud of what we'd done. It was really sad the way it was treated.

 

[yoopermom]

We are currently "reluctant" landlords due to not being able to sell our last house. DH loves it, but I'm a nervous wreck. There is no mortgage on it, it brings in $625/month. We agreed that we would bank the ENTIRE first year's rent, for "in case of emergency" (and as already been noted, there is always emergencies!). Our taxes did go up, but our insurance (due to it no longer being "unoccupied") went slightly down. The first of every month I hold my breath waiting for the rent check to come and to clear. We were very lucky/picky in that a former student of mine (plus her husband and kids) heard that we might consider renting it, and basically begged us to rent it to them. The husband does maintenance in a factory, so luckily hasn't asked us to do any work around the place and, in return, I try not to think about what three small children and two dogs are doing to "my" house!

I would NEVER willingly become a landlord, but am tolerating it, for now. Our hope and prayer is that this couple will decide they want to buy it rather than move out. Otherwise, we will let it sit empty rather than put a renter in there that we don't trust.

Terri

 

[cabanafrau]

It can be a nightmare. My mom just sold her rental home because it became too much for her. The guy renting her home stopped paying rent and it took 6 months to evict him. In that time, my mom still had to pay her mortgage on the home. The guy destroyed the house and my mom had to pay to fix $8,788.00 in damages.

I have a rental home and so far so good. It really depends on your renters. We rented to a couple of Millennials and they were very demanding. They wanted new kitchen cabinets, new hardware throughout the house, new tile floor. They were only in the home for a month when they started being demanding. They just wanted new things.

Are you saying they signed the lease, moved in and then expected that you would do cosmetic renovations simply because they wanted things upgraded? Obviously a landlord would have to fix a leaky roof, fix a furnace or take care of electrical problems, etc., but I've never heard of cosmetic repairs being something a tenant could insist upon after signing a lease and moving in.

 

[here757]

I've seen enough people's court and judge Judy...

 

[PlutoPony]

What kind of return % do you get if you consider a $450 net profit/month against the amount of equity in the house? Essentially, if you were to sell the house, take that equity and invest it elsewhere, how does the return you could get that way compare to the $450/month? By keeping the house you are essentially treating it as an investment so how does it measure up as an investment? (this is an extremely simplistic way of looking at an investment I know, and doesn't consider any gains when you sell it. But keeping only $150/month back for potential upkeep is really low and probably unrealistic, so I'd consider it a wash imho).

Also, the one thing i hear consistently is how hard it can be to find good tenants and how HARD it is to evict when they don't abide by terms of the lease.

 

[teller80]

Also, won't you pay income tax on the $450?

 

[nkereina]

Also, the one thing i hear consistently is how hard it can be to find good tenants and how HARD it is to evict when they don't abide by terms of the lease.

Its true that it can take months to evict someone and once you reach that point, you also have to worry about damage to the home since it's likely a contentious situation.

I would only be comfortable renting my house to someone if I had done a high level of due diligence on potential renters, which renters may not want to deal with. I'd want to do an interview, credit check, background check, reference check. I'd need an attorney to draw up a lease that was to my liking. I could see all of this being a put off to potential renters, and I would imagine it being hard to find someone who met all the expectations as well. I don't know if I'd trust a management company to put the right person in my house without some of these things.

 

[gottaluvPluto]

Are you saying they signed the lease, moved in and then expected that you would do cosmetic renovations simply because they wanted things upgraded? Obviously a landlord would have to fix a leaky roof, fix a furnace or take care of electrical problems, etc., but I've never heard of cosmetic repairs being something a tenant could insist upon after signing a lease and moving in.

Yes, they signed the lease and then wanted to change the interior look. The house was built in 2000 and we keep up with all maintenance. It is a very nice house and I would still love to live in it, but we had to move.

 

[GaSleepingBeautyFan]

It was a mess for the neighbor down the street. He rented it 3 times. All 3 times the place was trashed and he had to re-carpet, repaint, replace appliances. And in one case even had to replace smashed windows.

He said he was done now that the economy in our area is recovering and just sold the house. He is so relieved to be done with having a rental property.

But then there's the case of our Real Estate Agent who is now retired and had nothing but great things to say about owning rental property. She has had wonderful tenants and no problems at all.

 

[cabanafrau]

Yes, they signed the lease and then wanted to change the interior look. The house was built in 2000 and we keep up with all maintenance. It is a very nice house and I would still love to live in it, but we had to move.

I'm assuming you didn't grant their demands?

 

[kidshop]

We are military and have been Landlords since 2005, out of state since 2013. I don't know how else to say this, but if your rent is high enough and you do background and credit checks and verify references, your chance of tenant problems is greatly reduced. We do not allow pets and we manage it ourselves. Property managers are not necessarily better, and sometimes you pay a lot of money for awful! We currently rent ourselves, and I can say I care way more about this house than the property manger! It is shocking, so really research before you pay for that.

We have a home warranty to cover expensive repairs and that has worked well. So far, so good. The area the house is in is a strong rental area with lots of military, so you always have a pool of new people coming in.

 

[tvguy]

As they say, the higher the risk, the higher the potential reward. You just have to have a stomach for the risk. I think if I asked all the couples i know that own rental property, one would say it was a good investment, and the other would say the rental is preventing them from doing some of the things they want to do. And it would be evenly split on both sides based on gender.
We considered it briefly when my MIL passed away in 1999, and when my mom passed away in 2013 and decided we would rather have the cash than the houses and invest the money where we wanted. Both houses were paid off

A friend makes nice money off 20 rental houses he inherited. His Grandfather was a carpenter and bought some land in 1920, and bought 20 $520 Sears kit houses that he assembled himself. He rents strictly section 8 so HUD screens the renters, evicts them as necessary and pays for repairs and gets $750 a month rent from each. His only problem now as he approaches retirement is he will face huge Capital gains taxes if he wells them. He's got houses that cost a total of $11,000 new, that have long been depreciated to zero value and are worth over $2 million today.

 

[Colleen27]

Both. We did it for a short time when we bought this house and couldn't sell our old one for what we owed, and it isn't something I'd choose to take on again. We didn't have a bad experience or anything, but the "what ifs" were always there despite doing everything we could to make sure we had a good tenant. Even when things are going well it is a lot of stress.

It might be easier if you had a management company handling everything, as I assume you would since you'll be quite some distance away. I don't know. We just moved one town over and we weren't making enough on the rent to pay someone else to manage things, so we handled everything ourselves and DH & I both breathed a huge sigh of relief when our renter was finally able to get the financing to buy the place from us.