Thinking about a rental property

Discussion in 'Hangar Talk' started by DaleB, Nov 12, 2019.

  1. Shuswap BC

    Shuswap BC Pre-takeoff checklist

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    I kept it simple enough when I bought a commercial building. Its in an industrial area, a long building with 10 units, lots of parking space around back, some street parking out front. Each unit has an office area up front, and then a large rectangular area in the back that can be customized. A bit of everything is in there, from a kitchen cabinet shop, auto repair, wholesale bearings store, appliance repairs, to a gym for people who work in the area. It has been a blessing and great tenants.
     
  2. MIFlyer

    MIFlyer Cleared for Takeoff PoA Supporter

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    you have to decide what kind of landlord you want to be. I want quality, low drama tenants, so I focus on NICE single family homes in good neighborhoods, that I make sure are not only in serviceable condition, but actually nice.

    So far, this has worked well and I typically have 3-5 times a year that I have to manage something at each rental. I outsource the yard service and include that in the rental. it leads to pride in the tenant and happy neighbors because the yard/flowerbed always look good and as they're walking into the house, they're seeing a nice yard/etc on the approach.

    I tend to price a little under market and the way I find tenants is to create a frenzy. I don't do indivudal showings, but instead do a Saturday open house from 11-2 or something that I advertise broadly in advance and have applications/etc ready at.

    I typically get several people interested and legally pick the best one.
     
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  3. SoonerAviator

    SoonerAviator Final Approach

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    Yup. I can't imagine owning a rental property that didn't cash flow. I'd want at least break-even on mortgage/insurance + $100 or so to cover minor expenses. Hopefully that adds up for a few years and will cover some or all of a major repair (HVAC). After 20 years, you own it outright and the remaining payments are just a money machine. Sell if the market dictates that it's overvalued, then buy another down low when the market adjusts. Buying an overvalued home to start, then having a lot of repair work/poor tenants would be a show-stopper for sure.
     
  4. rbridges

    rbridges En-Route

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    Funny thing running into this thread. We are selling my FIL house to some kids that were friends with our kids. Long story short, there is a 2 month period they will rent until the closing. Lo and behold, they call up and the dishwasher isn't draining. Went over there and fiddled for an hour to get it fixed. I was thinking the whole time that this sucks.
     
  5. Skyrys62

    Skyrys62 En-Route

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    Meet the Fokkers
    With the never ending rise in taxes, insurance, and costs of repair supplies, my profit margins are getting very close to average market returns.
    I do most all my own work...if I didn't, I wouldn't own rentals at all.
    The diversification is nice.
    I bought all as foreclosures so I would have equity from the start and have sold a few over the years and down to only two now. Thats plenty to take care of working full time otherwise.
    Once retired, I'll reassess and may sell all or buy more. Not sure...but if I only net 4 or 6 percent, the only good thing is the diversification at that point.
     
  6. DaleB

    DaleB En-Route

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    For reasons I won't go into, I can't touch most foreclosures. If we were looking for houses to flip, that would be a disadvantage... for rentals, not so much. We can do our own work for anything that doesn't absolutely require a license, and often do -- but we also know when to call someone else.
    For two months of rental income, you're not making enough to make it worthwhile to go do stuff like that. Home repairs are always gonna happen -- you've got to be willing to do them yourself (regardless of when they happen), or pay someone else to do it for you. I always assume worst case -- the furnace will die on the coldest day of the year, the A/C will crap out on July 4th weekend, and the pipes will leak during Thanksgiving. You have to have a plan. That is, in fact, why I'm now leaning more toward looking at properties closer to our end of town. The prices will be significantly higher, and I'm not thrilled about the cash outlay for the down payment and taxes, but rents will be high enough to make it worthwhile -- and it's not a 40 minute drive through or into drive-by country every time something needs fixin'.

    I figure most of the houses we look at will need a week or two of time off work invested. A good scrub-down, flooring, paint, appliance install or replacement, replace can lights with new LEDs, that sort of thing. I also like to proactively replace any outlets and light switches that look less than solid -- those things are dirt cheap, easy to do, and really make a place look better.
     
  7. NealRomeoGolf

    NealRomeoGolf Pattern Altitude

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    I have had 3 rentals. I lived in all 3 and then moved out and rented them. Probably broke even on the first two (had to do roofs on both of them). Third one is people living in it while I am living overseas. Just doing that one to pay the mortgage while I am gone. Had to put an AC in it while we have been gone, but we will be moving back in so the AC will be mine long term anyway.

    I would do it again....but probably not something I would seek out, especially with how the economy is in Central IL.
     
  8. Morgan3820

    Morgan3820 En-Route

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    I had three houses, nice houses, in good neighborhoods. Financed them, purchased shortly after the bubble popped. Held them for about five years. Cleared about $70k when sold. Two bad tenants, both single mothers. I would do it again but I would find something that needed some fixing up to lower the purchase price. Might do it again in the right situation. Real estate is too high now.
     
  9. DaleB

    DaleB En-Route

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    It's not exactly a depressed market. I've got my eye on a couple of places that have been on the market for a while with no takers. I understand why -- and I'd be happy to buy them, but not until the price comes down some more, as I'm pretty sure they will. We'll see what happens in Jan/Feb of next year, when desperation starts to set in.
     
  10. Morgan3820

    Morgan3820 En-Route

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    January would be good. Don’t wait until February, as things start to pickup. At least where I am
     
  11. SoCal RV Flyer

    SoCal RV Flyer En-Route

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    The happiest day of my life was when I sold my rental property. All told, I make about the same money with the sale proceeds in a 3% 2-year CD (and deposits to 401(k) returning 9%) than I did with rent, after repairs, property tax, etc. were factored in. It was an older late-1940s Craftsman-style home that needed regular infusions of cash. For example, when tree roots hopelessly clogged the main sewer line, it all needed to be dug up and replaced, to the tune of $9000. New vinyl fence to replace rotting wooden one, $6000. Etc, etc.

    I did keep rent on the low side as I had excellent tenants that stayed there for more than 10 years. They'd do a lot of the smaller maintenance jobs themselves to make it worth my while.

    Even the best tenants can be hard on a property, as there's just not that pride of ownership.

    For me, the grief/return ratio was weighted more heavily toward the grief side!
     
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  12. ColoPilot

    ColoPilot Pre-takeoff checklist

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    What I've seen are landlords who get too focused on the monthly cash flow of their property -- "My mortgage, taxes, and insurance are $1000 and I rent for $1400 so I'm $400/month cash flow positive!". They get into trouble by forgetting about the one-time expenses that will happen with any property like repairs, improvements, etc. When your renter moves out and you need new carpet and paint -- $3000 (plus you lost a month of rent), new roof $5000, new A/C and water heater $4000. Those expenses eat up that small monthly positive cash flow really fast. I budget a reserve account that is funded from the rent to pay the one time expenses and gives me a better idea how much I'm really cash flow positive.

    Short term rentals are a different game. More profit but more work too, plus the regulations seem to be changing quickly. In Colorado, a lot of jurisdictions are making it more difficult for STR.
     
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  13. pmanton

    pmanton Pattern Altitude PoA Supporter

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    We had a house in San Diego and one in Tacoma WA. Our plan was to sell both, and go looking at airparks with a wheelbarrow full of $100 bills. The market went flat, and we went ahead and moved into an airtpark and rented both. The place in San Diego went like a dream. So well, that when we decided to sell, we had to bribe the tenants to move.
    The place in Tacoma was a total nightmare. I would rather pitch my tent in a bed of scorpions than be a landlord again. Just my 2 cents worth.
     
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  14. Shuswap BC

    Shuswap BC Pre-takeoff checklist

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    Welcome to airpark living!
     
  15. Crashnburn

    Crashnburn Line Up and Wait

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    Diversification is king. You can avoid all the hassles of repairs, non/late payment, repairs, empty rentals, a property manager taking a chunk by charging a fee, and diversify by buying a tradable REIT (Real Estate Investment Trust) or a Real Estate mutual fund or ETF.

    An advantage of Real Estate is you can deduct the depreciation from your income taxes, and if you hold it as a non-rental (say personal residence) for 3+ years, then you don't have to add the depreciation back to the selling price when you sell it. A Parker Exchange (I think that's the term) will let you defer the depreciation add-back as long as you buy a more expensive home within a certain period until you sell the last home.

    You don't get the depreciation with a mutual fund/ETF, but you don't have any of the above hassles, either. I held Vanguard's Real Estate ETF through the housing bubble burst, and for some reason, while property prices were cratering, their ETF was appreciating. I never read the annual report to see how they did it. I target about 5% of my investments to be in REITs.

    I owned a house in SO. CA when I moved to Silicon Valley. I rented it out for two years, after owning it for 10 years, I'd bought it close to the bottom of the market, and lucked into a FHA loan. When I rented it out, to defer selling it until I decided if I liked N. CA better, or not, I got way more than the mortgage payment, plus interest, insurance, and taxes, even after paying a property manager to manage it. The first couple were renters from Hell. The second were renters from Heaven, mostly. When I sold it, I said, "Never again", and I haven't.

    I did look into buying and managing rentals as a livelihood when I was unemployed, but to make the numbers work, you had to have a job so you could deduct depreciation from your salary. As I wasn't working, there was no salary to take a deduction against!
     
  16. Rgbeard

    Rgbeard Pattern Altitude

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    My wife and I own several one-bedroom condos, and find it to be a great use of the funds.

    We bought-in during the downturn, and paid cash for some, and had an IRA buy another. (Not a loan against an IRA).

    We have found condos to be awesome. As landlords we have no exposure to lawn/roof/paint/pool/HVAC.

    LMK if you have questions. It's a small but significant part of our retirement assets.
     
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  17. FORANE

    FORANE En-Route

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    It's referred to as a Starker exchange or a 1031 exchange, named after the man Starker who sued the IRS and won.
    You don't need a separate job; income from the property may be reduced by depreciation. In fact, if one does not qualify as a real estate professional as defined by the IRS, they still cannot deduct depreciation (or any passive loss) against income from their other work.
     
  18. Crashnburn

    Crashnburn Line Up and Wait

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    Thanks for the clarification. Obviously, I'm not a real estate professional.
     
  19. DaleB

    DaleB En-Route

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    You have a list of "prohibited" people and companies. You, your spouse, your kids, grandkids, parents, any company that a prohibited person owns a substantial part of. It's not a big list, but violating the rules can get your entire IRA declared as having been distributed to you, with the accompanying tax results.

    I started looking at distressed houses in a distressed part of town that could be bought pretty cheaply. I know what I'm getting into; a good friend owns a couple dozen and we've talked extensively about it. What I found was a feeding frenzy over the better opportunities -- if a house stays on the market for more than 24 hours, it's probably not worth buying. And no, I'm not exaggerating.

    After an extended evaluation of our financial situation that I won't go into in detail, we expanded our search to include more expensive homes in better condition and in other areas. We just had an offer accepted on our first house yesterday morning, which will likely close in 2 weeks or so. Tomorrow I'll go look at what could very well be the second, which is actually a house with a what could be a very nice walkout separate basement apartment... I'm thinking renters up top, renters or AirBnB below. We'll see how it looks. And there are a few more we're looking at.

    We've got an LLC to own the properties (trivially simple to do), and will be evaluating and interviewing property managers over the next couple of weeks. One was highly recommended, but tenant reviews are almost universally bad. I want a property manager that won't make us look like jerks.
     
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  20. G-Man

    G-Man Line Up and Wait

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    Curious to see how this works for you! In my very limited experience, I've never seen a property manager with good reviews. As one explained "The only people who comment are deadbeat tenants who get mad when we make the follow the rules."

    Good luck and report your success!
     
  21. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

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    Unless you "love" to work on houses.....cause you will lose if you have to pay to have work done....I'd not do it. I have 5 houses and have done it since 2005.

    Take your down payment and put it into an S&P 500 index fund....and enjoy yourself. I'd be further ahead if I'd done that.

    I'm finally making a money...and equity is increasing. But, for the sweat equity I've put into it......not worth it. IMHO
     
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  22. RussR

    RussR Pattern Altitude

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    Pretty much this. Nobody bothers to write a review saying "the dishwasher broke but they got it repaired in a timely manner".

    Are there valid complaints? Absolutely, of course. And there are property managers you do not want as an owner (we had one*). But unfortunately, you're not going to find out which is which by reading online reviews.

    * it was a former coworker of my wife who was getting into property management. We would have to send multiple emails or phone calls and reminders to get anything done. Feedback and communication was non-existent. We fired them after a year. They even bad-mouthed the company we switched to, quoting the online reviews (hah!). Our current manager we've had for 9 years now and are perfectly happy. What you want as an owner is for them primarily to do a few things: 1) find and screen tenants well, 2) perform periodic inspections, 3) enforce the lease, 4) communicate with you on any issues or repairs that need to be done, and 5) get them done in a timely manner.
     
  23. DaleB

    DaleB En-Route

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    I'm moving money OUT of index funds, because we're way too heavy in stocks for comfort if (when) the next economic downturn happens. I don't expect it to be really soon, but we all know it's coming; it always does. So we're diversifying. Stocks, bonds, and now some rental properties. We're targeting a totally different sort of house than when I started looking, since we will not be allowed to do any of the remodel or upgrade work ourselves. Fortunately, after a couple of major remodel projects we've learned how to have good quality work done by professionals without spending a ton of money. We did our last remodel job for around half of what we were quoted by a general contractor, and ended up with a far, far better result than we would have gotten with the GC -- because we were able to spend more on better materials, and oversee the work ourselves.

    We've heard the horror stories and bad experiences, as well as the success stories, from people that we know personally... and have learned as much as we can before jumping in. Even our realtor has a few rental houses, so she's been a good resource.
     
  24. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

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    the people who will be your biggest fans....will have their hands in your pockets.....realtors, contractors, lawyers, and property managers.

    Make a list of your goals......and prioritize them.

    Roll your gains into bond funds....or maybe emerging markets. That's a good way to lose money. lol ;)

    It's lots of work....for the return. I have almost $2mil in rentals.

    But, you are doing your DD and know what you're getting into....eye's wide open. You're not gonna get rich. I'd estimate 5% ROI....is a great goal.
     
    Last edited: Feb 7, 2020
  25. German guy

    German guy Cleared for Takeoff

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    IMHO, rental property only makes sense if a loan can be used as leverage, so that the tenants pretty much pay off the mortgage. If the property is bought cash, the return simply doesn’t justify the hassle, even if you assume an annual appreciation of the property by 2 or 3%.

    People also tend to forget about the occasional expensive repair and the cost associated with the transition between tenants like the house being vacant for weeks if not months, carpet cleaning (possibly replacement), painting of walls, smaller repairs, advertising and so on.
     
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  26. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

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    yup....it's a pure leverage play on money.
     
  27. DaleB

    DaleB En-Route

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    I have to respectfully disagree. The rental income alone (and I've budgeted pretty generously for repairs and maintenance) will be somewhere in the 6-7% range, if things go reasonably well. If they go to hell in a handbasket, they will still net 5-6%. Figure in some modest appreciation of the property over time, and it's pretty attractive. That 2-3% appreciation added to the net income now yields 6-and-change to 10 percent, year after year. The whole reason it is attractive is because we're paying cash. Servicing a loan on the property (at commercial loan rates, remember, with 25% down) would suck most of the profit from the whole thing and make it a crap deal. But I've got money that would otherwise be in bonds or bond funds earning less money (assuming AA or better rated bonds). Anything we invest in houses has already earned its keep in the stock market, it really doesn't owe me anything more -- but will be happy to keep earning on a different investment. Trust me, though I'm not a "pro" I'm also not a novice with no clue how to manage investments. I've made a few mistakes, but they haven't been too major -- and no education comes without a tuition payment. This gets us a little more diversity in where we've got money and how it pays.

    Again, the idea here is not to try to get rich. As I approach the point where I can retire a little early, I want to make sure a poorly timed market downturn doesn't keep me working years after I'd rather not. The idea is to have some fairly stable investments that produce acceptable returns (which to me means 5% ROI or better over time) and good cash flow, with less risk and volatility than the stock market. One more tool in the financial toolbox.
     
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  28. Kevin Eggert

    Kevin Eggert Pre-Flight

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    I have a few single family homes that I rent out. The key is finding good renters and maintaining the property so there are no surprises. If you are handy and can flip a house into a rental, there is the added benefit of serious return on investment. I have one 3 bedroom 2 bath house that I charge $1,100 per month that only cost me about $55,000 and a few months of hard work. I've had the same renter for 5 years now and it's the easiest money I've ever collected. I've seen others do it wrong, by buying low end rentals which only appeal to a low end renter. After a couple evictions, they are ready to jump ship on the rental game altogether. I like the cash flow aspect and make sure to stash away enough each month to take care of unexpected things that may arise. If you do it right there is a tremendous upside, but if you do it wrong it can be a real headache.
     
  29. DaleB

    DaleB En-Route

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    We're closing on house #1 tomorrow, and I anticipate making offers on one or two more over the weekend. We've adjusted our focus somewhat since we started for reasons I'm not going to go into too much detail on. As much as I would like to, we're not looking at the more run-down houses in the lower income areas that would be really good candidates to buy fairly cheap, renovate ourselves, and rent out. Doing that would probably yield better investment performance and more renter headaches, but for other reasons we've moved in another direction. We're looking more at houses that either have already been renovated or are very well cared for and are in or close to move-in ready condition. We're spending a bit more on acquisition but the ROI should still be pretty good. We're also looking in a more desirable part of town than we were originally.

    #1 is a 1920s built Craftsman style with all the original woodwork and floors intact, in very nice shape. We'll spend a few thousand to address a crumbling chimney and pre-emptively replace the 30 year old water heater and probably the furnace as well. After that it's rent ready.

    We've got half a dozen possibilities that we're looking at for the next one or two, all of which should yield decent income and appreciation over the next 15-20 years or so.
     
  30. Fiveslide

    Fiveslide Line Up and Wait

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    Last month, I started a part-time job as a maintenance man at a low income apartment complex.

    When I got there, five out of forty units were vacant. Two of them so disgusting I think they smelled worse than the animal shelter first thing in the morning before cleaning has been done. We're down to one vacant now, I should have it livable next week.

    A few highlights of what I've been dealing with.

    - The water bill, for 40 units, included in the rent, runs over $,7000 a month, nearly every unit I go in, has toilets that run constantly. They just don't care.

    - Got one emergency call stating the heat wasn't working. It was 26°F, so I rushed over with portable heaters so these people didn't have to suffer. When I arrived, the apartment was 79°F inside, thermostat set on 94. I checked the unit over and told them it appeared to be functioning fine. I had adjusted the thermostat during my testing so I asked what they would like it set at. THEY HAD ME TURN IT DOWN, AFTER CALLING ME OUT OF MY HOME ON A SATURDAY BECAUSE THE HEAT WASN'T WORKING! @#$&)() IDIOTS!!!

    - They would rather listen to a chirping smoke alarm than call me to come replace it. I hear them and just wait till I know they're gone and enter to fix it. I guess it feels like an invasion, having a maintenance man come in.

    - I'm pretty certain one lady broke her refrigerator on purpose because she saw a vacant, one of the disgusting ones, get a brand new one because the one in the unit looked more like the inside of a septic tank than a fridge. Second sentence out her mouth was she wanted the new one out of that unit. I fixed her fridge and told her she would not be getting a new one.

    - Over 25% only pay the rent after you've filed eviction paperwork... every month. They have to pay extra fees, but they do it anyway.

    - Today I was supposed to go in 24 units with the exterminator, something that happens every other month. 4 residents wouldn't let us in because they had just smoked weed. Another 4 let us in in spite of the fact they had just smoked weed. You read that right, eight out of twenty-four had just smoked weed at 11:00 am on a weekday. The exterminator has been coming there for years, he said that was normal.

    - I haven't even had time to tag all the cars flat tires and expired registrations.

    - I think some kids bust exterior lights for fun.
     
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  31. Brad Z

    Brad Z Final Approach PoA Supporter

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    I mean, that's the American dream, right?

    Bless you for doing the Lord's work. Dealing with folks like that is enough to send you into a permanent head shake.
     
  32. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

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    How'z the beach house rental bid-ness? ;)
     
  33. Flocker

    Flocker Pre-takeoff checklist

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    That is the only path I would recommend you take. I've been buying & selling commercial properties for over 20 yrs. Absolutely no regrets. Feel free to PM me with any questions.
     
  34. FORANE

    FORANE En-Route

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    FORANE
    Sounds like some of the same issues we face in our 80 some units.
    Your occupancy is good for the type of units you describe.
     
  35. DaleB

    DaleB En-Route

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    Omaha, NE
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    DaleB
    The area in which we bought is known more for hipsters and foodies than the extreme low income crowd. Probably a roughly equal amount of weed being smoked.
     
  36. Fiveslide

    Fiveslide Line Up and Wait

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    Fiveslide
    We're usually at 100% occupied and, usually, very low turn rate. They just had bad timing with some move outs, maybe evictions, I didn't ask how those five emptied at the same time. I replaced the 79 year old maintenance man that just couldn't handle that many turns at once. I'm only supposed to work there three days a week.
     
  37. Brad Z

    Brad Z Final Approach PoA Supporter

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    Dec 28, 2007
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    Alexandria VA
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    Brad Z
    Going into our fifth season and it's exceeded our expectations so far. The nice thing about the short term rental business is even the worst guest is only a problem for a week. Knock on wood, so far we've have really good guests.
     
    Checkout_my_Six likes this.
  38. DaleB

    DaleB En-Route

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    Well, we did our walkthrough and closed today. All we have to do is get the keys... and change the locks, clean the place, unstick a few windows, fix a few minor things, fix a few expensive things, yadda yadda yadda. Oh, and we'll need to find renters, that should be fun.
     
  39. Kuma

    Kuma Filing Flight Plan

    Joined:
    Sep 17, 2019
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    Kuma
    We have 14 rental properties equaling 53 units and a bakery (operated by my wife).

    My advice:

    Don't mess around with single family houses or even duplexes. Go for 4 and 5 unit buildings until you build a portfolio. Problem with single families is you either get the rent, or don't...there's no leeway for beginners there.

    Manage it yourself if you can because managers take a big chunk of your net profits every month. Find your own tenants, once you learn a bit they will be much better than those found by management companies.

    Do your diligence on potential tenants. Criminal/credit checks are mandatory. A little flight planning goes a long way.

    Use the bank's money. You can buy 4-5 times as many properties with leverage. That said, buy nice/turnkey not crappy places thinking you're getting a bargain.

    A good handyman who charges reasonable rates is worth his weight in gold. Retired guys with hours left on the motor are a good bet.Treat them like family and you will usually be rewarded with loyalty (my handyman has argued with tenants trying to give me the runaround without me asking).

    Don't fight with tenants. If you try to fight with them or cause drama you are in their element. If you do your diligence you can minimize problems.

    The courts are your tax dollars at work. Learn to use the law to get your money and kick out deadbeats. Get familiar with the eviction process and don't be afraid to trigger the process. Don't waste money on lawyers for simple landlord/tenant stuff.

    Be strict with your rules. Rent is due on day x. No excuses, start the eviction process if rent is not forthcoming. Don't buy the violin music unless it's a longstanding tenant you know well and then it's up to you.

    Advertise online with sites like Zillow. Don't waste your time sticking up a tiny sign that says "2 bedroom for rent, call 555-1223." We usually have 100 percent occupancy and have never staked a sign.

    No freakin dogs.You'll see...

    Hope that helps.
     
    Last edited: Feb 23, 2020
  40. JEB

    JEB Pre-Flight

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    Sep 27, 2019
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    Sunny SoCal
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    JEB
    We have 8 properties adding up to 79 units. Listen to what Kuma said. He nailed it.

    Here in SoCal and in my experience, rentals are a great thing to own.