Anyone going to *invest* in real estate once the bottom comes around?

NEW -> Contingent Buyer Assistance Program
Being a landlord of one or two properties is like having nearly all your investment monies in one or two stocks; you could easily think you're buying a rock solid property like Enron or Bear Stearns, only to find overnight your tenant did something to wipe out most of your cash flow or equity. That's why small time landlording is a risky proposition; one bad tenant like one bad stock can wipe you out no matter how carefully you planned your purchase.
 
<em>>>I thought I'd ask if anyone is currently planning on investing in real estate once things become more affordable.</em>





To everything there is a season, but right now, it's not RE.
 
My parents purchased a 4 plex once....it was a nightmare.....it was in Atlanta and the tenants were big trouble...not paying rents, and trashing the units. After the stories from them, I decided that real estate investment was not for me.
 
Skek, if your property manager is charging 15%-20% off rent, you got ripped off. Most will charge 6%-8% around here. Certain locations will charge more, like Las Vegas.





Finding a good property manager is very important. The experienced ones can hold a short conversation with the tenant and immediately spot all the alarm bells. If you have the empathy skills you can try to do this yourself, otherwise it's better to find someone to do it for you.





As a landlord you don't want to try to maximize the monthly cash flow. It's more important to keep a good tenant. You're entrusting property worth hundreds of thousands of dollars to a renter, it's quite stupid to try to squeeze an extra $50 to risk losing a very good tenant. Because if the property sits vacant for just 1 month, you'd lose more than what you're trying to make.





A property manager will be responsible to the tenant's needs, and repair anything that's broken. This means, if the dish washer broke, the manager will call someone to go fix or replace it at your expense. As the owner, you'd also have to pay renter's insurance and put your property manager as a covered person. There are all kinds of expenses (carpet cleaning, painting, advertising, etc) that you (the owner) will be liable to pay. It's better to listen to your property manager and not try to save pennies.





Anyone who has the $ can be a landlord, but not everyone can be a good property manager.
 
skek



6-8% is accurate for long term rentals and 15-20% is for vacation rentals. There is a difference in the amount of work involved. Also consider if there is a local rental or "bed tax" on vacation areas.



I have managed my own rentals for years and do not find it to be a problem. Owning rentals is not 'free money" and can have its challenges however it now beats "working" for a living.



Investing is usually a long term program so don't expect to get rich quick but over a long haul it can be rewarding.



Regards
 
How is rental income taxed? If the cost of owning a house is $2500/mo and I'm renting it out for $2700/mo would I really be generating $200 positive cash flow or would I be taxed on the $2700 income? Or would I only be taxed on the $200 profit?



First post! I've been reading this blog/forums almost daily for several months and decided to de-lurk to ask my question. I also want to express gratitude to IR for this blog and for his thorough and informative posts. Thanks also to the knowledgeable posters on the forums; I learn so much from you guys.
 
<em>As a landlord you don't want to try to maximize the monthly cash flow. It's more important to keep a good tenant. You're entrusting property worth hundreds of thousands of dollars to a renter, it's quite stupid to try to squeeze an extra $50 to risk losing a very good tenant. Because if the property sits vacant for just 1 month, you'd lose more than what you're trying to make.





</em>I have said this before too. Momo makes the most important point with that paragraph right there. Tenants make you money, vacancies bleed your bank account.





StudLee - Welcome to the forums and glad you decided to de-lurk. Unfortunately rental income is much more complex than that. You have depreciation, other write offs, and all kinds of wacky ever changing rules. You have the basic idea, that you would be taxed on the profit, but it is still more complex that that. I wish I could tell you more, but that is what I pay my tax guy for. Maybe, awgee will chime in.
 
<p>Yep, paying somebody to run my apartments as well as a tax person gains me 10x more than I could make from an apartment. My CAP rate right now is only about 4.1%. Not exactly huge, but when you factor in the depreciation usage as well as the appreciation (still VERY small) you make decent money. </p>

<p>Believe me the management company makes ALOT more in earning every month than i do.... But at the end of the day I have hard assets that are worth a decent amount.</p>

<p>All the information provided here are great pointers. But like stated the tenants are the great unknown and getting the right set makes all the difference.</p>

<p>good luck</p>

<p>-bix</p>
 
studlee - There are many deductible expenses associated with rental real estate. Many landlords show a loss on their schedule E even though the property has positive cash flow because depreciation is an expense. If the taxpayer shows a profit on his/her sch E, the income, (profit), is taxed as regular income at the taxpayer's marginal tax rate. If that is too confusing, only the profit is taxed.
 
<p>If you buy investment property in an area you like to visit or vacation and self manage you can write off your trips as long as you perform work on the property. For 5 years prior to moving from California into one of my investment properties out of state we made one trip per quarter to do a visual walkthru and perform basic maintance. </p>

<p>Totally legal deductable expense. Milage, food, and lodging comes off the top.I wrote the quarterly walk thru into each lease as backup for IRS. It also keeps deffered maintance to a minimum. I got to know the area real well prior to moving. </p>

<p>Every trip to Lowes or HD is a deduction. Good record keeping is a must. </p>

<p>Regards</p>
 
xsocal - Nowadays, in an audit, the IRS will want to see how long the trip was and how long the taxpayer spent at the property and what else was done during the trip, such as vacationing, and will prorate the trip expenses accordingly. But, until it actually goes to audit, it is what it is.
 
Back on topic.. I know several wealthy individuals who would love to scoop up some bargins. They are currently sitting on the sidelines because there are no bargins at this time. Im thinking that those with money and smarts (and they do exist) will continue to sit on the sidelines until prices fall a lot more, maybe by 2011 or 2012. Until then, the only bargin hunters will be larger players buying packages of several foreclosed homes from the banks at 45 cents on the dollar. You wouldn't see any individual bargins on single properties for small players any time soon.
 
awgee



True.



I spend time doing a personel walk thru, repairing any items needing repair, and looking at comparable properties. Only "party at night". LOL



The tenants seemed to keep things up when they know the owner cares and shows up to repair items.



Regards
 
skek,



Keep me in mind when you move out. I would love to live next to back bay. =P



As far as tenants are concerned, I have never been a land lord but I would assume that you get more bad apples with cheaper housing (apartments, inexpensive condos, etc) or leases where lots of people sign on (4 frat guys).



I am toying with the idea of some day renting out a nicer, newer 2 or 3 bedroom condo in Irvine. I wouldn't imagine management would be that much of a pain. Just run a credit check, background check, personally interview the tenants and diligently screen references, write out protective lease terms, do visual walk throughs and proactive maintenance a few times a year, and create incentives for people to pay their rent on time (for example, a good friend of mine who rents out several homes gives tenants a $150 off their rent each month if they pay on time).
 
<em>Im thinking that those with money and smarts (and they do exist) will continue to sit on the sidelines until prices fall a lot more





</em>Just go to the foreclosure auction, there you will see plenty sitting on the sideline, with cash, shaking their heads at the prices.
 
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