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gorillapaws's avatar

Do any of you own income properties? Would you recommend it? Caveats?

Asked by gorillapaws (25491points) February 26th, 2012

I was speaking with my parents tonight about ways they could invest their money. My mother is amazing, but has some nutty ideas about the stock market and always seems to be in constant fear of financial Armageddon. I don’t deny this possibility, and can appreciate that as they’re in their late 50’s and mid 60’s they need to be conservative in their investment strategies.

This led me to thinking that perhaps taking advantage of the lousy housing market by purchasing an investment property or two might be a reasonable course of action for them. Their house is paid off, and I was thinking they might be able to get a couple of modest properties in good condition in good school districts.

They could take out 10 or 15 year mortgages at great interest rates (they have amazing credit) with maybe 50% down or so, and use the rental income to cover the mortgages and maintenance/other expenses. By the time they’re ready to start drawing on their retirement, the mortgages on those properties should be mostly/completely paid off and they can use the monthly income to supplement the income from the rest of their portfolio. This would allow them more flexibility in not having to sell some of their other securities if things take a hit down the road, and allow them to wait for things to recover a bit.

Is this a crazy strategy? Do any of you have any experience with this type of investing? are there any books or other resources you’ve read on the subject that you’ve found particularly helpful?

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34 Answers

augustlan's avatar

I own a rental property, and there are good things and bad things about it. The bad mostly leans toward maintenance issues and crappy tenants. (I’m likely serving an eviction notice on mine in a couple of days.)

When the tenants are good, it’s a nice steady income, and I imagine your parents would buy properties that are in better condition (newer) than the one I own, so maintenance may not be as troublesome for them. Since I live right next door to my rental, and we are fairly handy, I don’t need a property manager. Your parents might, and that would really eat into the income.

Over the long haul, housing always seems to increase in value. Since the pros generally outweigh the cons, if I could afford to, I’d be taking advantage of the depressed housing market and snapping up additional properties right now.

Hypocrisy_Central's avatar

Fact from fiction, truth from diction. Nothing is as eternal as land, so said by the late Anwar Sadat. Land will always be here, you know how much of it there always is, it doesn’t go stale, rot, or evaporate. 90% of everyone wants it. Even if they are just booking time on it and can’t afford their own. If you can pick up REOs that just came online, or short sales they could be good investments.

NEVER, EVER RENT! If your parents let that ‘R’ word roll from their lips, smack them with a stale French roll. LTO or straight lease. The lease is a legal contract that says you will do this, they will do that. They do something else, they have broken the lease and part of the agreement could state they have 10 days to vacate the property once the lease is broken. If they sign it, that means they read, understand and agreed to abide by it. If they are leasing to own, they will take care of it because they feel they will be owning it one day. To make it easier keeping up on, you an have them send the lease payment in via ACH then so long as they deposit money, you will get paid. The worse that might happen is at the end of the lease period, they will decide they do not want the home and go find something different, and they will get the home back in very good condition.

Judi's avatar

I own several rentals. If they decide to do it, they should join their local property owners association. They will be able to provide them with all the forms to be legal in your state and the education to stay out of trouble. Fair housing is not as simple as it sounds.
This is not as easy as a 401k. They will be buying a job that requires lots of accounting and record keeping. Documentation is the number one rule of this business.
I would also suggest you watch the movie Pacific Heights before they make their final decision.
@Hypocrisy_Central , renting does not mean the absence of a contract. There are plenty of great month to month rental agreements out there. Also, laws vary by state. A lot of what you said isn’t true in California

YARNLADY's avatar

Rental property is not for the faint hearted, and the handier you are, the better. You have to be prepared to spend two to three months rent every year just to keep up the maintenance, and renters are notoriously rough on property. There are multiple government regulations, and lenders have stricter rules before they will loan money.

If they are not astute business people, willing to do a lot of accounting and such, I would not recommend it. I own a rental house right now, and it is very time consuming.

whitecarnations's avatar

Invest in an apartment in San Francisco. Renters come and go but with good $.

dappled_leaves's avatar

@Hypocrisy_Central I have never heard of anyone renting a home or apartment without a lease. Is that something that is legal in specific states?

keobooks's avatar

I know many people who have gone into rentals and flopped and I know many who have done well. The people who did well are the ones who were really into renovating and excellent handymen. They could fix just about anything themselves and loved doing it and would do so even if there were no profit to be had.

They were also good and experienced at property management—keeping an eye on their houses and renters without seeming too nosey. Some of the worst things to happen are when property owners ignore their homes until the lease is up. Even the best rental owners tend to let things get bad instead of calling and you could end up with a major train wreck of damage if you let it go.

The guy I know who does the best used to flip houses during the real estate bubble. He loved finding houses that were scruffy (but not totally shot) in nicer neighborhoods and fixing them up to sell. When the economy tanked, he switched to leasing with an option to buy. This was good for both parties as some first time homebuyers weren’t getting mortgage approvals, but my friend considered them a good investment risk.

One thing he does is that he sets up predetermined times to come over and perform services and maintenance on his properties. This is so he can check up and make sure the renters are keeping everything maintained—but in such a way that they think that he’s doing them a favor rather than spying.

Like he used to offer lawn mowing service and snow removal in the agreement until he got too many properties and he now hires out a friend to do it. This way, he can make sure the outside of the house stays in pristine condition. He would also change the batteries on the smoke alarms twice a year and clean out the heating and air ducts and clean out the gutters. He’d schedule things in such a way that he’d be in every other month or so. While he didn’t snoop, he would make sure the house was clean and there wasn’t any damage—like leaky pipes that renters seem to ignore until the floor collapses.

I think the worst mistake people make is buying properties and thinking that they can just ignore them until the renter calls. Unless the renters have been home owners, even the most considerate folk don’t know all of the stuff that goes into home ownership and they will let the house go to pot.

dappled_leaves's avatar

@keobooks While I respect your friend’s desire to keep up his properties, I’ve been a renter all my life, and if I had a landlord who wanted into my home almost every month, I’d leave fast. That borders on creepy.

jca's avatar

What @keobooks and @dappled_leaves brings up the very good point about tenants needing a good landlord, as well as the other way around. It’s true that there are tenants that hesitate to tell a landlord about an issue, out of fear that if they are too “needy” the rent might go up.

@dappled_leaves: Many landlords don’t have leases, and it’s not illegal to rent without a lease – that usually occurs in smaller dwellings. It’s called (in my state) a “month to month.” Usually in a larger building or complex, there is a lease. Leases benefit both landlord and tenant, so the terms are clear and legal.

I have friends that have investment properties, also known as income properties. One has a four unit building and their daughter lives in one, so she keeps an eye on things and lets the parents/owners know if there’s a problem. One of the tenants is an old lady who has been there for years, years before they owned it, and apparently has a hoarding situation in the basement. When she dies, they know they’ll have to hire someone to get rid of all her crap. It seems like from the stories they tell, good tenants are key. I have other friends that have onwed condos and rented them out, and they all have stories to tell about tenants not paying the last few months’ rent, tenants making outrageous demands and stuff like that. I have a friend that rents in a large, two family house, and her landlords are an elderly couple who never touch the property unless it’s disaster time. From all of the above, if someone is handy and has the time and know-how to do the maintenance themselves, then it’s profitable. Some people are not into disputes with tenants and taking people to court. Many people don’t have time for that stuff. If you do, it can be a good way to have the mortgage paid and hopefully, the real estate market will pay off in the long run.

dappled_leaves's avatar

@jca That’s interesting about the “month to month”, thanks. Around here, if you were to say the phrase “month to month”, it would be assumed you’re leaving off the “lease” part at the end of the phrase. ;) Leases are typically either yearly or monthly, though anything in between can be negotiated. I don’t know anyone who has even wanted to rent without a lease – it’s vital protection for both parties.

I’m reading all these warnings about scary tenants, and it makes me smile a bit. I have heard far more stories about awful landlords than about awful tenants. Maybe I’ve just been hanging out on the wrong side of the tracks for too long.

Response moderated (Unhelpful)
wilma's avatar

I have heard stories about awful tenants and awful landlords.
Where I live the tenants have more rights than the landlords and the law is written to protect them more than the other way around. A tenant really holds all the cards. They can not pay the rent for months, force the landlord to go to court to have them removed (again this takes months with no rent) and then disappear leaving the owner with months of unpaid rent, utility bills and usually a huge mess.
If they know how to use the system they can make a lifestyle out of doing just that.
I have some rental property. We have some very good renters and we do our very best to keep them happy. We want them to stay.

Judi's avatar

@keobooks , Your friend sounds like a real pro. I wish others took so much pride in their properties and realized that this business is way more than just an investment. When I was on the board of the local property owners association I was always amazed at how some owners thought their business should run. So many had a real disdain for their residents. I always thought that in any other business you would go broke looking down your nose at your customers, but these very successful guys did it all the time. They also tended to be slum lords. If the owner doesn’t takes pride and care in the property, why would they expect the resident to? Its refreshing to hear about another owner who understands the value of customer service in our business and how it positively effects our bottom line.

Judi's avatar

@dappled_leaves , I could tell you stories about bad “tenants.” (I prefer to call them residents.) There was they guy who threw all his meds in the pool, plugged up his toilet and all his sinks and tub, turned on the water and went on a “walk about.” We didn’t know about all the damage until it was seeping under the neighbors wall. Then there was “the bird lady” who had garbage piled 4 feet high throughout her apartment with trails leading to the bed and the refrigerator. She let her bird parrot fly loose in the apartment and it crapped all over and ate all the trim wood and the popcorn off the ceiling,
Then there was the quality control manager from Nestle who had beer cans piled up 3 feet high and maggots in his stove. His toilet broke (the chain fell off the flusher) and he just kept putting crap in it and didn’t want to call us to fix it. By the time he moved there was butt imprints in the poop. (and no toilet paper.)
There was the attorney with three cats and no litter box.
Three was the lady that smoked so heavily that we had to replace the drywall…..,.
For all that, over the years, most of our residents have been amazing wonderful people. I have learned that if you treat people with respect and dignity, they will usually act respectfully and dignified.

dappled_leaves's avatar

@Judi “I have learned that if you treat people with respect and dignity, they will usually act respectfully and dignified”

Yes, exactly. That has been my experience with landlord-tenant relations as well.

gorillapaws's avatar

@Rock2 there certainly are better ways, but as I stated above, my mother is very weary of securities at the moment. They do have some investments there (this would only make up a relatively small chunk of their total retirement portfolio), but I was thinking this might be a way to capitalize on the depressed housing market, low interest rates, and their excellent credit while diversifying a relatively smallish chunk of their portfolio.

Thanks for all of the really helpful answers. Do any of you have any book suggestions or know of any other resources that you’ve found helpful (@Judi I will definitely tell them to check with their property owners association, great suggestion)? Do you think they would be better off buying a couple smaller properties (still in great shape, in a good area, near good schools), but with less square footage, and less fancy appliances/fixtures? Or one higher-end property?

My gut tells me that having two is better than one, because if there is a problem resident/tenant the potential for damage is significantly reduced. Furthermore, the rent will be more affordable, and allow them to stay leased for more months of the year. The downside is that lower rent may draw riskier tenants, but from some of the nightmare stories about the lawyer and the manager it sounds like having higher income tenants is certainly no guarantee that they will respect your property.

My mother handles the bookkeeping for our family business of a small private surgical practice. We aren’t exceptionally handy, but we do know people we trust who are. I realize using a property management company significantly cuts into the profit margin, but are they helpful in mitigating some of the risk?

When a nightmare tenant trashes the place, and you win a judgment against them, can’t you garnish their wages and eventually recoup your expenses? Or is that usually a lost cause?

wilma's avatar

@gorillapaws it’s usually a lost cause, they either don’t have a job, or can’t be found. The lawyer and other legal fees make it more likely that you just give up and start over.

keobooks's avatar

@dappled_leaves I don’t understand why it would be creepy to have your landlord do maintenance on the house every other month. In apartment complexes, this is par for the course. They are keeping their investments in good condition.

Maybe you haven’t been a homeowner, but things like cleaning the gutters and air ducts are part of home ownership. Even non-scary very nice tenants can’t be expected to keep up with that stuff because the house does not belong to them. There is a responsibility that comes with ownership that not even the best tenants can be expected to perform the tasks.

I disagreed with him on the fire alarm batteries, as that is an easy task, but he said that even really good tenants would just take the batteries out rather than change them. He didn’t want the house burning down and the insurance company not covering him because the fire alarm wasn’t working.

dappled_leaves's avatar

@keobooks If a complete stranger entered/visited your home once per month (even announced, even with prior agreement), would you feel that you had privacy in your own home? I wouldn’t. You said above that the visits are really to “check up” on the tenants; in my opinion, that is intrusive. I have never had a landlord request such frequent visits, so I am going to assume that monthly maintenance is not needed for the well-being of the house. I am willing to take your word for it that he means well, but it is abnormal, and it would definitely make me uncomfortable – to the point that I would leave that building.

Judi's avatar

@gorillapaws , if the residents are properly screened their income should not really effect the quality of the person.
Management companies can mitigate liability if they are good by knowing the laws and doing things right. They are still working as your agent so if they don’t do things right you are still responsible for their behavior. They also might get some kind of volume discount frame some maintenance vendors. If you decide to hire a management company, ask a new question about what to look for in a management company.
The more units you have the better. If you have 2 units and one is vacant you have lost 50% of your income potential. If you have 4 and one is empty you have only lost 25% of your income potential.

keobooks's avatar

@dappled_leaves I lived in apartment complexes where this was the norm. Never bothered me.

Judi's avatar

@dappled_leaves , usually they come in to change the AC filter. It’s a service they offer and at the same time, they will be alerted if they have a “bird lady.” if I had been doing regular inspections I would have known about the Nestlé manager. I feel bad because he moved into an apartment that was managed by a friend of mine and I gave him a good recommendation. I called her later and told her to kep an eye on him.

HungryGuy's avatar

Yes. I recommend it. Sometimes you get crappy tenants, but overall it’s not that challenging.

jca's avatar

@keobooks: I have lived in about 3 different apartment complexes in the last 15 years and none were where the landlord visited once a month or once every two months, for any reason. They were all well maintained, and gutters were cleaned, etc., but none involved visits to my apartment from the landlord. My friends with income property do not visit their units this frequently, and I can assure you their buildings are all maintained.

I agree that if this occurred, I’d probably move out, too.

keobooks's avatar

@jca How did the gutters get cleaned? Just curious. When I was in complexes, I thought this was par for the course. After living in some skeevy rentals where I never saw the landlord once, I thought it was a good thing.

I once had the landlord forget to pay our utilities (which were included in the rent) and we had to go without power and water for a few days because she was hard as heck to find. When she finally came around, she didn’t apologize—she just said “oops. I forgot to pay. You know how it is!” and skipped off. I decided after that to only go to complexes where they had maintenance schedules in writing.

This is the way the guy I know does it. None of his renters complain. Most of them are older—many middle aged women who are single with a few kids. Maybe they like the attention.

jca's avatar

@keobooks: The gutters got cleaned by the super cleaning them. It did not involve having to ring my bell or deal with me personally at all. I lived in some great complexes/apartment buildings, beautiful locations, nice units.

You’re right, the women might like the attention!

keobooks's avatar

Yeah. I hate to admit this, but I think my not minding all the landlord visits from the past comes from the fact that I was an older single lady. I am mostly a self sufficient person, but I liked someone coming over every few months. Who knows? I coulda died on the toilet and nobody would have noticed!

jca's avatar

@keobooks: I understand. I just find someone popping up unexpectedly every month or two for something that does not require a personal visit would be unnerving.

Judi's avatar

@jca , usually it’s not unexpected. In California, you have to give 24 hour notice before entering someone’s apartment.

jca's avatar

@Judi: The situation @keobooks described seems to be (unless I misunderstood her) that the landlord is coming under some pretense like cleaning the gutters (which, I don’t see why that would involve needing to see the inside of a renter’s unit) unannounced. It doesn’t seem like he’s entering when she’s not home, it seems like he’s showing up, “knock knock” and popping in, looking to be allowed in (and then having the privilege of seeing what condition the apt. is in). She said in her first answer that he sets up “predetermined times” to come and do maintenance but in reality, it’s so he can check up on things in the unit. I have never had a landlord/superintendent coming at predetermined regular times every month or two months to do maintenance that required coming into my unit. Only if there was a problem, for example if I called with a plumbing problem, did they need to bother me at all.

keobooks's avatar

@jca No—you misunderstood. He does NOT come inside to clean the gutters or mow the lawn or other outdoor things. I don’t know where you got that idea. He never comes over unannounced. His visits are preordained and he usually has a yearly schedule that he gives to his tenants so they know when certain things generally happen. If he has to come for some reason not scheduled, he will give as much notice as possible.

It’s just that when he is in he does look. He doesn’t snoop around or give an inspection. But if he smells something funky or notices puddles or whatnot he will see what it is. Does that make more sense?

jca's avatar

@keobooks: yes, that makes more sense, that he doesn’t need to come inside. I did see that he has a predetermined schedule, though, and you did say that he uses it to “be in every month or so…..and check up” (your words) and then when @dappled leaves said it would be creepy for a landlord to “have to enter your home every month or so” you didn’t dispute that, you said you found it to be the norm. That’s where I got the impression you meant the person was coming in to the home.

Even with the predetermined schedule, I don’t see the necessity of coming over every month or so, with or without notice.

Judi's avatar

@jca , that’s because I’m sure you are an ideal resident. :-)

jca's avatar

@judi: I am! If something goes wrong, I try to handle it myself first!

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