High rent prices = easy money for landlords in DFW? (Dallas: real estate, renter)

[MikeSherman]

Based on some preliminary analysis (won't bore you with all the numbers), it would seem that while property values have stagnated since 2007, rent has shot up significantly. This means that landlords are essentially cashing in on massive profit margins, correct?
I am renting a house for about $3k a month right now (I'd buy but my work situation is pretty volatile right now, so don't want to be stuck in a place), which is almost DOUBLE what I'd be paying if I owned the place and was just making mortgage payments (even with property tax included into the monthly mortgage payments). The interesting thing is that people are DESPERATE for rental houses around here, and are paying exorbitant rental prices for them.
Let's say that you had $450k to invest. You bought three $150k houses, and turned around and rented them out for $1600 each (about what rent would be on a $150k house right now around here). Let's say annual property taxes are about $4500 per house, HOA dues are about $1000 a year, and you spend about $500 on maintenance per house per year and $1500 on home owner's insurance per year

In one year, you will make 3*(1600*12-4500 - 1000 - 500 - 1500) = $35,100

$450,000 divided by $35,100 is 12.82, which means that, assuming rent remains static through 13 years, you just broke even in 13 years. Oh, but now, let's say you sell all three houses (and let's assume property values are the same) after 13 years. You just made about $450k. You are basically doubling your investment in less than 15 years...and if property values go UP in those 13 years, well you just made even more money!! Not bad at all!

I'm looking to put some of my money to use in investing, and was wondering if perhaps this is a good idea. Do you landlords out there have any advice on whether or not my numbers are anywhere close to reality? I know very little about real estate, so you'll have to forgive me.
Anyone have any advice on how to get this ball rolling if it seems to be like a feasible business plan?

[jd433]

Right now is the best time I have ever seen to invest in rentals in Texas. We are enjoying low prices combined with low interest rates and Very high rent. This is the perfect storm for investors.

[BigDGeek]

If I had the spare cash lying around, I'd be in the market right now.

[compSciGuy]

Why are you assuming your house will be rented for 12 months in a year? You should take off a month between renters and time to do repairs / maintenance / cleanup. It might be better to 'force' a month off (or 2 weeks or something) because around here because it might be optimal to get the renter around the time the school year starts, etc.

You pay income taxes on rental income.

Do you have time to find the renters, do the showings, do all the maintenance yourself? If not, you need to pay a property manager to find the renters, and/or take care of the maintenance. Also, if you take care of property maintenance, are you ready to be disrupted at weird hours of the night for simple stuff, or interrupt doing your regular job. Also, keep in mind many renters hide problems that aren't a big deal to them because they don't want to pay for the repair.

You should be spending more than $500 a year on maintenance, upgrades, ... Renters typically treat their properties worse than homeowners. Also, if you are renting now, you probably don't have the tools to do the job, and need to experiment a little to get the job done right. On my personal property, I upgrade things to higher quality when the original builder grade items need fixes or repairs. On a rental property one is likely worried about a more 'consistent' look.

Also, when you sell the house, typically the seller pays the commission.

[TX75007]

There are a lot of costs you do not include.

First, cost of money. Interest rate plus inflation is around 7%.

Second, depreciation. Use a 15 year scale. Or, cost of repairs. Pick one. They are about the same. Some years its low - maybe $1K and others its really bad. Round $10K.

Next, you need a property manager. That can be you or someone else. But its a real cost. Figure 20 hours a month for those three houses at $25 an hour. Mileage, etc, too.

Next, unless you find a stellar renter who is there every year, you will have the house empty at least one month a year. Deduct that income.

Finally, at least on year out of two for those three homes, your renter will do something and need to be evicted. Add $2000 to your costs. Or, they will sue you for something dumb.

Taxes. Rental income is passive income. If you have a day job and do not do this as your primary job - and who does not - you cannot deduct the above costs as a going concern. HELLO! So you have to pay taxes on ALL the revenue not the profit. OUCH. That's 20-35% off the top!!

Market. Some years you are the bug and some years you are the windshield. You can make it up in the good years.

Then there is the emotional toll.

Running a business is just that - its a business. Some people have the idea that its just gravy. It isn't. Its very hard work and you have to deal with problems all the time. And its Risky. Not only is your money on the line, but so it your family life, your free time, and your reputation. Sometimes you have conflicts that put you at odds with good friends who are vendors. Or people you trusted have personal problems and you can no longer trust them. Or weirdos come along and sue you or stalk you. Or try to cheat you or scam you.

The best real estate investment I made in TX is buying raw farmland and holding it for 10-20 years. 100-200 acres off a major blacktop withing 45 min of Dallas is a good buy.

I'd also watch the movie The Money Pit with Tom Hanks. Its close to the truth.

[TurtleCreek80]

You're missing a few things:

1. If there is a realtor involved in the rental transaction (even on tenant's side), you'll pay 50% of first month's rent to each agent. So just count on 11 months of rental income each year.

2. But then....it's rare that one tenant will move out on the 31st and the next will come in on the 1st. You'll most likely need a little time to clean and / or repair carpet and touch up other things. So really count on 10 months of rental income and make sure you can afford the mortgages if at some point the market isn't as hot as it is now.

3. Maintenance will run over $500/year! I rent out my little uptown condo to a great tenant (very responsible middle-aged divorcee) and will have spent about $400 getting it ready for move in (carpet clean & deep clean) and about $400 on misc repairs (ice-maker stopped working, tub drain clogged, window leak, etc). I'm in a high rise where HOA sues cover a lot of things a single family home landlord would need to cover- exterminator, changing a/c filters 2X per year, yard, tree trimming & maintenance, etc.

4. Taxes! Rental income is taxable income on your 1040. Some of your expenses can be deducted from your rental income to lower the taxable amount, but not all.

[Squirl]

If you pay cash for your properties and manage them youself as an "active business" your calculations are not terrible. Repairs, maintenance and improvements at $500 annual could be possible if the property is very new. The most desirable properties are close in to the city so usually not so new.....which means HVAC, fencing, roof, garage door replacements, water heaters, etc. I manage my properties myself and they are mortgage free. My annual after taxes ROI after all costs averages about 9% for my properties combined. I spend one half day biweekly driving by the rentals doing a visual drive-by inspection. If something is amiss with the place, I immediatelycontact the tenants and then go back in a few days for a recheck. If something is amiss on the street, I contact the police or code enforcement. My point: this is not "free money" and like everything else must be earned..

This market is very hot and I have not had a single day of vacancy in 4 years. My tenants have done an excellent job of move-out cleanup and we work overnight if needed to turn the place over to the new tenants. I also offer below market 2-year leases which, ultimately, save me money in turnover expenses.

A couple of other thoughts: there is no guarantee that the money invested in property or anythng else will increase in value or remain stable. So the 9% I am presently achieving is only good now and may be the best I will ever do. Maybe I will sell those places at a loss. Maybe if I had my money as cash I would have other/better investments opportunities or at least have liquidity to respond to other investment opportunities or even move easily from this area when we retire. Your present landlords may have a mortgage on your place and be "underwater" and actually be achieving no profit at all. In my mind they best deals in real estate are in the "buy" -- not in the sell.

[Rakin]

"Easy Money for Landlords" is a contradiction of terms. Landlords seldom have anything easy.

[Mercuryman007]

You need to improve your plan

[Wittgenstein's Ghost]

Originally Posted by Mercuryman007

You need to improve your plan

The OP was from eight years ago. I hope he bought as much real estate as he could back then. That would have been a great plan.