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I have a colleague who is buying and renting out homes.
How are people able to do this?
Doesn't maintenance, interest on loan negate whatever rent he gets?
Are they assuming prices will go up and gambling?
Do you think they are overreaching and may cause another meltdown? I know banks are supposed to be stricter in lending but seeing how many people are doing this, I am afraid this is like 2007.
The answer is pretty simple. You charge a high enough rent to cover PITI (principal, interest, taxes, insurance)+maintenance and give you an acceptable profit for your troubles. People have been doing this since way before 2007. Yes there is systemic risk that housing prices will fall, but there's risk with everything. There's risk with stocks. There's risk that if you hide all your money under your pillow your whole life that inflation will devour it, and you'll die penniless. If you're renting the house anyway, you're insulated from the risk of the home price falling somewhat, as rents won't fall as quickly as the home value will.
Some people will fail because they don't know what they're doing. They aren't good at shopping for bargains, they aren't good at shopping for insurance, aren't good at screening tenants, doing repairs/renovations themselves, or aren't good at hiring good contractors. Some people won't go through the trouble of learning about eviction law and will get screwed by a bad tenant. But for people who learn how to do everything correctly, it can be a profitable enterprise. when it comes to investing personally, I don't know if it's worth the trouble over just following a buy and hold index fund strategy.
I think it is just depends on the circumstances. I have a friend that owns 50 rental homes. He used to take out loans, but now he uses the income from the homes to pay cash for the new homes (almost all of the homes are completely paid off). He will be the first to tell you that this is not easy money. He has had houses burn down, renters destroy his homes, etc. He has his own business and that allows him time to constantly drive by and check on his homes. He also has a handy man almost full time to pick up the rent and make repairs (minor repairs, change carpet, paint, etc.). However, when he was young, he was doing these items himself on the weekends. He will also tell you the highest returns are homes under 60k, but they also carry the most risk.
Personally, growing up, my parents had a couple of duplexes. The rent on one side basically covered the mortgage for both sides. The rent on the other side covered taxes and insurance (plus put a few dollars in my dad's pocket).
I have a colleague who is buying and renting out homes.
How are people able to do this?
Doesn't maintenance, interest on loan negate whatever rent he gets?
Are they assuming prices will go up and gambling?
Do you think they are overreaching and may cause another meltdown? I know banks are supposed to be stricter in lending but seeing how many people are doing this, I am afraid this is like 2007.
Our landlord owned 10 houses when we first became tenants, and shortly there after moved out of state. He uses a management company for maintenance purposes. By the time we move out we will have payed him $74K in rent.
It was appraised in 2007 (he purchased in 2006) at 122K. Houses on our block are now be listed for nothing short of 250K. I think if you buy the right homes, in the right areas it's a great investment. All of his are either around the M Streets or the Bird Streets.
How are people able to do this?
Doesn't maintenance, interest on loan negate whatever rent he gets?
Are they assuming prices will go up and gambling
Other people have outlined all the difficulties with renting, but pre-housing crash (2008), I had a co-worker who bought a package of used rental homes for about $1.1m (30-50 homes, most in Ft Worth) on about $100k down. Most were section 8 rentals, and he was way over his head, and lost all that to bankruptcy by 2011. So basically there are companies who will sell you packages of homes, and to gauge a crash, you'd have to see what percent down they are requiring people to pay and the quality of the houses in the package. I would guess that most people who own tons of rentals and come by them in a relatively short period of time are buying these packages of homes.
If you have a 15 year fixed on a house and get enough rent to cover the PITI, after 15 years you would have the house paid off. That plus any appreciation could bring in a good amount of money. A lot depends though on where the house is and if it can get rented easily.
What do you care that he is buying homes and renting them? He obviously has cash or a bank is giving him the money, so he must have good credit.
It's not going to cause another meltdown, please.
This just sounds like sour grapes to me.
I am all for investing and making money - my concern is not this one person but the system.
I was just concerned how things will work now when so many failed in 2007 trying to do the same.
Thanks everyone for the informative replies - I guess there are bad investors in any type of investing.
I just hope they do not bring down the system AGAIN and cause another recession.
There are a whole lot of factors that contributed to the last housing crash, not just house speculators/investors. Interesting though that you're starting to hear reports of the loosening of credit standards and banking practices that, in some cases, mirror the bad habits of past. There was an article in the Journal today on appraisers who are getting asked more and more to push up their estimates.
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