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I think it is a good topic and am willing to play along...
The hard parts come down to money and time...
It is much harder to get a non-owner occupied loan and the rates are always higher as is the down payment.
Also, many candidate properties are worth too much to ever cash-flow as a rental... kind of hard to make a go of it if your monthly costs are 2k and the unit rents for 1k... and that is assuming the unit is never vacant.
Also, their are limits to how many conventional mortgages a person may have at one time... so having 20 mortgages as an individual isn't in the realm of possibility for 99.9% of us.
The time aspect also includes demeanor...
You can never forget you are operating a business and as such many of the laws are pro consumer and as a business owner, you are held to a higher standard... not saying it is a problem... just saying that is the way it is.
If you omit a required disclosure or ignore State or local statutes, you could very easily find yourself in deep legal trouble... being a Landlord has changed so much since I started... my rental agreements used to be a single page plus a one page condition and inventory sheet... now, with all the required disclosures and local rent ordinances, my rental agreements are 26 pages...
True, you can hire professional management and large buildings can afford to because of economy of scale... I know many owners that will not own any residential rental property or if they do, it has to be large enough to support an on-site manager...
Most starting out, start out small... the cost of property management takes money right out of their pocket and sometimes you wonder why the management company is the only one making any money....
I have a Doctor friend that bought into a couple of rentals and hired a management company... the tenants were not happy and started calling or visiting the Doctors place of work... he said when it was all said and done, his rentals netted him about $3,000 a month and his time was better spent performing surgery than dealing with tenant issues...
Last edited by Ultrarunner; 09-22-2012 at 11:46 PM..
Why do people give up? What ios so hard about it? I plan to take out at least 20 mortgages/
I'm going to assume that this isn't really atroll post but legitimate so here's my comment specific to what you're asking.
First, the biggest mistake new landlords make is they enter the field thinking only of the money and how easy it should be. However if they spend a week down at the courthouse sitting in on Landlord/Tenanat issues, they generally walk away with a new vision in their minds.
The second thing is that places do go vacant for a number of reasons, with the most annoying being a tenant that skipped because you have no advance notice and the legal system usually causes you to have to show (may not be good enough that they havn;t paid a months rent) that you can rerent the place.
Third and most often never considered, it cost money to maintain a place to 'for hire" status versus your own home. There are things you can do in your home or a standard you may find acceptable in your home that is a lawsuit waiting to happen if it's done in a rental property.
The fourth is my favorite and you will read it many time in thsi forum. NEVER ASSUME COMMON SENSE IS LEGAL!!!!!! What you think, what you feel, what you want; may not be what the laws say and thats the "gotcha" so many new landords find out the hard way!
We can go on for several pages on the perils of being a landlord, but surfice to say, there are hundreds of post by landlords who are ready to explode. There are hundred of post from landlords who discovered they are way over their heads. There are also post here in the Economic forum about the falsehood of all those "be a landlroed and get rich" falsehoods that so many have fallen victim to.
Now, that doen;t mean you can be sucessfula nd make great money, but usually its not the way most think, quantity. It;'s usualy based on a sound bsuiness plan and quality properties and tenants. I would suggest instead of the "It's So EasyI" attitude ask the most important question; "Why do so many fail at this and end up loosing all their money?". That provides the best defense against a poor start up plan.
I have a Doctor friend that bought into a couple of rentals and hired a management company... the tenants were not happy and started calling or visiting the Doctors place of work... he said when it was all said and done, his rentals netted him about $3,000 a month and his time was better spent performing surgery than dealing with tenant issues...
How large were his rentals? A doctor, especially a surgeon, should have some serious cash to mortgage out more than a couple single family residentials . . .
I I would suggest instead of the "It's So EasyI" attitude ask the most important question; "Why do so many fail at this and end up loosing all their money?". That provides the best defense against a poor start up plan.
Okay, well, why do they fail? Do they not perform proper screening? Lack of economy of scale/proper funds?
The amount of leverage you have is insane. Pay a little down, purchase a place, lease it out, and repeat. It shouldn't take very long until you have a ton of these places.
Pay a property management company. Screen the tenants.
Easy $12,000 or so extra bucks a year per house.
Are people just unaware, or stupid, or both?
Easier said than done. If you have a dream tenant, it's a breeze. But a tenant could destroy your unit or fall behind on rent, and then you have to hire a lawyer to start eviction. And most judges are reluctant to throw someone out on the streets.
Also, you are an NYC WonderBoy... the rental market is not like NYC's in most places. NYC has a chronic housing shortage and real estate goes up and up and up. In other places, renters have a lot more leverage.
Okay, well, why do they fail? Do they not perform proper screening? Lack of economy of scale/proper funds?
The number one reason I see from those who have failed is thay didn't plan for problems. Their entire idea was based on everything going well. But what happens when things don;t go right? A tenant stops paying, a furnace breaks, your issued a summons for failiing to inspect the smoke detectors. Damages exceed security deposit. the insurance goes up 40%. and the thousands of things that can go wrong where you as a landlord must act within a specific time or face consequences under the law. Heck even a PMC that was great can go south on you and now you have to come up with all the expenses.
How large were his rentals? A doctor, especially a surgeon, should have some serious cash to mortgage out more than a couple single family residentials . . .
He owned 2 six unit buildings... so 12 tenants in all... there was also a tax advantage structured by renting to low income tenants.
What he did not count on is the 12 families were now his customers...
After a short time, he did a 1031 exchange into a commercial property... he is much happier.
Instead of dealing with 12 customers with annual lease renewals and habitability issues... he now owns a retail spot that is rented to a a single tenant triple net with 9 years left on the lease.
If the roof leaks, the tenant is responsible, when the tax and insurance is due, the tenant is responsible... if the parking lot needs to be re-striped, the tenant is responsible... etc...
Of course, the tenant could go bankrupt... although, commercial NNN leases are business to business with little to no consumer protections... if all comes down to the negotiated terms of the lease...
At one time, about 30 years ago, the above was very similar to leasing units to the local Housing Authority... Section 8 was responsible for finding the tenant, collecting the rent and maintaining the premises... now, Section 8 only responsibility is the portion of rent subsidy they deem applicable... even a few years ago, Section 8 still would stand behind two months rent for damage claims... that has all changed because they found they had very high damage payouts...
Okay, well, why do they fail? Do they not perform proper screening? Lack of economy of scale/proper funds?
A tenant's specs on paper vs tenant actuality can be two totally different things.
I personally don't have any experience in the realms of being a landlord- but my mother rented out her home for a while when she lived in another state due to work obligations.
She was renting out her (reasonably nice) house for $800/week ($3200/month). The family she chose to rent to looked great 'on paper'. They had just relocated to the city and wanted to rent for a couple of years before buying as they were unsure if the city would be the right fit for them. The father was an Air Traffic Controller at the International Airport, the mother was a Nurse and they had enrolled their sons in a very prestigious local private school.
Sounds great, right?
Mind you- as they had been owner occupiers at their previous property elsewhere, they obviously had no rental references.
Originally my mother went with a Property Management firm to handle collecting the rent etc but found the Property Management firm to be inept in addition to being unhappy with their fee scale, so she decided to do it on her own.
For starters- collecting rent was a nightmare. They were often delinquent and my mother had to send other members of her family to the house to 'chase them up' on rent due to the lapses.
Finally my mother got fed up with them and refused to renew their lease after a year.
The state they left the house in though was diabolical- they were evidently not clean or considerate people by any means- my mother returned to cracked glass shower doors, cracked tiles, badly scuffed up wood floors (which go throughout the house), broken light fixtures, broken doors, broken windows, so on and so forth.
Obviously you have to expect some wear and tear from tenants but the state they left it in was ridiculous (I didn't even describe the half of it). It wasn't worth dragging them through the courts (obviously they didn't get their security deposit back but it wasn't going to cover all the damages anyhow) for repair costs as that would be more money than it was worth.
Anyway, the moral of the story is just because you screen tenants or look at their credentials, doesn't mean they're going to look after your property.
What it comes down to, is they are people living in your property. When something is not theirs a lot of people are less inclined to treat it or care for it as if it were their own. It's just human nature.
By all means though- if you've got the money and the means to invest in property in order to become a landlord- go for it. Just realize though that like any job, it won't be smooth sailing from here on out. You're bound to run into a Storm every once in a while.
The number one reason I see from those who have failed is thay didn't plan for problems. Their entire idea was based on everything going well. But what happens when things don;t go right? A tenant stops paying, a furnace breaks, your issued a summons for failiing to inspect the smoke detectors. Damages exceed security deposit. the insurance goes up 40%. and the thousands of things that can go wrong where you as a landlord must act within a specific time or face consequences under the law. Heck even a PMC that was great can go south on you and now you have to come up with all the expenses.
Very well said...
Most operate on the slimmest of margins if they even have one... especially starting out. This is why buying a small owner occupied buidling of 2 to 4 units is a good way to get into the business hands on...
There is a huge difference between speculation and investment.
One of the reasons so many got into trouble the last go round is because they were speculators.
They banked on appreciation and not a sound business plan that made allowances for vacant units, set asides for repairs, higher costs, etc...
I used to get a chuckle when property was marketed as only have a negative cash flow of a couple of hundred dollars IF everything went perfect...
Small time operations only cash flow because the owner is willing to work for nothing and can buy material right... nothing wrong with this if you have a long range buy and hold plan... it is a disaster if you have to pay for management, pay for repairs and buy material at retail...
Check out Leigh Robinson's book Landlording from your local library if you are interested in being a Landlord.
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