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I became an accidental landlord, when I bought a house 3 years ago, and did not sell the house I had lived in for 10 years.

Here are the facts:

  • House purchased: $200,000
  • House Mortgage remaining: $162,000
  • Rental History: 3 years at $1750 a month
  • Rental Maintenance:
    Year one $6500 roof replacement,
    Year 2 ~$3000 in appliance maintenance,
    Year 3 ~$9000 in repairs after the 3 year tenants ruined the inside of the house
  • Property Management: $175/month
  • Taxes, Insurance, Interest: ~7500/year
  • House Value: ~$255,000
  • Home improvements since purchase:Approximately $15000 in upgrades while I lived there. Deck, hardwood floors, countertops, etc.

It seems to me like I am better off selling and investing the gains in my stock portfolio, but I would like to hear other opinions. The house just got finished with the renovations after the last tenants, so it is in tip-top shape. I also think I could rent it for $1900/month and possibly lose the property manager. The house seems to be appreciating in value, but I think it would take at least a few more years to get to, say $300,000 in value.

I hope most of the maintenance is DONE for a while on the house, but the tenants destroying the inside really stings this year (had been good tenants for ~3 years until the end), and makes me think I am done dealing with the property.

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    Honestly being a landlord or not isn't a financial decision. If you don't enjoy it dont do it, if you do, do. There isn't much in it either way financially on average – Vality Aug 19 at 3:49
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    I arrived at this conclusion as well and got out of the rental business in favor of REITs or stocks. I will only reenter if I can buy properties for cheap, rent them until they appreciate, and then sell when the market recovers. – Pete B. Aug 19 at 10:17
  • The idea of rental property is that for X amount of years the property pays for itself. No immediate profit for you but after that X you will have 200k property you put nothing (or very little) in. And after that time you gain profit. From renting or selling. – SZCZERZO KŁY Aug 19 at 11:21
  • The property has more or less paid for itself over the last 3 years, but with all the maintenance and damage repairs, it has not been cash flow positive. My only gains so far are the on paper gains of the value increase, which I am afraid could evaporate with a major recession, etc. – Derek Aug 19 at 11:50
  • Also, it seems like my cap ratio is very low. Sub 5% which is what prompted me to post this question – Derek Aug 19 at 11:52
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Looks like you've already spent all the big $$$ that you're going to need to spend for a while. You should have your property management company go after the previous tenant for all the damage. You're not limited to just their deposit if they caused a lot of damage. Your property management company should have told you that if they're worth what you're paying them.

Anyway, if you're bringing in any sort of profit on the thing year to year, it's worth it because your house will appreciate in value over time. I've had my rental for about 10 years and the house has gone up $100k in value during that time. So as long as I'm cash flow positive, or close, I'm earning a LOT of money on appreciation as the house value goes up.

That being said, if you don't like the hassle, don't do it.

It also depends on your purpose. If you do this for 10-20 years, you'll eventually have the house paid off and have nice residual income as well as a nest-egg for retirement. If you're wanting quick profits, this probably isn't the thing for you. But slow and steady does win the race when it comes to rentals. They can be your retirement account.

Another thing to consider is being a bit more careful with expenses as far as fixing it up and paying for repairs. $3000 in appliance repairs sounds pretty steep. You can put used stuff in there and it doesn't need to be top of the line if it's for rentals. Get better deals on repair jobs or replacing things. Don't use High end carpet if you're replacing it. Assume it will be trashed every few years and need replaced. Get cheaper stuff and your replacement costs go down a bit.

It's a lucrative investment if you stay in it for several years and are looking at long-term gains vs quick $$$.

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    I do have plans to go after the tenants for the repair money, but I am expecting to not have much luck with that. Out of the total of $11000 in missed rent and repairs, I have a $2400 security deposit we will keep, but doubt they will pay. I intend to take them to claims court to try to recoup costs. – Derek Aug 20 at 14:04
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    @Derek the people that do that kind of damage generally don't have anything you can collect. – Loren Pechtel Aug 21 at 2:54
  • That's a good point.. It might not hurt to try though, and also perhaps to have your property manager report it on their Rental Credit Report (I think that exists...) to warn future landlords. – Curtis Aug 22 at 19:51
  • @Curtis I wish more landlords did this. It's so hard screen bad tenants, when previous landlords don't report them. – unknownprotocol Aug 28 at 7:07
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Financially, it's hard to say, if you don't screen tenants thoroughly enough or just get unlucky then the extra costs/hassle could eat your profits and your sanity. It sounds like you've hit a lot of big ticket items so you might be set to coast for a few years with higher rent which would be especially lucrative if you could do without a property manager (or at least do without one that costs so much).

If you haven't lived in it 2 of the last 5 before selling you can't claim the capital gains exemption, so you'd want to factor that in. You've also got 3 years of depreciation expenses that would be recaptured if you sold now. Neither of those are deal-breakers, if you are just done with being a landlord then take your tax lumps and move on.

I enjoy having rental property as a substantial part of my portfolio, I view being a landlord as a part-time job that I can continue into retirement. Also my area is lucrative for rentals and seems likely to continue to be so due to high projected growth. If you don't have confidence in your area and are on the fence about being a landlord, might be time to bail.

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    Capital gains and tax depend on jurisdiction. – Lawrence Aug 19 at 6:42
  • Capital gains would apply, however it is unclear to me how many of my expenses would be adding to my basis vs. my deductions. About 8,000 dollars was spent on fixing things from the last tenant, but I have not re-rented it. If I sell where does that money get accounted? What if I list it for rent at the higher rate, get no interest, and then decide to sell? – Derek Aug 19 at 11:54
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In your calculation about selling, you need to remember also that it costs 10-11% to sell. If you keep it as a rental, have you checked what other people are charging for rentals in the area for the equal size and condition? I have 5 rentals and keep the rents below the market, so I can pick my tenants from a larger group, and then I am Real Picky! I've owned all of them more than 30 years. I also don't raise the rents often. It has paid off. My rents have all come in faithfully during the COVID-19 pandemic. They may be late, but I've gotten every one. I called each of my tenants when this started and told them that I would not be charging any late fees, even if they got behind. I only have 1 tenant who has been with me less than 10 years. I've tried property managers, but was unhappy with them all. (It does sound like your property manager is ripping you off. Does he handle the repairs, if so he may be getting kick-backs or something. My last one was.) The 10-11% is in So.California. It assumes 6% Realtor Fee (our "normal"), + Escrow Fees, Title Fees. & the usual garbage fees.

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  • 10-11% to sell? That's outrageously high. – Brady Gilg Aug 21 at 18:09
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After Management fee, you have $19,000.

Tax, Ins, Int, $7500. Call it $11K left.

There seems to be a lot missing, the other line items from the Sch E would help. No grounds maintenance? Snow in winter, grass in summer?

The numbers for the roof, appliance, etc need to be looked at, but over their lifetime. The roof, for example, should last, say, 20 years, and should be thought of as a $400/yr 'sinking fund' cost. Same for appliances. Once you account for all of that, it's still a personal choice. Every year, it's "Would I rather have $X ($80K gross, if you sold now) or the cash flow plus potential appreciation of the rental?"

In '14, I bought a 3 family (i.e. 3 apartments) house. It cost $180K after major renovations, including roof, most appliances, etc. When put into service, it rented for a total $2000, since rising to $2650. The first few years had some tenant issues, and it felt as if the property was a bit positive in good months, but needed some cash during an apartment turning over. The last 2-3 years saw the rising rents, and tenants settling in longer term. The $180K has been paid down to $130K. (Note - it was funded 100% from an equity line, so, in effect "zero down".) As it gets paid off, I have the same question, an asset worth about $220K, would I prefer to keep it, or sell, and invest that elsewhere?

In the end, it's a small portion of my retirement plan. The manager is a neighbor whom I work for for a few years, and they charge a reasonable monthly fee. I trust them, to the point where they know to 'not' call me for random small issues. In your case, is it a concern? A very different experience using a manager vs having to arrange for every minor repair yourself. Also different to have a long term tenant, with modest, accepted rent increases along the way, than to have an annual turnover costing a month's vacancy, a commission to re-rent, and clean-up / minor paint job each time.

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  • Thanks for the reply. In this case, I am also essentially zero down on the property. I bought it as a first time home buyer and put about $2500 down. Then lease stipulated tenants do lawn care, snow, etc, and there is a nominal HOA fee. If I am able to raise the rent high enough I will include the lawn care. Really the biggest thing for me is the destruction and mess the tenants left costing me about $8000 in new carpet, paint, cleaning etc. The prop manager only had 6 evictions out of 250 rental properties, so I didn't expect to have to deal with that. – Derek Aug 19 at 13:18
  • I think I am going to fire the property manager, or make them find the next tenant commission free if they want to keep my business if I decide to rent it going forward. – Derek Aug 19 at 13:19
  • This is what made me choose a multifamily. I've had multiple turnovers, but during that time, I still get a check from management co, the net from the 2 still rented. In your case, the success may start with that ideal tenant. – JTP - Apologise to Monica Aug 19 at 13:22
1

Do what the catholics (the institution) do, they never sell properties since even if they don't appreciate this year, they will in a 100 years and leaving property in your estate for your children and your children's children will benefit.

It seems right now you're working for the tenants with all the expenses, let me remind you, they and your money need to work for you. Some not so popular advice which I strongly agree with, put in as little work as you can with repairs/renovations. People will still love to rent what you have. Right now you're paying for someone else to live in your house...

If you have a property portfolio less than 10, get rid of your property manager - obviously they're not doing their job. It's easy to find a tenant and do a review yourself using Zillow property manager or tools easy and cheap to use. People are in need of housing and you can find some good ones out there. Instead put that $150 into your principle and get your rental paid off sooner for that additional interest savings.

A rental is a place you have to be extremely conservative and stingy in order to maximize your profits end of the day. Some ideas to cut fixed costs:

  1. Refinance and take advantage of low interest rates.
  2. Seems like with the high expenses in the past 3 years, you are hiring out your work. Learn how to fix/maintain property yourself. Regarding the roof, you lived for the last 10 years and it was fine. What was the problem on year one of rental? Could you have just did a patch job to fix a leak or two? Why does someone else have to benefit of a new roof when you lived with the old? Repair instead or replace until replace is cheaper than repair.
  3. Shop around and find a lower cost landlord policy

A rental is definitely less profitable than some stock market ETFs but its consistent, reliable and you have something tangible at the end of the day that brings that sweet sensational feelings of being a landlord.

As other alluded to, it's what you want to rather deal with. Tenants/ physical labor at the house or do you want to kick back?

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Sum of total expenses so far: 6500+3000+9000+(175x3x12)+(7500x3)+15000 = 62300 $

(You must also factor in the time spent refurbishing the house, if the Property Manager does not do that on your behalf. I don't know how much do you value your time. Let's keep it simple and put it as 0 $ for now.)

Sum of total revenue so far: 1750x3x12 = 63000 $

TOTAL BENEFIT: 700 $ in 3 years.

You invested into a property to get 233'3$/year of profit, or 19'44$/month. Now that the figure is shown in detail, you may determine better if it works for you or not.

The big benefit so far comes from the fact that the house won value and you can get 55000$ more if you sell it and walk away with the profit.

As a comparisson, if you purchase stock to target and get 5% revenue from dividends only, a 200k investment yields 10k per year, without refurbishments. Obviously, please, please take this with a grain of salt. The abovementioned statement assumes a lot of things about the stocks market that may not become true.

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    I see it as OP had 0 down investment and near 0 cost (income-expense) with a gain of approx $75K (value minus mortgage). Yet you are stating OP has 200K to invest in Stock which he never had. – Programmer66 Aug 20 at 18:58
  • OP specifically compares his investment with Stock: "It seems to me like I am better off selling and investing the gains in my stock portfolio, but I would like to hear other opinions" . Therefore, the 200K to invest is a reference comparison. Please read carefully before downvoting. – null_pointer Aug 24 at 15:06

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