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Yes as long as the math works from a cash flow standpoint and you take a buy and hold approach, owning rental properties can be an excellent investment and a nice way to diversify retirement assets and income.
In addition to monthly income, there are significant tax benefits as well as the potential for growth in the value of the property itself. Additionally, I view increasing rents over time (in line with the market) as somewhat of a hedge against inflation, at least at a local level.
Treating the management of rental properties as a side gig works for me currently, however, I make sure to have enough cash flow that if it becomes too much of a hassle, it would be financially feasible to hire a property management company.
Having seen many friends and family invest in real estate, I see it working best if you have the desire and capability to do some of the fix-it work for the rental. If you outsource, you are paying someone a month’s rent each year to maintain the place and that cost will be very impactful to your returns. Another thing I’ve seen work well – if you do decide to take it on – is to focus on getting top quality tenants who have a high likelihood of staying put. A few months of vacancy can be really costly!
I think real estate can be a great investment if you have a long time frame to work with. I had a friend I worked with in Phoenix who every year for about 20 years would buy a rental property house. All of the homes followed the same pattern – 3 bedroom, 2 bath, cinderblock brick single story homes with a two car car port or garage and off street parking. They were all painted white, (inside and out), had the same hot water heaters, the same tan carpet, the had the same toilets, bath fixtures (Moen – lifetime guarantee), and the exterior plants that used minimal water and were landscaped with a drip irrigation system on a timer.
My friend always targeted the same pattern of tenants. Working class people who had stable jobs, and 2 to 3 kids in school. The school districts were very important to these families as they all wanted educational opportunity for their children. My friend came to realize if he had stable renters, they would stay in the home for many years as moving caused a big disruption for their families. He was able to get modest rent increases every year without loosing a tenant.
My friend would watch the market for these homes and attempt to buy them at a below market cost. He would then paint/carpet/fix up the property to attract the type of renter he was looking for. He never sold the houses even though the real estate had appreciated considerably. His plan was to use them as his “pension” fund, selling one home a year, starting when he retired, and continue to rent the remaining homes.
He had the same HVAC, electrician, plumber, landscape guys working for him for years. Every few years, he built up a schedule for regular maintenance which kept his replacement cost manageable for repairs.
I think most successful real estate investors have a plan they work from. Some specialize in small apartment complexes, some specialize in raw land investing, etc. Most important is figuring out how you can get an edge in the buying process to get the right property at a low price. I always believe you make your profits in real estate when you acquire the property.
Yeah, Andrew said it well. I also think it can become burdensome as someone ages. Picture a diligent saver & investor in their 60s/70s with a multi-million dollar portfolio (in today’s dollars). Does it really make sense to own several rentals that you have to manage? It just seems like headaches and illiquidity could be a pain for the estate. Still, I think it is wonderful for someone younger—perhaps buying a duplex and renting out a room.
Your ageism is showing, Mike. 🙂
This 73-year-old has been managing our rental properties for 22 years. It helps that I’m good with my hands and enjoy making minor repairs. In fact, I installed recessed ceiling lighting in one of our townhouses last week. I also find it rewarding to provide our tenants with a high-quality rental experience. Renting from a management company can be very stressful and our tenants greatly appreciate my personal hands-on approach.
There definitely is a learning curve to owning and managing rental properties. However, it isn’t that much work after you get the hang of it. I will probably spend about 60 hours this year managing our four properties here in Raleigh. Local management companies charge 8% of gross rental income plus one month’s rent for finding new tenants. We re-rented three of our places this year so a management company would have charged us ~ $14,000. I do spend ~$1,100 on 24/7 emergency service contracts that include free annual inspections. Having a great handyman is another big plus.
As for the topic of this thread, rental properties have worked out great for us. We became accidental landlords in 1999 when we fell in love with a 3-story apartment in a 5-story 4-family brownstone. We had a few tenant headaches early on but quickly became very good at screening prospective tenants. When we sold in 1919 our gross profit was 370%. Although we hadn’t intended to continue being landlords after we retired and moved to Raleigh, we changed our minds when our CPA told us how much we could defer in taxes on capital gains and recaptured depreciation via a 1031 exchange. We were fortunate to have purchased our four new properties in January 2020 just before the pandemic hit. According to Zillow, our places have increased 30% in value over the past 18 months. Rent increases have lagged behind the increase in home prices but are now increasing rapidly and we were able to increase rents 12% for our two newest tenants (we never raise rents more than 3% for renewals).
I think Andrew nailed his answer. I’m not sure fancy vacation homes are a great investment. The people I know who’ve done well stick to basic year round rentals, modest apartments, easily rentable properties. They build up a nice portfolio of say 20 homes, and they are bringing in passive income equal to a decent wage.
It certainly can be and I know several folks who’ve done very well with it. But it helps greatly if you’re “handy” and are prepared to do the work, as well as deal with the tenant headaches—or else get a good management co. and be willing to pay their fee.