Does anyone have a good resource on the economics of rental properties? I am interested in comparing the return to that of stocks, etc. Thanks.
Is this for business or personal? That is, are you thinking about buying/renting houses for yourself?
EDIT–BTW, this still won’t change my answer. I still don’t have a good resource for you either way. But any good resource will probably be fairly unique to your geographical area, though.
Renting out your old condo will be nothing but problems and grief. Save yourself the headache and stress. The ROI ain’t that great.
Business rental properties are another story.
Residential rental properties are useless in terms of ROI from rent. Unless you are willing to put up with the headache. (Although renting out to a close friend/family might make it worthwhile since you trust them more than any random hobo).
PS: Beating today’s stock market might be really tough…
It’s a big difference if the rental property is paid off or financed. If the latter, cash flow tends to be weak for residential
being a residential landlord doesn’t make sense without scale. in my opinion you need to play in larger properties where you won’t be competing with mom & pop owners who aren’t investing for yield/IRR (they look at it as a retirement savings plan and don’t look at yields or IRRs, so they tend to pay too much).
I like the 8 -10 unit residential space. you can outsource management and still make some $.
Returns can be very good on deals where you add value. I recently looked at a community retail property that would throw off a leveraged 16% cash on cash once you leased it up. The trickiest part in these properties (sub $1 million) is the depth of the buyer market on your exit, but if you can make 12-15% from the income component, i think it’s a pretty compelling investment.
Not to try and diminish what the Turd is saying, but all the numbers in the world don’t mean much if the rental market turns to crap and you can’t rent the place out.
Or even worse is a tenant who won’t pay, because there’s probably not a lot you can do. It make take months before you can legally evict them. And by then, they’ve probably trashed the place.
And every time they clog the toilet because they stuffed a whole roll of toilet paper down the commode, you’ve got to call a plumber. (And this comes out of your pocket.) Or when they put holes in the walls and floor, you’ve got to fix that (out of your own pocket). Hopefully they’ll change the air filter–if not, you better plan on doing it yourself. Otherwise, that A/C will have a short life. And when the air conditioner breaks, you have to get a new one. That will cost between $5-10k (out of your pocket).
Personally, unless you are a real handyman, and don’t mind taking a “hands-on” approach, I wouldn’t even consider renting out a house. Will Rogers (I think) said, “Never invest in anything that eats or needs repainting.”
^in the words of the Big O (R.I.P.) – “you’re making my point”
this is exactly why you need a property manager to deal with the headaches. the other issues require a strong lease, good tenant selection and adequate security deposits.
i do agree that having residential tenants is a bit of a headache. that’s why i prefer commercial property…much easier to evict.
…and if the rental market turns to crap, it’s likely a result of a bad economy so the stock market ain’t doing hot either. of course you need to know your market and not just buy anything that you can get your hands on. you need to be able to distinguish good real estate in a good market. if it were easy, everyone would be doing it.
Everyone I know that owns a residential rental property can’t wait to get out. None of them have had a positive experience and they all say that the rent is not worth the hassle
do they perform the landlord duties our outsource? if they do it themselves, it’s because they don’t have enough scale to outsource the management, which again makes my point.
^This. Robert Kiyosaki is rich helping others think it’s so easy to get rich off real estate. It’s beyond a PITA and the current income is barely above a risk free yield. The ‘equity’ earned by having rent pay off the mortgage is a marginal gain. The sweat equity, stress, and headache make it a negative return when it comes to total utility.
Fk You Kiyosaki!
Thanks for the responses. Yes, this would be for personal income (I don’t work with real estate through my day job). I agree that multi unit buildings will probably yield better returns, even if they require more maintenance.
In any case, it seems like the key is to borrow as much as possible to finance the building, thus levering up your returns. I wonder how feasible it is to construct a LLC to shelter personal assets from potential depreciation of the building.
Although I agree with most of your points, I disagree with this one.
First, a lot of the value of real estate lies within its geographical location, and each location can be isolated from the larger economy. For example, I live in West Texas, where as the price of oil goes, so goes the economy. (There’s not much other industry out here.) So for several years, while the rest of the US is still in the doldrums, the rental market out here has been incredible. A house that will rented for $1000/month in San Antonio or Dallas runs about $2000 out here. Vegas’s economy is extremely cyclical, so you would imagine that it would fare differently from Arlington, VA, where the economy is almost purely military (which is defensive, in more ways than one).
Second, if I’m correct, Ohai lives in San Francisco, where they won’t be building a lot of new housing. Unlike Dallas or San Antonio, SF can’t “sprawl out”, so the available housing is limited. Plus he has to deal with rent control there, unlike most other cities. So zoning and local politics will again play a bigger role than the role of the overall economy.
Third, I imagine that the market for RENTAL real estate runs opposite of the market for BUYING real estate. In a good economy, everybody lives the high life and wants to buy houses, which is bad for a renter. When the economy turns sour, all these people get evicted, and nobody wants the long-term commitment of having to pay for a mortgage when their future is uncertain, so they choose to rent instead.
All of these are just platitudes and blanket statements. But the bottom line is–if you’re going to rent a house, you better examine your own local market conditions and constraints. The rental market is extremely different between SF and Dallas and Midland and Denver and wherever else. I don’t think it’s comparable to the broad “market” as we CFA-types like to think about it.
^dude, you’re acting as if you only learn of these market dynamics AFTER you buy your property. the price you pay should reflect the risk you’re taking, accounting for the specific geography you’re investing in.
do you buy stocks without any due diligence? real estate is no different. only an idiot would buy a property without understanding the risk profile and the potential reward. everything has idiosyncratic risk, stocks and real estate are no different in that regard.
A buddy of mine owns a couple Section 8 properties. Sounded kind of interesting until he got a call from a tenant saying someone had broken into the home and stolen the hot water heater and the carpet.
F that noise.
^ If I owned S8 housing, every day I didn’t get a call from the police would be a good day…
But seriously who steals carpet.
geitner, miller, clayton and eicholtz
Commercial Real Estate Analysis and investment
Urban Economics or Land Economics could be useful… im sure google scholar could find some relevant stuff, for free, in those fields.
I knew this white cat who would only invest in Section 8. You get a gauranteed rent stipent from whatever gov agency and deal with the rift raft. He turned that ish into a slum real fast.
chances are you’d be getting in on the end of the current low rental-rate cycle…
It’s, as always, about supply and demand. But because housing takes awhile to create, demand usually entails the current amount of sqft in an area, and the sqft planned to be built in the next 6-12 months. Take that and forecast some demand, typically jobs in the area.
I suggest getting a real estate “radius” report. Basically pay somebody $200 bucks to do the above for you. Maybe even get a few of them, and then when you’ve identified a good area or two, wait until you can find a good buy in those areas. Patience and planning.
san fran is good, as are most big cities, because, as youll find in urban econ, big cities tend to stay big cities-- and eat up most of the econonmy for the given area. Ever notice how NYC, LA, Boston, Etc are all spread out across the USA.