why would anybody want to be a landlord?

Rehabbing, Fix and Flip, Rental Properties
1

I’m looking for pro’s and con’s here…

what would be the advantage of dealing only in rentals and being strictly a landlord v/s being a person who obtaines properties (regardless of means) and lease/options them out?

Lets say I deal only in rental properties and I acquire 1 house a month, 12 a year. at the end of year 1 I’m clearing an average of 200/month rent on each property. So going into the 13 month assuming no vacancies, I’m getting $2400/month in cash flow. thats about 28k per year on gross…then comes, the vacancies, evictions, damages, repairs, utilities etc…The concencus on here seems to be that about 50% of your gross will get eat up one way or another. That being said, If I gross 28k then I’ll net 14k +/- and the end of year 2 assuming I dont aquire any new properties in year 2…

V/S

Now lets say I acquire the same 12 properties, and lease/option them out. Lets assume I get on average about 3k option fees per property and the same 200/month gross cash flow. So Now going into year 2 13 months out I’ve got the same $2400/month gross cash flow + $36,000.00 in option fees over the previous 12 months + when I sell these 12 properties as the options come due over the ensuing 12-24 months I gross lets say 5k-25k per property depending of course on appreciation, how much equity I had at purchase etc… and then of course, surely you’ll have some of the same problems w/ vacancies and problem tennants, but it would stand to reason that you can limit that due to the fact that you’re charging an option fee + 1st months rent to get in. The avg. bum renter isnt going to post up that kind of cash. Next, you have the equitable interest issue, but thats not a given, depending on how you structure the leases and options and wheather or not you use a land trust or not…etc…Then you could also reduce your liability by putting in the lease that TB is responsible for all maintenance. This would be easier for them to accept b/c they are moving in under the pretence that their going to buy the home v/s knowing that in 12 months their out of their. They’ll have a homeowners mentality more so then the renters mindset.

AS I see it, I couldnt see the advantage of only dealing in rental properties as opposed to lease/option them out.

what am I missing here?

2

What you’re missing here is that what you said is simply guru nonsense. I do both rentals and lease options and in reality there is very little difference. IF (and that’s a big IF) you can find someone with the cash to put up a significant option premium, you are that much ahead of a straight rental. However, often it takes longer to find a tenant-buyer with that much money and you’re out the difference in lost rents. Virtually all of the other stuff that you said is guru nonsense. I do lease options and I know a lot of other serious investors that do lease-options. What I can tell you for certain is that very few tenant-buyers actually buy the property. Tenant buyers are not a better class of tenants than straight tenants and they usually don’t have significantly more money. You can put as much stuff in your lease as you like, but don’t count on it occurring. For example, you can put in there that the tenant-buyer must do the maintenance, but since they won’t have the money or experience to do the maintenance, they either don’t do it or do a terrible job. So, when you finally get the house back, you’ve got a bunch of deferred maintenance and crappy repairs that need to be re-done. Moreover, most states have tenant-landlord laws that require the landlord to maintain the house to certain standards. These laws supercede anything that you put in the lease.

So, in reality lease options are virtually the same as straight rentals. I have not found them to be a big advantage.

Mike

3

There are couple of other things to consider too.
You can find one three family property that will cash flow $2400 a month, (in the right area). That may be at the higher end of things, but still, a couple of multi families can produce the same monthly cash with less headaches. Plus you should easliy be able to find a property manager to handle the day to day and you can pay them less if you take on the paperwork aspects. Then there is Section 8, which offers monthly electronic payments, annual inspections, and they’re raising their monthly allowances at the end of the year.
All in all, landlording can be a pretty decent part-time job.

4

I’d like to see the numbers on any three unit anywhere that will cash flow $2,400 per month!!!

Mike

5

Listen to Mike (propertymanager) very carefully here. Thinking that there is a big difference between straight rentals and lease/options is sure to doom you to complete and utter failure.

First, since you’re assuming that you’ll get the same monthly rental payment for either, I’ll assume that you’ll be L/Oing the same type of property as your rental. That said, you will probably be looking at lower middle/middle class/first time homebuyer type houses. Don’t know what your market is, but as Mike said, getting $3K down average is going to be VERY HARD to do. At least $3K down AND a good monthly rent. You can do it, but it takes longer, so you waste month(s), and monthly rent payments, trying to get your $3K.

Second, you’re assuming that by L/Oing, you eliminate all of the landlording hassle. That’s just plain wrong. You will still have tenants that don’t/won’t pay, you’ll still have to evict, and you’ll still have to watch over your properties. If you put in your contracts that the tenant is responsible for ALL REPAIRS, you’re setting yourself up for major troubles. 1st, the tenants will not do the repairs needed (as Mike said). 2nd, if you ever have to go to court (and you will eventually) for eviction, etc., then the tenant can hold that against you since, as Mike said, most states laws maintain that the landlord is responsible for maintaining minimum standards.

Third, if you don’t treat the L/O business any different than the rental business, you won’t get better tenants, nor will you get tenants that can/will close on the property within 24 months.

If you manage the L/O business correctly, however, I do believe that you do get better benefits.
first, you need to carefully screen your tenants (true even for straight rentals). Most important is that you need a credit check. Explain that the score doesn’t matter, you’re just determining where they are at creditwise, so that you can determine the best L/O arrangements. What you are looking for in their credit is why it’s bad (and what you really want to see is a period of time that caused it), how did they pay before, and what they’ve done with it You don’t want someone that has NEVER paid a bill ontime in their life.
second, you do want a downpayment. However waiting for the one with the most money is not always (hardly ever, in fact) the best solution. What would you prefer, someone that offered you $3K down and $600/month, but would be pushing it DTI to make the monthly, or someone that offered you $1K down and $1K a month and financially should have no trouble making the monthly?
third, check their DTI (again good with rentals, too). If they are going to struggle making their monthly, it’s not going to be good.
fourth, you need to know what they need to do to be able to buy in the timeframe provided AND you need to do everything that you can to ensure that they have EVERY chance to get to that point. By that I mean that you should have already lined up a mortgage broker/lender that works with bad credit, determined ways for them to fix/repair their credit, and work with them throughout the lease term to get them to that point.

These are just some small points that will help you.

I do disagree (at least somewhat) with PM on tenant quality/action with a lease/option. For the most part, I’ve seen that L/O tenants DO take better care of the property overall than straight rentals. Especially if you give the the feeling that they have more control over what they can do with the property.

Raj

6

Sorry Mike, That property nets about $600p/m section 8.

7

Man, I sure do learn a lot from reading this web-site. Even though I am on the financing side I still love to read all of the good advice that gets posted here. Keep up the good work everyone.

8

There are a number of explanations, the most plausible may be different tax rates for owners and tenants a better understanding of how property values are likely to change with a comparative advantage for the elimination of property owner’s ability to exploit economies of scale in owning property, and finally, the ability to solve problems of free-rider.

9

I think that you need to change tactics with the type of property you are dealing with: some properties will work better for a buy and hold strategy (where you buy and hold for a period of time, hence being a landlord), while some other ones (possibly the most attractive properties :biggrin) will do great as lease option.
Several investors make the mistake of labeling themselves and their investments, instead of keeping their eyes open to opportunities. Value each property independently and play different scenarios and choose the best ones. Set up a spreadsheet, crunch numbers and make a decision based on the facts in front of you.

10

If you want headaches, loss of sleep, constant calls, bitching, moaning, complaining, late rents, evictions, losing thousands, then renting is the place to be :banghead

The rest of my rentals are for sale. I have much easier avenues to make monthly cashflow then rentals. I.e. coaching students, private money, mobile home notes, etc.

Nate-WI

11

You know, I ENJOY being a landlord. It’s great getting rent checks each month, and earning 20-35% interest on your money for rentals you paid CASH for. People go to work each day, just to pay ME rent. That’s COOL. And all businesses have their problems, and if you get the right kind of rental (a bargain deal, that rents at a good price), right kind of tenant (one that has been properly screened) and you have the right system in place - it’s really not that bad.

12

I did not read all the responsess you recieved so if I am repeating anything that has already been said, I apologize in advance.

You ask why would someone want to be a landlord when they could lease option their property instead. You don’t seem to appreciate that you are still a landlord in a lease option deal. The lease portion of the deal makes you a landlord; the option part of the deal makes you a potential seller (but don’t hold your breath).

For me, rental property ownership was my retirement plan. I wanted to retire long before I became eligible for social security, so I needed another income to supplement my retirement pension. The income had to be passive income because the idea was to retire, not undergo a career change.

I officially retired in 1998. My retirement plan underwent a few fine tuning adjustments over the years, but it has been working. I don’t have to chase a deal to put food on the table (which you have to do each time a tenant-buyer exercises their purchase option). I will be eligible for early social security benefits next year, and will start drawing a second pension when I turn 65. Right now my unearned income is making up the difference between my current pension benefit and what I was making on the job. I outsource day to day property managment to professional property managers, so, I can really live the leisure lifestyle I expected in retirement.