Read This Before Getting in the Rental Business

Repairs to HouseYears ago I had a conversation with a friend about some repairs on one of his rentals.  It went something like this:

Me: “Brett, I have some bad news today.  The garage door on one of your rental units warped and fell off its hinges.  I had a professional check it out, and they said it was beyond saving.  It will cost about $700 to replace.”

Brett: “That is too bad.  You know how to stop that from happening, right?”

Me: “How is that?”

Brett: “Get out of the rental business.”

The phrase, “get out of the rental business,” is a common joke amongst many of us who have been in the business long enough.  We know that there is only one way to stop many of the expenditures of owning rental property: never own it in the first place.  Otherwise, we take expenditures as a fact of life (as in any business).  Once you learn to handle them, this can become a very rewarding investment.

But here is the problem that I see too often: not enough people are told about the realistic expectations of owning rental property.  There is a myth going around that once you have the money to buy real estate, you can just sit back and watch the money come in.  It isn’t as easy as that.

Let’s face it; there are a lot of things that can go wrong with a rental unit:

–       Obsolescence (problems arising from a house getting older):

  • Roof starts leaking
  • Water Heater stops working
  • Toilet, Window, Faucet, HVAC problems, and more

–       Vacancy and Collection Loss

–       Tenant can mistreat the property

  • Stains in carpet
  • Uncleanliness
  • Unkept Yards
  • And more

–       Non-Payment of Rent and Eviction Lawsuits

You get the idea.  No matter how hard we try to prevent these things from happening, there is no way to stop all of them.  A good application process can weed out the really bad tenants, and a good insurance policy can stop a lot of major bills, but there are still expenditures that come about through owning a rental unit.

As a property manager, I feel like it is my duty to let owners know of these problems.  If you are thinking about getting in the rental business, but haven’t heard about the risks of this business, contact me and I can help explain it to you.  If you are in the rental business, but were never told of the risks beforehand, we can help you out as well.

I love the rental business; it is where I put the majority of my money.  If I didn’t think that it could work, I would have gotten out a long time ago.  In writing this post, I am in no way demeaning the thought of owning rental units; I just want every owner to be prepared for the business.

So here is the bottom line… owning rental properties can be a great investment, but it also carries much risk.  We, as a property management company, will do all we can to lower the cost of a rental unit while increasing the revenue.  Our presence can reduce much of the risk, but we cannot stop bad things from happening.  It is up to the owners to know how much they can risk.

Therefore, if you contact Loewen Clovis Realty to learn about our property management services, or to learn how to invest in rentals, we will not steer clear of the fact that the rental business is tough.  We will give you the full impression of the pros and the cons of the business.  By doing so, we hope that you get a realistic view of the business so that you can properly prepare.  With enough foresight and preparation, rentals can be a great addition to your portfolio.

Rent vs. Own: 6 Reasons Why Renting is Better than Homeownership

Recently I wrote a post about why owning is better than renting.  Now I would like to look at the flip-side to that argument…. why renting is better than owning.  In my industry, it is taboo to talk someone out of owning a house.  It would be comparable to a car salesman convincing you to stick with your current vehicle rather than buying a new one.  But, the truth is, there are a lot of advantages to renting, and I would not be a good real estate professional if I didn’t talk about all facets of real estate.  So, here we go…

1. More flexibility

If you are new to your career, just arrived to town, still going or just finished college, or if you have a complicated financial circumstance (in the process of divorce for instance), renting may be the better solution for you.  The reason is because your future may change in an instant, and it is a lot harder to move from an owned home than it is from a rental.  I wrote an article about why it  wouldn’t be cost effective to own unless you planned on staying for at least 2-5 years.  If you are in a situation where your living arrangements could change quickly, renting definitely offers more flexibility than owning.  Some people just love to move often, and renting just works better for them.

Renting also offers more flexibility with your neighborhood preference.  For instance, say you moved into a neighborhood because you liked the shops nearby, or liked the neighbors, or whatever, and those factors changed…  The stores nearby closed down, a bad factory moved into the area, or your friends moved.  If you are renting, you can choose to relocate to another neighborhood pretty quickly.  A homeowner may have to wait for a while to sell their house (especially if the neighborhood is no longer as desirable).  Overall, renters usually have more flexibility with their living arrangements.

2. Fewer carrying costs (maintenance, insurance, property taxes, etc.)

While it is true that most homeowners pay less for their mortgage than a comparable rental, they also have to worry about maintenance issues.  Some of these maintenance costs can be quite expensive; roof repairs, plumbing problems, painting, electrical issues, and more.  When you are renting a house, these costs are usually covered by the landlord.  This is definitely one of the perks to renting instead of owning.  Your rent payments are predictable payments, no worrying about unpredictable maintenance expenses that come up.

3. Sometimes it is cheaper than owning

If a person does not have a large down payment (at least 20%), they will probably have to pay Private Mortgage Insurance, which can make owning nearly as costly as renting.  Or, if your credit score is not good enough to secure a lower interest rate, that could make a mortgage more costly as well.  Remember, just having a lower mortgage payment is not all that matters, it is the unexpected costs like maintenance that can actually make rent cheaper than owning.  If an owner is hit with a $10,000 roof replacement bill, it could take several years to even break-even with a comparable rental.  Therefore, if a rent rate is similar to a mortgage rate, renting may be cheaper in the long run due to the predictability of maintenance costs (or lack thereof).

Let’s not forget that some tenants have a really good rent rate because their landlord never raises the rent.  In these cases, their rent may be cheaper than owning.  No use spoiling a good living arrangement.

4. No risk in economic recession or depression

If our economy goes into a recession, homeowners initially suffer more than renters.  During a recession the market slows down, house prices fall, and many homeowners are stuck paying for mortgages on homes that no longer have any equity.  Just look at what happened to house prices in bigger cities over the last several years (Phoenix and Las Vegas ring a bell?).  Foreclosures have sky-rocketed around the country, and more people are looking to rent to avoid that mess from happening to them.

Let’s face it, the United States is in a lot of debt.  There are two ways that a government can pay off debt: inflation of the currency, or stopping the spending and letting the country go into a recession/depression.  Usually it is a combination of both.

Renters are not affected nearly as much as homeowners in times of deflation.

6. No Debt

Many financial advisors don’t see a mortgage as bad debt, but it is debt nonetheless.  If you really wanted to stay out of debt and avoid the mortgage altogether, renting is your alternative.  There are many advantages to being debt-free.

Photo Credit: “Unfurnished Apt for Rent” by turkeychik on Flickr.  CC Licensed.

Rent vs. Own: 7 Reasons Why Homeownership is Better Than Renting

Homeownership is usually considered a better alternative to renting, thus the reasoning why many people call it the “American Dream.”  I think that both have their advantages and disadvantages,  but in this post I will cover 7 reasons why homeownership is better than renting…

1. Homeowners can customize their property

As a homeowner, you can customize your property any way that you like.  You can paint, add a patio, remodel the bathrooms, put in new flooring, and more.  Most landlords would not allow you to do this, but being a homeowner gives you the right to do it.

2. Homeowners get tax benefits

Mortgage interest and property taxes are tax deductible.  You can also qualify for energy efficient deductions, home office deductions, and more.  Plus, if you own your home for 5 years, you can pretty much avoid federal taxes on the sale of your house.

3. You don’t have to deal with a landlord anymore

This can be a good advantage if you have dealt with bad landlords in the past.  You now have control over the privacy of your home and can maintain it the way you see fit.  If something goes wrong, you can control who to call and how fast you want them out (of course, you now have to pay the bills for that service).

Also, a landlord cannot ask/force you to move from the property.  When you own your own home, you have certainty about your living arrangements.

4. Owning a home forces you to save

There is an argument out there that owning a home is like forcing yourself to save.  A portion of your mortgage payment every month goes towards the principal of your house.  Whenever you sell the house, you can access all that equity that you have built up over the years.

5. A fixed mortgage won’t raise in times of inflation

If you have kept up with the economy, you may realize that inflation is the norm nowadays… and it looks to get worse before it gets better.  For the most part, inflation raises the cost of living, but not with your mortgage.  If you have a fixed mortgage, your payment will stay the same, regardless of inflation.  Renters cannot have the same guarantee with their payment.

6. House values usually increase

There is a good chance that your house value will increase over time.  If anything, it should increase to keep up with inflation.  If this is your only reason to buy a house though, beware.  House values also have the possibility of decreasing, as many have seen in other areas of the country.

7. Limited Payments

If you live in your house long enough, you can eventually pay off your mortgage and not have to worry about house payments anymore.  It could take 30 years (with a 30-year mortgage), but it is better than paying for the rest of your life in a rental.

Photo Credit: “Housing” by james.thompson on Flickr.  CC Licensed.

Rent vs. Own: How Long You Plan on Owning Can Make a Difference

How Renters and Owners View Homeownership as being Positive

One question that is asked a lot is whether it is better to rent or buy a house?  Whether buying is better than renting depends on several different factors.  For me, the starting factor is how long do you plan to stay in your house?

The general consensus is that if you do not plan on owning a home for more than 2-5 years, it is probably not cost effective to buy as opposed to renting.  Buying a house is a big commitment that requires some foresight.  There are extra costs involved.  There is more responsibility for maintenance, insurance, and taxes.  Although a mortgage payment is cheaper than rent, a lot of the initial costs aren’t recouped until 2-5 years of ownership.

NY Times has a great calculator to show this:  Check it out here.

Reasons as to why it takes 2-5 years for ownership to become cost-effective:

– Mortgages are structured so that there is more interest paid in the initial years of the loan.  This means that for the first several years of owning a home, not very much of your payments will be allocated to the principal of your loan, but rather to interest.  Therefore, you won’t be building much equity in the initial years.

– There are closing costs to purchasing a home.  They differ depending on the house and how your loan is structured, but there is still an initial expenditure other than just your down payment.  Even if a VA or FHA loan was used to reduce the amount needed at closing, those costs were lumped into the loan amount, and will still be paid off over the life of the loan or when the house is sold.  Remember, there are also closing costs to selling a house as well.

– Houses are not liquid assets.  This means that whenever you want to sell your property to get your money back, it may not happen as fast as you would like.  Unlike pulling your money out of a bank, getting your money (equity) out of a house takes time.  This is why you need to think of the exit strategy for your home.  Are you OK with waiting for it to sell?  Or, do you have another plan like keeping your house as a rental?

As you can see, there are several things to consider if you are on the fringe of buying a home, but don’t know whether you will be around for 2-5 years to make it cost-effective.

How to beat the 2-5 year rule

There is a way to lower the timeframe of cost-effectiveness though….

Since most people purchase the biggest house that they can afford (or the bank will let them), a way to lower your payments is to buy a home that is more modest.  It will lower your monthly mortgage payments and free you up to put the extra amount against the principal of your loan.  Depending on the situation, this could make owning more cost-effective than renting in a shorter timeframe than 2-5 years.

Another option would be to purchase a “fixer-upper” and do the work that is necessary.  Whenever you go to sell, even if it is before the 2-5 year mark, you might have created enough equity to have beat the initial cost of owning a home.

 Owning is still considered better than renting in the long-run

As you read through this post, it may be a little discouraging to hopeful homeowners, but it is only meant to reveal the inital cost of owning a home.  If you plan on staying around the area for longer than 2-5 years, you should really look at your options of homeownership.  In the long run, it is often more cost-effective to own a home as opposed to renting.  Plus, having your own place allows you freedom to customize and live in your home the way you see fit.

When it comes to home ownership, there is no black or white answer as to whether one should own or rent.  It all depends on the circumstances of each individual.

Photo Credit: “Trulia American Dream Infographic – Q1 2011” by truliavisuals on Flickr.  CC Licensed.