Investing in rental property?

[MrNick]

My friend asked me what I think about him an another person taking out loans and buying up some cheap real estate and then doing a rent to own where they rent out the property. They could "become the bank" and have people with bad credit pay them on the rental property until they own it.

What do you all think about this?

 

[Josh_LA]

there will be plenty of good credit people who will need housing

but I don't know your area. housing market might just get better for buyers soon

 

[pinkmandy]

My first thought would be to check out the local laws regarding the rights of tenants vs. landlords. I've met people who have rented out a house and after many months (one gal I know spent a year fighting her tenants to get them out of there) were finally able to legally evict only to get their house back in total shambles. I mean doors ripped off the hinges, crap (literally) smeared on the walls, carpets ripped up...and what do you do? Go after someone w/no money?

For a HEFTY downpayment I'd probably do it if I had the funds.

 

[Michigan11]

Yeah, there are alot of negatives and very few positives to becoming a landlord. My parents had several store fronts and apartments they rented out, problems were the norm. Problems such as repairs needing to be done, investment into the property, checks not clearing, or not getting rent on time. On top of all that you are dealing with people that may break their lease, not care about taking care of the property they are renting, the list just goes on.

I know quite a few real estate agents who have houses they rent out on the side, but they have a more sophisticated method in handling their properties. All the agents within an office have a system setup to handle repairs, collecting rents, etc., but they aren't making any money, even after buying these properties in foreclosures, they are just storing up the equity in the properties, which isn't really going to amount to a whole lot after all is said and done.

This is something for those with the time and extra funds that love dealing with problems.

 

[gaazn]

I don't think any bank will allow someone to rent-to-own a house they currently have a mortgage on. Sure it can probably be done under the table, but what if the home is foreclosed. Would that be considered fraud because the owner is promising the tenant equity he never could give away in the first place? It used to be buyer beware for the owner to do a rent to own to the tenant. Now it's the tenant who has to beware the owner.

 

[Matt Collins]

www.daveramsey.com has good advice on this

 

[Zippyjuan]

"Rent to own" does not sound like a good idea with houses. Buying to rent out can be a way to make money if you are careful. You will need to find a property that you can charge enough to cover your annual expenses including repairs and mortgage and taxes with nine monthly payments or less (to try to allow for time the place may remain vacant between tenants). You will be the landlord- you will have to collect the rent, you will have to call a plumber in the middle of the night (and pay him extra for coming in at that hour) and you will be responsible for fixing things. You can hire property managers but that cuts into what you can make on the property although it cuts down on the hassles you have to take care of personally. Run the numbers several times to be sure it is a good idea. See what rents are going for in areas you are looking at.

 

[Ex Post Facto]

My friend asked me what I think about him an another person taking out loans and buying up some cheap real estate and then doing a rent to own where they rent out the property. They could "become the bank" and have people with bad credit pay them on the rental property until they own it.

What do you all think about this?

I really like your idea. I think it's going to take compassion in business in order to turn this economy around. Think of all the people hoarding their money that could solve a lot of these issues by having a heart.

Rent to own property will probably be the only way people could afford it in this economy.

My grandfather did this a long time ago. He would get the paper everyday and keep the newspaper for 6 months. At 6 months he would start calling all the homes listed for sale. If any of them hadn't sold he would offer them a significant amount less than they were asking. He would then rent them to low income families on a lease to own basis. He started this business during the Great Depression and made millions of dollars.

 

[Frederick B]

I do buisiness with a lot of owners of rental property...
We live in a former manufactoring town, so we are in a depression here

1. you must do credit checks etc. on anyone moving in.

2. you can not depend on rent to be paid

3. if rent is not paid for 3 months, or they're distroying your investment, you'll have to take actions you may be unconfortable in taking.

ps... if your too picky about who you rent for and your 'For Rent' sign stays up too long, the copper plumbing inside will likely dissappear

 

[JordanL]

I do buisiness with a lot of owners of rental property...
We live in a former manufactoring town, so we are in a depression here

1. you must do credit checks etc. on anyone moving in.

2. you can not depend on rent to be paid

3. if rent is not paid for 3 months, or they're distroying your investment, you'll have to take actions you may be unconfortable in taking.

ps... if your too picky about who you rent for and your 'For Rent' sign stays up too long, the copper plumbing inside will likely dissappear

Here in Oregon, I was renting a property with four room mates. We kept the house in ideal condition, were excellent tenants, and had our rent on time every single month.

Despite the fact that the landlord was a complete douche, and actually would come over on occasion without 24-hour notice expecting to see the house, which is illegal for a landlord.

So one month, after being model tenants, we turned in 80% of the rent on time, and got the other 20% two days late. In that two day time, he served us a 144-hour notice of eviction.

If you keep it month-to-month rental agreements, instead of leases, you can eject tenants in 6 days here in Oregon... :/

 

[slamminshaun]

I hate to be the guy to rain on the parade, but buying a rental home is probably the WORST investment you can make. And renting houses to people who already have shown an inability to pay their bills is even worse. You're just inviting trouble with very little chance of an upside. There's a HUGE glut of homes still on the market, prices are still dropping, renters are making landlords compete against one another, there's an extreme amount of leverage which amplifies the risks, and you're competing against the government who is now the country's largest landlord.

I'm surprised to see so many Austrian enthusiasts supporting investment real estate. If you follow Austrian principles, you'll see that now is probably the worst time you could buy because prices will only drop further. Why catch a falling knife? Then again, decide for yourself....

And check out www.patrick.net for lots of info on housing and real estate. Or you can check out my own blog at www.crankybanker.blogspot.com since I have alot on housing and real estate too.

 

[Primbs]

Make sure you have an income that can cover the mortgage for a year and then some extra back up money. Try to find good renters, not those who are strapped for cash.

You can do well in the end after many years, but expect these types of problems along the way plus other problems not mentioned.

 

[danberkeley]

I hate to be the guy to rain on the parade, but buying a rental home is probably the WORST investment you can make. And renting houses to people who already have shown an inability to pay their bills is even worse. You're just inviting trouble with very little chance of an upside. There's a HUGE glut of homes still on the market, prices are still dropping, renters are making landlords compete against one another, there's an extreme amount of leverage which amplifies the risks, and you're competing against the government who is now the country's largest landlord.

I'm surprised to see so many Austrian enthusiasts supporting investment real estate. If you follow Austrian principles, you'll see that now is probably the worst time you could buy because prices will only drop further. Why catch a falling knife? Then again, decide for yourself....

And check out www.patrick.net for lots of info on housing and real estate. Or you can check out my own blog at www.crankybanker.blogspot.com since I have alot on housing and real estate too.

c
Why are "option adjustable rate" mortgages the "the worst mortgages"?

 

[Zippyjuan]

Options adjustable loans are the worst of the loans. In issuing them, they required the least proof of income and assetts- "liar's loans". The second feature (and hence the "options" title) is the "pick a payment" option borrowers had. You could choose to make a standard payment, including interest and principle, or you could choose interest only or even a smaller option. Unless you used the first one, your mortgage payments could fail to cover all the interest so your balance was growing, instead of going down. When you hit the adjustment point in the loan you are converted to paying full interest plus equity for the remaining period of the loan meaning a much larger jump in payments than you would have faced in a supbrime loan. Both of these factors (less income required, potentially much higher jump in payments) means that these types of loans have the highest risk of default of all the loan types out there right now- and as the chart shows, they have not really hit their major adjustments yet. "Alt A" is also one of the "liar's loans" categories with an adjustable rate but they at least keep the principle from rising.

 

[danberkeley]

Options adjustable loans are the worst of the loans. In issuing them, they required the least proof of income and assetts- "liar's loans". The second feature (and hence the "options" title) is the "pick a payment" option borrowers had. You could choose to make a standard payment, including interest and principle, or you could choose interest only or even a smaller option. Unless you used the first one, your mortgage payments could fail to cover all the interest so your balance was growing, instead of going down. When you hit the adjustment point in the loan you are converted to paying full interest plus equity for the remaining period of the loan meaning a much larger jump in payments than you would have faced in a supbrime loan. Both of these factors (less income required, potentially much higher jump in payments) means that these types of loans have the highest risk of default of all the loan types out there right now- and as the chart shows, they have not really hit their major adjustments yet. "Alt A" is also one of the "liar's loans" categories with an adjustable rate but they at least keep the principle from rising.

Thanks for the explanation. So the mortgage crisis will only get worse.

 

[icon124]

Options adjustable loans are the worst of the loans. In issuing them, they required the least proof of income and assetts- "liar's loans". The second feature (and hence the "options" title) is the "pick a payment" option borrowers had. You could choose to make a standard payment, including interest and principle, or you could choose interest only or even a smaller option. Unless you used the first one, your mortgage payments could fail to cover all the interest so your balance was growing, instead of going down. When you hit the adjustment point in the loan you are converted to paying full interest plus equity for the remaining period of the loan meaning a much larger jump in payments than you would have faced in a supbrime loan. Both of these factors (less income required, potentially much higher jump in payments) means that these types of loans have the highest risk of default of all the loan types out there right now- and as the chart shows, they have not really hit their major adjustments yet. "Alt A" is also one of the "liar's loans" categories with an adjustable rate but they at least keep the principle from rising.

I don't see "Alt A" loans being a big problem seeing that interest rates are the lowest ever. I do see a poblem with the option adjustable loans IF people decided to only pay interest because they wanted to flip the property in a short amount of time. If we could get exact numbers on people choosing to only pay interest for a period of time, then I think we could understand how much further this market is going to drop.

My personal opinion is that it will be big enough to drop the housing market even more than what it already is. I guess we will find out some time this year.




Anyway personally I DO THINK owning real estate for the purpose of renting IS a money maker if implemented right. I personally know of a few people who have been really successful in the market. I even know of a few that are STILL buying properties now.

I plan on investing in real estate for the same purposes, but I also plan to work in other areas while I'm using the rent to pay off the houses. If I can break even until I pay off the mortgage I will feel like I've done what I set out to do. I mean just look at it like this, at the end of the day when the mortgage is paid in full who has something to show for it, the guy paying the rent or the guy renting out the property? We all know that answer. Oh, I don't see how anyone could make any money by doing this alone...unless the have a ton of houses...I mean a ton. So if you are going to do it, plan on having another source of income in the meantime.

 

[JordanL]

I don't see "Alt A" loans being a big problem seeing that interest rates are the lowest ever. I do see a poblem with the option adjustable loans IF people decided to only pay interest because they wanted to flip the property in a short amount of time. If we could get exact numbers on people choosing to only pay interest for a period of time, then I think we could understand how much further this market is going to drop.

My personal opinion is that it will be big enough to drop the housing market even more than what it already is. I guess we will find out some time this year.

The "Lowest rates ever" only help reduce Alt A defaults if banks pass that adjustment on to their customers, which at this point they have no motivation to do.

If the person can't make the payment, the bank gets an asset, if the person can make the payment, the bank gets more money out of them before they can't make a payment in the future should the economy tank. And if the asset is too illiquid, the government has been bailing them out left, right and center.

The NY Times even just ran an article on how banks didn't even consider for a second using their bailotu money to help reduce foreclosures. Alt A loans are going to implode because banks are going to let them since they expect to be bailed out.

 

[icon124]

The "Lowest rates ever" only help reduce Alt A defaults if banks pass that adjustment on to their customers, which at this point they have no motivation to do.

If the person can't make the payment, the bank gets an asset, if the person can make the payment, the bank gets more money out of them before they can't make a payment in the future should the economy tank. And if the asset is too illiquid, the government has been bailing them out left, right and center.

The NY Times even just ran an article on how banks didn't even consider for a second using their bailotu money to help reduce foreclosures. Alt A loans are going to implode because banks are going to let them since they expect to be bailed out.

I really don't see that happening at all...that's literally like shooting yourself.

 

[JordanL]

I really don't see that happening at all...that's literally like shooting yourself.

This whoel damn situation is like shooting yourself.

I really wish we had competent leadership...

 

[MrNick]

I really don't see that happening at all...that's literally like shooting yourself.

I think he made a valid point. To me it would seem stupid, but obviously so far these banks don't care since they will just get another bail out. I'd use the money to help mortgages in trouble but from what the banks have been doing I think it's clear they just see more free money coming their way from bail outs and aren't taking any steps to reduce losses and conduct better business. These bail outs breed horrible business policies from the banks/companies that are getting them.