I went inside a rental yesterday that a tenant just moved out of. Yuck, smelled of urine, broken kitchen door that looked like someone had kicked it in. Lots of debris left on the carpet. Kitchen countertops dirty. It could have been worse. This house has been continuously rented for 20 years. The first group was 5 female graduate students. They were friends and kept the house nice. As one moved on they just switched out roommates. The present group was 5 unrelated males.
I’ve been thinking about this question the last few days. I have numerous friends who have made a good income with rentals. Quite a few are properties both residential and commercial that have been passed down from parents and grandparents. Some who have bought in out of state locales in recent years. Some who have moved and kept their previous home and rented it out. Every location is different.
The house I mentioned above is worth double what we paid for it. Aside from the down payment the rents paid the mortgage and all costs. Some areas don’t have the same appreciation as this area. In our case our adult child and her family are going to now move in. They could not afford to buy today in this area.
My sister in law rents out her home (she moved out of the area). She includes a once a month cleaning person so she knows the kitchen and bathroom gets cleaned at least once a month. She also includes utilities like water so the tenants water the yard.
I think the people on FB complaining about rental prices on would love to own… but they can’t afford that either. I am sensing more extended family and roommate groups in the rental market. Plus a lot of folks with pets (which is a choice they make). All seems to mean there could be a lot of wear and tear on rental houses. I like OP’s idea of small rental ADU, where it make economic sense.
Unless OP is able to buy a house with an existing DADU, building one would require either a full cash payment or financing with a construction loan. In some places, the latter is very hard to qualify for as very few banks provide such loans and the interest rates can be very high. Make sure to include these variables in the calculations! Plus, addition of a DADU will trigger higher property taxes.
Our county and cities are extremely ADU-friendly. With one town allowing a DADUs up to 1/2 of the size of the main dwelling! The DADUs in that town are palatial! If the main place is 4,000 sft, the accessory dwelling can easily be 1,500-1,800 sft. If the septic drain field can handle that.
Why am I saying this? Research the ADU laws and regulations carefully!
The maximum ADU in my county is 1200 sq ft. The state law supersedes old city and county and HOA laws. In my HOA rentals of guest houses or ADU were forbidden but now they can’t stop you. If I could build bigger I’d offer it to one of my kids as I’ve got over 2 acres.
Our primary residence is 1250 square feet. ADUs around here are limited to some smaller size.
Our renter has already called managing agent once, right after moving in. When she took a shower, she noticed strong sulphur smell, which she believes is water heater. We had plumber go down as soon as we heard and they put bleach in water heater and hopefully that fixed the issue but haven’t gotten an update.
UPDATE—all is well with renter tho she has to get mustiness out of washer dryer—hadn’t been used in months.
Both of our renters are middle aged professionals….one an RN and the other a foundation director who could EASILY afford to buy the $325K houses they are renting from us with house payments that would be half their rent. Luckily for us, neither wants to be a homeowner any longer and are quite happy having a landlord to take care of their homes. Go figure. Works out for us obviously. But I always wonder when they will come to their senses.
My parents built a cottage on our farm and used it for 20 years. We now rent it out. If you are a horse (or animal) person, it is heaven. If you are not, you’d hate it. As such the general public isn’t the audience for the cottage. I have rented it twice now, and both tenants were found through word of mouth (and I knew them, though not well, over 20 years). Both retired single women. Could not be better tenants!
I doubt this situation could be replicated, but did want to say it’s possible to have a good experience.
Jumping back in to say thank you again for all the additional insights.
I realize nothing is (pretty much) a risk free income stream for the future/retirement. But (as with so much) - you can just try to learn, hear about others’ experiences, diversity, assess your own skills/resources, and factor your risk tolerance.
I’m still working on all that - but hopeful now that my husband is the one who wants to (with good reason) pretty dramatically change our trajectory - he’ll be doing some of the learning with me!
Hmmm - fixed income - whether federal bonds including treasury or agency, municipal bonds, or CDs. And some would argue annuities are assured…or 99.9% assured statistically speaking.
That’s the point - with property you are taking a risk. You might do well, you might have appreciation but…you might have expenses or worse - no renters.
With fixed income sources from government bonds or CDs, your risk is inflation is higher and your cash stream can’t keep up - but youR income stream is virtually secured or risk free. The feds don’t default nor does it agencies. Nor do investment grade munis. And nor do CDs which are insured (up to a certain level per bank).
There are near risk free options, including in a high inflation environment. An example treasury product is TIPS, which are treasury bonds indexed to CPI-U inflation rate – near guaranteed return above inflation, if you hold until the maturity date. 5-year TIPS currently are at 1.2% above inflation. 10-year TIPS are at 1.7% above inflation. 10-year treasury bonds are at 4.1%, so annualized inflation over next 10 years would need to exceed 2.4% for TIPS to have higher return than treasury bonds, if both are held until 10 year maturity. If not held to maturity, the result and break even inflation threshold are likely to differ.
The downside is you are giving up a lot of potential return in exchange for having near risk free returns. A relatively small 1.x% real return (may be significantly less after taxes) limits the magnitude of income/spending, as well as potential principle growth. This can make living longer than expected or similar event resulting in longer time horizon than anticipated a risk. A mixed portfolio can mitigate this longer time horizon risk and allow one to choose the risk-return that aligns with the particular investor.
The issue for small landlords, especially single unit is the concentration of risk. Let’s say you run the numbers against a $100k investment and it looks like the cash return (after debt service, management fees, repair and maintenance, insurance and property tax) plus property appreciation come out as a attractive numbers. All it takes is 1 bad tenant (or no tenant), 1 unanticipated casualty, some major plumbing, electrical, HVAC repair or replacement to wipe out your returns. If you are looking at retirement investments, you should be looking to reduce risk, not concentrate it.
If you are wanting a fixed and low risk stream of income and you want to hedge against changing interest rates, if you have enough money, you should look at laddering treasuries or other highly rated corporate bonds with different maturities. You basically can reset the overall effective interest rate in your fixed income portfolio each time one rung matures. Muni’s work if the after tax income works in your favor (you have high federal, state and local taxes in general). More than likely you will need an FA to help you with the ladder.
As concentration of risk goes, you are probably best off investing in an area you know. You know where there are flooding or erosion risks, where parking is tricky or there are issues around a school, etc. You probably know it because you live there. It’s not necessarily a problem, but you are now even more exposed to the vagaries of one area.
Certainly, this could pay off nicely if you’re riding the right wave. But in some other markets, you could find that neither your primary home nor your rental appreciate as expected.
I have one too. We have done the vast majority of the upgrades and repairs on our house the last 30 years. But my handyman is much more interested in playing pickleball these days! lol
And I have found that I don’t love painting rooms as much as used to. Everything just takes longer and is physically harder than it was when we were in our 20s and 30s.
The issue with laddering is you are accepting less return today to set that ip.
If I can get 4.75 today, why would I take some T 3.75, some at 4, some at 4.25 so they mature at different times in case rates are higher then…and they could be lower.
If you are seeking current income, laddering doesn’t make sense.
I’ve always wondered why it’s pushed. Perhaps to generate more commissions?
If OP has money to invest in a property and decided to go fixed income instead, laddering makes zero sense - in my opinion. I’m investing for max income today. And I’d be doing sooner than later with impending Fed cuts if I were to go that direction.
Not all securities will tie to that but some will and directionally most should.
Except for the bad tenant, we’ve had all of those events. None of them even remotely wiped out our returns.Returns are not just based on cash flow. You have appreciation(of an asset worth 4 times what you actually invested), tax advantages, cash flow, and the fact someone else is buying your (for example) 325K asset.
If the main place is 4,000 sft, the accessory dwelling can easily be 1,500-1,800 sft. If the septic drain field can handle that.