18 comments

Good Times for Landlords

As dedicated MMM readers already know, I have fiddled around a bit with rental property ownership over the past six years. In that first article linked above, I had a somewhat neutral view on the practice, figuring it was definitely good money, but it took real work to get it.

But I’ve been noticing an interesting trend in recent times which is forcing me to upgrade my opinion on the value of Landlording a bit. You see, one of my local friends is a fellow creatively self-employed-businessman who has a few rental houses as well. Last year, one of his houses was in bad condition. It started out as your typical 1950s ranch house with an inconvenient chopped-up-into-small pieces floorplan and pretty modest interior finishes. Then it endured several years of rental from a very, ahem, creative large family who added plenty of additional wear-and-tear. By the end of all this, it was getting into “dump” territory, complete with weeds’n’dirt lawn and several large truckloads of leftover junk belongings.

Since it was in a nice neighborhood, he decided that instead of just doing a major cleanup, he wanted to give it a Total Mustachian Makeover. I got to be the main carpenter, keeping my own construction career as busy as I could handle. We brought in some helpers and a dumpster, and ripped out  all the unnecessary walls, as well as the junky bathrooms and much of the barely functional plumbing. Everything was nicely rebuilt, with new luxury baths, a great functional kitchen overlooking the newly opened large living room and dining area, almost-new used appliances from Craigslist, and a full landscaping and interior/exterior paint job. Even the basement was finished and painted to add to the useful space.

We did all of this on a shoestring budget, reusing and refinishing materials whenever possible (such as the original 1950s-classic natural wood kitchen cabinets), getting some from a recycled building materials facility called ReSource, and buying the rest from the usual local stores as cost-effectively as possible.

The result was quite a hit, and as soon as we finished the renovations, he was able to re-rent the house at a much higher rate, to a more qualified set of tenants. With the higher rental rate, the cost of the renovations actually will deliver a 10% annual return for as long as the house is rented, then return more than the original capital amount in the form of a higher sale price when the property is eventually sold. Since he rolled the cost of the upgrades back onto the mortgage with a rate far below 10%, the renovations were actually a no-cost way to increase the value and the cashflow of the property – a neat trick indeed. I would recommend this trick to you too, if you ever buy a distressed property to rent out, as long as the numbers work out properly. I can help you with this analysis if you like.

This summer, it was time for my friend to re-rent the upgraded house a second time. He put up the usual Craigslist ad, and was immediately flooded with many responses from eager tenants. He very quickly found a new tenant, and the house is again producing great income.

Then it was my turn for a positive surprise. My own rental house has had a wonderful 2010-2011 season. Fantastic, reliable tenants with no funny business whatsoever, and the house looks better than when they moved in. I was scheduled to re-rent it in August, but last month I got a call from another highly qualified resident of the same neighborhood asking if he could rent it from me as soon as the current lease was up, since there is now a shortage of available homes to rent in the area. The rental rate has been raised to keep up with inflation, a new lease has been signed, and the MMM family’s grocery money is locked in until at least August 2012. Yeehaw!

 And now we’re getting back to the original point of this article. Every anecdotal story I’ve heard has pointed towards an unusually strong rental market. So I did some further research on the matter, and found further confirmations on this on the Denver-wide level and even the US National level.

According to those articles, the combination of foreclosures and employment growth has brought lots of new renters to the market, presumably even greater than the number of people who have decided to rent out houses rather than trying to sell them as a way of waiting out the slow housing market.

For me, there are two lessons in all this:
#1 – Being a landlord is more fun than I had previously estimated
#2 – Even in weird economic times like the present, there are often little pockets of gold to dig up and enjoy if you stay optimistic and aware of your surroundings. Nobody could have predicted back in 2008 that the housing market crash would lead to Good Times for Landlords in my town, but here we are.

The key is to realize there is always opportunity to be had out there, so don’t waste any of your mental energy worrying about how bad things are or which gigantic world financial catastrophe to worry about next. Instead, keep your set of useful skills and your savings growing, and your eyes open.  Happy ‘Stashing!

  • Contrarian June 29, 2011, 12:41 pm

    Great story! Regarding property evaluation, are you familiar with the book, “What Every Real Estate Investor Needs to Know About Cash Flow,” by Gallnelli? I picked it up recently and there’s a lot of stuff in there. Kind of overwhelming for a new guy thinking about getting started in the land-lording business.

    Reply
    • MMM June 29, 2011, 3:23 pm

      Hmm, interesting sounding book. I would like to check it out, although the title makes me think I’d open it up and it would just say, “You want POSITIVE cash flow, sukka!”. Still, reading about little business opportunities like this is always fun for me.

      Reply
  • Eva June 29, 2011, 1:08 pm

    It still seems, based on this post, that it’s still really only a good option for those who are inclined and able to use power tools. Yes or no?

    Reply
  • Tim H June 29, 2011, 3:35 pm

    What are some easy to pick up / less labor intensive skills for a landlord? I’ve learned some plumbing and appliance installation skills, I paid someone to install tile and would probably pay it again. What should be outsourced?

    Reply
    • MMM June 29, 2011, 3:46 pm

      You’ve got some good ones. To make their own life easy, a landlord should be able to change a deadbolt, fix a toilet, stick on a smoke detector, and at the next level up, they could hook up a fridge, washer, dryer, dishwasher, etc. You could outsource things like exterior painting, carpet, and shingle replacement, which are labor-intensive and benefit from multiple hands working together. I like to install tiles, especially nice artful ones, and renovate kitchens and bathrooms.. but those are easy to outsource as well.

      Reply
      • KM September 8, 2012, 7:34 am

        I know this is vey late but I just found your blog yesterday!
        I was wondering what are your thoughts about owning and renting out if you basically have to outsource pretty much everything? I own a 600 sq ft condo and my condo fees are only 58$/month, which I think is a pretty good deal considering I have no maintenance to take care of. Do you think owning and renting out another condo is a smart move for someone with very limited manual skills?

        Reply
  • MMM June 29, 2011, 3:41 pm

    Hi Eva – good question. Sorry I gave that impression – the Power Tools factor is actually not necessary at all for rental housing. I just talk about it a lot myself because I am such an addicted carpenter that I try to mix renovation in whenever I can.

    The bottom line with rental houses is in the numbers – cost of the house or apartment building versus the amount of rent it can reliably bring in with hassle-free tenants. Doing your own renovations effectively lowers the cost of the house (since you can fix it up and maintain it efficiently yourself). But you can always buy a newer or lower maintenance house to compensate, and pay other people to do the maintenance if needed.

    As I mentioned in the article, we can do some more case studies if anyone is interested in sending in their own details of a real or proposed property. Financial calculations are fun.

    Reply
  • mike crosby June 29, 2011, 4:58 pm

    I’ve done well in the past with real estate. My last investment (around 5 years ago) was 250 miles away in an apt building in Las Vegas. The tenants were all bad, so after owning one year, I sold the property with a 6 figure profit. I was lucky.

    Now, I’d like to get in the Phoenix market. But I’m scared with what happened to me the last time. It would be nice to have a steady income, but I just don’t want all the headaches.

    I’d love to buy in So Cal, but properties are too high for me, or I should say, I don’t like the cap rate. If you have any suggestions/ideas Mr Mustache or anyone, I’d love to hear your comments. Thank you.

    Reply
    • MMM June 30, 2011, 6:07 am

      Six figure profit in Las Vegas five years ago? That does sound like lucky timing indeed, since you must have sold just before the house prices there fell into the crapper! Congratulations!

      I agree – trying to make a rental out of an expensive house which results in a low cap rate for you just doesn’t work.

      I had heard that the suburbs in the newer areas outside of LA were one of the biggest foreclosure hotspots with correspondingly large price drops. Suburban neighborhoods going from $600k per house down to a more appropriately valued $250k. Which could make a good rental, and should also appreciate nicely over time. But I haven’t researched actual properties in detail – you would know the details more than me.

      Reply
      • jDeppen July 11, 2011, 3:32 pm

        Average price in the Ft Knox, KY area is about $140k, that means great opportunities for rentals. We are also protected from the national market because we have soldiers coming and going. I have 5 properties myself and use a property manager (less hassle). I also own a real estate company, check out the homes for sale (you can search without including your contact info): http://www.HardinHomes.com

        Reply
  • Kevin M June 30, 2011, 12:42 pm

    Great story, considering all you usually hear about are the renting horror stories….my tenant was cooking meth and trashed the place! I was tied up in court for 6 months trying to evict them!

    I’ve thought about getting into this market for awhile, but not quite sure of the first step. I guess just looking around for a good property? I can do almost anything myself to fix it up, except roofing, so even a crappy place isn’t out of the question. I actually just talked to a buddy yesterday that had 8 properties at the end of 2010 (with a partner) and now they’ve grown their mini-empire to about 15. So he’s gotten me excited (along with this post) to explore it again.

    Reply
    • MMM June 30, 2011, 9:53 pm

      The first step? You could start by browsing your local Craigs to get an idea of rental rates in each neighborhood. Then work backwards to determine what you would pay for a property that would deliver that rental rate – shooting for a nice high cap rate of 7% or better annually. Then see what the houses look like in that price range. If the prices are below your target value, and the neighborhood, schools and other desirability factors look good for the eventual resale, you’re in business!

      Reply
  • Emily July 1, 2011, 7:58 pm

    Nice article. Renting has a lot of advantages for both the landlords and the tenants. My husband and I rent our house in the city we moved away from. It’s worked out well so far (better after we dumped the property manager!). The tenants are taking good care of the place. We used an online service to check their backgrounds. They are a family that has to move every so often so renting is a better option for them too.

    Conversely, we rent in the city we moved to (Atlanta). The housing market there is really slow. We could buy and get a good deal, but we lose some of our flexibility to move if we ever would have to since the market is so slow. We also lose some of our cash to a downpayment and I’m using some of that to start a resource website http://www.frugalpharmacies.com/

    Home ownership is not always better than renting. This is a longer, but worthwhile article Time did weighing some of the advantages and disadvantages.
    http://www.time.com/time/business/article/0,8599,2013684,00.html

    Reply
  • Josh July 6, 2011, 9:15 pm

    Great read. I do agree that landlords currently have the power as there are more renters around as people are afraid the housing market hasn’t hit a bottom yet. I am worried about that myself. I did refinance my house though into a 15yr with a very good rate with intentions of paying it off in 7 years. At that time I will move and become a landlord. My plan is to continue to do this every 7 years or so. Within 15 years I want to have 2 rental properties. The cash flow from the two properties should generate enough income to live comfortably on. For other ideas visit my site at http://www.grow2millions.com

    Reply
  • Emma December 7, 2011, 6:47 am

    I loved this article – something that has been on my mind for a while. But I was hoping you could elaborate a little more — are you suggesting buying a house with cash outright? Or do you put a minimal downpayment and let the tenants pay off the rest? (if you’ve already covered this in another post, I apologize!)

    My boyfriend and I are in our early twenties, have saved religiously and would like to put our savings to work. But we can’t decide if our “workers” would be better off in a high interest account, or as a downpayment for a rental property?

    Thoughts anyone?

    Reply
  • Mike December 10, 2012, 6:07 pm

    Hi,
    I also have a question relating to the purchase of a rental property. I have approximately 18 months until my mortgage will be paid off ( i will be 31 at that time yeehah!) I want to purchase a rental property using some the the freed up cash flow. Do you think it’s a wise move to try and pay down the rental property mortgage to really generate good passive income in a short period of time or should i leave and allow renters to pay down mortgage. The other question relates to student rentals and if anyone has had positive/negative results with that. It seems in my area (london ontario) if i purchase in college/university area the positive cash clow seems very enticing and the vacancy would likely be low. Any comments suggestions would be appreciated
    thanks

    Reply
  • Sheila November 21, 2014, 6:46 am

    Have you ever considered using your stock/investment portfolio as collateral for buying rental property. I am looking into to this as I can get a lower interest rate, no down payment, and still leave my money in the stock market earning. I wanted to know what you think about this?

    Reply

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