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A Case Against Owning Rental Property

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This is a guest blogging post by Julie Ali.

It makes me laugh at all the articles in magazines, newspapers and on the Internet regarding how to make money on that last financial frontier – the ordinary citizen’s entry into rental house investment. These articles and the books that joyfully proclaim the good news about money for nothing (or almost nothing), suggest that anyone can make money by going out, buying a house, renovating it and renting it out to the multitudes of renters that are scouring the market for affordable housing. Who writes these articles anyway? And if they have made such a surplus of money and secured their own financial freedom, in this way, then why are they writing articles and books to make yet more money? In addition, if profiting from the rental house market were that easy, sort of like collecting eggs from quiescent broody chickens on a farm, then why isn’t every intelligent citizen putting all their financial eggs in the rental house basket?

The business of renting houses to people is not an easy, painless way of generating additional revenues. There is a rental cycle that is the diagrammatic opposite to the house buying cycle. When people are madly engaged in a love affair with the purchasing of their first, second or final upscale home, they turn their nose down at even the mere plebeian thought of dating a rental house. Even the sensible arrangement of renting for a few years in order to acquire a down payment for said house is refused. “Why should we make the landlord richer?” they sniff as they run to their local banking casino of choice and throw down their chips to lose a fortune on the turn of the mortgage interest wheel.

The siren call of no money down mortgages has pulverized the current rental market and houses are sitting on the market like sad old senior citizens, with their overgrown lawns, chipped paint and bowed fences. Some one has to pay the mortgage on the rental houses that stand like wallflowers, abandoned at the rental dance and that someone, will have to fork out his own cash to avoid foreclosure on his property. So in this rarely mentioned scenario, the rental property business is not generating cash flow but a cash deficit.

If this process continues long enough, it will bleed the financial blood right out of your body and put you in the morgue. Has anyone noticed that when a rental house has been sitting on the market for a while, that the “For Rent” sign stuck in the front lawn becomes a “For Sale” sign? There is a reason for this, people; most of us do not relish the prospect of the financial equivalent of the morgue – which is bankruptcy.

It is never easy to make money. It is even harder to make money on rental properties. Mind you, I only have one rental house so I’m no expert in the business. I’m just an average Jane who bought a house, lived in it, wanted to sell it several years later but couldn’t bear to sell it at a loss, and so, put the house up for rent. Almost a decade later, battle scarred and wounded, my husband and I, are almost at the end of our rental house rope. We have had a steady succession of tenants, most of them 3rd and 4th year University students who have marched through the house like a marauding army of Carpenter ants, decimating the interior and neglecting the exterior. Last year we put in almost $10,000 worth of renovations on the place. This year, we are faced with another hemorrhage of our “profits”, as the basement was flooded with the incredible rainfall experienced by many people in southern Alberta, Canada.

So if the returns are so poor, then why do we still keep the house? We are keeping the house until lightening strikes and the Alberta Children’s Hospital is completed in a few short years. This hospital is just a hop, skip and a jump away from our house. In other words, we are trying to time the sale of our house to coincide with a peak in the housing market for our community. This strategy may not work out as well as we hope since the Federal Government will be able to scoop up some of the increase in value (for the gains in the property’s value during the time the house was a rental property is taxable). But we still hope.

I reiterate this message: rental properties can KILL YOU financially. The only thing that saved our bacon was that I had put 50% of my house’s value as a down payment when I bought the house. This kept the mortgage payments at a survival level. In addition, we lived in the house for 6 years prior to renting it out and were able to put in our own labor into some renovations. Another factor that helped us out was that my husband is very handy and has the ability to fix the things that invariably broke on us. He did most of the renovations on the house last year in an amazingly short period of time.

It almost killed him but we were able to complete enough projects to get us back into the survival zone for the next few years. We still have ongoing projects to complete with the additional stress of commuting 3 hours from Edmonton to Calgary in order to do these tasks, but at least, the major projects (except for the basement woes) are now done. The only things we are unable to control are the appliance breakdowns, ongoing plumbing repairs, the appliance replacements (fridge, washer and the stove), the basement leaks and the garden messes. Of course, the exterior house painting still needs to get done, the garden is jungle like in its proportions and the tree in front is due for a biannual trimming by a professional arborist. Do these expenses give you an idea of how much money you can expect to make from a single rental property?

There are other aspects to the rental property business that are rarely mentioned. You spend a lot of your own personal time dealing with house maintenance, the search for tenants and checking references, the problems with tenants, inspections of the house and repair time. Besides the time factor there is a quality of life factor, this rental property business has had a cost to us in terms of the quality of our lives. We have had good tenants and we have had poor tenants. It is better to have no tenants at all than to have a tenant with an anger management problem, a substance abuse problem or a lack of responsibility problem. And working with tenants who are hostile for an extended period of time such as a year, is very taxing to one’s own sunny disposition and determination to be a nice person.

Are rental properties worth it? NO.

We went into the process with the single rental house that we had, rather naively and blindly and we are still in it rather less naively and still operating blindly. Would we do this again? No. It’s not the best way to make money. Rental properties may be an excellent passive way to earn surplus dollars for the many individuals who write those glowing articles on the Internet, but I certainly, have not found them to be the BEST way to earn money. A long stretch of time without a renter can be a killer since you still have to pay the mortgage and if you don’t have the contingency fund present to pay this mortgage, you will either have to sell the house or lose the house to the bank. These are very unpleasant situations to be in and in contrast, if you merely work at a job and deposit part of your savings in a bank account in a disciplined fashion, you never have to be in these unpleasant situations.

In fact, you are free to enjoy your summer vacations rather than do what my husband and I do every summer: unclog toilets, weed a jungle in the front and back gardens, hire a construction company to fix the basement leak, call in the arborist to cut our trees for another $400 or so, paint the exterior of the house, put in sod and the other millions of tasks that are the rewards of rental home ownership. Think about this business before you jump in: what would YOU rather be doing? Going to the mountains in Jasper with your family and sprinting up the zigzag path up Mount Robson in British Columbia or fixing a toilet? I certainly hope it is not the latter.

Julie Ali loves to write and is a stay at home mom of two elementary school boys.

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5 Responses to “A Case Against Owning Rental Property”

  1. PFDigg.com says:

    Buying property for rental purposes may be bad

    Guest-blogger Julie Ali writes a riveting expose about the issues of being a rental property owner. But what I love is the cyclical attitude of people towards renting. It’s “why pay the mortgage for the landlord” vs. “it’s more economical to rent”

  2. Sorry to hear about your bad experience with rental property.

    I agree with your comments comments regarding much of the literature about investing in (usually) residential real estate either for either quick renovation and sale or renting. Many books and articles make it sound a lot more rewarding than it is and understate the costs, the risks and time committment needed.

    My own experience over a period of ten years has been largely positive. I have only regretted purchasing two properties (the first two that I purchased which could be viewed as a learning experience) which were difficult to let and were disposed of after a few years (one at a loss and the other at a much smaller capital gain than I had hoped for at the time of purchase). Subsequent purchases have all worked out resonably well for me. It has not been a “get rich quick” experience, but the rents generally get paid on time and capital values have appreciated. Certainly, there have been occasional short term vacancies and regular outgoings and maintenance – but these are all things to be expected when owning a rental property.

  3. steve says:

    My brother in law has had a wonderful experience in owning rental property. He bought a 2 unit house (duplex) and is living in one side and renting out the other. He has had a run of good tenants, and relatively small maintenance costs. The rent payments are helping to pay the overall mortgage and so in the scheme of things it is almost like a 50% return on his investment since he is also living there. If I were going to do a rental property, this is likely how I’d start.

  4. James says:

    Julie,

    Thank you for your insightful comments on landlording.

    I think your posting raises several important points:

    1) Tenant quality matters:

    As you clearly point out, renting to students means that your place will get trashed. Also, its been my experience that renting to poorer people is more of a hassle. Tenants who are on public assistance tend not to be the ideal clients for your real estate business.

    2) Controlling expenses is important:

    Paying $400.00 to maintain your house in a manner which makes it an attractive rentable place to get the right kinds of tenants sounds like its really expensive. I have heard that a good way to save money is to be a do-it-your-selfer.

    I’ve had mixed success with this. For some things, its great, but for some others, its been a near disaster!

    3) Management Proximity:

    One thing I think you rightly point out is that you need to be close to your investment property. The place my fiancee and I have is about 15 minutes on foot from our apartment. Its quick so we can pop over there to do whats needed. Driving three hours sounds like a total pain.

    Lastly I wanted to point out a couple of other interesting things about your posting. I really like the fact that you mention the importance of a low loan to value ratio when making your purchase. It sounds like you’re able to make some money because the mortage is relatively low. Second, I wonder if you’re taking the depreciation of your property and your capital gains into account. Both of these matter.

    Okay, to shameless plug my own blog, you might be interested in having a look at my profit/loss calculations for our investment property:

    http://dinksfinance.blogspot.com/2006/06/is-our-real-estate-profitable.html

    Given capitol gains and rental income, we’ve made about $75,000 on our place.

    Finally, you might consider checking out John T Reeds site. He’s got some really no nonsense books on managing rental real estate. I reccomend his stuff.

    http://www.johntreed.com/realestate.html

    Best,

    James

  5. Scott says:

    The biggest thing you missed in your equation is someone else to manage your property for you. I would not still be doing the “rental property thing” today for all the reasons you iterated – except for that extremely helpful expense line in my budget called “property management.” Almost all of your hassles could have been almost completely removed from your life with the engagement of a property manager. We were ready to sell our first duplex after a year of absolute chaos and headaches. In stepped a property manager, and here we are 7 years later with 9 more multi-unit houses. Still doing it. Still loving it. 99% of the phone calls have left our house and moved to the property manager’s cell phone. Sorry to hear your experience has ben so difficult. We have also had good tenants and absolutely terrible(!) tenants (I have the pictures if you want to see…), but my property manager deals with them all. My houses have made me more financially than my mutual funds ever have. I do not claim that the rental business is easy. It has a much higher learning curve than depositing money into mutual funds and crossing your fingers. But for us, it has been worth it. not just financially, but in learning how to do business well, how to better relate to all kinds of people and how to manage money well, and other stuff I can’t recall at the moment because I am so busy with my second deal this month, closing in a couple of weeks (the last one closed last Friday).

    If anyone has any questions, feel free to email me at okiedokiedoo@hotmail.com. I can’t promise speedy responses. But would love to hear from you.

    Signing off,

    Scott


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