patrick.net

From a practical standpoint, the last thing I (or anyone) want to do is to have the deal with renter's in 90K Richmond. No amount of yield is worth it. Well, you pay someone to do it for you, right. Unfortunately, no management company signs into these deals unless fees represent 40-50% of rent.

You get what you pay for.

In contrast, in 3%-4% Lafayette, you can choose from hundreds/thousands who you want to rent to.

But that's what property management companies are for, right? The cheaper ones seem to cost maybe 8% of rent.

They take the calls, make the repairs, collect the rent, etc. And some of them are totally turn-key I hear, where they do everything for up to 25% of the rent. Might be worth it.

I think what SF ace is getting at, is that many of those companies understand the costs of getting those places rented and the difficulty in collecting that rent. While the numbers look good on paper, the logistics of collecting from someone in those markets is a nightmare and they just avoid them all together.

If those management companies can get the place rented and collect the rent, then it should work though, right?

Section 8 'em.

robertoaribas says

I can show you condos here for $20K or less, with HOA under $200 a month, and taxes of $600 a year, that rent for $550 to $600. 15% or better return with no loan, but NOBODY and I mean NOBODY will manage that for 10%, probably not even 20%. $100 a month is not worth the headache.

OK, that's a good explanation. Let's say you pay $200/month management, $200 for HOA, and $50 per taxes. That leaves $100/month if you rent for $550/month.

But even that $100/month is $1,200/year, so 6% return on $20K. Not so great, but way better than CDs. I suppose it's right on the edge though. One big repair would wipe out years of profits.

I think the problem is you're not going to get 12 rent checks per year.

Well you might, but 12 that clear is a different story.

I have had rental property in Richmond that I sold over 20 years ago. It was an old house that needed lots of maintenance. One set of tenants had to be evicted and the partner of another couple tried to commit suicide. Blood over the walls, etc. We did not have a property manager because we could not afford one at the time. Even if we did have one, the problems would have still caused us major issues.

We now have property in Oklahoma near Tulsa in a nice suburb. About a 4%k return and a good property manager. Much easier.

I'm sure if you started off young enough, you could make an absolute fortune in 10-15 years by constantly buying up more and more of these properties. You could learn the ins and outs of your renters. You would probably need to operate as a slumlord though.

I had a conversation years ago with a fellow one could only call a slum lord. He managed his own properties. I (a general contractor) was looking at an insurance job on one of them, an old two story house carved up into 4 units. Of course, he wanted me to include some "repairs" in the estimate that had nothing to do with work covered by the insurance company. It was all very shabby and sleazy. He did this slum lord thing on the side and was of all things an optometrist. I asked him why he did this (owning and renting crappy properties). He said his father had started the business and he just continued it but wanted out. It was then that he imparted his wisdom to me "never own and rent to others any property that has a bed." I took it to heart and stayed away from residential properties, commercial leasing is much better suited to my temperament, though as they used to say "different strokes for different folks."

"Iffy neighborhoods" will typically get you "iffy" tenants. You also have to factor in the potential damage done to the property by these types. Personally, I don't think it's worth the risk or the hassle. IMO, the quality of tenants has diminished over the last few years. By quality, I mean the type that will respect the property, pay when the rent is due, etc.

where they do everything for up to 25% of the rent.

I was looking at the income statement of a large apartment REIT, AIMCO, recently. In the most recent quarter they had gross rental revenue (including tax credits) of $295M, and "property operating expenses" plus "general and administrative expenses" totaling $148M. Fully HALF of the gross rental income of the properties goes toward operating the properties. Of course this is not just management fees, but I assume other staff, materials & contracted services. And this is in a REIT that has economies of scale that come with a large building, like having all your tenants in one place, identical units, having maintenance people on staff, etc.

I think the expenses of being a landlord are much higher than most people think. Maybe some landlords could chime in here.

Hmmm, maybe those “general and administrative expenses” include CEO salary.

Oldie but goody for Patrick:

http://www.boiseweekly.com/Cobweb/archives/2009/07/01/the-idaho-slumlord

Also, totally unrelated, but worthy of a post:

http://www.zerohedge.com/article/are-existing-home-prices-overrepresented-40

> Why can’t I make a fortune on these?
> My rough estimate of the rent is $1400/mo using 60 nearby 3BR house rents from my Property Finder service.
> Let’s say that’s wrong and I can get only $1000/mo. That’s still $12,000 rent / $90,000 price = 13.3%

- your renter won't have rent every month
- you'll need to evict tenants more than you think; vacancies will be higher than predicted. lawyer fees are expensive.
- the repairs will be more extensive than you initially thought.
- you'll probably be shot and stabbed while you drive around richmond

in other words, the cash flow and expenses are both a lot less predictable than your calculation would suggest.

Patrick......You probably can make a lot of money, but what is your sanity worth and is the risk/reward ratio worth it to you? I personally think it's very risky and the reward aspect is questionable. I agree with most of the posters here and would think long and very hard before putting your money in something like that. I grew up in Richmond and San Pablo and then as an adult, policed that same area. I'm sure that there are some success stories in the lower income areas, I ran into them all the time, but I think that your money would be better off in a neighborhood close to you, or even in the Midwest somewhere. Heck, when I was 19 my first apartment was ghetto central in Richmond at the San Pablo Border and I was a great tenant and paid on time. It was the only place I could afford and included cockroaches. I can say that it built character and the experience made me a better person.

I don't advocate long distant ownership, but I would rather have a place being managed in a middle class neighborhood in Indiana than a poor neighborhood in CA. You can buy there for the same amount of money or LESS and still make 15% return. Save yourself the grief, pain and heartache as well as money by not buying in an "iffy" area . It is my opinion that if you get into "iffy" neighborhoods there are going to be costs beyond belief. I remember the 100s of landlord tenant calls I have been to and most were not pretty. There are two kinds of landlords, the ones that either hate it or love it, and I don't think there is an in between. I happen to love it, but it is because I have no problem tenants, my properties are in middle to upper middle class neighborhoods and I am hands off other than to get my statements and checks out of the mailbox then cash them. I don't hear from the management company unless the bill for a repair is going to be over $500.00. In the two decades plus that I have been a landlord, I have never had an eviction and only one month was someone late and didn't pay so I don't have any horror stories to tell, thank goodness. Now the info behind the one tenant that was late......About 20 years ago, when I was a new landlord I was playing the role of management company and did everything myself, so after this experience I have contracted with management companies to do everything. I was too nice and not enough of a businessman then, so I learned a valuable lesson. I had rented to this person that didn't look too good on paper and so that was my fault for not being more diligent. She was a single mom, nice lady with 2 kids, and her boyfriend was a Rotary Club member with me. He vouched for her and said he would take responsibility for any late payments, etc., and when they split up she didn't pay the last months rent and there was a hole in the sheet rock in the living room, and grape juice stains in 2 of the 3 bedrooms so the Berber carpet had to be pulled out.

From that point on I have had a management company take care of my properties and I don't have any interaction with tenants other than to introduce myself the day they move in and give them the manuals for the gadgets and appliances at the house and let them know I only live about 10 minutes away. The management company knows how to pick and screen tenants and they have all the trades people on a list that they have dealt with for years so the price is right for any repairs and then it's all on the monthly statement and then the year end statement making your tax person happy. Having a good managment company that charges $130.00 a month is worth it so I can enjoy my time fly fishing in Burney Falls or traveling on a cruise.

Patrick, as someone who runs a bunch of content websites for a living, I'd say just throw more ads on your site and you'd probably make a fortune ;)

Of course, most of the ads would be for realtors and other real estate ads, but hey, I've seen ads for Jim Cramer and thestreet.com on zerohedge.com and anyone who reads that site know what the authors think of them....

But that’s what property management companies are for, right? The cheaper ones seem to cost maybe 8% of rent.
They take the calls, make the repairs, collect the rent, etc. And some of them are totally turn-key I hear, where they do everything for up to 25% of the rent. Might be worth it.

I've never run into a managment company that wasn't turnkey. That's what they are being paid for so the only difference I have found is some are better than others. For 6-10% that should include turnkey. In an "iffy" area they may charge a little more, I don't know, but that too should be turnkey. All you should have to do is collect your checks that their billing/accounting department send you.

Patrick, the first thing to do is call/email several property managers and ask them about the area and verify what you can get for rent. They will normally tell you everything you need to know about renters in the area, turnover rates, etc. I have had my property managers tell me that they would not manage property in some areas so I trust their judgment since they are experts. Normally, if you hear it from three different places it is true.

Patrick - If your willing to consider an ify neighborhood there are even better deals out there than the ones you mention but you'll have to travel.

"Ify" in this case is Steubenville Ohio (though there are a number of similar towns around). Here you can pay 20k for a house (sometimes less sometimes more) and rent it for $400 to $550 per month. So thats a 30% gross return on cash. You'd have an even better return if you had a mortgage. Those of you out there in California but still interested in Real estate investment should check it out.

The town, with its proximity to Pittsburgh is not Detroit either. Every house I have owned here, that has been prepared nicely for rent rents easily. Sure you have your share of tenant issues but the courts here are not as lenient as they are in CA when it comes to tenants not paying their rent.

Anyway I bring this up only because Ive always gotten a kick out of the California (and other big market) mentality that a good rental investment is one that at minimum "cash flows" or at least doesnt loose too much per month. Of course maybe that way of thinking developed during an era of high appreciation and so was justifiable but who is expecting appreciation these days. This area (eastern OH) on the other hand has never experienced meaningful appreciation so your rents are all your going to get but do the math 20 to 30% gross returns + can over time make up for the lack of appreciation.

When I was renting in a neighborhood like that, I had a problem with my next door neighbor who was also a renter.

Well, not exactly did I have a problem with the "renter", but rather her adult son who showed up after she had been renting there for awhile, after his incarceration.

The problem was, that this young man took in some of his buddies' pit bull dogs, and the fence was in poor repair.

I told the management company about the fence but they did not follow up right away. I also told my neighbor's landlord, who lived a few miles away in Berryessa, that if those dogs did anything to hurt my family or anyone else who might be visiting where I rented, that I would sue his ass.

This landlord was afraid of his new "tenant" and I don't blame him a bit. The law enforcement cannot be everywhere all of the time. Rather than confront his tenant he sold the house.

So fine, you wanna make some extra percent return landlording in those kinds of neighborhoods, is it worth it? Your tenants, or their "buddies" whom you will not even know who they are, can easily find out where you live, who lives in your cushy home in a cushy neighborhood, etc.

Patrick, instead of the inve$tment, hassles and risks of getting into the slumlord business, have you ever considered taking your portable income, buying a nice, inexpensive little home or mini-farmstead, with low property taxes, somewhere out in some peaceful little town in the heartland, and just dropping out of the working world alltogether?

prices are still going down but your thoughts seem on the right track. i always found cheap rents and long term tenants worked best. just an idea but consider no property management and offer the tenants 10% back after 12 months of no problems. i don't know about putting it on paper but if you are successful you might find good tenants calling you. of course you would need to be reasonable and allow for at least one late payment. these are poor people and like lenny bruce once said," you are only as honest as you can afford to be".
as for the grow house and meth lab problem make sure that they know you be need a walkthru every 2 months or so til you can rest easy.

I'd go with a REIT. AIMCO is good. In this market you'll make as much and with less hassle.

As to meth lab houses, they're on the wane. There's a quickie method of making meth now your DIY methhead can make in a soda bottle.

A multi-unit property owner/manager I know in Madison, Wisconsin has had good luck culling bad tenants by offering his units without stoves or refrigerators. He attracts a lot of recent retirees (which includes retired husbands that enjoy doing the simple repair work). One he had a critical mass of older folks in his complex, the security that older tenants offer and their heightened sense of responsibility toward the property has permitted him to raise the rents, and they are glad to pay since the complex is still cheaper than most retiree complexes and safer than the struggling single mom apartments.

Patrick I think your point is well made that there is oppty in the market to make rental income. I'm not familiar with the Richmond market, but in my experience there are lucrative location "microcosms" beyond the best neighborhoods ... and in my experience there are other factors that can make rental income profitable - AND can build in future purchaser for the property. My case: In Florida, at the near bottom of the market I sold my cute lake cabin at a 25% profit on my investment. I then purchased a well renovated home in the heart of the historic district in a marginal Florida town for 50% of it's top price. The economy there was terrible, but this home was in the edge of the "good section" and walking distance to elementary and middle schools. I upgraded and cutsified it for a total of $150k invested (cash) and offered for rent at $1400/mo for a 4/2/2/Pool. I created a website with 40 photos, advertised on craigslist and local on-line newspaper for minimal costs. Because the photos were so complete and professionally produced (by me) I rarely showed the property... but told folks to go look in windows and walk the property. I easily interviewed ppl via email and if they got past the "crazy story" stage (just talk long enough and people tell you exactly who they are: ie "I stopped paying rent at last place because of mold in the walls". ahm NOT). I turned down many offers and settled for a single mom with school age kids who wanted roots. I called her references and confined her employment. I negotiated that she conduct all yard, pool and repair maintenance for a reduced rent of $1200/mo. I left her some of the cute furnishings at no cost. She gave me 1st/last and $1200 security deposit up front - on a year lease with a first right of refusal to buy the property for $180k. I prefer she doesn't buy it as I make an 8% capitalization rate which FAR exceeds a CD return. Additionally I get depreciation and other tax benefits. She has made improvements by adding doors, fans, landscaping etc. Bottomline, my tenant pays my retirement income for a small amount of my "property management" time. I have executed this strategy during the ups and downs of the markets since 1980 in Southern California, Florida and New Mexico. The key is: purchase in a location that has some "pull/interest", ADD VALUE by making it cute/desirable, automate your process with photos/website/pdf applications, and screen prospective tenants for wackos. Geesh are we so spoiled we think we don't have to do anything for income? I think that is the "flipping mentality" that got us into trouble in the first place. I don't think you have missed anything Patrick (I think you are the smartest fella on the planet). But if the Richmond property is a dog in a bad hood, with likely bad tenants and no "I wanna live here cause it's adorable factor" then ppl are right to pass it by until they find a property with the right opportunity.

Your question implies that markets are rational. What we have learned from the fantastical euphoria peaking in 2006 is that markets are based on sentiment. To flip the question, try asking in 2006 why shouldn't I sell, prices are too high, surely I must be missing something, right?
In northern Idaho, I am seeing properties rent for twice what the 15 year mortgage, taxes and insurance cost. Is this profitable? Yes. does it mean I have to mow lawns and fix leaky faucets from time to time? Yes. Is there a free lunch? No. Even landlords have to work to make money.
And ultimately the market needs to understand that real estate is not a cash cow (where you get free money for life just by signing on the dotted line); to make money we have to work.

PS. You asked:

Should I start a hedge fund or REIT to invest in these things? What am I missing?

Yes I think you should, but you gotta find someone who can execute for you... ;0)

Patrick

I just checked the listing you posted at the beginning of this thread. A chain link fence is a dead giveaway that you need to stay away from this neighborhood. It is like a neon sign saying TROUBLE AHEAD................Just my opinion

you guys are idiots its easy to make money on these cheap properties, the only thing is you can only rent to people lighter than a paperbag, that's the rule, if u rent to someone darker than that your in for a whole lotta TNB hooliganism you'll never get more than the first months rent, and youll be lucky if your not raped, and your house will most likely become a crack den

surfingerman says

hooliganism

"The original hooligans were a spirited Irish family of that name whose proceedings enlivened the drab monotony of life in Southwark."

Can't rent to the Irish either. You know how they are. Never will be civilized! Their skin is weirdly pale though, except for the freckles, which just proves they're not really white... ;-)

danville woman says

Patrick

I just checked the listing you posted at the beginning of this thread. A chain link fence is a dead giveaway that you need to stay away from this neighborhood. It is like a neon sign saying TROUBLE AHEAD…………….Just my opinion

But there's also a swingset and slide behind that fence I think. If someone's letting their kids play in the front yard and can build or by play structures for them, how bad could the area be?

how bad could the area be?

I lived in the flats of El Cerrito in the late 70s, and everything to the N, past the BART track, was Mordor.

This is basically the worst area you can find in all of the US.

This thread is completely disgusting to me, BTW.

"I have a friend who builds his units with 5' ceilings -- easier to boss the midgets around".

Capitalism at its most rapacious. Ho Chi Minh had it right in the 1950s.

soeren says

Patrick, instead of the inve$tment, hassles and risks of getting into the slumlord business, have you ever considered taking your portable income, buying a nice, inexpensive little home or mini-farmstead, with low property taxes, somewhere out in some peaceful little town in the heartland, and just dropping out of the working world alltogether?

Yes, I've considered that, but I'm basically an urban person. I like cities, espresso and wine bars. My wife would probably like the countryside better, especially since we could keep the roosters. Looks like we found a home for them at Picchetti Winery in Cupertino. We'll drop them off this weekend.

Troy says

This thread is completely disgusting to me, BTW.

Capitalism at its most rapacious. Ho Chi Minh had it right in the 1950s.

Rapacious? Mere ownership of land is not productive, but creating and/or maintaining a building to live in is a real value added to the community. I always say the answer to most economic problems is the single tax on land.

It doesn't make much sense to buy a rental property just to give away your money to a property management company. These deals are not for newbies, but for people who've did their own managing for 20 years, have the cash flow on the buildings, and would take an absolute beating if they were to sell. Instead they retire and hire, willing to take the reduction in cash flow when you figure they'd lose 30-50% right away to capital gains.

Rental companies also make a deal with the owner: This is what we will give you, and if we make more/less its up to us. So the owner get's a fixed return while the management company looks to raise rents and go after non-payment. A company that has manages 10s of millions of dollars in real estate is not looking for your 20k in equity.

Here's what you do: Go buy 10 of those 20k condos. 20% of 200k is 40k down, and you're getting 10% over costs on the rents so now you're leveraged 5/1 and getting 50% on your 40k. Hard for me to think that everyone you're going to rent to is a scumbag. It's not that hard, but its not hands off. I'm still looking but the good ones keep slipping through my fingers.

surfingerman says

hooliganism

“The original hooligans were a spirited Irish family of that name whose proceedings enlivened the drab monotony of life in Southwark.”
Can’t rent to the Irish either. You know how they are. Never will be civilized! Their skin is weirdly pale though, except for the freckles, which just proves they’re not really white…

Damn right! No FUCKING IRISH!

Mere ownership of land is not productive, but creating and/or maintaining a building to live in is a real value added to the community. I always say the answer to most economic problems is the single tax on land.

If there were a single tax on land there would be no "fortunes in real estate" since the capital return of real estate would be just that, return on the depreciated value of the capital improvements, not what the market can bear as it is now.

These "fortunes in real estate" everyone loves is simply the wealth transfer from the laboring to the rentier non-laboring, thus every "fortune in real estate" is the simple theft of wealth from the productive to the unproductive.

Landlordism is one of the greater social evils in our system. In the Bay Area the housing stock here is simply atrocious, yet the rents are high because that's what the market will bear, or is subsidized to bear.

A 10.0 quake would do this place a lot of favors, failing that changing Prop 13 to only protect commercial buildings over their depreciated life would be an acceptable alternative.

I used to live in the Richmond Annex and worked for the City of Richmond for almost 12 years. That neighborhood I wouldn't touch with a ten foot pole. There are nicer neighborhoods in Richmond, that's for sure. North and East of of the old City Hall (McDonald and 27th) are better. If you go further East into the hills it gets better yet. But the West side of Richmond is pretty much a slum, at least it was a few years ago.

Troy says

These “fortunes in real estate” everyone loves is simply the wealth transfer from the laboring to the rentier non-laboring, and every “fortune in real estate” is the simple theft of wealth from the productive to the unproductive.

Yes, to the degree that it's just about the land ownership. And yes, it would be harder to make a fortune in real estate, because the land rent would all go to to pay the land tax, and only the rent for the building itself would be kept by the landlord, to cover maintenance and profit.

So it sounds like you agree exactly with the Georgist single tax as a solution.