Is renting out property really a good idea?

Question

I have come from the school of thinking that flipping property is 100x better than renting out (thanks to television) - but is this true?  it seems to me as though there are no real immediate benefits of buying property just to rent out.  Though, I could be wrong.  Could someone please shed some light on this for me?

Account Closed · Answer

Dealing with tenants isn't for everyone. Tenants can be difficult and the worse the landlord is at landlording, the more difficult the tenants will be.

Flipping is good for generating fast cash. Landlording is for building wealth over time.

Sometimes you have to flip a couple in order to get enough cash to buy and hold.

You can do both. Buy fixer-uppers and sell the ones that aren't good for buy and hold, and keep the ones that look like they will be a good long term investment.

Charles Whitaker · Answer

I think the proper wording would be that flipping is 100x harder. TV is not even close to the actual numbers of a flip. I personally prefer flipping and that's what I do, however, i know the power of rental properties and that is where I am heading. The major difference between flipping and rentals is this:

Flipping will make you rich if done correctly, rentals will make you wealthy if done correctly. Rich and wealth are two very different states of being.

Michael Rossi · Answer

Mouschi,

The rental property business (if done properly), allows you to make money at least 5 ways:

1. Instant Equity  -  this is the equity that you have at closing.  Generally this MUST be at least 30% or you won't have a rental that will cash flow.

2. Cash flow - this is the money that you have left each month after paying all the bills (expenses and debt).

3. Paydown of Principal - the tenants should be paying down the principal on your mortgage, which is more equity for you.

4. Appreciation - I consider this icing on the cake, but property does historically appreciate over time.

5. Tax benefits and Tax Depreciation - the government allows us to depreciate rental property for tax purposes, even though in reality it will appreciate over time.

Once you've got your rental portfolio built, then your only work becomes managing and maintaining the property.  With flipping, you can never stop unless you're able to save a BIG pile of money, which most people can't.

Good Luck,

Mike

Timothy W. · Answer

I'm amending my opinion on this as I was just reminded of something Kiyosaki said at a Learning Annex a few years back here in Chicago (yeah, I'm only quoting other folks in this thread but they're right).  Someone asked him, "Is (fill in the blank) a good investment?"  His reply was, "I don't know.   Are you a good investor?"

If your good at landlording or are willing to learn, it's a good strategy.

Tim

Grand Wally · Answer

Flipping is also a good way to lose cash very quickly as well....very quickly.

Jon Holdman · Answer

If you buy houses at $100K and rent them for $1000/month, you'll be hard pressed to make any money.  At least anytime soon.  Between your expenses and payments, you'll most likely be losing money.  Maybe not every month, but as you've figured out, bad things will happen occasionally that will eat a lot of money.

Over the last few years, lots of people bought property and rented it.  However, they weren't really in the rental business.  They were speculators betting the price of housing would continue to appreciate, and they would make money when they sold.  Renting the property was just a way to lessen the costs of holding the property.

The rental business, IMHO, is different.  To be profitable at rentals, you have to buy cheaply enough relative to rent to make a profit from the start.  Then you hold the property for the long term.

If you do some reading here, and you certainly should, you'll run across the "50% rule".  This rule of thumb says expenses will eat up 50% of the rent.  I'm honestly not sure if that's truly the case or not.  But I am fairly certain that if you buy a house where you can pay 50% of the rent in expenses, and then pay your P&I payment (note that the taxes and insurance often included in the payment are actually expenses), and then have money left over you're likely to do OK in the rental business.

My take on the long term picture is that over time rents and expenses are going to go up.  But as long as you don't try to extract cash from your properties, the payments will stay fixed.  If you hold it long enough, you can get it paid off.  Then, you have a nice income stream coming in with minimal effort and minimal money actually put in.

Mark N.A · Answer

Around here everyone and their pet monkey are trying to 'flip'.  Last REO I looked at (in absolutely terrible condition, but in a so/so neighborhood) sold for well above what the bank had it priced at -- because a torrent of flippers bid up the price!  Another flip I know about has been on the market well over eight months.  And another flip I've been watching got foreclosed on a second time because the flipper ran out of time and money.

Mouschi, the questions you ask can only be answered by yourself after some very serious time and effort put forth into studying and learning.  How many books have you read?  How many courses have you taken?

Understand this:  you can make some really good money in Ultimate Fighting;  but if all you did to prepare was 'watch TV', you will get your clock cleaned.

Timothy W. · Answer

I will simply quote Richard Davis, the original star of Flip this House, Owner of Trademark Properties and arguably one of the most famous flippers in the country, at the end of the one episode where he rehabbed one of his rental properties for a new tenant.  He said, "People think you have to flip, flip, flip, flip, flip.  But the real money in real estate is in holding property."  There's really nothing more to be said when a person at his level of flipping says this.

Jason Schmidt · Answer

typerider, you had me at ultimate fighting :)

I am reading one book now, and am in the midst of researching through this site here.  I am by no means knowledgable about anything just yet.  I just don't think I understand how exactly renting can truly explode for me.

For instance, if I buy 10 homes at 100k, that only bring 1k each a month - that just covers the houses.  While I am left with building equity in all 10 of them, I am also left with 10 possible a/c's going out, 10 roofs, etc.

Jason Schmidt · Answer

ok, thanks for the kind words!  I was wondering if I bought, say, 3 rental properties at $100k each putting very little down ... is there any benefit to me besides having the renters paying my 3 extra mortgages?