I don't understand people who are long term tenants, and the logic behinds it bothers me.
They are paying monthly rent to other people, which doesn't make sense to me. If they have money to pay rent each month for long period of time (I am talking more than ten years), why not save and buy their own property? From what I heard, there seems to be a vast amount of long term tenants.
Am I missing something here?
Can you guys share the story of your long term tenant and why do they decide to be tenant instead of a homeowner?
My parents rented the same house for 20 years when I was growing up. There were two main reasons:
1. They couldn't afford to pay rent, raise 3 kids, AND save up money for a down payment. Any extra money went towards paying for school supplies, after school activities, and tent camping vacations. Their focus was completely on child-rearing and just surviving month to month.
2. They claimed bankruptcy when they were younger and assumed it would ruin their credit forever. They weren't financially savvy, and didn't realize that you can rebuild your credit over time.
Wow......That was a long post. I felt like I was in a podcast. Actually. I dont have time for that stuff. I am comfortable with what I am doing. I am not looking to be Trump and I have for the most part met all my lifetime financial goals so I honestly dont feel the need to have any more rentals other than if they drop into my lap. When I say drop in my lap I mean when investors over leverage themselves like they did in the downturn and implode. I wont turn away those deals and investors will never be finished over levering themselves.
Back to the topic though I think I covered it. I am connected in my employment with some wealthy people. I see the other side of the road in the rentals. I find more and more saying no thanks on home ownership. Home ownership is just no longer this safe retreat to stash money. Its as fragile as the stock market and not nearly as liquid. You may not think so but ask the scores who were slaughtered during the downturn. Some made it back but only a fraction. We would still be in a real estate mess if Wall Street (hedge fund investors) had not bailed the housing market out. Some real cautious people want no part of this and I for one cannot blame them. Its not my path but I fully get it unlike the original poster.
Walgreens is a long-term tenant, aren't they?
In California I had a tenant who rented from me for eight years and she left because she got married to her 2nd husband and he wanted to live in a newer home. She said, had she not gotten married she would have stayed in there until she passed away. She was a great tenant and I've rented her my home in Hawaii for vacations as well. She is gainfully employed in law enforcement, was quite reliable and had owned a home in the past, with her first husband. But, that turned out to be a traumatic experience. Her first husband took out a 2nd mortgage without her knowledge, even though he was not on title, she lost the house to foreclosure and ended up living in a camper in a friend's horse pasture with her 7 year old son. It took her a few years to get back on her feet and she never wanted to own a home after that. She is the perfect long term tenant.
I have another friend who rents a two bedroom apartment in Long Beach, Ca for $4,000.00 a month. She could easily buy house or condo but she prefers the freedom of being able to leave easily if she wants, even if she never does. She also used to work for a mortgage company back in the 80s and saw what could happen when mortgages are upside down across the nation and she doesn't want to be part of that system. Now, she has lived in the same Long Beach apartment for 10 years and loves it. If I could I'd rent to her so fast your head would spin.
@Jay C. Ha! Yes long post only because in addition to first quoting your whole paragraph, I then spliced your paragraph (again) into bite sized portions to respond. I guess you can say I felt compelled to be thorough. ;-)
To your point - I guess with regards to "home ownership", income producing property is the way to go.
I've rented group homes, some of which has rented for 14 years to over 20 years. Their business plan is that they NEVER buy real estate, always rent houses and they have 30 or 40 houses that they rent. Its a business decision to rent. For one thing they don't have to come up with down payments, which in their case would be at least 20% down, probably 30% down. They don't have to pay closing costs, and they don't pay real estate taxes. Their business plan allows them to not have dead equity tied up in properties and allows them to operate more house. Its a business decision and imo is a very good decision. Obviously they can't qualify for VA, FHA, USDA, or any residential mortgages, which plays into their business decision.
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Sure there are people who rent because they have no choice, but there are many more people than you realize, who could buy but chose to rent rather than to buy!
David, so many excellent points in this post and the follow-up one, thank you! "Schools, crime, location, unemployment" seems like a simple formula for long-term success. A high percentage of owner-occupied properties is likely a consequence of the above four factors, and it could also be a great proxy for measuring the attractiveness of a deal in light of these non-financial aspects of an investment decision.
A few interesting things stood out to me:
- 140 miles daily times 13 years is just madness. That's about 437,000 miles total or $245,000 dollars. Not to mention close to two years' worth of life. I don't know their specific circumstances of course, but there should be plenty of chances in 13 years to optimize this situation. On the other hand, positioning yourself as a landlord to offer a property with good schools to tenants who will likely enjoy long-term stability (keep kids in same school til they graduate, etc), is a great strategy.
- Hearing about the landlord with 50 properties is funny - that's exactly where I want to be in the future. In my mind, investing the capital elsewhere for a higher return, and renting my primary residence is a great way to go - including owning rentals while renting your house.
- The point about dead equity is important to understand. "Paying down your mortgage" means that your rate of return decreases over time (effective returns of having a place to live, divided by the capital tied up) . Compare that to taking that same money and investing it every month - your income will be increasing over time as you contribute to the invested capital, and re-invest the proceeds.
To the last point, I would say there are three categories (in order of increasing preference as a target tenant):
- people who rent because they have no choice
- people who consciously chose to rent
- people who unconsciously choose to rent because they think they have no choice.
The people in the first category may be living paycheck to paycheck, and any unforeseen expense can get them in trouble, and really work that vacancy allowance that you built into your budget (right?) The people who are conscious renters, are more likely to be in it primarily for flexibility and convenience, and will probably move eventually. The people who I'm calling "unconscious renters" will more likely be financially steady enough to pay rent on time for 10+ years, but are trapped by their own pre-conceived notions of money, spending, and life. They are giving themselves the shaft, but providing a great return to the landlord - your tenants who drove 18 times around the globe in their 13 years with you, are a prime example.
Thanks also to the OP for a thought-provoking topic, which generated some very insightful responses!
Cheers
-D
My parents rented the same house for 20 years when I was growing up. There were two main reasons:
1. They couldn't afford to pay rent, raise 3 kids, AND save up money for a down payment. Any extra money went towards paying for school supplies, after school activities, and tent camping vacations. Their focus was completely on child-rearing and just surviving month to month.
2. They claimed bankruptcy when they were younger and assumed it would ruin their credit forever. They weren't financially savvy, and didn't realize that you can rebuild your credit over time.
Sorry to hear this.
I've had other long term tenants. One stayed for 21 years, like the garage at the rental (did some work from home) and liked the school district and closeness of the schools within walking distance. They would NOT move unless I found them a larger house with a garage in the same school district within their budget. I did find a place and they moved. But as it turned out the school that they were so interested in was closed and merged with another school in the neighboring town!
One thing I rarely see mentioned is location. My husband's parents never bought because they were tied here for work, but really wanted to live and own in another state. So, why buy here instead of there? A house would have just been one more tie to where their heart really wasn't. Sometimes there are intangibles like that.
Hey @Roy C. I know why they do it here in Los Angeles. The rent to price ratio of homes are in rental favor. Also, people in LA like to live above their means (show off) so they can afford to rent a much nicer house than they could actually own.
Yep, that pretty much describes most of my renters ... they have higher W2 salaries than me, drive nicer cars than me, want a nicer house and think they are so smart and saving money renting instead of buying because their rent is lower than the mortgage on a similar property would be. They pay like clockwork for the honor of showing off "their" nice house to their friends, though, and every year I raise their rent 5%+ because I can with the market's rental demand, my 30 year fixed mortgage payment stays the same, and my prop 13 property tax basis stays low.