Question for the minds on this board. I am happy with the amount in my stock portfolio right now and am thinking about a rental property. Here are facts: 1/3 cost down, borrow the rest. Down payment would mean I sell about 20% of my portfolio. Current rentals would cover all costs but not positive cash flow at this time. Appreciation generally runs 5% year if you hold for 5 years. The property would be far away so I would not use it now myself except 2-4 weeks per year at best. Nice tax loss when you include depreciation. When I retire I would like to spend several months a year there. Any thoughts would be appreciated.
Htownrich
Htownrich:
IMO, a second home rarely, if ever, is a good investment unless you plan to live there for extended time.
I say this because of factors like these:
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Loan origination and down payment costs that are lost opportunity for other investments
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Maintenance costs (electricity, water, sewer, upkeep, insurance, property taxes, etc.) - these add up to more than one thinks and keeps eating annually
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Renters demands and repair that often require you to pay a rental manager who oversees the property - thus reducing profits
It may be advisable to run what ifs and budget out all these items balanced against the lost opportunity costs of what those expenses might have yielded on investments and the answer should be more clear for your particular circumstance.
The above may also not take into consideration a true steel you may have gotten that could sway the analysis nor desires to use trust mechanisms for estate planning.
Good luck with your decision.
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Hey Htownrich!
Several thoughts.
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Investing 20% of a portfolio is a huge investment. I would never sell 20% of my portfolio to invest in a single stock. I apply that rationale to other investments, whether it is gold, commodities, or even rental real estate.
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Appreciation is 5% a year? Where did you get that number? I think it is a mistake to assume anything (other than a fixed return security) will ever yield anything. That is one of the factors that gave us the housing bubble.
When my son as a sophmore at NC State 15 years ago, I bought an apartment. Recently I sold it for $7,000 less than I paid. And this is in Raleigh, NC which is a very strong real estate market. Back then I too assumed 5% a year and I was wrong.
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If the rental property is far away who is going to manage it for you? If you hire someone plan on spending around 8% of your rent on management fees. You will still have to pay for the maintenance in addition to that. In my case that 8% was the entirety of the profit I would have made, even after considering the tax benefits (but I only put 3.5% down).
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The catch with the depreciation tax deduction is that it gets added back to you in capital gains. The amount you deduct also gets deducted from your cost basis (causing you to show more profit). That may or may not work in your favor.
I’m not a landlord and more recently I am not even a homeowner. We sold our rental place, our house, cars, etc… Now we are retired and living light. But our cash position is good!
Bottom line: I would not get this rental place. But that is just me. Good luck with your decision.
Jeb
Explorer Supernaut
SWIR and NUAN Ticker Guide
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx
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I’d look for a property that provides cash flow and consider appreciation as a bonus. There are opportunities to get positive cash flows in most areas except some could be difficult, CA for example.
Hey guys, I’m sorry but this is a board for stock discussions, not real estate discussions. Please bring it to a close in the next couple of posts. Thanks,
Saul
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I know Saul wants this conversation to end, but I thought I’d post a link to a Mr. Money Moustache post that has tons of valuable info about the pros and cons of rentals, how to properly evaluate a property and estimate expenses relative to income, etc.:
http://www.mrmoneymustache.com/2011/10/10/lets-buy-a-foreclo…
Basically, the post is a guy who knows a ton about renting ripping MMM a new one about his plan to buy a rental. It’s a great starting point for anyone considering getting into the rental game. MMM values this expert’s advice, but goes ahead and buys the rental anyway.
Long story short, a few years later, MMM regrets it and wishes he had known about REITs back when he bought the rental, because he would have just done that instead of going the landlord route.
Sorry for extending the thread, but hopefully this link will arm anyone curious with all the info they need to make an informed decision on such things.
Cheers,
Eric
who is currently listing his lone rental property and can’t wait to get the thing out of his life
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