Is Buying a Rental Property Worth it?

Get Out of Debt Blog – Month 4

Is buying an investment property worth it?If you haven’t been following my quest to get out of a half million dollars in debt, I suggest you begin with My Journey to Payoff half a million in debt or check the Get out of Debt Blog master page.

Last month I talked a lot about getting my wife on board and suggested she read Dave Ramsey’s “Total Money Makeover”, but she has yet to and the spending continues.  To make matters worse, our rental property is showing its money eating teeth.  I currently have a vacancy and am in the process of evicting another tenant.  Therefore, only 50% of the building is rented out and paying.  I often ask myself if buying a rental property is worth it.  Maybe I’ll write something later on my disastrous attempt at being a landlord, but in short…I’ve had 5 evictions, over $10,000 in lost rents, forced to invest $30,000 worth of building repairs, and have probably had 3 years worth of at least one unit being vacant during the 5 years of ownership.  

The image I lead this post with is misleading in my state. Tenants aren’t forced out at the whim of the landlord, but rather they can dwell almost indefinitely. As soon as this particular tenant owed me $2,000 in back rent, I served him the 14 day Notice to Quit and now I wait a month for the Eviction hearing. Tenants knowing they are being evicted cease to pay anything, if they were even paying before. Once the hearing is complete and we come to terms, the tenant usually gets another 30 days to pack up and move out. If they don’t leave, we wait again for another hearing and come to some more terms. This is an endless cycle where eventually the landlord has to pay for movers and 12 months storage for the tenant’s belongings.

The landlord is eventually given a money judgment on the tenant that lasts 20 years. However, if you have lost contact with the tenant, you’re out of luck. That is, unless you want to hire attorneys and private investigators that normally cost just as much as the tenant owes you. In my opinion, money judgments are worthless and buying a rental property is not worth it.

What is the Income of a Rental Property?

Even if you have good luck with tenants and only need to put a modest amount of money into renovating the rental property, the value just isn’t there. Say you make $200 profit each month with a fully rented property after paying the mortgage, taxes, utilities, and other regular bills. Your profit over the course of a year is $2,400, but having one eviction will eat the whole year’s profit and more. If you have just one vacancy for a month, it will take roughly three months to recoup your losses. When I have a vacancy, it usually takes a month to clean and prep the unit for rental again, then another month of tenant screening and showings, then another month while the chosen tenant gives their current landlord 30 days notice. On average, there is a 3 month vacancy when a tenant moves out which requires 9 months to recoup the losses. Provided you don’t have any more vacancies. Again, buying a rental property is not worth it.

What about the equity you earn in the rental property?

I guess it depends on when you purchase the investment property.  It is a good time to buy with the current real estate market, but I still wouldn’t even if I had the money.  The value of my property has lost $65,000 in equity since I purchased the building.  Combine that with my other losses and I’m out well over $100,000 attempting to better my position buying a rental property.  It has done nothing but destroy me financially and mentally, even more so than my wife’s spending habits.  I will reiterate, buying a rental property is not worth it.
 

Get out of Debt Goal Reminders

Get out of debt goalsGoal 1: Achieve a Net Worth of $0 by paying down debt and increasing savings and investments.

Goal 2: Have $0, and I mean ZERO debt and liabilities.

Goal 3: Increase my net worth to $500,000.  Basically, turn half a million in debt to half a million in assets…a daunting task to say the least.

Get out of Debt Status – Month 4

Financial Status for the end of Auguest:

  DEBT EQUITY Asset Value
Property $273,773 $300,000 $26,227
  Remarks: This is our home plus our rental property.  I took the value of the properties from Zillow to determine equity and subtracted the remaining balances on the mortgages to figure the Asset Value.  After speaking to a realtor this month, it turns out the investment property's market value is $20,000 less than zillow...figures adjusted from previous months to reflect this major depressing loss
Equity-Line $39,400 $0 -$39,400
  Remarks: Took this line on our primary residence to fund the down payment on an investment property.
Credit-Cards $3,673 $0 -$3,673
  Remarks: Not much progress, but some..
School-Loans $154,215 $0 -$154,215
  Remarks: Yup, it's a lot.  Between the both of us there are 13 years of schooling with no parental help. We'll probably tackle these last as the interest rates are very nice.
Vehicles $32,200 $27,400 -$4,800
  Remarks: I took the trade in values for both vehicles from Kelley Blue Book to determine equity and subtracted the remaining balances on the loans to figure the Asset Value. 
401Ks $0 $47,560 $47,560
IRAs $0 $7,312 $7,312
Investments $0 $7,000 $7,000
  Remarks: This is a gamble on an IPO that still hasn't panned out.
Savings   $10,032 $10,032
529   $1,933  
  Remarks: I can't let my kids have the same burden as my wife and I with school loans.  Our goal is to pay for at least half of their college education...which is not included as assets.
Totals $503,261 $399,304 NetWorth: -$103,957
Monthly Changes $3,430 $18,915 NetGain: $15,485
  Remarks: This would have been an ok month with a $4,515 NetGain, but one of the properties value was overestimated.

My Get out of Debt Monthly Budget

I’ve tracked our income and expenses for the month of August. 

  Income This Month Over/Under
Salaries and rental income $18,179 $16,554 -$1,625
  Remarks: Our income has dropped significantly due to apartment vacancies and a pending eviction of a tenant. 
Other      
Total: $16,554    
    
  Deductions    
Taxes $3,841  $3,841  -
401K $1,240  $1,240  -
  Remarks: We could put this toward debt, but I need to match company contributions and the investment market is just so under valued at the moment.  I hope I'm making the right choice.
Life-Ins $48  $48  -
Health-Ins $465  $465  -
Dental-Ins $30  $30  -
529 $100  $100  -
Total: $5,724
Remaining Income: $10,830
  Long Term Debt    
Mortgages $2,737  $2,800  +$63
Equity-Line $200 (min)  $200  -
Vehicles $821  $821  -
School-Loans $1,286  $1,286  -
Total: $5,107 Remaining Income: $5,723
 
  Expenses    
Insurance $415  $112  -$303
Day Care $450  $510  +$60
  Remarks: Our day care situation has changed this month and will again next month, I should have an updated budget for this by the end of September.
Gas $500  $363  -$137
Food + $1,100  $1,769  +$669
  Remarks: The + means anything you would buy at a retailer, such as a shovel, toilet paper, lawn bags, clothing, etc.  My wife does this sort of shopping and I go crazy figuring out why these necessities are so expensive.  Could I ask everyone to comment and let me know how much you spend on groceries et all and your family size.  I need some average bearing.  
Electricity $450  $234  -$216
Oil $800  $0  -$800
  Remarks: We ended up on a payment plan last year and when the price of Oil dropped significantly, we had a balance of a grand or so.  Still haven’t needed to pay anything additional for oil yet. 
Water&Sewer $255  $0  -$255
  Remarks: We paid the quarterly charge last month so this should even out over the year. 
Trash $20  $20  -
Internet/Tele $80  $85  +$5
Cells $90  $91  +$1
Cable $130  $144  +$14
COH $400  $370  -$30
  Remarks: COH is Cash on Hand that is spent every month on lunches at work, fast food on the go, tolls, quick marts, small apartment fixes, and the like.
Credit Card $275 (min) All of our extra income goes toward
this.  Therefore, the paydown is
tracked above in the Debt status table
Newspaper $10  $10  -
Gifts $100  $0  +$100
Dinning Out $200  $148  -$52
Entertainment $200  $0  -$200
  Remarks: Entertainment is for movies, day trips, games, and other luxuries. Obviously, these aren’t needed, but for now we’ll keep it at a modest amount. 
Incidentals  
  $152 Window Repair
$621 A weekend getaway for my wife and I
$378 Clothes and shoes
$63 Kid Toys
$92 Hired an Electrician
$106 Random things like copays
  Remarks: I could probably budget for everything here, but broken down and saved for monthly according to frequency.  These are different every month however.  I think I need some sort of budgetting software to help me.
Total: $5,268 Remaining Income: $455


Aside from the rental property issues, my wife has yet to come around and agree that we need to really focus on paying down debt.  She wants to do a bunch of refinancing and buy a bigger home, but I’m persistent in keeping this idea at bay until we have a hold of this debt.  She also wants to work part time to spend more time with the kids, but our income to expenses just doesn’t allow her to do that.  She sees our financial picture much different than I and these two arguments are a constant thorn in our relationship.  I can’t get her to read Dave Ramsey’s book “The Total Money Makeover” no matter how much I try.  She feels like I think she’s clueless about money and is insulted that I keep pressuring her to read it.  I fear even if she reads it now, her mindset will be skewed and negative in that she will not benefit from anything Dave explains. 

My Get out of Debt Progress for September 1st

Get out of Debt Progress

My Get out of Debt Conclusion for the end of August

I need to get rid of this rental property to be able to budget better through fixed income and expenses.  However, the current market conditions will have me taking a loss that I cannot pay for.  I need to wait out this downward real estate trend and bank on both properties during the upturn.  A colleague of mind thought I should try the Zipbuyer service whose banner is to the left.  Anyone tried this service?  It has yet to be included as an opportunity for review here, but I’ve asked they add it soon.

 

I also need to get my wife on board through any means necessary.  One commenter last month said that he or she sees this ending in nothing but divorce.  Is that a good option?  I’ve run the numbers as a single and it certainly looks like I would be much better off.  Most people say divorce only hurts your finances, but in my case I don’t think so.  However, I’m not sure there is reason enough to leave my wife just yet, there is still hope.

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 < Getting Out of Debt July 2009     Getting Out of Debt September >

 

what I did


1.Got a third party involved Marriage counselor or paster {preferably debt adverse and go even if she won't attend)

2.Stop mentioning Dave Ramsey to wife ( I am a big fan of radio show)

3.Lead by example.   When I started my wife was not fully on board,Knowing "I could not out save A spender". My 2nd job income only went toward debt that was dead(closed) and could not come back with out my signature.

4. Fail first ,our budget was broken by me first and we developed a plan for this.

5. sold my leased car an now drive a debt free car.

If you do this for 6 months and you fell like you are still "pushing a rope".

Well... This is something you need to know about your wife moving forward.

We have been debt free including the house for 18 months and don't fight about money near as much and when we do only on one day a month(budget planning)

I will continue reading this blog.

Hang in there.

Wow, you have a tough row to


Wow, you have a tough row to hoe.

obviously pointing out your mistakes does not help your problem, so i will only offer an outsiders opinion on what I would do to correct your situation.

Getting your wife on board is the most important thing you can do b/c you will have to change a lot of things.  If you will not take a loss on your primary residence, sell it. buy something smaller, or better yet, rent something until you are at zero. keep the investment, lower the rents, and only rent to people with spotless backgrounds. that always works better for us.

sell both cars private party. buy two cars in the 5-8K range.

stop contributing to your childrens 529's, you cannot afford to do that until you have no debt. You are paying interest on your credit cards, yet trying to make interest on their 529 plans? making more in the market than your credit card interest rate? i doubt it. same goes for 401K, stop until the high interest debt is gone. you must be militant about paying it down.

no unnecessary expenses until things are better. you are one emergency away from serious default. you have lots of assets, but how many can you touch if needed?

no eating out, no lunches out, cancel the cable and the newspaper, get rid of the CC debt. then reevalutate.

BTW, our household spends $400/mo on groceries. two people, organic food, eat almost every meal at home (dinner out maybe 2x a month)

you have to want it bad enough, soon enough.

Get Out Of Debt's picture
Thanks


Thank you for your comments, support, and advice.  I wish I could do most of the things suggested. 

@gdynpm
1. I’m thinking about it
2. I’ve given up on that effort
3. Getting a second job is a thought, but I already work 55 hours a week and don’t see my kids enough
4. As you can see, we’ve broken the budget every month, albeit my wife’s doing…or Murphy’s law.
5. I work an hour away, and need something reliable
I envy your current position, but until the real estate market bounces back…we’ll be in a pinch.  If real estate values kept a steady pace upward over the last 5 years, I’ll bet we would have $100,000 more in equity and I would have sold the investment property a while back saving us tens of thousands. 

@anon
Sound advice…getting my wife on board.  I show her this budget every month and she dismisses it as overreacting.  I’m at a loss on how to get her on board.  She feels I lecture her too much.

We could probably sell the cars and downgrade, but that will be a hard sell to the wife as well.

The interest on our credit cards has been floating around in 0% deals for a while and I intend to get this paid off this month.  After that, would you still suggest ceasing contributions to 401k and 529’s.  We’re only doing $50 per month per kid.

“no unnecessary expenses” now that is what I keep trying to get my wife to agree on, but in her eyes they are necessary.

$400 a month on groceries???  Does that include all the other household items…ie cleaning supplies, toiletries, etc. If we could get it under a $1,000, I’d be amazed.  At least I talked my wife into clipping coupons…haha, that seems like nothing in the grand scheme of things.
 

i was the anon from


i was the anon from yesterday.

Yes, $400 on groceries. we buy good, clean food. the girl can cook, so we dont go out too too often. i always pack my lunch.

realistically if you and your wife do not come to some kind of understanding/compromise/agreement on what direction you are heading, the rest of my advice is pretty much useless.

i see it as the boulder is rolling downhill, you must stop it first, then start pushing it back up. the more drastic measures you take ,the quicker it will happen. if you are burning money, the $50 a month for the 529's could help. if you are just going to spend it, then might as well put it away for the kids, even though it is only $600 a year.

you and the wife must align your goals to some extent. otherwise their will be animosity or passive aggression between you two.

i wish you the best.

Painfully watching from the sidelines!


I've been watching you for months and commenetd in the past.

This is painful to watch.

I said it before and will say it again, the Ramsey method works, if you do it.

You both are not even close.

You will dig out of this if you follow the plan, you will win.

$621 for a weekend getaway...you have got to be kidding me.

$378 clothes...yet more insanity.

$999 on two line items that absolutely should not have happened. Do you really want this?

 

Behavior, Behavior, Behavior wins this game.

I think it depends a lot on


I think it depends a lot on the area where your rental property is. Sure, this is just like a business with long term investments and long term returns. I know that apartment investing work best near university areas or even industrial areas. If you think you are overwhelmed by the task of always searching for new tenants you should probably find a real estate agent to help you with that.

Rentals at this point in the housing market...


The plan to make cash flow from rentals at this point in the market doesn't work.  By renting out properties now, you are merely getting assistance with paying the mortgage on the property until the housing market rebounds and you can sell for a profit.  Unless you bought investment properties cheaply at auction, you will most likely not be in a position for cash flow.  So, I agree you need to get rid of the rentals...

did you?

Real Az

Realaz.com

I have to agree that "it depends"


I know there are properties near my alma mater that have been increasing in value steadily for the past 10 years -- with little or no disruption from the real estate fallout.... Obviously this is due to the University itself and not the market at large, but makes this type of consideration (as always) an "it depends" decision. Also, it is always a good idea to have an exclusive buyer agent helping you find the best property for the best price.

Building Contractors


Should you need to make a claim on your household insurance, often the onus is on you, the policy holder, to obtain several quotes to pass to your insurer. This may be at a time when your house is under water or your roof has fallen in. Contacting builders, plumbers and roofers etc, to arrange for quotes is a hassle that you can probably do without at this time.

Depends on location


The return on rental property will surely depand upon area of investment.

For example if you have invested near a college or Institution with number of students,.

Then you might get good returns. Similarly, if you invest in tourist destination such

in Cote d azur property, then there is great chance of geting good rentals.

Real Estate Dangers


Rental properties are not for someone who needs the monthly cash flow right now.  They are for investors that are looking for reap the benefits many years down the road.  You can make a lot of money owning rental properties IF you buy them right and IF you remove all or most of the risk (i.e. debt/mortgage).  If you cannot pay cash for a rental property, or atleast put 50% down then do not buy it.  The risks will out weigh the benefits and potentially force you into a position that may cause you to lose everything you have invested in the property (foreclosure).

We would all like to e able


We would all like to e able to get out of debt so fast but, unfortunately, good planning isn't really enough. I understand we have to start somewhere and putting it all down on paper and sorting it out might be the best place to start. Besides property, I was wondering if you guys can help me decide if it's all right to invest into art pieces. These shouldn't lose value in time but actually do the opposite. I wanted to invest in two katanas that are quite old and cost quite a lot. Do you think this would be a good investment?

LANDLORDS


This is such a good post. i thought rental business is cool its like waiting for a month they tenants will pay just like that, i didnt realize that landlords need to also pay taxes, bills, renovation, etc. this article is helpful somehow, thanks for sharing. ~ Abby

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WEBMASTER of Buy Netbook Central

It is better to be poor and debt - free


I really can relate to this topic and I remembered how my family suffered because of debts. It is not that we lack in the financial department, it is just our luxury that caused us debts. I really recommend that you should only stick to your needs and disregard your wants most especially when you don't have much as it will keep you debt - free.low

Stacy | Best Slow Cookers

Depends on the location and the vicinity


I think it is really fortunnate for anyone to have his/her rental property. It is my dream and it will be my goal for the long years to come. I think having the place located around schools or universities would be awesome as I am living in one. However it would be costly nd I wonder if there are available properties for sale. The other commenter is right! The return of investment is definitely upon the location!

Stacy| Carpet Stain Removal Tips

Rentals Are For The Future/How much we spend on groceries


Can you make your rentals break even???  I never expected my rentals to do anything other than break even...and I even paid extra on the notes to pay them down ahead of schedule.  From a cash flow standpoint, they cost us money occasionally...but they are a big part of our retirement plan, so it was worth it to us.  This year we finally paid 2 of them off !!!  That was when life changed for us.  We were able to buy a bigger house for ourselves with the decrease in debt...which was good because I also had my 3rd child this year and desperately needed more room.

Given that you've already invested so much in your rentals, can you make them stay afloat till they are paid off?  If not, you're gonna have to sell them. 

I just read Dave Ramsey's new book 2 weeks ago (but I'd read Financial Peace 15-20 years ago...when I was a young pup).   I agree with everything except selling off rentals.  We got our rentals for pennies on the dollar because we searched for years before making a purchase, became extremely familiar with the market, and jumped on a couple of fantastic deals.  This allowed us to charge more for rent than the amount of the note, and reinvest the difference into maintaining and improving the rentals, and paying taxes on the profits.   It only cost us money when we had to pay the mortgage for months the rentals weren't rented.  

We did the same thing with our new home...we found a repo and got it for a ridiculously low price.

We just started the Total Money Makeover 2 weeks ago...and we were already on a budget, but I use that term loosely.  I put numbers on paper to make sure the bills were covered, but felt free to spend a chunk of what was leftover instead of paying down my husband's truck note.  Now I'm trying to not spend anything that isn't written on that piece of paper.  UGH.  I already blew it...gotta reduce the grocery budget down to $125 this week to make up for it. 

We did finance our vehicles...have $5,000 more to go on one of them (the other is paid...and I'll have to drive it for another 4 years before I can get another car...it will be 11 years old when I put it in the garage to save it until my daughter reaches driving age...it will become my daughter's first car).  My daughter will move from private grade school to public high school in a few years...and what I used to spend on her tuition will buy my next vehicle.  Its a choice...drive an ancient vehicle...or give her a great education during her formative years.  Given I tried the "best" school district in our area for my son...and after 3 years he still couldn't read...we gave up on public school and invested in private school for the kids.  The public high school is decent, so we switched him over to public school in 9th grade and he did fine.  Now he's in college...splitting his tuition with me....paying cash as we go.  OUCH. 

Our grocery bill runs $225 per week on average...that's after using $10-$15 worth of coupons each week...that's everything you'd buy at Walmart...food/household, diapers, and an occasional piece of clothing for one of the kids.  (NOT the big fall and spring clothing purchases for the kids)  I have a family of 5...with only my husband as a big eater.   Every once in a while, it touches $300...if we buy oil / oil filters to change the oil in the cars...or if there is a home repair and my husband throws a tool or two (or a ceiling fan) into the buggy.  We buy a lot of steak and upper end foods...on sale of course...I watch the sale papers like a HAWK.  Got 13 ribeyes for $60...each cut 1-1/4" thick...that's my kind of sale.  Found asparagus for 99 cents at the local farmers market.  You have to look and become familiar with what's a good price...can't just throw whatever you feel like into the buggy.  Groceries have about a 6-week cycle...so if you find something at a great deal...buy enough to last you 6 weeks...till it goes on sale again.  If you have a coupon to further reduce the price, that's even better.

Those incidental expenditures are what's tough...my area where I blew it was when I realized I didn't have a single toy for my toddler to teach her shapes/colors...I probably should have gone to goodwill for toys...but she still puts stuff in her mouth...so I bought a few new toys...and out of fairness, bought a Barbie for my grade-schooler who came with me on the shopping trip...and a gift card for a birthday party we have to attend this weekend.  The only place left for these purchases to come from was the grocery budget.  NOT willing to use credit and run up more debt.  I'm not being gazelle-like in my thriftiness (Dave Ramsey's term)...but I am staying within what we've budgeted overall.

 

Just reading this blog was


Just reading this blog was enough to give me confidence and courage to make myself believe that I can do something positive about clearing of my debts. I was really getting desperate as I was really getting into a tight spot but with the guidance suggested here, I am sure that I can now plan accordingly and chart out a repayment scheme where I can take one step at a time to slowly come out of the doldrums that I had found myself in!! I am also planning to move out of town and rent my property, i will have to find a moving company which has trucks to get the job done.

Hi guys, I'm just wandering


Hi guys,

I'm just wandering how much money this blog pays you. Right now, I have my wifes student loan debt and thats about it, but we essentially live paycheck to paycheck. I'm not able to earn a higher salary and we live very budgeted. What scares me is that we have only about $200 into a savings account each month. I work a regimented schedule and am interested in finding out ways to earn money on the side without much commitment.

 

patience


Please don't even allow yourself to consider divorce as an option.  Your wife is a treasure.  She is worth more than gold.  A loving relationship is worth so much more than money.  Please be patient with her and remember what really matters in life.

Careful with Rental Properties


We have six single family rental properties and if someone would have told us that at some point in our rental owning future that all six properties would be vacant for a yearm, at the same time, I would have laughed.  It happened, all six were vacant for between 9 and 12 months.  Devistating.  We sill have them all after a lot of re-budgeting.   Be prepared to handle it if the vacancies last over 3 months. Know this before you buy and put down a minimum of 30%, nothing lower.  if you can pay cash, that is the best way.

Today Real Estate business is


Today Real Estate business is not it's boom, if looking towards the rate of the land they are just simply touching the height of skies. It would be worth it if you are going for rantal property business, but for which you have to have patience. Carpet Cleaning Companies

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