bostonbubble.com

[JCK]

I've never been a landlord, but I wondering what people's thoughts are on buying a multifamily to live in. I'm thinking about this both based on the numbers, but also what the personal downsides would be.

For example, check out a place like this.

http://www.redfin.com/MA/Stoneham/31-Harrison-St-02180/home/11651978

The asking price is $349k. That means you'd be paying $1456/mo for a mortgage with 20% down. Taxes are another $340/mo.

According to the ad, you can rent out the units for, about $1200/mo. So your monthly expenses would be, if you lived there would only be about $600/mo, far cheaper than rent on an reasonable 2 BR in the Boston area. You'd obviously be responsible for maintenance and repairs, but moving from say 2 BR rental you'd have $800-1000/mo to cover your costs, which I'd imagine would be more than enough.

I'm not familiar w/Stoneham, although I have friends in Melrose (right next door), and it seems perfectly nice.

Has anyone considered going this route? I understand that you face the risk of someone trashing your place, and you don't get the privacy of a SFH.

You'd be cash flow positive, and you might be able to condo the place and make some money on the resale.

[JCK]

Granted, this places looks like a dump, with the same tenants who've been there for a bazillion years. And calling this place a 2 BR is generous at best, given the photos of one of the bedrooms...

But this place is just an example. I'm more curious on people's thoughts on both the numbers from an investment/financial standpoint, as well as lifestyle issues, rather than the merits of the particular property.

[GenXer]

Questions:
1) What is an estimate of repairs you have to do for the next 10 years, with an adequate margin built in (i.e. estimate + 50% at least).
2) What do you want as a return on investment? What income rate will make you happy, and what are your numbers telling you about how much income you will make considering the above expenses and possible rents?

The point of this exercise is to show that you are not getting that much of a return - more of a huge risk of overspending, at which point you will be trying to convince yourself that 'over the long term' you will be fine i.e. the risk of this transaction is enormous, and is bound to sink you.

Now, compare that return you calculated with a return on a decent intermediate term bond or a muni bond. I think you will see that the 'risk premium' from owning a house is actually negative! You will not be compensated adequately for the kinds of risks you will be taking, AND you will be spending tons of your own time worrying about it. Dont get suckered into something because you HOPE it will make you money. Your esimates have to be solid, or else you are setting yourself up for failure.

[JCK]

[Brian C]

My friends bought a two family duplex for $250k back in 2003. They spent money on renovating the rental unit to maximize the rental income. Well it worked. The rent from the other unit was their monthly payment. They took the money and pumped it into their unit. But soon everything went bad. The renters pretty much destroyed the place and started to complain about every little thing. Because my friend was getting good rental money, he had to please them and fix the issue. Soon he was in the hole about $10k fixing things.
Now they are condo-ing their units out and selling because they cant deal wasting their weekends dealing with their demands. They will make money for sure but its something to think about

[GenXer]

Let me put it another way.

1) It doesn't matter who got lucky and why. They got lucky. They plunged, and did it, so to speak. Do you want to do the same? Probably not.
2) Ultimately, it does not matter whether somebody succeeded or not. Ask a question another way: "Did anybody here FAIL at doing this?"
This answer will most certainly give you more information.
3) You can not bypass the numbers analysis by asking whether anybody did it and succeeded. Its like asking a day trader how he made his money before trying to invest yourself. If the day trader does this long enough, he will implode someday, depending on what types of bets he makes. If the people who 'succeeded' would do this often enough, they can also fail (especially since most people never run the numbers properly).
4) The people who did it might not tell you the whole story. You don't know how much money they spent and how much they made. They never do ROI analysis anyway - its part of the psychology. Just like many day traders will tell you how much they gained, they are pretty quiet about what they lost.
5) Just because somebody 'made it' in the short term means nothing - in the long term they will be subjected to house prices, job loss and other types of risks which will affect them if they do not have good plans in place and if they are leveraged without much savings.

[JCK]

Brian,

Your feedback is much appreciated.

Thanks.

[melonrightcoast]

We bought at two-family in 2003. The larger unit had already been renovated but the smaller unit was a total pit. Here is a laundry list of the things we did and what it cost:

-new roof: $8000
-new furnace for smaller unit: $5000
-new hot water tank for smaller unit: $1500
-paint the exterior: $6000
-gut renovate EI kitchen for smaller unit, all new appliances: $25,000
-replace tub surround and fix up smaller unit bathroom: $500
-update electrical to house and get rid of fuse box for small unit: $3000
-refinish hardwood floors for entire house: $1500
-remove trees that fell on tenants car: $1000
-landscaping, fix drainage, regrade lawn(did some ourselves): $2500
-replace decking for upstairs unit deck (did this ourselves): $300
-build out eaves for a closet/storage: $1000
-fix cracked plaster in a closet: $250
-painted the interior (ourselves): $200

We figure we spent at least $65K in three years.

We did all this, and we still weren't done. We probably would have finished doing all the work, but we had our first daughter and quickly realized how little time we would have to do any of the work ourselves.

Other things that you want to think about regarding being a landlord: the lead laws. Our smaller unit was only a 1 bedroom, so we didn't really have an issue renting to people with kids, but if one of the units is a 2 bedroom or bigger, then you will want to make sure it is de-leaded. MA has strict laws, and you do not want to be held liable for a child ingesting lead from your property. Make your tenants have renters insurance. Make sure you get an umbrella insurance policy, just in case a tenant slips on the ice on your property and sues you. Also, ALWAYS screen your tenants with credit checks and verify employment. Keep the rent just below market rate to keep the tenants long term. If you do not like confrontations, do not like to say no, and you generally give in to demands to your detriment, then being a landlord may not be for you.

All that said, we would buy a multi-family property again, but only if 1)property was in better condition 2)we had the time and money to renovate it properly, or 3)it was newer. The tax benefits of owning a multi-family property are tremendous. We eventually sold it as condos in 2006. Because of all the $$ we put into it, we would have sold at a loss if we had sold it as a multi-family house.

Best wishes if you do decide to buy one!
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melonrightcoast ... are you?

[melonrightcoast]

Something else I forgot to add: when getting estimates for work, make sure you get at least 3 to 4 estimates. For example, I got about five estimates for a new roof, and for pretty much the same roof (30 year fiberglass shingles), the estimates ranged from $5000 to $15000! I think contractor prices have come down since back then, which will help your bottom line .
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melonrightcoast ... are you?

[JCK]

Really appreciate the information, as well as scope on the costs.

Quite frankly, we don't have the cash sitting around right now to make this work without completely ruining any long-term savings that we're building. This would be for something a couple years down the road.

But I really appreciate the education.

[CC]

[melonrightcoast]

The tax benefits are that a portion of your home is actually a business and all expenses related to the business can be deducted. It was very complicated and we hired an experienced accountant to figure it all out (well worth the $500). Here's a link to the IRS web-site about what is deductible if you are renting out part of your property:

http://www.irs.gov/publications/p527/ch04.html#en_US_publink100027406
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melonrightcoast ... are you?

[GenXer]

Thank you, melonrightcoast for such a detailed and honest assessment. Nobody ever thinks of the actual time they will spend doing this kind of business. Nobody is thinking about potential pitfalls and issues. Bottom line - there are very few people who make money doing this (and I mean, who actually make a profit which is quantifiable. It may be better to invest your money in boring investments such as CDs and bonds. Of course, it is much harder to generate the kind of income a rental property can bring, but using an enormous leverage subjects you to enormous risks. What if you are not able to sell at a profit, which is more than likely will be the case now? What if rents are falling and vacancies are rising?

A boring $200k bond portfolio can generate $10k a year in income. It is much easier to liquidate, but it requires a good savings rate. Think about how much money can go into a rental - easily $150k just to buy it and maintain it. How much time? Think about a 1000 people doing this, and on average, you'd probably find that most are barely breaking even. While an investment in corporate or municipal bonds will ALWAYS get you a decent yield while keeping the principal safe.

[JCK]

[GenXer]

JCK: I think we agree. But I really have to keep stressing the point. The only reason we are even discussing investments in real estate for those who really do not have the money to pull it off is
1) Its been done before, and some people got REALLY lucky
2) The cost-benefit analysis is complicated to do, and there is no right answer
3) Most of us are not in a good position to do this
4) To succeed in this, you MUST buy many, many properties to mitigate your risk
5) Even if you do that, systemic risk (i.e. risk of a real estate collapse) will still sink you!

My conclusion is, its not even worth trying to do this, unless you somehow got lucky and landed an inheritance! See my point? You sound like there is 'hope' there yet, but my point is that there is none! It may not be a fair comparison - buying a house vs buying bonds simply because the risk of owning a house is much greater.