American Rental Property Traps and Pitfalls

[cat man do]

American rental property traps and pitfalls for an Australian.

I imagine there will be more than a few people on here that have rental property providing income for while cruising and as such I am trying to get some sensible response from those who are actually doing it instead of real estate agents with vested interests .

I am contemplating (have been for a couple of years) buying some property in the states as yield seems so much higher than generally available in Oz, but have been finding mixed reports as to costs associated with it.
These costs seem to be mainly maintenance related along the lines of :

“What they just don’t understand,” he says, “is that it will likely cost thousands of dollars every year to maintain those properties.”

One of the biggest differences is a result of the American fear of being sued. Tenants call their property manager when something as simple as a light bulb needs replacing. Rather than having a handyman come in, the agent will call in an expensive licensed electrician instead - just so they are covered if any problems occur.
The same applies to other maintenance - air conditioning, ice makers, ‘winterizing’ pipes, blocked sewers (and beware: US sewer pipes are just 2” in diameter) and so on.
“US property investors should be prepared to completely re-carpet and re-paint their properties every two years, at least. Anything less would be unacceptable in the US rental market,”

And
Management Monitoring.

Monitoring the expenses claimed by management agents is challenging. Verifying whether a property is vacant or occupied, or that it is being well maintained is impossible when the owner is thousands of miles away.

I have property in Australia so maintenance is nothing new but here its probably carpet and repaint every 10 years, no problems with freezing pipes and no issues with blocked pipes(in the last ten years), tenants are responsible for lightbulbs and most maintenance issues are taken care of by a handyman at the cheaper hourly rate.


Property management has to date not been an issue either, but from various reads it sounds like the US property manager can be a bit of a scam artist pocketing rent and taking a large skim on maintenance, charging considerably more for maintenance than what the actual cost of repair was.


From those who are actually doing it, do the above observations ring true?

[ShaunJ]

I manage the properties that I own myself, I have friends that have a management company (real estate company) manage their properties. They have not encountered the problems you speak of. I think it all comes down to who you hire to manage your property. Just like boat brokers, there are good and bad. A little bit of homework will make you cruising life easier. Being an absentee landlord can be done, you just need to build a good team to do you work for you. It is not uncommon to pay 10% for a good management company.
As for painting and rugs, I only do that when the tennant moves out. If they stay for 8 years, they live with the rugs and paint they started with.

[roverhi]

Buy a house in a decent neighborhood but not top end. Buy the worst/smallest house in the subdivision. Look for a property that has mother in law apartment or that can be added. Qualified rental agencies will be able to handle the maintenance but it cuts into your profit. In areas such as Phoenix, you should be able to break even with 20% downpayment on A 10-15 Year old house. Nice houses are selling from $150,000 to $200,000 with a strong rental market from $1,200 to $1,500. There have been so many foreclosures there that there is a ton of inventory and those who have lost their houses are forced to rent.

Expect to be upside down on the cost to income equation for anything close to the water on the west coast of the US unless you are paying cash. By close to the water, mean an hours drive or so. Prices have come down but they are still so high that the rental income won't come close to covering the loan with 20% down. Hear it's the same for the NE/Central East Coast. Florida and Gulf Coast supposedly have realistic prices and would be another area to look. You can find a ton of houses in Detroit for under $10,000 from what I hear.

If you are going to need a loan, would find out what the restrictions are for lending to non resident foreigners. The loan requirements have gotten stupid for us locals, can't believe it would be easier for a non resident.

[Noname]

I suggest a "class A" commercial office or retail property with multiple tenants on a triple net lease in the 6-8% cap rate in a stable area.

[cat man do]

Originally Posted by roverhi

Nice houses are selling from $150,000 to $200,000 with a strong rental market from $1,200 to $1,500.

These are the sorts of example being shown over here and at these prices I will be a cash buyer.

Sold for $45k (apparently needed a $13k reno)
rent for $1050/mth



8566 Lake Meadow Dr Union City GA - Sold Home Price for a Recently Sold Home - MLS #4214094 - Realtor.com®

You can find a ton of houses in Detroit for under $10,000 from what I hear.

You can also not get paid and then get shot
A lottery winner killed the Detroit landlord from Australia

Expect to be upside down on the cost to income equation for anything close to the water on the west coast of the US unless you are paying cash. Prices have come down but they are still so high that the rental income won't come close to covering the loan with 20% down.

Heres an example of $120k buy and $1550/mth rent
Not good enough to get me excited (at all) but that was just a quick search.
http://www.zillow.com/homedetails/20...43879219_zpid/

[xiabbo]

Hey there,

I have a duplex property in West Palm Beach FL and I am an absentee landlord as I live in Kansas City. The price I paid for it is twice what it would sell for in today's market. I am basically breaking even. You could make money with savvy buys and if you got the right property manager.

My advice would be:

* Rental property is the "investment du jour" these days.
* Rental income is very reliable and in my view, one of the best concepts man ever invented it is like interest - except it is real - perhaps that is why they call it real estate.
* Think vacation properties - they get lighter use and bring higher rents.
* Check out VRBO.com and shop for good markets in the USA
* My maintenance guy is a building contractor and I pay him a set monthly amount and settle major issues as the situation demands.
* The USA has laws in place to protect the landlord and generally favors the owner except in cases of negligence.
* Get an attorney to write your lease and give yourself plenty of "outs" such as "any repair costing less than $50.- shall be the responsibility of the tenant"

Being an absentee landlord is problematic but with the internet, there is a lot you can handle electronically (marketing, lease agreements and so forth). The big advantage of email is the written record. Be sure the tenant writes you first and then you may use your good judgement to protect your interests. This means you will need to check your email frequently.

My maintenance guy is awesome! That is the key for sure. So many issues are anticipated and I have someone representing my interests actually on site. He speaks to the tenants, looks around inside when he changes filters and generally keeps me abreast of the situation.

When the market does eventually improve, vacation spots will be the first to feel the bounce. If you do buy, look for property that has "teardown" potential. You might replace a duplex with a triplex and that will keep your maintenance/contractor partner on the scene.

Mine is an older structure and there are certainly issues, some liability exposure for sure. It is a hassle sometimes and I have cursed and torn my hair but - it ain't over yet! I would love to see buyers in the market! Bring your OZ money and invest it in South Florida!!!!

good luck,

Xiabbo

[cat man do]

Originally Posted by ShaunJ

As for painting and rugs, I only do that when the tennant moves out. If they stay for 8 years, they live with the rugs and paint they started with.

Fair enough after 8 years, maybe, but if they only stay for 12 mths?

Here I can and have had on occasion had new tenants every 12 mths, but no new paint or carpet yet.

[cat man do]

Originally Posted by xiabbo

.
My advice would be:
* Rental income is very reliable

I agree, I have on average less than 1 week/year vacancy on Australian resi

* Think vacation properties - they get lighter use and bring higher rents.

Surely they will be vacant during a downturn, like they are in Australia.
That means ZERO income yet you still have outgoings (rates, management fees etc)

* My maintenance guy is a building contractor and I pay him a set monthly amount and settle major issues as the situation demands.

WTF, so if no maintenance he is still on the payroll?
Bugger that.

* The USA has laws in place to protect the landlord and generally favors the owner except in cases of negligence.

Same as here, sort of
here it seems the tenant has better rights in many cases

* Get an attorney to write your lease and give yourself plenty of "outs" such as "any repair costing less than $50.- shall be the responsibility of the tenant"

You can really do that?
cant here, so thats a plus for there

Being an absentee landlord is problematic but with the internet, there is a lot you can handle electronically (marketing, lease agreements and so forth). The big advantage of email is the written record.

My stuff here is 10 hours away, so well versed in these methods

Be sure the tenant writes you first and then you may use your good judgement to protect your interests. This means you will need to check your email frequently.

Isnt that what a property manager is for?
I dont want to actually hear from my tenants.
Tenant speaks to PM first and if it needs addressing, pm emails or speaks to me.

[xiabbo]

You may be way more well versed in the landlord business than I am. It was not what I got in to do. I wanted to tear down and build a spec house, the market fell out from under me. Any management company will charge you a set amount plus ancillary costs, my $65.-/mo is well worth it to pay my guy and that way I can do a business plan. It keeps the grass cut and the filters clean. Good deal for me.

I am just trying to help old boy. I like the reply that suggested "Class A - triple net commercial property if you do not want to deal with tenants. When I suggested that you act as a firewall between the tenant and the management, it meant that you would be in the loop and at the con.

[cat man do]

Originally Posted by xiabbo

You may be way more well versed in the landlord business than I am.

Maybe in Australia but not in the US.

Any management company will charge you a set amount plus ancillary costs, my $65.-/mo is well worth it to pay my guy and that way I can do a business plan. It keeps the grass cut and the filters clean. Good deal for me.

Fair enough.
Here we pay between 5% and 8% depending on deal struck
for that we get tenants checked, leases done, 3mthly inspection, rents collected, invoices and statement done, evictions and court appearances taken care of and maintenance issues taken care of (at owners expense)
Things like mowing, filters, lightbulbs, cleaning is all the responsibility of the tenant so says the act.

I am just trying to help old boy.

And that is appreciated, thanks.

I like the reply that suggested "Class A - triple net commercial property

Everybody needs a roof over their head but not everybody needs a commercial property.

In my area which has commercial property nearby, there are many many for lease signs that have been up for a long time now.
Thats ZERO rent coming but they still have the outgoings.
Not very good income that.

if you do not want to deal with tenants.

I have issue dealing with tenants requests - via the property manager

When I suggested that you act as a firewall between the tenant and the management, it meant that you would be in the loop and at the con.

I am still in the loop and at the con here and I make the call on what gets done when and where and for what cost, but I don't have to deal with or put up with the first initial contact with what can be angry or abusive tenants like the Australian that was shot in the previous article.

Hassling tenants for rent and getting shot at as can be the case in the US, is a Property Managers job.

Anyone have any comment on property in areas like shown above in post #5
$45k buy + $13k reno and $1100/mth rent @23% yield?

[David_Old_Jersey]

Originally Posted by cat man do

Property management has to date not been an issue either, but from various reads it sounds like the US property manager can be a bit of a scam artist pocketing rent and taking a large skim on maintenance, charging considerably more for maintenance than what the actual cost of repair was.

From those who are actually doing it, do the above observations ring true?

Like many of my posts - this one kinda grew on it's accord .

Ok, no experiance of the US - but some experiance of Property Management, both professionally and family interests.

The fundamental problem with Property Managers is that they are not spending own money. and that a universal thing, not country specific.

Case in point, Father bought my brother a cottage (really a terraced 2 up and 2 down! - most of the development being apartments) on a sheltered housing development 6 years back (the attraction was a stable community and that although a freehold property all exterior work was covered by the 1/4ly service charges - important in my brother's circumstances) - and was a new build......so both low maintanence and low property management.

Unfortunately me brother then went and died on us ...........so now rented out. Bought near top of the market so now probably underwater by 10%, but family never been a big one on selling property so that not a problem - and generating "only" around 5% (pre-tax).....but the low maintanence and low management (low aggro) compensates for that - and no Property Manager basically pays the tax bill! (20% over here).........

......but (always a but!) recently the pressurised hot water system went partly kaput ....fortunately only affected the upstairs Shower, so that bought a bit of time. Nowadays family relies on tradesmen to sort stuff like that - Plumbing firm were good as gold in sending someone out quickly to make a temporary fix / have a looksee - but when my Father initially spoke to them they were talking about replacing the entire Hot and Cold water system! 2nd call Father mentioned he had been in the building game and had other properties - the answer to that was a 3rd call from the boss, with the fix now being only a new pump (I suspect they thought, old bloke with a retirement property = mug).

My point being that if a Property Manager was involved, the answer may well have been an entire new Hot and Cold Water System (Yikes! $$$$!) - even if a 2nd cheaper quote had been received.....and the Property Manager would not have been wrong - at least not in a way that could be sued for............at the end of the day, it's not their money being spent - I have been on the spending money end of things for other people via Property Managers and also direct to tradesmen - trust me that one is a bit (? ) more relaxed when not own money!.....just have to make sure decisions are defensible and that for important decisions the owners fingerprints are all over the decision.

IMO / IME there is no such thing as year in, year out zero management on any property that is owned - either managing the property itself or managing the people acting for you......not unless happy to be taken advantage of, whether being an absentee landlord or simply lacking knowledge (sooner or later someone will try).

IMO the happy medium is no ongoing Property Manager (if one is needed to be on hand 24/7, then property not a good rental), and replaced by good tradesmen / firms.......and good agreements with Tenants (i.e. changing lightbulbs own responsibility!). The most important thing is good tennants.....and on that, a degree of luck is involved.

Of course I am talking about dealing with regular folks as tenants - not feeding off the poor, good money in that but really only something that works well with hands on management - even if the "hands on" side of things is outsourced .....and for a bit of thread drift!....that was something me and the missus were looking to get into in Bangkok, not a place / market for shrinking violets! - but only so many "regular" jobs that suited a woman whose main skill (and hobby!) was battering people for money .......but if I tried that on my own nowadays I would likely be dead within a few months.......but that's another thread / forum .