Real estate reality

[Nutria]

Hmm, I feel like TH explained it pretty sufficiently. A trashed up rental of course is a negative, but shouldn't deter you from investing into real estate since it is so uncommon. So when we are talking about the positives and negatives of investing into real estate, potential clients that once in a blue moon that trashes up your investment shouldn't be counted as a negative for the analysis.

To me, "trashing up the place" invokes thoughts of booze-fueled destruction by college students or rock and roll musicians.

Obviously, there's a lot lower threshold for damages (plus increased wear+tear) where the costs still add up...

[TexasHusker]

I did say young children...





The bottom line is that if children inflict damage on rental properties at a high enough rate to be noticeable and TH doesn't see it, then there must be some reason why he doesn't see it.

• Money?
• Class (for various definitions of "class")?
• Good Luck?
• Something else?

Of course, maybe:

• children don't children inflict damage on rental properties at a high enough rate to be noticeable, or
• property managers hide the fact from TH, or
• he suffers from confirmation bias, or
• he's trolling us.

To me, "trashing up the place" invokes thoughts of booze-fueled destruction by college students or rock and roll musicians.

Obviously, there's a lot lower threshold for damages (plus increased wear+tear) where the costs still add up...

My experience has been that "wear and tear" is less in a vacation rental than a residence. My theory is that guests simply aren't there much, and there's around 140 days a year that there are no guests. Additionally, there is a housekeeper there after each stay who thoroughly cleans. If there is a repair item, the repairman is there right away. Things don't get out of sorts, because guests won't tolerate it.

I have had residence rentals and wlll likely have them again. I've found that these houses need a pretty good fixing up if a family has lived there several years - a few thousand dollars worth typically. Again, that's the cost of doing business, and a rental of any variety is a business.

[disneysteve]

My experience has been that "wear and tear" is less in a vacation rental than a residence.

Do you think that is offset, however, by the need to keep things looking new and fresh?

I could walk through our house and point out lots of things that are worn out or could use replacing but we're okay with tolerating them the way they are rather than spending the money to fix them. But in a rental home, guests may not be so kind. They expect things to be clean, functioning, and up to date.

For example, we put new carpet in our family room around 1996. Somehow I doubt you could go 20 years without replacing the carpet in a rental unit. Our bedroom has wallpaper that is peeling in a few spots. It's been like that for many years. There's no way you'd leave it like that in a rental because your reviews would be awful. We have a built-in microwave that no longer works, so we have one on the counter instead. But if I encountered that set up in a rental, I'd find it a little odd. You probably need to repaint on a somewhat regular basis just to keep things looking sharp and fresh.

I realize you said you budget 10K/year for maintenance, so maybe that encompasses all of this, but I still wonder if wear and tear isn't more in a rental than in a private residence just because of the need to freshen it up more often.

[disneysteve]

The statement suggesting that having a rental potentially trashed is not a negative is absolutely absurd. Trying to defend that statement is absurd as well.

I think you are reading too much into some comments.

Sure, a rental could get trashed. No, it isn't likely or common. So is it a negative you need to seriously consider when buying a rental? Probably not.

Now if you are thinking of buying a rental near a college campus and renting to undergrads, maybe that possibility is a bigger risk and should enter into your decision. But when buying a luxury lake house, that risk is probably close to zero.

Sorry, but I'm just getting really tired of the negativity on the site. Too many people here can't seem to have a discussion without it being, "I'm right. You're wrong." We don't all have to agree, but I'd like to see folks disagree without having to attack each other in the process.

[TexasHusker]

Good questions. We have a philosophy that goes like this: Keep things fresh and new at all times. If we wait to replace something until it needs replacing, we waited too late. We try to keep fresh,high quality linens, pots, pans, comforters, etc. We toss the propane BBQ grills each year whether they need it or not and buy brand new.

So we really focus on "front end" preventive maintenance. That prevents most emergent R&M. Right now we are evaluating the game tables in the big cabin to ascertain their sturdiness.

I am sure other vacation home owners don't do it this way - they keep things on the cheap and hope for the best. To us, that is being penny wise pound foolish.

The $10K a year encompasses all R&M. Some years it might only run $7K. This year it was more like $12K (new roof).

We avoid carpet and stick with hardwoods. Virtually indestructible and sanitary.

We avoid furnishings that are not leather - unsanitary and can easily soil.

Etc.

[disneysteve]

We try to keep fresh,high quality linens, pots, pans, comforters, etc. We toss the propane BBQ grills each year whether they need it or not and buy brand new.

That's exactly what I mean. I don't know anyone who replaces their grill annually. We had our last grill for about 20 years and it was a hand-me-down from my inlaws. The grill we have now was given to us by a friend last year because we was moving and couldn't take it with him. I don't know how old that one is either.

Linens are another good example. We have sheets and towels that I'd never use in a rental property but they are fine for our personal use despite showing obvious wear.

So I think when you say the wear and tear is less on a rental, you might be glossing over how often you replace stuff that wouldn't need replacing in a personal residence.

[TexasHusker]

That's exactly what I mean. I don't know anyone who replaces their grill annually. We had our last grill for about 20 years and it was a hand-me-down from my inlaws. The grill we have now was given to us by a friend last year because we was moving and couldn't take it with him. I don't know how old that one is either.

Linens are another good example. We have sheets and towels that I'd never use in a rental property but they are fine for our personal use despite showing obvious wear.

So I think when you say the wear and tear is less on a rental, you might be glossing over how often you replace stuff that wouldn't need replacing in a personal residence.

No intent to gloss over. I've tried to be transparent for the sake of discussion. I have no motive to embellish anything. I hope that fewer people own vacation rentals - that leaves more opportunity for me.

As for wear and tear, we have many (most) of the same pieces of furniture in cabin 1 (2005) that we started with. There's just not much wear and tear on these items. We don't have to worry about walls much because they are log. Dishwasher and frig sparingly user. Same for W/D. Bathrooms the same. Ditto the mattresses / slept on 2/3 of a year. Light TV use.

Etc.

[disneysteve]

No intent to gloss over. I've tried to be transparent for the sake of discussion.

I didn't mean that in an accusatory way. Sorry if it came out that way.

It makes sense that certain things get lighter use in a rental, like the washer and dryer probably. But it also makes sense, to me at least, that other things might need more frequent replacement because you want them looking great - like towels. And I would think mattresses need more frequent replacement. Even only being used 200 days/year, I doubt you have any 15 or 20 year old mattresses in your properties like we have at home.

I'm certainly happy that rental homes are a thing. As I've said, we rent them regularly, mostly in Florida but have also rented other places like Stowe, VT and Richmond, VA. We've helped friends rent homes in Maui and a couple of other places. It's a great way to travel, so much nice than staying in a standard hotel room - and often cheaper, too. I've just always wondered about the business side of things. I had thought about buying a rental in Florida, especially after the crash when nice condos were available for under 50K (I saw a 1-bedroom listed for 19K) but ultimately decided I didn't want the hassles.

[TexasHusker]

I'm just kind of comparing what I spend on my personal residence. It seems like crap is breaking all the time around here. Need a gate fixed, leaky sink, shower head issue, kitchen window got broke by a volleyball, new carpet in study because dog peed on it so much we couldn't get rid of the smell, etc. I spend a ton more on my own house just trying to keep it from falling apart and looking like a homemade bar of soap.

As for vacation rentals, I would love to break into the So Cal market with a nice condo near the ocean. I know we are often talking a $ million +, but many of those things are renting for $5-$10K a week. Could be good.

[corn18]

Texas, I think you've got me excited again about the possibility of getting into real estate. I really, really want a place in a warm climate that we could use 2-4 weeks out of the year and rent the rest of the time. My buddy got a condo on the redneck riviera in Panama City. He loves it and it has positive cash flow and equity. It started off rocky for him as he figured out how to make money, but now it is a cash flow gold mine as it is paid off and appreciated a lot since he bought it.

I am very busy with my current career plans and things won't slow down for about 5 years, so doing this myself is not an option. Walking away from my current income and equity would be silly at my age. So, is there some sort of consultant service or something like a head hunter (let's call it a house hunter), that would sit down with my wife and I, determine what we want, find it, set it up and manage it for a few years while we sit back and just enjoy it? Something more than a realtor. A lot more than a realtor. Might cost me money and might not be break even at first, but my time is worth a lot as well.

Tom

[TexasHusker]

Texas, I think you've got me excited again about the possibility of getting into real estate. I really, really want a place in a warm climate that we could use 2-4 weeks out of the year and rent the rest of the time. My buddy got a condo on the redneck riviera in Panama City. He loves it and it has positive cash flow and equity. It started off rocky for him as he figured out how to make money, but now it is a cash flow gold mine as it is paid off and appreciated a lot since he bought it.

I am very busy with my current career plans and things won't slow down for about 5 years, so doing this myself is not an option. Walking away from my current income and equity would be silly at my age. So, is there some sort of consultant service or something like a head hunter (let's call it a house hunter), that would sit down with my wife and I, determine what we want, find it, set it up and manage it for a few years while we sit back and just enjoy it? Something more than a realtor. A lot more than a realtor. Might cost me money and might not be break even at first, but my time is worth a lot as well.

Tom

You know, good realtors in various tourist markets know what works. So what I would do is identify maybe 6 different locations that you might be interested in. For the sake of conversation, let's say Tahoe, Cabo, Victoria BC, San Diego, and Hilton Head.

If you are starting fresh, try to find the very best vacation rental market to invest in, REGARDLESS OF WHETHER YOU PERSONALLY WILL USE IT.

If Tahoe is "best", that means you will make a lot more money, and you can go to the Red Neck Riviera with your extra profit. We haven't vacationed at our cabins in years now. We are always going different places. The rentals are still there though, churning out the rents.

The first thing you want to do is find the top realtors in these markets. You will want to call each of them and just find out general info. about the local vacation rental market.

Questions I would ask are:

1. Is it possible to earn a meaningful yield while paying a management fee? (most of the time, the management fee drags down your yield significantly, to the point you are many $$$ ahead just doing that yourself. It is not difficult.

2. What sort of rentals do the best in that market? Obviously location is going to be a biggie here, which is going to cost you more upfront.

3. Do you have listings of rentals that I could at least look at online, and do you have the last three years of rental history? (don't be discouraged if you find one with a poor rental history - it may just be mismanaged and/or need a few things - in fact, try to find one that is mismanaged and that can help you with the price).

Something as simple as adding a game table can boost your annual rents by $10,000!

After these conversations, you will want to go to VRBO and actually look at the home listings for each area. Take note at the number of bedrooms, amenities, and rates. Also look at the calendar to see how busy the house stays. Look at guest reviews. Try to gauge how busy different home types are.

What you are seeking is a market imbalance; a situation whereby the home prices versus rents present an opportunity to do well. If a home can't generate at least 15% of its value each year in rents, then there isn't a sufficient imbalance to consider that home further.

So if a $400,000 is only generating $40,000, that's nothing special, because that $40K isn't your profit. I bought two cabins for $260K, put $20K in them, and now their annual yield is around $51K. That's more like it. You just have to find a house that presents you a good ratio. I do know of people who have done MUCH better. I have a friend who bought a cabin in foreclosure with an indoor pool for around $220K. He had to spend about $30K on it. That cabin does about $90K a year!

If you want to manage the vacation rental yourself (which I highly recommend), you will want to list it on VRBO.com for about $350 a year. You will want to hire a professional photographer to take good photos (about $25 a photo is standard).

VRBO allows you to manage payments, rental agreements, etc. all in one place, and it is all pretty automated. Once you get the hang of it, it is really quite simple.

If you want to pay someone to manage the property, that is going to be anywhere from 30% to 50%. We charge 32% at my co. Find out what all is included in this fee.

The first year is a learning curve and you'll ask "what the heck am I screwing with this for"? But once you get the hang of it, things really take hold and you can start making good money.

[rennigade]

It hasnt been said yet so Ill go ahead and say it..."all that glitters is not gold."

Texas has presented us with a lot of useful info about rentals and how successful he is. He is clearly a professional at this and has worked hard in the 11 years he has been doing real estate rentals.

With that being said...this isnt some get rich quick scheme. If done right there is certainly a lot of money to be made. But you can also lose your shirt. Like the saying goes "if it was easy everyone would do it."

Im not telling anyone to buy or not buy rentals...just know like any other investment that can make you money...that investment can take your money.

[LivingAlmostLarge]

I think TH is doing a good job presenting ideas about RE. The truth is that RE is not easy to do. I mean rennigade presented two scenarios Kona and Florida and neither RE investment made TH cut. So yes he makes large profits, but he also wisely picks his RE investments.

Do all RE landlords do that? NOPE. Any HCOLA I shudder because you can rarely make it work. You don't get 1% of the cost annually in rent. BUT for some reason there are a ton of people doing it and losing money. Then there are those who have a golden touch and make money but not necessarily in the same area.

I have a friend who invests entirely in RE. But she develops properties and is in partnership with a realtor and they have their team of renovations etc. Once I asked if it would be easy to get into? She said you'll lose your shirt.

And another neighbor was a realtor who invested in multiple properties but mostly buildings. She also told me super easy to buy one property and lose your shirt if you don't know what you are doing. Two people making a good living and still telling me that you can lose everything.

It's probably like trying to daytrade. You could do it, and many do. But you can still lose money.

[TexasHusker]

I think TH is doing a good job presenting ideas about RE. The truth is that RE is not easy to do. I mean rennigade presented two scenarios Kona and Florida and neither RE investment made TH cut. So yes he makes large profits, but he also wisely picks his RE investments.

Do all RE landlords do that? NOPE. Any HCOLA I shudder because you can rarely make it work. You don't get 1% of the cost annually in rent. BUT for some reason there are a ton of people doing it and losing money. Then there are those who have a golden touch and make money but not necessarily in the same area.

I have a friend who invests entirely in RE. But she develops properties and is in partnership with a realtor and they have their team of renovations etc. Once I asked if it would be easy to get into? She said you'll lose your shirt.

And another neighbor was a realtor who invested in multiple properties but mostly buildings. She also told me super easy to buy one property and lose your shirt if you don't know what you are doing. Two people making a good living and still telling me that you can lose everything.

It's probably like trying to daytrade. You could do it, and many do. But you can still lose money.

Agreed but it's nowhere in the universe of risk that day trading is. Only 1 out of 100 can make that work. I speak from experience unfortunately.

[StormRichards]

Hmm, I feel like TH explained it pretty sufficiently. A trashed up rental of course is a negative, but shouldn't deter you from investing into real estate since it is so uncommon. So when we are talking about the positives and negatives of investing into real estate, potential clients that once in a blue moon that trashes up your investment shouldn't be counted as a negative for the analysis.

Actually, when I disagreed with him about his statement he didn't explain it at all.