• Most houses do not have the amenities that alternatives may offer, such as a clubhouse, gym, pool, etc. • Beware of senior communities. They have fewer potential tenants who can qualify, many have HOA dues and assessments that reduce your cashflow, and their rules restrict what you can do with your property. Alison inherited a house in a senior community with HOA rules such as no tenants under 55 years of age and visiting grandchildren can’t stay more than two weeks. No investor will buy it because you must own for three years before you can rent out. HOAs can change rules at any time, including deciding to ban rentals! Next time we will look at what other types of real estate might be a good fit for you. •
payment, and that can create negative cashflow. When my wife Alison and I were beginners we attended real estate seminars and bought a rental house with little down and a substantial negative cashflow. We didn’t worry about that; the seminar speakers told us that negative cashflow doesn’t matter, because appreciation more than offsets it, and over time we would raise rents and eliminate it. What the speakers ignored are the costs of repairing or replacing a central air conditioner/furnace, appliances, roof, etc., vacancies with no rental income for a couple of months or more, and fix-up expenses. These expenses teach new landlords curse words they never knew before. Then a recession hit, which dashed our hopes of raising the rent (“you can raise rents and it will appreciate!” Talk to the hand.) Property values went DOWN. We tried to sell at a loss but couldn’t get a buyer. We later learned that if we had sold, we would have discovered something else the seminars never mentioned called depreciation recapture, which means paying back most of the taxes we had written off. For example, you buy a
house for $200,000 with little down and sell it after five years in which you had negative cashflow of $12,000, paid $15,000 for repairs, insurance, and property taxes, and sold it in a recession for $175,000 less $10,500 agent’s commission, $2,000 in closing costs and $6,362 in depreciation recapture. That’s a $45,862 loss. Here’s the good news: We kept the house, moved out of the area and lost track of property values there until, 18 years after we bought it (with the same tenant!), we started getting postcards from investors and agents interested in the house. We listed and sold it for a substantial profit. “Real estate always forgives.” (Thanks, Dad!) Other risks of houses: • Unlike multi-units, they have no income during vacancies. They will be vacant for a couple of months or more while you vet potential tenants and make repairs. (Always let a house sit vacant rather than get the wrong tenant.) • There is a smaller pool of potential tenants for houses vs. lower-rent multi-units.
W. J. Mencarow has invested in various kinds of real estate since the 1980s and offers a free e-course on notes at www. PaperSourceOnline.com
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