There is a reason some people rent, and it has little to do with not having money to buy.
We are renting out our condo and it is interesting to see who applies. We spent nearly two weeks cleaning and painting the place - four coats of paint - and doing a lot of minor repairs. When you are on your hands and knees at 2 in the morning cleaning someone else's fecal matter from the toilet, you have to ask yourself if it is all worth it.
But think of all the money you're making, right? Well, it ain't that much. With a $631 a month condo fee and property taxes and insurance, we are lucky to clear $5000 a year in profits. Well, that's a lot of money for doing nothing, right? You did read the part about fecal matter and two weeks' of backbreaking work, right? Sure, I could have paid someone to do that, but it would have cost... $5000 or more. UPDATE: Over the last ten years, we have broken even on this property - making money one year, losing the next (vacancy kills!). That is with no mortgage!
There are other things that cut down that profit and vacancy is one of them. A tenant leaves and you have to clean the place and get it ready to rent. It is off the market for a month or two - or three - and your agent wants a month's rent as commission to lease it. You can see that leasing it yourself is far more profitable.
There are other issues. For example, a neighboring condo flooded ours. The condo association insurance paid for a whole new kitchen (and a crappy paint job) but it meant three month's vacancy as the tenant had to relocate. And no, your insurance doesn't cover "loss of use" or consequential damages. So although we got a "free kitchen" out of the deal, we ended up breaking even that year.
Over the last five years, we've made $13,590.16 - not per year, overall. That's a couple grand a year. Still sounds like free money? Consider that this is the income from an asset worth maybe $160,000 and you can see the annual rate of return is a paltry 1.69%. We could have done far better in the stock market or even in a Certificate of Deposit. Over the last decade we made zilch - broke even, due to repairs and vacancy.
Still convinced your landlord is "greedy"?
Part of the problem, besides vacancy, repairs, and an unexpected flood, is the fact the condo is slated to be demolished by 2025 or 2026. This makes it hard to sell the unit and we probably should have taken an "early out" and sold the unit a year ago Well, that ship has sailed and we have three or four years to think about it - and another recession to live through. It may very well be that the unit doesn't even sell in 2026. (UPDATE: We were able to take "early out" and are slated to close in August, as they had to reauthorize the redevelopment of the property).
Now granted, there are other ways to make money from Real Estate, such as the depreciation deduction and of course capital gains (which are, in effect, the same thing). We fully depreciated this unit years ago, which knocked $3,850 off my income for taxable purposes from 1998 to 2008. Yes, we paid only $38,500 for the condo "back in the day".
So we're making out like a bandit, right? Well, the present value of $38,500 in 2022 dollars is worth $67,399.64 today, which means we are sitting on close to a hundred grand in actual capital gains. That sounds great, until you consider how long we've had the property - nearly 25 years. Over time, that comes out to about another $4000 to $5000 a year in capital gains, which again sounds swell, until you realize the rate of return on that money over time. That money invested in stocks at 7% rate of return would be worth over $200,000 today.
So real estate can be quite mundane but fairly safe - "safe as houses" as they used to say in England. Of course, you can also lose your shirt in real estate, particularly if you bought in 2022 and want to sell in 2023 - shit is about to hit the fan as mortgage rates rise to 6% and beyond.
Compounding this is that we rented the place to a friend for the first 18 years at cost, so we broke even over time. But even if we optimized our income, it still would not have been a hugely profitable investment.
There is talk today of a rental shortage and unaffordable housing. But as I noted in an earlier posting, the rent we are asking on this place is right in line with what Mark and I were paying back in 1987, factoring in 37 years of inflation. Our salaries actually would be higher today, factoring in for inflation than they were in 1987. Patent Examiners and Assistant Store Managers are actually making more today than back when we were in our 20's.
But that doesn't stop the hue and cry from the Amalgamated Whiners, Losers, Ne'er-do-Wells, and Dudes Living In Mom's Basement. It is all so unfair! (wah!) unfair! (wah!) unfair (wah!) and not only should rent be more "affordable" they argue it should be free. No, I am not kidding, they argue rent should be free. Hell, even in the Soviet Union, the plebes had to pay rent! It is just bizarre thinking and no doubt the flames are being fanned by our friends in modern-day Russia.
As I noted when I started this piece, there is a reason some people are renters, and it has a lot to do with their attitudes in life and this loser mentality that "everyone else" has it so good and they are put-upon. Tenants can leave a rental unit in horrible condition (ask me how I know!) and walk away from the smoking wreckage with little or no consequences, other than to lose a security deposit (which as we know, was so unfair, man!). Those holes in the wall? Well, we were doing MMA in the living room and someone's foot went through the wall. Or was it his head? I forget. Anyway, that's just normal wear and tear, right? That is the mentality you are dealing with when renting to tenants, particularly young "dudes" who are rambunctious and have no clue how the world works.
With any luck, however, we will be out of the landlording business in a
few year s. As the above example illustrates, you have to be "on site" to really make money at landlording. If you have to pay someone to paint a unit or fix the stove or find a tenant, it gets expensive quickly and your thin margins become even thinner - or go negative, as they likely will this year.
All you want, as a landlord, is to have a tenant who will pay the rent on time - because you have to pay the mortgage, condo fees, taxes, and insurance on time. Most landlords are not making a huge profit on their properties and often are beholden to others just as you are beholden to them. As a landlord, you also want someone who isn't going to destroy the place - and that can happen and be quite costly. In our case, it was just a tenant who was dirty - they smoked and didn't leave the place clean - so we had to scrub-a-dub and paint and it was exhausting work, or would have been expensive work if we hired it out.
If you have a tenant who damages the property, it can wipe out all your profits for the year. And yet so many tenants are so irresponsible and word gets around about them - or you can figure out what they are all about. A tenant who wants to move in "right away" is a red flag - they are probably being evicted from their current situation, or their roommate finally put their foot down when they left yet more dirty dishes in the sink.
You want to find good, reliable tenants - and they are hard to find! You can't blame a landlord for not leasing a place to a tenant with a sketchy rental history, a shitty credit score, unverifiable income or previous rental history. It is almost guaranteed that they will not pay the rent and trash the place, as they will harbor these juvenile ideas that the landlord is an "asshole" and is making "tons of money" on the place. Yes, marijuana is involved.
Despite what you may hear or may think, landlording is a hard business and you have to be hard-minded. Ideas about being "generous" with tenants or being soft are just not workable - even the nicest tenant will walk all over you, once they realize that they can be 15 days late with the rent with no consequences. For the amount of labor involved - as well as risk - you might as well just get a regular job, in many instances.
Yes, sometimes it can pay off and pay off big. It can have tax advantages, too. The big companies that own hundreds of units hire an army of people to service them - and hence, their bottom line gets even smaller. You might think they are "making out like a bandit" but if they were, someone else would enter the market and offer to rent for a dollar less and start a price war.
Funny thing - that ain't happening. I wonder why?