Random Financial Thoughts

The Sandbox Finance/Investments
181

i am sure usaa has data and affinity groups of all kinds exist (alumni of whatever). I’m not looking at every purchase option that has a relationship with inherited attributes.

Narrowly perhaps, I am saying if two young people (Kid A and Kid B) are identical (same job, earning history, actual spending and debt) go to buy a car and require a loan for the same amount for the same car. Kid A has a better credit score owing to a financially responsible parent including them on accounts, while Kid B was not on any accounts (parents may be responsible) and appears light on credit history. Loans depend on earning level , earning history, and credit score?

The gift of lower interest rate to Kid A seems like a direct benefit that Kid A didn’t earn at all and that seems unfair to me. that’s all I am saying. if you want to extend it to all transactions, feel free.

182

Parent trusting a kid enough to put them on an account seems worth something. Kids learning financial responsibility from financially responsible parents seems worth something. I guess it sucks that kid B didn’t get the chance to do this because his parents didn’t understand that value of credit. I am not sure what should be improved in the system or what the specific thing that is unfair is.

183

Been thinking recently about the idea of a rental property. We live in a touristy town that’s projected to grow significantly in population and property value. I expected Partner to not be interested, but they were.

We own a roughly $500k home and, ignoring retirement accounts, have about $175k in funds after capital gains tax. That includes our emergency fund which we’d want to grow with two homes.

We discussed if a rental property would mean buying a worse home and renting that out, or buying a nicer home to move into and rent our current one. At this moment I’m not itching to get a nicer home, and I figure why buy more house than we need?

But we could probably buy a $300k home and rent that one, likely take a 30-year mortgage for flexibility but plan to pay it off early.

I’m sure people here have thoughts on being a small-time landlord. Any initial ideas/warnings?

184

I am no expert, but this is what comes to mind…
You don’t get favorable property tax treatment on the second house (I’m pretty sure).

How good are you with maintenance? Tenants may expect everything to be in tip top shape and also won’t lift a finger to help you out.

What about the periods between tenants? I.e., no money coming in?

What about tenants that don’t pay their rent or trash the property?

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185

Quite worried about maintenance. I’m decent about upkeeping the things, just cleaned the coils behind our fridge last weekend, I change the furnace filters, etc. Can unclog drains and replace a recessed lightbulb that’s more complex wiring than just screwing something in. However, can’t do major repairs myself, especially electrical.

We could afford a second mortgage with our net worth still increasing, but it would be an anchor with no extra income.

Nonpayment seems like a risk for any landlord, but being a small-time landlord I understand I have increased right to be picky about the tenants we accept. I don’t remember the parameters, but when renting more units you are subject to more Fair Housing regulation.

I’d be looking for traits that don’t seem likely to cause a trashed property - like not taking in those three 21-year-old college men, and potentially not allowing (or requiring extra for) pets.

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186

We did this about 12 years ago and it has worked out nicely. Got a condo in a complex where I lived while in college. I was also worried about sketchy renters but we’ve been selective like you say. Rented to grad students for awhile, then the last two have been families that have paid rent mostly on time. It basically pays for itself and hasn’t been too much effort for maintenance. Had to replace appliances and installed a garage door opener. Stuff like that. Of course we have it at a low interest rate like 3% or less. Not sure if today’s higher rates make it a no-go for you.

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187

It’s a consideration of course, but to some extent the higher interest rates should be baked into rent. Average rent around here is $1,900/mo for a 3-bedroom apartment. If I purchased a 3-bed, 1.5-bath home for $300k with $100k down, I’m looking at a mortgage of around $1,300 (15-year morgage; more like $1,330 on a 30-year).

Rent that for $1,900, and if we assume 1% of the home value for repairs per year we’re looking at a profit of around $4,200/year.

Aggressively pay off the $200k mortgage over about 10 years and it’s mostly profit.

Plus, property value here is speculated to rise far more than the countrywide average.

188

Don’t forget about property taxes (just roll it into the mortgage if you want). And insurance. And you will have to pay taxes on the profit.
Ours is a condo so there are HOA fees too. Sounds like you have the means, so I say go for it if you find a place you like.

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189

Also thinking, all of this is balanced against a stock market that’s been returning over 10% YoY returns.

One day that 10%+ return will show -5% for a year or more and I’ll be sad I didn’t diversify, but it’s hard to believe that when I’m conditioned that, even on a rare month in the red, my next month of green will likely blow that out of the water.

190

This will obviously vary by jurisdiction, but many locales offer an owner-occupancy discount, which Rastiln will not qualify for.

Also the actual mortgage rate can be higher for rentals. This is an advantage of converting your existing home to a rental. You can keep the existing loan.

Some folks will take out a home equity loan on their primary residence to finance the rental. I’ve heard conflicting answers about whether it’s ok to deduct the interest from your rental income on your taxes if you do this. I would say that you could, but keep a really clean paper trail documenting how the money was never commingled with personal funds and clearly used to purchase the rental.

As far as income taxes… this is where a lot of people decide they need a tax preparer because it’s so easy to screw this stuff up.

You break the purchase price into “land” and “improvements”. (You can use the property tax breakdown to calc a percentage of each and apply that percentage to the purchase price.) Land does not depreciate. You deduct the depreciation on the improvements over a 27.5 year horizon (straight line), prorating to the middle of the month that it is placed into service as a rental.

Any costs associated with the mortgage are depreciated over the period of the mortgage and there’s some controversy over what to do when you pay the mortgage off early or refinance.

Any other closing costs are depreciated over 27.5 years.

Repairs are deductible in the year you make them. Improvements should be depreciated. And you want to depreciate them because they increase your basis in the property.

Your basis in the property? Yeah, all that depreciation you took? When you sell it you have to pay taxes on it all!

Figure, eh, I’ll just pay the taxes as I go and not face a huge tax bill the year I sell? No soup for you! You have to pay taxes on any depreciation that was allowed… whether or not you previously took the deduction.

And the depreciation for improvements depends on what it is. A roof is 27.5 years… starting with the date the work was completed. Carpet is 5 years if it is tacked down or 27.5 years if it is glued down. A fence is 15 years. Appliances are 5 years. An outbuilding like a shed is 15 years.

Deciding what is maintenance vs what is an improvement is a judgment call sometimes. It’s financially better to call it an improvement but also more work.

Keeping the records on all of this is also a PITA. It’s helpful to use one software the whole time that will track it all for you.

Ultimately if what you do is defensible then the IRS isn’t likely to come to blows with you over whether you depreciated the roof on the shed for 15 years (shed) or 27.5 years (roof) so long as you’re consistent from one year to the next and there’s some reasonable basis for what you did. But it’s a PITA. So just keep that in mind.

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191

I have been where you’re at a few times, and never got close to entering into landlordship.

Perhaps I am overly pessimistic, BUT…

My feeling is that hearing about other acquaintance’s real estate success is a lot like hearing about other people’s gambling results. You hear an awful lot about the wins but people don’t talk about the failures.

On top of everything Twig mentioned about taxes, you have to worry about maintenance. Would you like calls at 3AM when a toilet won’t flush. Would you like to be replacing some appliance every year? Do you realize that eventually, on top of painting and carpeting, eventually you have to come up with big bucks for bath and kitchen remodels?

What about deadbeat renters? Sure, it’s great to get a renter who is employed and delivers the rent on time every month. I know someone who bought a 4 unit apartment building, and during the pandemic, they had 1 renter out of 4 making his regular rent. 1 was paying most of the rent when he could. 1 was unemployed and not paying anything, and 1 was employed but knew that he was “unevictable” and just didn’t pay rent for a couple of years.

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192

I also think a property owner gains a lot from economies of scale.
One rental property? Meh. 100% occupied is important.
Five or six? Well, now you have experts on retainer and 80% occupied is OK. You have a website or working with finding multiple renters and such.
It also becomes your job, though. So, need a Property Manager who lives at one of your places for a discount.

193

Yeah, you have to have really thick skin to go into the “affordable” market. Source: father and uncle who operated in that space for multiple decades.

Low end landlord is like an 80% job to be worthwhile.

Are you interested in learning the entire eviction process and getting on a first name basis with all of the judges and magistrates in the county and figuring out how to garnish wages and bank accounts to collect debts?

Are you interested in handling copious quantities of cash?

Are you willing to hire movers to throw the belongings of little kids on the street after their parents don’t pay rent for a year and you successfully evict them?

Do you have a place to store 5 dishwashers and 4 air conditioners and 7 refrigerators when they go on sale at Home Depot?

Do you have great and affordable contractors to cover all of the maintenance you can’t do yourself (including because you’re out of town)?

Are you willing to work out payment plans? Accept rent on whatever schedule your tenants get paid? (Twice a month for 201, Bi-weekly for 103, monthly for 102 and 202)

Do you have the chops to hire and fire building managers who are willing to live onsite at the property? And audit the financials so you know when they’re stealing from you?

Are you willing to deal with Section 8 housing requirements?

Are you willing to check your messages every 12 hours, even when on vacation?

If you answered “no” to one or more questions, you should avoid the low end market. The margins are higher in that space but there’s a reason why. It’s a crap ton more work.

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194

It’s a cash flow thing

Rental property is a great way to increase your cash flow. In terms of cash flowing in, there is a huge difference in 1,000,000 in paid off rental properties vs 1,000,000 in an index fund

It’s a good way to diversify your cash flow

I’d go for it

195

Fair point, BUT…

there is less of a difference between 1M in paid off rental properties and 1M in a dividend fund. Although one difference is that you don’t get 3am phone calls from a dividend fund to come fix a toilet.

I guess my point is that sometimes people imply that Landlording is easy cash flow.

It can be. It’s not always. Just look hard at Twig’s lists.

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196

Wonderful post.

But, again, this is not “random financial thought.” This is a specific answer to a specific question posted here!!
(kisses and hugs)

197

Precisely. Right now vacancies are low and getting great tenants isn’t too difficult in most areas.

When the economy tanks and good tenants are scarce then you either have to lower the rent to attract one of the few good tenants out there, or lower your standards and roll the dice on someone with something in their history that makes them less desirable (lower credit than you’d like, past eviction, etc.)

The nicer the property the less work there is, but the quotient [rent / purchase price] will go down accordingly.

There’s also a fair amount of luck to it. There are great tenants out there with poor credit. And far less common but there exist bad tenants with good credit. But none of them come with signs. They’re unlikely to disclose on their application that they have drug dealers coming over at all hours of the day and night or that the ex-boyfriend came over to their last apartment drunk one night and stabbed one of the other residents who he mistakenly believed came out of his ex-girlfriend’s apartment but was actually coming out of the unsuspecting guy’s mother’s apartment in the next building over.

Oh my dad had one where the gal was (unbeknownst to my dad) suicidal. She shot her dog and then shot herself leaving a massive mess behind. And she apparently only grazed the dog. The dog didn’t die right away and instead, while bleeding out, walked all over literally every surface in the apartment. Tragic, and emotionally difficult for everyone especially including the apartment manager who was a friend. Then there were also a lot of health code i’s to dot and t’s to cross… I think it took him like 8 or 10 months before he could rent the unit out again. Loss of use insurance is helpful, but it doesn’t cover stuff like “the apartment manager (who is otherwise a good apartment manager) falls apart over everything to do with this unit so the landlord has to do a lot of the stuff that would normally be handled by the apartment manager.”

198

Best tenants are college students, med students, physician residents/fellows, young physicians/surgeons, and young professionals

You’ll have to pay a premium to secure a property that is in an area attractive to that demographic but it’s so worth it

I’d rather just keep working my boring desk jobs than deal with the headaches involved with multiple the tenants seeking low income properties

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link: Frank and Ernest by Thaves for July 30, 2024 | GoComics

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As Revolut finally secured a UK Banking license (after multiple tries) I decided to open an account with them.

I have to admit that I really like their interface.