Real Estate Question in Sacramento, CA: Should they buy a rental?

My parents have been thinking about taking their money out of the stock market and putting it into real estate. We have done a lot of research on foreclosures and believe we can get a pretty good deal. They have great credit, and shouldn't have a problem getting a good loan. My questions are: Are any of you people actually making money off having rental property? Is it worth the work of fix-ups and dealing with renters? Also, what is the best investment overall, single family house, duplex, condo? Do you have any other info that will help me? Thank You!

Condos seem pretty hot when it comes to younger couples, wanting something nice and cheap. I say go for a condo or Duplex.

It could work out well, and now would be a good time to do it: stock prices are fairly high, but will certainly fall if the Democrats get elected; real estate is fairly cheap. Look at some properties, and then visit nearby rentals and pretend to be a prospective tenant to see what the competition looks like.

You are going to get a lot of opinions on this one. Several schools of thought about buying rentals and becoming a landlord.

Let me start with some key issues surrounding the decision to buy and hold rentals.

I will start with the basic question of what are their investment goals. Is the primary motivation cashflow, tax benefits, appreciation, all of the above? What time lines are they working with as they look at this strategy. Income property has all three of these potential benefits, but they must be measured against their present investment portfolio. These statements become more and more important as they make their final decision because they want to be investors, not speculators.

Investing in income property (notice I am moving the terms from rental to income) is a great way to build wealth over time. It needs to be said, that you absolutely should be focusing on the income portion of this investment. Too many people ignore that simple fact. Why the income? Because it is the basis of how you value the property over all. It impacts your taxes and is often the determining factor of all the ratios used to determine returns on the investment (ROI, Cash-on-Cash return, Internal Rate of Return) - which are the key measures you use in determining if this is a good income property or not.

Once again, as far as cashflow is concerned, there are several schools of thought. Some people do not care if they carry a negative cash flow because they get the tax benefit in the end. I do not favor any kind of negative cashflow because it limits the amount of property I can acquire and carry. An investment property must pay for itself or it is a liability. A simple question you should ask (ala Kiosoki); How many properties can you carry with a negative $100 per month cashflow? How many can you carry with a positive $100 per month cashflow?

As for type, once again that will depend on their goals. although I buy and hold single family properties (condo, Town Homes, Detatched SFR), I think the real play is in multifamily (which I also buy).

The primary benefits are:
1 - Economies of scale (cheaper to fix one roof than separate roofs)
2 -Concentrated management in one area (focused in one spot)
3 - Minimize vacancy impact (if you have a single property going empty it is a 100% vacant for that time period)
4 - Potential for more controlled appreciation (you can raise the rents on a regular basis which increases the value - not the same for a sf property)

From a lending perspective, anything up to 4 units is considered similar to a single family home loan. Above 4 units is considered commercial.

There are three things to keep in mind as you think about becoming a landlord - Tenants, Trash and Toilets. The best advice I can give you about investing in income property is to build a good team. Unless you or your parents want to get the call in the middle of the night about that whole chicken your tenant stuffed down the toilet, just to see if they could - causing it to overflow, I would suggest you screen and get a really good property management team. Expect to pay anywhere from 5% to 8% for collected gross rents. This way you are not managing a property, you are managing a team that does that for you. On your team should be a good accountant, who knows real estate, so you can really leverage those tax benefits, a real estate attorney - for any legal matters and a good Realtor who knows and specializes in investment property - to spot good deals. In addition to these team members, you may want to find a good property inspector and some good maintenance people.

By the way - there are people who own multi-unit properties who are in distress too, so don't overlook this when you are looking for your deals.

Let me suggest a few books that may help them along the way in this process:

What Every Real Estate Investor should Know About Cashflow - Frank Gallinelli (all investors should have this one)

The Complete Guide to Buying adn Selling Apartment Buildings - Steve Berges (the principles in this book can be used for all income producing properties).