The Rental Business
tarnok
Registered User regular
Registered User regular
I don't want to get too bogged down in details so I'll summarize by saying that my career prospects are not great and renting houses is rapidly becoming my best option to make a living.
The situation is this: my father owns four pieces of land. Three already have houses on them but they are in terrible repair. Two have room for a lot more houses (26 acres and 9 acres iirc). My father is retired and seems to plan to rent these out. The problem there is that he has a history of making terrible business decisions and is convinced that he knows best. Again, I don't want to go into too much detail and distract from the point but he has put forward a wide variety of ideas, all of them crazy, and done little work to see any of them accomplished.
So. With my bleak career prospects and his..shall we say, lack of focus, I'm thinking I may be able to rent the property from him, improve it and rent it out at a small profit initially, and perhaps more as I'm able to add units.
I guess what I'm looking for here is two-fold. First a sanity check. Is this even a viable idea or am I as crazy as my father? Second, does anyone have any advice or resources for someone about to get into the rental business?
The situation is this: my father owns four pieces of land. Three already have houses on them but they are in terrible repair. Two have room for a lot more houses (26 acres and 9 acres iirc). My father is retired and seems to plan to rent these out. The problem there is that he has a history of making terrible business decisions and is convinced that he knows best. Again, I don't want to go into too much detail and distract from the point but he has put forward a wide variety of ideas, all of them crazy, and done little work to see any of them accomplished.
So. With my bleak career prospects and his..shall we say, lack of focus, I'm thinking I may be able to rent the property from him, improve it and rent it out at a small profit initially, and perhaps more as I'm able to add units.
I guess what I'm looking for here is two-fold. First a sanity check. Is this even a viable idea or am I as crazy as my father? Second, does anyone have any advice or resources for someone about to get into the rental business?
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0431-6094-6446-7088
0431-6094-6446-7088
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The problem with renting out property is you never know who you're going to get. Maybe they'll be fine. Maybe they'll have a cat that shits all over the floor (I'm sorry we can't help it, we try, please put tile/hardwood in trust me). Maybe they'll break into the grid directly to get power and force you to pay huge fines. Maybe they like their potted plans but it's a humid summer and suddenly mold everywhere.
Are you okay with doing that? Or, rather, do you and your father have enough liquid assets to be able to pay if someone breaks your house and causes $10,000 worth of damage? Repairing small stuff like drywall is easy enough.
Yes. He would like nothing more than for my brothers and I to go into business with him but that ain't happening. If this goes forward at all it will be with a clear contract and me renting the property from him to run the business myself. If he's not open to that I suppose the rest of this becomes moot.
Not precisely. He wants me to give him money to fix up the property and let him run the business. I think I'd get more benefit out of folding a stack of hundred dollar bills into paper airplanes and throwing them at a bonfire.
0431-6094-6446-7088
Especially if you think they're crazy.
But I don't see why this won't work out, probably should move the property into an LLC/Corp/Partnership and become joint holders of the company and profits.
He has bought an old plumber's van to carry his tools around and intends to do the repair work on the houses himself. This is a man who I never saw, in fifteen years living in the same house, do any repair work whatsoever. When my brothers and I broke holes in the drywall it was my mother who finally fixed them. This is also a man who has spent the past month living in my house and hardly stirred from the couch because he doesn't have the energy.
He will probably have to live with my wife and I in the near future because he's becoming unable to care for himself and has suggested that I allow him to buy freight containers to build an addition to my house. Suggested is too weak a word. He really thinks this is a stellar idea. I know this isn't directly related to the business, but I mention it to give you an idea of what kind of construction he thinks is acceptable. He genuinely believes that a freight container addition will increase our property value.
He cut down every tree in the yard of one of the houses because in twenty years a tornado knocked down one tree on the house. This yard was prone to standing water in high rains even when it had ten or so pine trees in it. The stumps remain two years later.
The repairs he did oversee on the tornado damage were done with pretty shoddy materials and look terrible.
He wants to buy a small saw mill so he can have a side-line as a tree surgeon and get people to pay him to cut down their trees and haul them off so he can mill them and get free building material for new units.
There's more but I'm convinced that if he does run this thing then when he dies I'll inherit a couple of decrepit houses and a trailer park where every other unit is a meth lab. I'm not sure how easy it is to evict meth heads but I'd rather not find out.
On the other hand, I think if I start now before he begins his "improvements" I can actually make these houses liveable for people who care about how their house looks and will be more likely to treat the property well.
0431-6094-6446-7088
0431-6094-6446-7088
No but really, you need to formulate a business plan, and get your father to agree to be a silent partner while you do all the work. Estimate what kind of repairs needs to be done, get some figures from contractors, and estimate what kind of return he'd see. Then figure out how much it'd cost to form an LLC and get him to agree to relinquish rights to the property in compensation for 50% of the business and becoming a silent partner (no ability to dictate business decisions).
That's how I'd do it. This way neither of you are personally responsible for business losses because of shitty tenants and you have a better chance of not fucking over your relationship.
And yeah advice related to this, replace all the carpet in these houses. Put in some hard surface and use radiant floor heating of some form (water/heating pads). Because carpets suck.
I think you may be overestimating the profit to be made by renting while still managing a loan payment, and I don't even want to do the math on actually building on the land. You can't do most repair work on your own normally. Sure, paint, power wash, maybe repair some fences, but when it comes to HVAC, roofing, plumbing... unless it's your trade or your fathers trade, it's expensive and impossible to do yourself.
Replacing a flange/valve, faucet, and patching drywall ain't no big thang, yeah!
But you're right, if the property is still being paid off, you're looking to maybe make about 20% if you're lucky. So if your mortgage is $600 and the taxes are $300, you can expect to maybe take in $1100. That gives you $200 profit. A few properties, maybe you'll get a grand a month. And this is likely going to be near a full time job.
So if you've got 5 properties, all give you $200 a month, giving you a grand total of $1000 a month, splitting 50/50 with your dad gives you $500 to basically act as a landlord for 5 properties. That doesn't include insurance business/landlord insurance. And you'll probably be putting in at least 10-20 hours a week with this unless your tenants are amazing and your repair work is amazing, and all the appliances are new and under warranty.
Now, if the mortgage is paid of.. that's a different story entirely.
I would much rather form an LLC that I control with no involvement from my father and then have the company lease the property from my father, or from an LLC that he forms to lease out the property if that would be better for liability purposes. I don't want his name to appear connected in any way with the ownership of the company because if he feels any sense of ownership he will not be content not to meddle and try to get his way.
I am also not going to work for him. I spent enough of my childhood dancing to his insane tune. I'm not going to destroy this property at his command.
There is no loan to worry about except maybe on the property which does not have a structure on it.
I may be over-estimating how much I can make, that's one of the things I am hoping to get some help on here. Does anyone know a resource where I can find numbers or locally specific legal advice?
I don't intend to do any of this work myself. My father might but he's nuts. I would hire people who knew what they were doing to do the repairs. It would be a large up-front cost but if I can determine whether or not the venture would be profitable I could manage it.
As to why he needs money from me, fuck if I know. I think he's just bad at managing money and has grandiose plans which will ultimately come to nothing.
In fact, let me try it this way:
I'm thinking about leasing a couple of houses at a very low rate from a person who isn't and won't take care of them, fixing them up to be presentable and then renting them to people who will live in them. The person I am leasing the property from will have no further interaction or input in the matter for the term of the lease. I am aware that I will ultimately need to talk to a lawyer about a lot of stuff before setting any of this into motion but I'm now trying to gather as much information before-hand as possible. Does anyone know of a good resource where I can find some information on rental prices, costs associated with the rental business or legal issues that may arise in the course of this venture?
0431-6094-6446-7088
That's bad news for you because he could just strip it from you after a contract expires, and could do lots of things since it's ultimately his property. Silent partnership would be good because it means he's not really in charge of anything, he's donating assets, you're donating time and money. The company holds the property, it's no longer his, but since he's 50% silent owner, he walks away with 50% profits. Profits is the key, because he doesn't get 50% of the income. If you have to pay for repairs that comes out of the business's account, and you pay him what is left over (after you take out loans and all that to cover repairs unless you both agree to put money away for the business to handle it.
So once the property is owned by the LLC, and he's a silent partner, you can now do what you need to do as the executor/organizer/business operator. Get repairs, fix it up, find tenants, etc. Then you handle the money, deposit it into the bank, then pay out the employees and contractors. Then once that's done, you pay profits to the owners once your day to day operations are taken care of. If it were me I'd probably do something like a 33% split. 33 to me, 33 to him, 34 to business to cover repairs. Maybe 40/40/20 if it's a lot.
You'll need to do some research and find out how much that square footage is going for if you were to sell the property today, and do some snooping around craigslist and padmapper to find out how much similar square footage is being rented out for. Obviously feel free to go full out and put in granite and all that if you want, but I'd avoid it. Just do your basic apartment cheap ass appliances and again, replace the carpet with tile/Laminate/Bamboo just trust me on that one.
Obviously you'll want to talk to a lawyer and the SBA to help you out and fine tune/correct what I'm saying here. You need to stress to the lawyer you want your father to be a silent partner only and for him to draw up the papers.
You need to stress to your father you think this is the best for both of you as you can make a bit of money taking care of his assets, and he doesn't have to worry about it and can relax and retire.
He's honestly probably looking for some father son time, if he's anything like my dad, and just wants to be with you to see what kind of man you are today.
I think I addressed everything, I hope.
It kind of sounds like you're trying to start a property management business, but you're subletting leased properties?
I'm not sure that's how they typically operate though and by leasing you may be creating a lot of unnecessary risk for yourself.
If these properties are being left fallow and are in disrepair, you might be better off approaching the owners and offer to fix them up, rent them out, and maintain them for X many years for % of the rent.
This way if Bob, Jim, Sally, Ray, and Marco are late on the rent at the same time you aren't completely fucked.
0431-6094-6446-7088
Even with the suggested 'silent partnership', there is a pretty good chance he's going to get involved anyway, and you're going to be put into a situation where you risk your relationship with your father. Having legal options is a major plus, but actually following through with them will probably suck.
The 'leasing' option also has some substantial risk, since you're looking at a fixed payment to your father to maintain the lease, and you could potentially end up deep in the red if you have trouble finding tenants or have to put money into the properties. Also important is that your investment in the properties doesn't really belong to you, and there's no guarantee you'll recoup your up-front repair / renovation costs.
If you are insistent on moving forward with this, I would suggest starting with one and only one property. Have a set budget / investment up front, and rent for six months to a year to get an idea of the demands - both financially and on your time. Don't go deep into debt, or take on too much at once, but if you do find it's doable without issues slowly expand into the other properties. Ideally, you would use profits from the first property to renovate the second property and so-on.
One other suggestion that may or may not work would be a land contract. You would basically own the property in all but legal title, and make payments to your father. This is similar to obtaining a mortgage, except in this case your father acts as both the seller and the lender. The advantage to this is that you can often get better / more flexible terms than you would get in a typical mortgage, and if you default the seller retains the property instead of a typical foreclosure.
Make sure that whatever you do, you keep everything at arms-length or at least discuss the repercussions of a not-at-arms-length agreement.
Also, a secondary concern in any agreement is inheritance issues. If you haven't prepared for this and your father passes on, there could be major issues with any siblings or other heirs. Your father's best intentions may not matter if a sibling / second wife / etc has a falling out and turns into a greedy jerk. My non-professional opinion would be that transferring the property / properties you plan on renting out into a trust, and naming you as the successor trustee would be ideal. Even if other heirs are beneficiaries, you would generally have full control over the property / properties and insulate yourself from a lot of headaches.
What you really want to do is buy his business 'Crazy Dad's Property, llc', even if it is not incorporated in a formal way currently.
Get all the assets listed.
Get all the houses/land appraised.
Figure out what it will cost to get the houses into rent able condition.
Take the appraised value+repairs(+ some % buffer), and figure out what a business loan for this amount(+property taxes) will cost you monthly.
Figure out what you can get in rent for the properties.
How do these numbers even compare? Like is there actual room in here for you to make money? Like enough to be worth all the work?
Now there may be room for you if for example, he is ammenible to letting you finance it directly through him. Aka I'll sell you this for 360 monthly payments of X. Wording something like this is going to be key because he has to have basically 0 way to break the agreement short of you not paying for a substantial chunk of time. Then you just need to come up with what you need for the repairs.
The less obvious of the black flags to me is that you said there is a lot of land. Rental properties tend to work better if they are you know, by a lot of people. Just forget about developing more houses on those 26 acres yourself. Those acres are 2 things, a tax liability that will cost you money, and a giant buffer keeping your people away from your properties.
Do some research and pick the most viable of the houses. Find a contractor in the area who will give me a quote on getting it in presentable condition and figure out what I can expect to rent it for by looking at other rental properties available in the area. Crunch numbers and determine if this can be done with a reasonable expectation of profit in the near future. If so ask my father to be a silent partner in the venture.
I'm starting to think this just isn't going to work any way I cut it though because of shit like this...
I'm not worried about the inheritance issue much. My uncle who just passed away had a great deal more money than my father is likely to be able to leave and he left it all to my father, my brothers and I. No one is trying to make an issue except my father who thinks he convinced my uncle to leave most of it to my brothers and I and thinks we owe him some funding for his business.
0431-6094-6446-7088
there are a bunch of areas where you could potentially risk liability to renters, contractors, passers-by, etc.
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Your Dad is already eyeing off the money his brother gave you and your brothers.
Don't go into business with him. It'd be more fun to light that money on fire, and probably more profitable.
0431-6094-6446-7088
The rule of thumb for a homeowner is - over time - assume an absolute minimum of 1-2% of the property value in annual maintenance costs. That's usually figured for a home that's in good repair (i.e. good plumbing / electrical, solid foundation, etc). With a smaller house, figure it'll cost $5000 for a roof, $1500 for a furnace (+$1000 for central air), and $800 for a water heater if you're paying a someone to do the work. A roof lasts 15 years, furnace 15-25 years, water heater lasts 10 -15 years.
If you have foundation, well, or septic problems, getting them fixed can easily run $10,000+.
Guessing how much it'll cost to get the home back into good repair is really more of a job for an inspector or general contractor. If the home has been unlived and unmaintained for years, I'd just ballpark 10-15% of the property value will be needed to restore it to good condition for each year it's been sitting. This would likely be in addition to the typical 1-2% annually for maintenance (although quality repairs will help keep down maintenance costs).
That estimate also doesn't include things like appliances, lawn service / snow removal, or the extra wear and tear that usually comes with renters, If you are just going to pay people to do everything, keep in mind renters normally aren't happy waiting until morning / Monday, so you may have to pay a premium to get someone out at 2:30 on a Sunday morning.
Just based on what you've said, I'd recommend planning for around 5% of the property value annually, and keep a decent cash reserve for urgent repairs that come up.
When you look at the comparable rental prices, also take into account if electricity / heat / garbage / water are provided. If they are, adjust by ~$200 / month.
Finally, one important note is that if you're getting a loan from a bank, a business loan typically has higher rates (2% or so) than a mortgage on your own home. Business loans often require 20% down as well, compared to 5% down for FHA loans.
EDIT: Note that where I said property value, that's based on typical property values. If the home is in a poor area with abnormally low property values, you'll want to adjust accordingly.
EDIT2: If it's just a typical house and has been sitting 5-10 years or more unmaintained, depending on where you live (climate) there is a good chance bulldozing and rebuilding would be cheaper than paying someone to repair it.
It sounds like if you do this, you will fight constantly with your dad.
If you want to do this and you have a nest egg to start with, I would look around for a distressed but occupied apartment building. One of the richest men in the world (andrew beal) became a billionaire in time to retire early by starting with one HUD repo.
Four money pits that you're going to have to put 10k a piece into to rent for 10k a year for a two-three year return, for the low low price of dealing with a kooky relative? Doesn't sound like the path to wealth.
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If you have a house that is is crappy condition in a poor area. You are probably going to need to adjust your idea of 'livability'. You are looking for 'no broken windows, no leaks, functioning heat, working plumbing/electric. A working stove/fridge. Not a nice one, like the cheapest ones you can find.
Like if the garage is fucked, well the garage is fucked, don't spend money fixing it. Demo it for liability reasons, but don't build a replacement.
Also idk how familiar you are with renting property, but there's a lot of shit you see in renting out shitty properties that if you don't put into the contract you will be sorry. Shit like first & last months rent + security deposit. Pretty harsh penalties for late payment, clauses about who can live there(aka no your cousin who just got paroled for gang shit can't come stay there), and stuff that lets you terminate the lease(drugs, failure to keep it clean, etc). Look into the local laws concerning eviction(some places a landlord can basically say, you have 3 days to GTFO, other places you are looking at a several month process).
There's an entire extra layer of nightmares renting low income. You have increased drug/crime issues and tenants with no assets or steady income you can go after if they destroy everything.
I host a podcast about movies.