4 ms·

If you own a property, why not just rent it for cash flow? What's the benefit of letting a property sit vacant? So the property owner doesn't have to deal with

by mjfern 9y ago

If you own a property, why not just rent it for cash flow? What's the benefit of letting a property sit vacant? So the property owner doesn't have to deal with finding tenants and property wear and tear?

karthikb 9y ago
If property value appreciation is significant (in SF, about 12% in 2017) the benefit of renting out (AirBnB or otherwise) may actually be minimal - as you said, the overhead of finding and managing the rental. $3k/month on a rental makes you far less than just 12% appreciation on a $1.5M place.
- maxxxxx 9y ago
  And renting out is a lot more work than keeping something empty.
- usaar333 9y ago
  Where are you getting 12% appreciation from? Paragon (https://www.paragon-re.com/trend/san-francisco-home-prices-market-trends-news https://www.paragon-re.com/trend/san-francisco-home-prices-m...) shows it at 7% for houses and 5% for condos. That's ~6% after property taxes (assuming recently set cost basis) or $90k/year. Maintenance, HOA fees (if any) further drop this return. (Besides future appreciation isn't something you can bank on..) A $1.5M home should rent for at least $4.2k (P/R ratio of 30). That's $50k a year, smaller than the appreciation of $90k but still very significant. The only reason I see to not at least hire a rental management company to do the renting for you is if you are subject to rent control and fear not being able to evict the tenant/raise their rents.
  - karthikb 9y ago
    https://www.zillow.com/san-francisco-ca/home-values/ https://www.zillow.com/san-francisco-ca/home-values/ - 12.8% last year and projected lower this year. The reason I have a lower rent figure is that rents haven't gone up as quickly, as much of the new construction has been focused on rental stock.
    - usaar333 9y ago
      Thanks for the citation. I'm a bit skeptical of Zillow's numbers; they look pretty volatile (e.g. they show 2016 with 0% appreciation) Anyway, according to zillow last 2 years is 7% average - and since depth of recession 8 years ago, 8.6%. 12.8% is likely a statistical abnormality. (Of note 10 year average is 5% vs. ~8.5% for SP-500 index funds)
- geebee 9y ago
  This isn't a bad point. If you purchased a house in SF for $1m in 2009, there's a good chance it would sell for $1.8 mil today[1]. Rents have varied over time. I'd say the rent on a place like this would be $3k a month in 2009, and maybe $4k now. This is harder to estimate. Also, rent control is different for SFH than for apartments - in this case, I'll assume rent control is in place [1]. So, lost rent is 3k a month for 8 years, $288,000. Ok, that's some serious lost money. Gain in equity is $800,000. If your tenant make is hard to see and realize that gain, it really might make sense to leave it vacant. I have seen houses in SF sell for vastly below market due to existing tenants, with powerful rights (there are certain protected classes of tenant). There's a lot of room between 300k and 800k. It's not so simple, of course. It's expensive to be a landlord, and time consuming, and that income is taxed. So the loss of renting actually isn't $288,000, it's lower. Also, the house may be enjoyable as a pied a Terre. Think of it as any investment - you park your money somewhere, hope it will grown. Owning this house is no different from owning gold, or stock. You buy it, you hope it will appreciate. Buying and not renting could make sense as a mildly risk-averse approach - you give up some yields in exchange for the lower risk of not having a tenant. . At the same time, cash flow is tough. Many people simply can't afford to pay the mortgage for 8 years without that rental income. And they figure, eh, eventually the tenant will leave, and then they can sell. But overall? Yeah, I can see how it's economically rational to buy a place to speculate and simply leave it vacant[2]. Or, alternatively, rent only to extremely trusted people (family members or others treated as such). [1] I'm cherry picking dates and rent control policy to show the best case scenario for not renting a place out. [2] I believe this is harmful. Pointing out that something is economically rational (and in this case, perfectly legal) does not mean I endorse it!
sdenton4 9y ago
Fwiw, my understanding is that the Vancouver ordinances are also levying heavy fines for letting properties sit vacant. There are lots of vacant properties: people happy to just watch the home value go up without dealing with renters...
JumpCrisscross 9y ago
> why not just rent it for cash flow? Depending on the jurisdiction, letting go of a tenant--or dealing with a problem tenant--can eat up months, if not years, of expected profits. Two ends of a spectrum: India, with squatter rights, versus most American cities, with speedy courts and contract law.
jessriedel 9y ago
The other problem with renting out a place which will eventually be taken over by a (new, impatient) owner is that you face a low-level risk that the current tenants welch on the lease and refuse to leave. For better or worse, there are large legal hurdles to evicting people, and the fight can drag out for months or even years.
hkmurakami 9y ago
Wear and tear. Psychologically not wanting "other people" to have occupied your property. Basically if you have a lot of money, the marginal extra income isn't worth the headache.
astura 9y ago
Being a landlord is a serious job with serious legal requirements. Tenants can also be surprisingly good at destroying your property and they have a surprisingly large amount of legal rights.
- erroneousfunk 9y ago
  Amen. I rented in Boston, Somerville, and Medford after college, and it's amazing the number of landlords who are just random people who happen to have an extra property, or bought a house with an extra unit, and decide to rent it out. They print a template lease, we sign, and they hand over the keys. Two landlords in particular didn't know about things like escrow account and interest laws for security deposits, contact information posting for vacant landlords, who's responsible for things like snow removal and smoke detector maintenance. I left those units in good condition (thankfully for them!) but nearly sued twice and, in one case, received triple damages on my security deposit. One landlord said "To keep costs low, tenants generally organize snow shoveling" I said "Oh, sorry, I didn't realize we were breaking the law here." There are some states with very few tenant rights where landlords can get away with a lot. California and Massachusetts are not those states. It's a very serious part time job that requires a lot more than just owning a property.
  - astura 9y ago
    I had a previous landlord who was a shady motherfucker who wanted to "play businessman" but had no business skills and ignored the law with his various "businesses" and was a general terrible human being. After I moved out I reported him to the town (for violation of various town rental ordinances), the EPA (for violation of lead paint safety statutes), and the banking department (for violation of security deposit collection laws). He got his comeuppance.
pfarnsworth 9y ago
They don’t need the money. My wife’s friends own multiple houses in Hillsborough that they leave empty most of the year unless they are visiting during the summers.
- mjfern 9y ago
  Hillsborough NC?
  - pfarnsworth 9y ago
    CA

by mjfern 9y ago

karthikb 9y ago

If property value appreciation is significant (in SF, about 12% in 2017) the benefit of renting out (AirBnB or otherwise) may actually be minimal - as you said, the overhead of finding and managing the rental. $3k/month on a rental makes you far less than just 12% appreciation on a $1.5M place.

maxxxxx 9y ago
And renting out is a lot more work than keeping something empty.
usaar333 9y ago
Where are you getting 12% appreciation from? Paragon (https://www.paragon-re.com/trend/san-francisco-home-prices-market-trends-news https://www.paragon-re.com/trend/san-francisco-home-prices-m...) shows it at 7% for houses and 5% for condos. That's ~6% after property taxes (assuming recently set cost basis) or $90k/year. Maintenance, HOA fees (if any) further drop this return. (Besides future appreciation isn't something you can bank on..) A $1.5M home should rent for at least $4.2k (P/R ratio of 30). That's $50k a year, smaller than the appreciation of $90k but still very significant. The only reason I see to not at least hire a rental management company to do the renting for you is if you are subject to rent control and fear not being able to evict the tenant/raise their rents.
- karthikb 9y ago
  https://www.zillow.com/san-francisco-ca/home-values/ https://www.zillow.com/san-francisco-ca/home-values/ - 12.8% last year and projected lower this year. The reason I have a lower rent figure is that rents haven't gone up as quickly, as much of the new construction has been focused on rental stock.
  - usaar333 9y ago
    Thanks for the citation. I'm a bit skeptical of Zillow's numbers; they look pretty volatile (e.g. they show 2016 with 0% appreciation) Anyway, according to zillow last 2 years is 7% average - and since depth of recession 8 years ago, 8.6%. 12.8% is likely a statistical abnormality. (Of note 10 year average is 5% vs. ~8.5% for SP-500 index funds)
geebee 9y ago
This isn't a bad point. If you purchased a house in SF for $1m in 2009, there's a good chance it would sell for $1.8 mil today[1]. Rents have varied over time. I'd say the rent on a place like this would be $3k a month in 2009, and maybe $4k now. This is harder to estimate. Also, rent control is different for SFH than for apartments - in this case, I'll assume rent control is in place [1]. So, lost rent is 3k a month for 8 years, $288,000. Ok, that's some serious lost money. Gain in equity is $800,000. If your tenant make is hard to see and realize that gain, it really might make sense to leave it vacant. I have seen houses in SF sell for vastly below market due to existing tenants, with powerful rights (there are certain protected classes of tenant). There's a lot of room between 300k and 800k. It's not so simple, of course. It's expensive to be a landlord, and time consuming, and that income is taxed. So the loss of renting actually isn't $288,000, it's lower. Also, the house may be enjoyable as a pied a Terre. Think of it as any investment - you park your money somewhere, hope it will grown. Owning this house is no different from owning gold, or stock. You buy it, you hope it will appreciate. Buying and not renting could make sense as a mildly risk-averse approach - you give up some yields in exchange for the lower risk of not having a tenant. . At the same time, cash flow is tough. Many people simply can't afford to pay the mortgage for 8 years without that rental income. And they figure, eh, eventually the tenant will leave, and then they can sell. But overall? Yeah, I can see how it's economically rational to buy a place to speculate and simply leave it vacant[2]. Or, alternatively, rent only to extremely trusted people (family members or others treated as such). [1] I'm cherry picking dates and rent control policy to show the best case scenario for not renting a place out. [2] I believe this is harmful. Pointing out that something is economically rational (and in this case, perfectly legal) does not mean I endorse it!

sdenton4 9y ago

Fwiw, my understanding is that the Vancouver ordinances are also levying heavy fines for letting properties sit vacant. There are lots of vacant properties: people happy to just watch the home value go up without dealing with renters...

JumpCrisscross 9y ago

> why not just rent it for cash flow? Depending on the jurisdiction, letting go of a tenant--or dealing with a problem tenant--can eat up months, if not years, of expected profits. Two ends of a spectrum: India, with squatter rights, versus most American cities, with speedy courts and contract law.

jessriedel 9y ago

The other problem with renting out a place which will eventually be taken over by a (new, impatient) owner is that you face a low-level risk that the current tenants welch on the lease and refuse to leave. For better or worse, there are large legal hurdles to evicting people, and the fight can drag out for months or even years.

hkmurakami 9y ago

Wear and tear. Psychologically not wanting "other people" to have occupied your property. Basically if you have a lot of money, the marginal extra income isn't worth the headache.

astura 9y ago

Being a landlord is a serious job with serious legal requirements. Tenants can also be surprisingly good at destroying your property and they have a surprisingly large amount of legal rights.

erroneousfunk 9y ago
Amen. I rented in Boston, Somerville, and Medford after college, and it's amazing the number of landlords who are just random people who happen to have an extra property, or bought a house with an extra unit, and decide to rent it out. They print a template lease, we sign, and they hand over the keys. Two landlords in particular didn't know about things like escrow account and interest laws for security deposits, contact information posting for vacant landlords, who's responsible for things like snow removal and smoke detector maintenance. I left those units in good condition (thankfully for them!) but nearly sued twice and, in one case, received triple damages on my security deposit. One landlord said "To keep costs low, tenants generally organize snow shoveling" I said "Oh, sorry, I didn't realize we were breaking the law here." There are some states with very few tenant rights where landlords can get away with a lot. California and Massachusetts are not those states. It's a very serious part time job that requires a lot more than just owning a property.
- astura 9y ago
  I had a previous landlord who was a shady motherfucker who wanted to "play businessman" but had no business skills and ignored the law with his various "businesses" and was a general terrible human being. After I moved out I reported him to the town (for violation of various town rental ordinances), the EPA (for violation of lead paint safety statutes), and the banking department (for violation of security deposit collection laws). He got his comeuppance.

pfarnsworth 9y ago

They don’t need the money. My wife’s friends own multiple houses in Hillsborough that they leave empty most of the year unless they are visiting during the summers.

mjfern 9y ago
Hillsborough NC?
- pfarnsworth 9y ago
  CA