7 ms·

These stories that come out of the woodwork every time tenants are mentioned are why I’ll never be a landlord.

Grimm1 6y ago
My simplified understanding is that this is what REITs are for. They're an investment vehicle for companies looking to build real estate they don't have the capital for. They raise through a REIT and you wind up with a dividend of some kind out of what they make from tenants. It minimizes the risk for a general investor. Disclaimer: I know very little about them, this is not a recommendation I probably have some details wrong, just something I've seen floated around. Edit: Someone want to jump in with what they are then? Not like I said go do this right now or something, would genuinely like to learn what I'm wrong about here. Downvoting without a response continues to be the weakest part about this community.
- ctchocula 6y ago
  My understanding is that the appeal of owning real estate yourself is housing mortgages gives you: (1) the cheapest leverage available to retail investors and (2) a loan that can't be margin-called. In an upmarket, this leverage lets you juice your returns. Say you only have $200,000. Then by getting a mortgage of $800,000 you get ownership of a house worth $1M. This gives you the right to the cashflow from renting the house out and in an upmarket, the appreciation in the house price. If the house appreciates in value by 20% or $200,000, then with your $200,000 investment your return is 100%. Buying REITs in he form of an ETF doesn't offer you either the cheap leverage nor the margin call-proof loan. Another difference is that REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands, but usually real estate retail investors own are for housing.
  - echelon 6y ago
    > a loan that can't be margin-called What do you mean by this? That the loan can't be eagerly collected in full? That the repayment is on a schedule?
    - oillio 6y ago
      The lender can't foreclose if the house loses value. You have to stop making payments before they are allowed to take the collateral. In contrast, if you buy stocks on margin, they will forcibly sell your position if the value of the collateral gets anywhere near the loan value.
    - NovemberWhiskey 6y ago
      Say you have $100,000. You could buy a house worth $500,000 with 20% down and a 30 year note. As long as you pay the mortgage, it doesn't matter how much the market value of the property changes. A drop of 40% in real estate prices that lasts for five years is not necessarily a problem. On the other hand, imagine you put $100,000 into a brokerage account and were able to get 2:1 leverage. You could then borrow $100,000 and buy $200,000 of stock. However, if the market runs into a bad patch and that stock decreases in value to $120,000, your equity is now only ~16.7%. This is below the minimum margin requirement (25%) for your account. Your brokerage calls you up and says you need to put an additional $10,000 in your account - that's a margin call. If you don't have the $10,000 then your brokerage will sell enough of your position to bring your account back within requirements; possibly at the bottom of the market. Real estate: 5:1 leverage, no margin call Margin account: 2:1 leverage, plus margin calls
      - StillBored 6y ago
        You can get around this by purchasing leveraged funds/etc. Although that should never be considered functionally the same. That said, you could consider real-estate interest+taxes+upkeep similar to the inherent loss/overhead in leveraged funds.
  - gruez 6y ago
    Is there a reason why REITs can't themselves be leveraged? ie. taking out a mortgage to buy a house, just like an individual buyer.
    - patio11 6y ago
      Many are, but they're not typically 5:1 (or 33:1) no-recourse leveraged.
  - Grimm1 6y ago
    Ah okay very interesting, so I guess it would be fairer to say the REIT would be used in the case you were a less a real estate savvy investor perse and more someone who was looking to diversify I guess what I would call a layman's portfolio such as me. Thanks for the info!
  - patio11 6y ago
    The tax treatment of directly owning real estate is also extremely favorable to landlords in the US, particularly mom-and-pop scale landlords. Many will have businesses which make an economic profit and many of that subset will positively cash-flow, but for tax purposes deemed depreciation will cause their business to operate at approximately break-even or at a loss (offsetting other income). Then, when they sell the property, they either get extremely favorable treatment on exchanging for other properties (to defer taxes until post-retirement), ability to exclude capital gains, or capital gains treatment on income which was effectively business income [0] (and would therefore ordinarily be taxed at a much higher rate). [0] This might be a little weird to wrap your head around. Suppose I am a landlord and, over the years, depreciate a building by $200k. That is a "phantom" cost. On my balance sheet, it decreases my cost basis in the building and decreases my taxable profits from the rental business. When I sell the property, because I've shifted that rental income into depreciation, my cost basis has fallen, so my gain on sale rises by $200k, but that $200k is now taxed at 0~20% not plausibly 50%+ (top individual bracket + state taxes + self-employment taxes). (I have somewhat better than casual understanding of this because my father worked in real estate all his life and other family run mom-and-pop real estate operations, but feel free to run past your friendly local tax advisors.)
    - ctchocula 6y ago
      Taxation is another important advantage direct real estate investment has over REITs. Thanks for sharing it!
- tinytim69 6y ago
  Largely offtopic but: You are not incorrect per sé. REITs exists in an awful large number of varieties in every possible flavor and indeed broadly reflect what you describe, i.e. an exposure to a Real Estate. You get paid a dividend (which would be similar to the cashflow you receive from a rental property you own). There are a number of upsides of investing in REITs over buying a property and renting it out: - less work (no need to manage tenants) - less risk (it's a diverse set of properties across multiple locations vs a single property in one location). - highly liquid (you can buy any amount and sell virtually whenever you want you need to liquidity) there is some downside: - it is not tangible as a property (sometimes that means that if you don't understand exactly what you bought under what conditions it can mean you have some unknown exposure/risk you were not aware of). - it has less upside generally (in terms of risk/reward, it is a much safer investment but with that there is also upside as if you were to own a single property in the right neighborhood). - less leverage (generally you get more leverage on your mortgage than on your investment account) Particularly the last points is what catches people often. I.e. if you are renting a property and everyone else is owning, and the properties go up, you will feel 'stupid'. People love bragging how they got rich by buying and 'flipping' and ofcourse this happens and has happened in the past. But for all those great stories you don't hear the people that bought and were stuck with the house, had to sell at 'firesale price' because they lost a job/got divorced/etc etc. In the end, buying and owning property with leverage is a choice that fits a certain lifestyle and SHOULD not be for everyone. There are a lot of other investment opportunities in the set for any individual that would be better suited but are often considered 'complex'. Owning a house is simple and has been pushed for decades to 'build' wealth. The reality is that for most people their housing cost is by far the largest fraction of their cost of living. Owning alleviates this costs to a certain extend if only psychologically, but it does not come risk free (the number of times I heard people say 'house prices only go up'). The leverage factor aside (which is a real thing), looking from a person investing their savings, an appropriate allocation would be something dependent on their age but in any case not much over 10% in Real Estate. About as much on commodities (GOLD/precious metals/etc), Fixed Income depending on age but somewhere between 20% percent earlier in career with little commitments and up to 70% in retirement, with the rest in stocks ideally globally diversified. That all being loosely based on the highest risk-adjusted return models (or how any active manager would run your fund from a top level). Obviously, this is boring and it is way more smarter to buy this sexy property and flip it a couple times and those tenants are not an issue cause 'you love dealing with them anyways and have nothing better to do'. Basically risk-free money and you didn't even work for it. /s
busyant 6y ago
> These stories that come out of the woodwork every time tenants are mentioned are why I’ll never be a landlord. My wife and I own a number of (8) rental properties. My wife manages them and we rarely have problems with tenants. I will tell you what I think is the secret. My wife figuratively crawls up the ass of all prospective tenants. She needs to see credit history, pay stubs, and proof of punctual rent payments in their current situation (if applicable). I don't think many landlords do this type of background checking because it's extra work and it can come across as confrontational. But you'd be amazed at the number of prospective tenants who don't come back after being asked for that information.
- xenospn 6y ago
  Last time I rented from a private person, they asked me for some basic information. I sent them my last 3 pay stubs and a credit check in a short email. They accepted me on the spot, and said most people can't even manage to write a proper email.
  - nsxwolf 6y ago
    Every time we advertise for a new tenant we get many calls that go like this: "Do you do criminal background checks?" "Yes." "Ok, thank you, goodbye."
    - jeffdavis 6y ago
      To me that's very up-front. There might be a lot of people who would try to hide disqualifying information, hoping you don't find it. There are probably a limited number of landlords who rent to felons, and they have to just make 1000 calls to find a place.
      - curryst 6y ago
        They also get it on both ends. Felons make 41% less than their same age counterparts [1]. Thus they are both felons, and have lower income (as well as a higher likelihood of evictions, etc). I've been reading Evictions: Poverty and Profit in the American City on recommendation from HN and it has been eye opening. They don't make 1,000 calls, but there are several stories of people making a little over or under 100 different calls because of prior evictions and/or felony convictions. The quantity is only magnified by the fact that they're limited to apartments that are ~$500/month (which is already ~75+% of their monthly income). The book is heavily anti-landlord, although I'm not versed enough to say whether that's the truth or if there is a heavy bias. I don't know what the solution is. There's a delicate balance of trying to give people a chance to recover or rehabilitate without also forcing landlords with cheap property to enter into blind negotiations and potentially damaging their own property. Frankly, Section 8 seems like a bad solution, and that we should go back to government owned and leased housing where you won't be evicted for complaining about sub-standard conditions because the landlord knows you can't afford a lawyer.
paulcole 6y ago
If being a landlord was so awful they’d sell the property and call it a day. They want to make it sound worse than it is.
stx 6y ago
I have one way worse. My Dad rented a couple houses for extra income when I was a kid. One tenant was evicted for reasons I cant remember. To get revenge they spread bird seed or grass seed all over the living room carpet and then turned the sink on and stopped the drain. When my dad came into the house later the seeds has sprouted and were growing out of the wet carpet.
- imposterr 6y ago
  That's actually really creative. Horrible, but creative nonetheless.
- deleted 6y ago
  [deleted]

My simplified understanding is that this is what REITs are for. They're an investment vehicle for companies looking to build real estate they don't have the capital for. They raise through a REIT and you wind up with a dividend of some kind out of what they make from tenants. It minimizes the risk for a general investor. Disclaimer: I know very little about them, this is not a recommendation I probably have some details wrong, just something I've seen floated around. Edit: Someone want to jump in with what they are then? Not like I said go do this right now or something, would genuinely like to learn what I'm wrong about here. Downvoting without a response continues to be the weakest part about this community.

ctchocula 6y ago
My understanding is that the appeal of owning real estate yourself is housing mortgages gives you: (1) the cheapest leverage available to retail investors and (2) a loan that can't be margin-called. In an upmarket, this leverage lets you juice your returns. Say you only have $200,000. Then by getting a mortgage of $800,000 you get ownership of a house worth $1M. This gives you the right to the cashflow from renting the house out and in an upmarket, the appreciation in the house price. If the house appreciates in value by 20% or $200,000, then with your $200,000 investment your return is 100%. Buying REITs in he form of an ETF doesn't offer you either the cheap leverage nor the margin call-proof loan. Another difference is that REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands, but usually real estate retail investors own are for housing.
- echelon 6y ago
  > a loan that can't be margin-called What do you mean by this? That the loan can't be eagerly collected in full? That the repayment is on a schedule?
  - oillio 6y ago
    The lender can't foreclose if the house loses value. You have to stop making payments before they are allowed to take the collateral. In contrast, if you buy stocks on margin, they will forcibly sell your position if the value of the collateral gets anywhere near the loan value.
  - NovemberWhiskey 6y ago
    Say you have $100,000. You could buy a house worth $500,000 with 20% down and a 30 year note. As long as you pay the mortgage, it doesn't matter how much the market value of the property changes. A drop of 40% in real estate prices that lasts for five years is not necessarily a problem. On the other hand, imagine you put $100,000 into a brokerage account and were able to get 2:1 leverage. You could then borrow $100,000 and buy $200,000 of stock. However, if the market runs into a bad patch and that stock decreases in value to $120,000, your equity is now only ~16.7%. This is below the minimum margin requirement (25%) for your account. Your brokerage calls you up and says you need to put an additional $10,000 in your account - that's a margin call. If you don't have the $10,000 then your brokerage will sell enough of your position to bring your account back within requirements; possibly at the bottom of the market. Real estate: 5:1 leverage, no margin call Margin account: 2:1 leverage, plus margin calls
    - StillBored 6y ago
      You can get around this by purchasing leveraged funds/etc. Although that should never be considered functionally the same. That said, you could consider real-estate interest+taxes+upkeep similar to the inherent loss/overhead in leveraged funds.
- gruez 6y ago
  Is there a reason why REITs can't themselves be leveraged? ie. taking out a mortgage to buy a house, just like an individual buyer.
  - patio11 6y ago
    Many are, but they're not typically 5:1 (or 33:1) no-recourse leveraged.
- Grimm1 6y ago
  Ah okay very interesting, so I guess it would be fairer to say the REIT would be used in the case you were a less a real estate savvy investor perse and more someone who was looking to diversify I guess what I would call a layman's portfolio such as me. Thanks for the info!
- patio11 6y ago
  The tax treatment of directly owning real estate is also extremely favorable to landlords in the US, particularly mom-and-pop scale landlords. Many will have businesses which make an economic profit and many of that subset will positively cash-flow, but for tax purposes deemed depreciation will cause their business to operate at approximately break-even or at a loss (offsetting other income). Then, when they sell the property, they either get extremely favorable treatment on exchanging for other properties (to defer taxes until post-retirement), ability to exclude capital gains, or capital gains treatment on income which was effectively business income [0] (and would therefore ordinarily be taxed at a much higher rate). [0] This might be a little weird to wrap your head around. Suppose I am a landlord and, over the years, depreciate a building by $200k. That is a "phantom" cost. On my balance sheet, it decreases my cost basis in the building and decreases my taxable profits from the rental business. When I sell the property, because I've shifted that rental income into depreciation, my cost basis has fallen, so my gain on sale rises by $200k, but that $200k is now taxed at 0~20% not plausibly 50%+ (top individual bracket + state taxes + self-employment taxes). (I have somewhat better than casual understanding of this because my father worked in real estate all his life and other family run mom-and-pop real estate operations, but feel free to run past your friendly local tax advisors.)
  - ctchocula 6y ago
    Taxation is another important advantage direct real estate investment has over REITs. Thanks for sharing it!
tinytim69 6y ago
Largely offtopic but: You are not incorrect per sé. REITs exists in an awful large number of varieties in every possible flavor and indeed broadly reflect what you describe, i.e. an exposure to a Real Estate. You get paid a dividend (which would be similar to the cashflow you receive from a rental property you own). There are a number of upsides of investing in REITs over buying a property and renting it out: - less work (no need to manage tenants) - less risk (it's a diverse set of properties across multiple locations vs a single property in one location). - highly liquid (you can buy any amount and sell virtually whenever you want you need to liquidity) there is some downside: - it is not tangible as a property (sometimes that means that if you don't understand exactly what you bought under what conditions it can mean you have some unknown exposure/risk you were not aware of). - it has less upside generally (in terms of risk/reward, it is a much safer investment but with that there is also upside as if you were to own a single property in the right neighborhood). - less leverage (generally you get more leverage on your mortgage than on your investment account) Particularly the last points is what catches people often. I.e. if you are renting a property and everyone else is owning, and the properties go up, you will feel 'stupid'. People love bragging how they got rich by buying and 'flipping' and ofcourse this happens and has happened in the past. But for all those great stories you don't hear the people that bought and were stuck with the house, had to sell at 'firesale price' because they lost a job/got divorced/etc etc. In the end, buying and owning property with leverage is a choice that fits a certain lifestyle and SHOULD not be for everyone. There are a lot of other investment opportunities in the set for any individual that would be better suited but are often considered 'complex'. Owning a house is simple and has been pushed for decades to 'build' wealth. The reality is that for most people their housing cost is by far the largest fraction of their cost of living. Owning alleviates this costs to a certain extend if only psychologically, but it does not come risk free (the number of times I heard people say 'house prices only go up'). The leverage factor aside (which is a real thing), looking from a person investing their savings, an appropriate allocation would be something dependent on their age but in any case not much over 10% in Real Estate. About as much on commodities (GOLD/precious metals/etc), Fixed Income depending on age but somewhere between 20% percent earlier in career with little commitments and up to 70% in retirement, with the rest in stocks ideally globally diversified. That all being loosely based on the highest risk-adjusted return models (or how any active manager would run your fund from a top level). Obviously, this is boring and it is way more smarter to buy this sexy property and flip it a couple times and those tenants are not an issue cause 'you love dealing with them anyways and have nothing better to do'. Basically risk-free money and you didn't even work for it. /s

busyant 6y ago

> These stories that come out of the woodwork every time tenants are mentioned are why I’ll never be a landlord. My wife and I own a number of (8) rental properties. My wife manages them and we rarely have problems with tenants. I will tell you what I think is the secret. My wife figuratively crawls up the ass of all prospective tenants. She needs to see credit history, pay stubs, and proof of punctual rent payments in their current situation (if applicable). I don't think many landlords do this type of background checking because it's extra work and it can come across as confrontational. But you'd be amazed at the number of prospective tenants who don't come back after being asked for that information.

xenospn 6y ago
Last time I rented from a private person, they asked me for some basic information. I sent them my last 3 pay stubs and a credit check in a short email. They accepted me on the spot, and said most people can't even manage to write a proper email.
- nsxwolf 6y ago
  Every time we advertise for a new tenant we get many calls that go like this: "Do you do criminal background checks?" "Yes." "Ok, thank you, goodbye."
  - jeffdavis 6y ago
    To me that's very up-front. There might be a lot of people who would try to hide disqualifying information, hoping you don't find it. There are probably a limited number of landlords who rent to felons, and they have to just make 1000 calls to find a place.
    - curryst 6y ago
      They also get it on both ends. Felons make 41% less than their same age counterparts [1]. Thus they are both felons, and have lower income (as well as a higher likelihood of evictions, etc). I've been reading Evictions: Poverty and Profit in the American City on recommendation from HN and it has been eye opening. They don't make 1,000 calls, but there are several stories of people making a little over or under 100 different calls because of prior evictions and/or felony convictions. The quantity is only magnified by the fact that they're limited to apartments that are ~$500/month (which is already ~75+% of their monthly income). The book is heavily anti-landlord, although I'm not versed enough to say whether that's the truth or if there is a heavy bias. I don't know what the solution is. There's a delicate balance of trying to give people a chance to recover or rehabilitate without also forcing landlords with cheap property to enter into blind negotiations and potentially damaging their own property. Frankly, Section 8 seems like a bad solution, and that we should go back to government owned and leased housing where you won't be evicted for complaining about sub-standard conditions because the landlord knows you can't afford a lawyer.

paulcole 6y ago

If being a landlord was so awful they’d sell the property and call it a day. They want to make it sound worse than it is.

stx 6y ago

I have one way worse. My Dad rented a couple houses for extra income when I was a kid. One tenant was evicted for reasons I cant remember. To get revenge they spread bird seed or grass seed all over the living room carpet and then turned the sink on and stopped the drain. When my dad came into the house later the seeds has sprouted and were growing out of the wet carpet.

imposterr 6y ago
That's actually really creative. Horrible, but creative nonetheless.
deleted 6y ago
[deleted]