HAVING RENTALS
IS A DUMB IDEA


This is my opinion, as "Mr. Real Estate," regarding rentals. The only time rentals make any sense at all is if you have a real lifetime goal to buy real estate and use it as a retirement vehicle by waiting 30 years for the mortgage to be paid off on each property.

This was the plan of our fathers, 30-40 years ago. Buy a house. Put a tenant in it. Have the tenant pay off the mortgage. Take a good tax deduction for all expenses. Wait 30 years for the value of the house to double or triple in appreciation. This may have worked 30 years ago.

Today, we don't have nice tenants. We don't have good tax deductions. And in many places in the United States, we don't have great appreciation. Further, landlords of single family homes compete with apartments. The newer apartments have pools, saunas, fitness centers, club houses, movie theaters -- whatever you can think of. Times have changed. You should, too.

If you are just thinking about getting involved in rental properties, go to any video rental store and rent a movie called "Pacific Heights," which was made in 1990 by 20th Century Fox. The video may carry the tenant problem to the extreme, but the principles are, unfortunately, very much real life. After you watch the video, I recommend you read a book called Happy Landlording. I could tell you one horror story after another about tenants and the tricks they can play on you. Then, if you still want to own rental properties, I wish you good luck. Remember, I warned you.

Is There Anything Better?

I believe there is. It involves using creative financing to buy and sell homes. For complete details on my program, go to:
Million Dollar Secrets

Let's say you own, or buy, a home worth $100,000 with a $90,000 mortgage balance amortized over 30 years at 7.5% interest. Your monthly payment is $629, principal + interest, plus $104 for taxes and insurance, making your TOTAL monthly payment $733.

This type of home in your area usually rents for $850 a month which gives you $117 cash flow per month less property management fees if you use a property manager. If you have only one (1) vacancy per year, the costs of fix-up, lease up, and advertising will eat up your entire profit for the whole year! That is a lot of aggravation for making No Money!

Here is how you can reverse this situation. Remember, regardless of the type of loan you have on your property, you can sell it using creative financing. Your risk is reduced to a minimum by having professionals like me, who have a complete understanding of creative financing, showing you, in this site, how to do it.

The very same house will be marketed slightly above market value at $109,950 with a down payment of $14,950. A new note would then be created for the buyer in the amount of $95,000 amortized over 30 years at 8.75% interest, all due and payable in 5 years. (This may sound like "witchcraft" but it is perfectly legal.) Now the buyer's payment is $747, principal + interest, plus $104 for taxes and insurance, giving him a TOTAL monthly payment of $851. This will give you a monthly income of $851 minus $733 (your payment on the underlying loan) for a TOTAL MONTHLY NET CASH FLOW OF $118!

Let's compare it:

From the Tenant you can collect the first month's rent and one month security, which is refundable: $850 + $850 = $1,700. Of this total $1,700 you must use $733 for the monthly payment. You are left with a "profit" of $117. If the tenant leaves, you lose all your profit and have to start the cycle all over again. The only thing you gain is that the tenant's payments have paid off some principal on your loan and you can deduct most of the expenses from your taxes.

And if you are lucky, your rental property looks better than this:


From the Buyer you'll get approximately $7,000 up front from the down payment after all closing costs are paid. Or more, if you sell it yourself. That's $6,033 MORE than from a tenant! You also receive monthly income of $118 per month - an uninterrupted stream of income.

$118 x 12 months x 5 years = $7,080
Cash from the Down Payment = $7,000
(or $14,950 if you sell it yourself)

Here is the BEST PART. You created a new note of $95,000 and your note on the underlying loan is $90,000. This means you will receive an additional $5,000 when the buyer refinances in 5 years. You will make a TOTAL PROFIT of $19,080 and you still have a full tax deduction on the underlying loan.

You be the judge of which numbers you like better! Also, compare the work and aggravation! Of course, you can play with the numbers to fit your needs or make more money. Keep in mind that all of the above is perfectly legal. I have been doing transactions like these since the late 1980's.

And to make the horror picture complete, read below what can happen if you own a rental house. Federal and State laws allow seizure of properties in which criminals reside. Each state has different laws; I have quoted only Nevada statutes. Don't think this is some kind of joke or gimmick. Today, seizures are skyrocketing all over the country!

CAN THE U.S. GOVERNMENT
OR
THE STATE OF NEVADA
YES -- They Can!


According to Nevada Revised Statutes (NRS) 179.015-179.115, if your Tenant is involved in drugs, racketeering, or any other illegal activity, your property may be seized under the new seizure and forfeiture laws.

179.1158 - Claimant defined. Claimant means any person (you) who claims to have any right, title, or interest of record or proceeds subject to forfeiture .....
179.1159 - Plaintiff defined. The law enforcement agency.
179.1162 - Property defined. Property includes any real property or interest in real property, fixture, or improvement to real property.
179.1164 - Property subject to seizure and forfeiture exceptions. ... Unless the owner of real property or mobile home...has given the tenant notice to surrender the premises within 90 days.....

We Fear The Most:


179.1165 - Seizure of Property: Requirement of Process. 2. A seizure of property may be made by a law enforcement agency if:
a. The seizure is incident to arrest, a search pursuant to a search warrant.....
b. The law enforcement agency has probable cause to believe the property is subject to forfeiture.

What is really happening is that your Tenant can cause you to lose your real property even if you had absolutely no knowledge the tenant was engaging in criminal activities! Even if you hired a Property Manager to manage the rental for you! Does this mean that landlords now must have tenants take a drug test and search criminal records for prior offenses, etc., etc. ? YES! We have information that properties are being seized every day all across the country! Nobody is safe!

Of course, the laws that cover seizure and forfeiture are explained in full in thick books. One page cannot do more than raise a red flag as a warning to get rid of your tenants NOW - or else you had better know exactly who is renting your property!

Still have doubts? Read on .....

If you think that my ideas can make you much more money, give me a call at 702-260-1314. Let's talk! Remember, the work to find a good tenant or a good buyer is pretty much the same. And there is one secret to my creative financing. Sooner or later I get all my properties back - improved - in good shape - free. Buyers, for whatever reason, their life changes - especially a divorce; they don't want the properties and even start all over again. However, the property appreciates more, the 1st or 2nd mortgages are paid down and many times I can get a higher down payment and increase substantially the monthly payment. Since 1990, I have the 4th set of buyers in the same property - which means just on down payments I made 4 times more money alone! If you can prove to me that I am wrong and rentals are not a dumb idea, I'll change the name of this page.

George Paukert, Mr. Real Estate