Profits n costs of owning rental property.

topic posted Wed, November 23, 2005 - 9:46 AM by  Unsubscribed

Why do investors acquire rental properties?

For the owners of all three categories of multifamily properties, the primary reason for acquiring rental property was for income from the rents. This ranged from a low of 32 percent for small properties (Footnote 1) to a high of 42 percent for medium sized and large properties. (See Figure 1)

Footnote 1: Statistically the same as "for use as a residence" by the owner as the primary reason for acquisition.

The second most common reason for acquiring rental property varied by the size of the property. For small properties, use as a residence, meaning the owner either lives at the property or lived there when the owner bought the property was equally as popular a reason for acquiring rental property as was income from rents. For medium size and large properties, the second most common reason for acquiring rental property was for long-term capital gains.

Is operating a multi-family property profitable?

Overall, 58 percent of multifamily properties made a profit or broke even. About 27 percent had a loss, and for 16 percent the owners did not know whether they made or lost money. About 58 percent of small and medium size properties had a profit or broke even, compared to 51 percent of large properties.

What is the financial profile of rental properties?

The yearly median operating costs per unit for multifamily rental properties vary between $2,300 per unit for small properties and $3,300 per unit for large properties. Operating costs include everything from advertising to utilities.

The median percentage of rental income spent on maintenance ranged from a low of 13 percent for small properties to a high of about 17 percent for medium size and large properties. The percentage of rental income spent on maintenance usually reflects the amount of owner commitment to the future viability of the rental property.

What are the three most frequent complaints which make it most difficult for owners and managers to operate?

Far and away, the most frequent complaint from owners of multifamily properties was local property taxes. Their second most frequent complaint was parking restrictions associated with their properties. These two complaints were most frequent for all sizes of properties.

For small properties, the third most frequent regulation which makes it difficult to operate was lead-based paint requirements. For medium sized properties, controls placed on the rents they could charge was the third most frequent complaint by owners. For large properties, the Americans with Disabilities Act was equally troublesome as rent control and waste disposal requirements.

How much are rent subsidies being used?

Overall, about 7 percent of multifamily properties had tenants using the Federal Section 8 certificate or voucher program, and 4 percent had tenants using other Federal, state or local housing subsidy programs. For small properties, about 6 percent used Section 8, compared to 8 percent for medium size properties and 13 percent for large properties.

Small properties had the lowest usage of other subsidy programs. For all subsidies other than Section 8, such as state or local subsidies, small properties had 4 percent usage, compared to 6 percent for medium size properties and 8 percent for large properties.

The owners of about half (52 percent) of small properties stated they were not familiar with the Section 8 rent subsidy program, compared to 36 percent for owners of medium size properties and 22 percent for owners of large size properties.

What is the main reason for continuing to own this particular property?

One might think the reasons for holding onto rental property would be the same reasons for buying the property, which was partially true. Regardless of size of property, all multifamily owners stated their primary reason for continuing to own property was the income they received from rents, the same reason they originally bought the property. The second most popular reason for owners of small properties was to use the property as a residence for themselves or their family. For owners of medium size properties, the second reason was for retirement security, and for owners of large properties, it was for long-term capital gains.

How does property management maintain the property?

Respondents for about four in five of multifamily properties reported handling all maintenance immediately and practicing preventive maintenance. Even more (92 percent) of respondents for the large properties reported handling all maintenance immediately and practicing preventive maintenance. About one in eight multifamily properties postponed handling minor problems, and 6 percent postponed most maintenance, while handling major problems immediately.

What are property owners doing to physically improve their properties?

Over half (52 percent) of all multifamily properties underwent capital improvements in the last five years. (Capital improvements are additions or substantial improvements in the property, beyond repairs or replacing the existing facilities.) The three capital improvements reported most often in the last five years for all multifamily properties were renovation of bathroom facilities, replacement of kitchen facilities, and upgrading heating systems.

About 93 percent of respondents for all multifamily properties reported doing work to specific rental units in the last five years. This activity involves repairing or replacing existing facilities, but not improving their quality. Of those doing work, about 82 percent of the multifamily properties had units painted, and 44 percent had some or all of the kitchen applicances replaced. About two in five repaired their building roof. About 36 percent replaced some or all of their bathroom fixtures or repaired heating or air conditioning.

About 10 percent of multifamily properties were changing or planned to change the property in a major way. Of those properties with current or planned changes, 85 percent were planning renovations or replacing features, 13 percent were working to change the tenant population, 4 percent were converting to condominium or cooperative status, 4 percent were converting some or all units to non-residential use, and 3 percent were combining units to make larger units.

PART 2: Multifamily property owners

Who is the typical property owner?

Most properties, regardless of size, were owned by individual or partnership owners. Individual owners include single persons, husbands, and wives and trustees for estates of deceased persons. Partnerships include limited partnerships and general partnerships. Almost all small properties, 96 percent, were owned by these two groups, compared to 88 percent of medium sized properties and 70 percent of large properties. For small properties, 92 percent were owned by individual owners, compared to 77 percent for medium size properties and 32 percent for large properties. Only about 4 percent of small properties were owned by partnerships, compared to 11 percent of medium size properties and 38 percent of large properties. No other type of owner owned more than 2 percent of small properties. However, when large properties are examined, real estate corporations owned 11 percent, while non-profit organizations and other corporations each owned 6 percent.

About half of the multifamily properties owned by individuals or partnerships had owners between 45 and 64 years of age. Most rental property owners were white (85 percent). Black or African American individuals owned 8 percent of multifamily properties and Asian or Pacific Islanders owned 4 percent. Hispanic individuals (who may be of any race) owned 6 percent of multifamily properties. This disparity in ownership between whites and minorities grew larger as the property size increased. Whites owned 93 percent of large multifamily properties, while Blacks and Hispanics owned only 1 and 2 percent respectively. (See Figure 2)

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    Re: Profits n costs of owning rental property.

    Wed, November 23, 2005 - 9:49 AM
    I have never been a landlord, so I dont know what its like. How come rent is so high?
    • Re: Profits n costs of owning rental property.

      Wed, November 23, 2005 - 9:58 AM
      The price of rent basically follows the law of supply and demand. Long term investment is the main reason for some of the kinder landlords I have known, they just hope to break even between the house payments, insurance, taxes, repair and maintenance costs and then sell the property in their retirement years. They also hope they don't get a bad renter that tears the place up. Other landlords are merciless slumlords grabbing for every penny they can get.

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