Rental Properties Never Made Sense

In the town we just moved away from, our hometown, owning rental properties never made sense to me. I couldn't make the math work.

If you need to make 6-10% on an investment, I couldn't get there. Property taxes were too high.

In rental real estate there's the "1% rule" which says you should be able to rent a property for 1% of its value on a monthly basis. So if you buy a $150,000 property then it should rent for $1,500 per month or more.

The next "rule" is that expenses are about 0.5% per month. So that same property should see expenses of $750 per month. These expenses include property taxes and repairs.

And this is where the problem came. Property taxes in our town would be about $6,000+ per year on a $150,000 property. That's $500+/month.

So that would leave only $250/month for repairs and other expenses. Throw in vacancy and it's tough to break even. And in our old town, you can't get bailed out by higher property values. Our house sold for $180,000 in 1988 and we bought it for $175,000 in 2012. 

So to be a profitable rental owner in our old town, you'd need a duplex or two or more to reduce vacancy risk - and have to buy right and/or do the repairs yourself. It just didn't make sense to me to fight that hard to make 0-5% in a year.

But in Florida, property taxes are about 1% of value, not 4%. So that same property would only have annual taxes of $1,500 - which is $125/month. That leaves an extra $375/month for repairs and vacancy. And rents are about 1% of value per month. In season, rents are about 2-3% of value - so even a seasonal rental can be a profitable holding. Plus, I'm a bull on Florida real estate prices. They're pretty reasonable still - despite being up dramatically in the last year or two. And the influx of population gives a tailwind that our old town lacked. 

So I'm on the hunt for a few profitable rentals and will likely have more to report in the next year or so.