Greg has a lot more experience in rental property than I do and I'm not trying to steal your thunder Greg but I will share my experiences to hopefully contribute to the discussion here. I bought my first one here in Phoenix, a 20 unit place, in 2002. I sold it at about it's peak for a 133% profit, plus the monthly income, tax benefit etc. BUT, I was over there every weekend just about (just like when I was a kid at the building my dad owned) after working 10 hours days all week long at my job. I exchanged that one into one twice it's size in San Antonio (a rapidly growing market at the time) and a lower class but higher CAP rate. Biggest investing mistake I ever made. Why? The reason I bought it, so I COULDN'T go over there all the time, was also the biggest reason I SHOULDN'T have bought it. Management wasn't near what it was represented to me it would be. By the time I found the right guy 3-4 years later, the property had sucked up so much money that it couldn't recover. I sold it last year at a considerable loss, and valuable lesson learned which has made me a much better investor going forward.
Now my brother and I have a Walgreen's store that we inherited from our father who passed away about a year ago. He bought it to get him to the end of his life. It's a NNN lease with good cash flow and he didn't have to do anything. The loan is at 6.2% and has tremendous pre-payment penalties, called "defeasance", which basically in our case amounts to 20% of the current loan balance additional if we want to sell it or even re-finance it early. The reason is these loans are sold as CMBS or commercial mortgage backed securities so if you want to get out early the investor wants all the return he originally signed up for, so you have to pay it. It's not a bad deal though, we'll just keep it until it matures in 2019 and collect the income for doing nothing in the meantime. We could just probably do better with it somewhere else, MAYBE!
I think rental property is a great investment but big mistakes or mishaps can happen too. The loans are much different than home mortgages so you have to know what you're signing and getting into and commercial property loans are even more complicated and often harder to get out of early.
BTW, going through some of my fathers things recently turned up a savings account passbook from the early 80's that paid 15% interest, for a REGULAR savings account, so it's all kind of relative in most cases. I'm gonna go out on a limb here and predict we aren't going to see that any time again in the near future.
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