Buying a rental property?

[darnheather]

DH and I recently bought our first home. However, we are geographically separated during the week. He pays $550 to rent a room with private bath in a single family home. It's starting to strain our budget*. My sister told us to look into buying a second home in his location. Looking at townhouses and condos we can get something with a $500 a month mortgage! He can then rent out the other two rooms and it's money in our pocket. Once (if) he gets his reassignment we could continue to rent by the room or the entire house for at least twice the mortgage cost. It's an area with a navy base, university, and army post.

However, I feel like this is almost too good to be true. Am I overlooking something?

*Well strain is a strong word. We currently invest $400 a month and are not being as careful as we could be with food costs. This extra rent is putting us at breaking even right now something neither I nor DH are entirely comfortable with as we like to invest the $400 and save at least some each month towards vacation or incidental expenses.

 

[abolanwoski]

DH and I recently bought our first home. However, we are geographically separated during the week. He pays $550 to rent a room with private bath in a single family home. It's starting to strain our budget*. My sister told us to look into buying a second home in his location. Looking at townhouses and condos we can get something with a $500 a month mortgage! He can then rent out the other two rooms and it's money in our pocket. Once (if) he gets his reassignment we could continue to rent by the room or the entire house for at least twice the mortgage cost. It's an area with a navy base, university, and army post.

However, I feel like this is almost too good to be true. Am I overlooking something?

*Well strain is a strong word. We currently invest $400 a month and are not being as careful as we could be with food costs. This extra rent is putting us at breaking even right now something neither I nor DH are entirely comfortable with as we like to invest the $400 and save at least some each month towards vacation or incidental expenses.

You will need money for a down payment. You will now be responsible for the cost of maintanence and upkeep that the landlord currently bears. Does that 500 include taxes and insurance? Other than that, if you really think you can rent for twice the mortgage and if he's ok with roommates while he's there (my DH wouldn't be) then it sounds fine. You should meet with a realtor and see what the current rental market is like to be sure that you could find appropriate tenants (trust me - nothing is worse than crappy tenants!!!)

The other option would be for him to look for a cheaper 3 bedroom rental and then find 2 roomates to rent it with. If a mortgage would be 500, then he should be able to find a rental for around the same which should allow him to share a rental house for less expense and not have to deal with upkeep or down payment. Just a thought.

 

[tvguy]

Ah, risk and reward. The bigger the risk, the bigger the potential reward.

Up front, twice in the last 14 years we have evaluated becoming landlords when we inherited homes from our parents, and we concluded it was not worth the risk to us.

My crystal ball is a little fuzzy on your situation, but these are some of the risks.

1) You are not including HOA dues in your cost estimate.

2) You are not including any savings in case the HOA decides to access an fee for emergency or major repairs, like $10,000 for a new roof, or $1,000 for pool repairs or a parking lot repair

3) You are not including property management fees, or the cost of advertising, screening and evicting tenants if you do it yourself.

4) I live in a community that had 2 Air Force Bases and an Army Depot, which are great sources of tenants.....until....as happened here.....all three close and rents plunge.

5) How hard are Townhomes to sell if you decide you no longer want to be a landlord. My nephew worked at UC Davis, and bought a townhome. Several years later he left, and he was forced to rent it out because it wouldn't sell.....and in a college town with lots of rental options, the going rate for rent wouldn't cover his mortgage payments. Took him 6 years to sell it, at a loss, not counting the $150 a month he lost between what the rental income was, and the mortgage payment.


In our case, both houses we inherited with paid for. What turned us off was, we had enough trouble dealing with the hassles and expenses of running our own house, we didn't need to double that with a rental. With our house, we could work around a broken stove or microwave, or dishwasher or heater or air conditioner for a while. But with a rental, you really have to act immediately, even if you don't have the money , and even if it happens at 2 am.

 

[kymom99]

If you buy a condo, you also pay an association fee each month. Many condo associations prohibit renting. My mom had a condo when she died and we had it for sale for a while. We had people ask if we would rent it out but we weren't allowed.

Here where we live, there is a yearly fee to have rental property. I rent out my old house and had to fill out paperwork with the city for a renter's license. Also, insurance on a rental property is higher than a regular policy, I suppose because renters tend to not be as careful as owners.

 

[tar heel]

I would be careful about doing this unless you can afford the mortgage for several months with no tenants because you can't guarantee you're going to have them or that they will pay. You also didn't include maintenance, condo fees, taxes, insurance or utilities in your list.

I inherited my parents' house, which is in good condition and hasn't had a mortgage since the 70s, two years ago, and I'm meeting with a realtor about selling it this week. I have found owning it to be both expensive and stressful. I've been dithering for a few months -- I think getting the insurance and tax bills the same week did it. The insurance is a lot because it's both in the country and not owner occupied.

 

[darnheather]

Thanks everyone for the replies. Let me try to answer a few questions. Sounds like a Condo is out. Good to know. Spouse is trying hard to get out of this rent and was considering living in our van so roommates are not a problem. The math I have is $500 mortgage, $500 for rent from each bedroom. So yes there are still dues, management fees, and utilities. Might not be as good a deal as we first thought.

1) You are not including HOA dues in your cost estimate.

Not sure about HOA dues, that's a good one.

2) You are not including any savings in case the HOA decides to access an fee for emergency or major repairs, like $10,000 for a new roof, or $1,000 for pool repairs or a parking lot repair

The money that is over and above the mortgage would go into a fund for maintenance. But we'd at least be $500 better off.

3) You are not including property management fees, or the cost of advertising, screening and evicting tenants if you do it yourself.

We do plan to talk to an agent to see how much it would cost.

4) I live in a community that had 2 Air Force Bases and an Army Depot, which are great sources of tenants.....until....as happened here.....all three close and rents plunge.

I think it's safe to say that this NAS will not be closing in the near future as it is one of the largest in the country. There is also the university and it's a vacation destination.

5) How hard are Townhomes to sell if you decide you no longer want to be a landlord. My nephew worked at UC Davis, and bought a townhome. Several years later he left, and he was forced to rent it out because it wouldn't sell.....and in a college town with lots of rental options, the going rate for rent wouldn't cover his mortgage payments. Took him 6 years to sell it, at a loss, not counting the $150 a month he lost between what the rental income was, and the mortgage payment.

Our mortgage would be $500. Similar townhomes are currently renting for between $1200-$1500. The rental market is insane. When he was looking for a place to rent there was more than one place he couldn't go inside because the smell was so bad and yet it was rented within the week.

 

[darnheather]

Oh and he doesn't want to rent a place and then sublet because we don't know how long he will be there. If he can find a place that is month to month and still reasonable that is a good option.

 

[jedijill]

I was forced into renting my house out when it wouldn't sell in 2008 after I took a job out of town. I hired a property management company since I was out of state. They took care of maintenance, tenant screening, collecting the rent, etc. I paid them $500 upfront for each new lease plus advertising costs ($140) and then 10% of the rent every month.

PP are correct. Things that you would fix yourself or put off maintenance until you have the cash have to be fixed ASAP. I learned this the hard way when I was dead broke and of course the heat pump went out in December.

Homeowner's insurance doubled since it was a fire policy...same amount as when the house was unoccupied when it was for sale.

Renters will not take as good of care of the place as you would. I lived in dread fear of someone trashing the place even though the Property Management company did inspections twice a year. My tenant did not water the yard or any of the the landscaping and my lawn was trashed and I lost all the trees I had planted in the backyard. Because it was not specifically called out in the lease, I ate the cost.

My parents had rental property when I was growing up and they gave up after a couple of costly and lengthy evictions proceedings. I will never be a landlord again. Thankfully I was able to sell the house this spring.

Jill in CO

 

[JessM]

I wouldn't rule out a condo to rent out. My BF and I are currently renting a condo and our last rental before this one was also a condo. Most places around us will allow renting. We also live near several universities.

 

[wiigirl]

Oh and he doesn't want to rent a place and then sublet because we don't know how long he will be there. If he can find a place that is month to month and still reasonable that is a good option.

 

[crisi]

We had a rental home for about two years - we rented it at a loss to my brother in law while he was dying, so I was a non-profit landlord.

Do not underestimate repairs. We bought the best house that met our needs that we could, but I think we spent $3000 in plumbing over three years.

Also, although he took ok care of it, when we got it ready for sale I put another $3k in it - and sold it at a loss (but I did list it to get rid of it quickly). Just things like gardening and repainting.

While your husband lives there, I think its a worthwhile idea, if he can stand roommates - he'll be able to keep a direct eye on things, collect rent, do minor repairs and make sure things are being taken care of. When he moves out, I'd make a new decision to keep or sell - which may depend on if the roommates are good and want to stay on. So I'd treat it as two decisions - the first really isn't a rental property situation - its a second home and taking in roommates.

 

[eliza61]

Former land lord here. It's been a while so some of these things may not be current.


1) Credit: even with absolutely great credit when you go for a mortgage on an 2nd home that is not your primary residence a lot of banks will not give you the great rates.

2) My firm belief is that there will be long stretches when you either have no tenants or tenants that are slow in paying. count on it.

3) Are you going to be able to manage the property yourself? Never underestimate the ability of a tenant to drive you crazy. are you ready for 3 am phone calls about toilets? Irate tenants that want stuff fixed yesterday

4) not only repair problems but don't forget annual maintenance. Yearly painting, appliance up keep. never underestimate a tenants ability to wear on an apartment.

5) where are you getting the 2X's the mortgage amount figure from? believe me, I've seen more people "swear" their house, condo or apartment was worth a lot only to find out the market does not bear out. You mentioned two military bases. In my experience military personnel want to pay the least. They are on very limited budgets and if it's couples where the military person maybe deployed soon they are even more frugal. do not assume because it's near these bases that you have a ready made source of income.

 

[TheRustyScupper]

1) Current landlord.
2) We have 17 properties.
. . . single homes
. . . duplexes
. . . apartment buildings (4-6 units each)
3) Sure, we have an ugly tenant once in a while, but overall, very profitable.
4) As mentioned above, you need to make sure you budget very well.
. . . we use a massive Excel spreadsheet
. . . we account for every dollar coming in and every penny going out
. . . it is also very handy at income tax time
. . . we don't need to hunt for recipes
5) This includes contingency moneys for repairs or tenant messes.
6) Other things to be considered.
. . . do you have someone for yard maintenance (mowing, snow removal)?
. . . do you have a good real estate attorney for evictions?
. . . do you have a maintenance person you can trust?
. . . do you have a company to do the background search on tenant candidates?
. . . do you have enough annual rent to handle 1-2 months when a tenant moves out?

 

[darnheather]

Former land lord here. It's been a while so some of these things may not be current.



5) where are you getting the 2X's the mortgage amount figure from? believe me, I've seen more people "swear" their house, condo or apartment was worth a lot only to find out the market does not bear out. You mentioned two military bases. In my experience military personnel want to pay the least. They are on very limited budgets and if it's couples where the military person maybe deployed soon they are even more frugal. do not assume because it's near these bases that you have a ready made source of income.

Thanks. I looked up the prices on Trulia. We know how much BAH is and that is why rents are far higher than mortgages. While military families (like us) may be on a budget housing is separate and provided for. When spouses are deployed they make more money so I'm not sure how that would make them be more frugal. Hasn't been my experience at all.

 

[limace]

We have one rental property and it's been generally fine. We have chosen not to use a property management company, since rents aren't super high here right now, but if we had the wiggle room, we definitely wood, and that would address many of the concerns others raise above.

We have had to dump a lot of money into repairs (and a lot of sweat equity) but that's all deductible.

I suggest joining the landlord association in that area, if they have one: ours provides all the forms you need (applications, walk through forms, etc). We learned to send prospective tenant to a local business that does the credit check and background for us, so we didn't have to figure out a process for that; the tenant pays the business directly and then signs a document releasing the information to you.

 

[darnheather]

We have one rental property and it's been generally fine. We have chosen not to use a property management company, since rents aren't super high here right now, but if we had the wiggle room, we definitely wood, and that would address many of the concerns others raise above.

We have had to dump a lot of money into repairs (and a lot of sweat equity) but that's all deductible.

I suggest joining the landlord association in that area, if they have one: ours provides all the forms you need (applications, walk through forms, etc). We learned to send prospective tenant to a local business that does the credit check and background for us, so we didn't have to figure out a process for that; the tenant pays the business directly and then signs a document releasing the information to you.

Thanks so much. I was wondering how to do the documents and credit checks without a property manager. I think property manager will be our first choice but good to know there are other options. We don't mind the sweat equity and our primary home is about an hour from the area we are looking to buy.

 

[HM]

I don't even know you and this whole idea scares me (for you).

Is there any chance your husband can find a new job in the town (or nearby) where you currently own? I'd be looking at that before thinking of taking on a second home.


OK, I posted this before I read your last post. Your husband's only an hour away? Why in the world is he renting there? I'd be commuting every day instead to save money....and so that I'd actually be living with my wife. I know quite a few people that have similar commutes.

 

[swilshire]

Ten years after my Mother's death, we finally decided to rent out her home to a family member. It cost about three times as much as I expected to get it up to rental condition ($25-$30K) and expenses just keep rolling in.

A couple of my co-workers who moved temporarily away from their families lived in nice campers in campgrounds that cater to long term rentals. They spend weeknights in the campground and go home on weekends. Some of the local construction jobs also bring in a lot of people who stay in the nicer places.

We live about an hour from the Smokey Mtns and a lot of retirees spend the summers in the campgrounds there and work at Dollywood and other seasonal places. We also knew a family who had a child performing in the park who did something similar.

A friend told me about a relative that got a great deal on a slightly used motorhome and uses it as a lake "house". With the high gas prices, you see them for sale everywhere.

I've always thought I'd try that if I had to work long term away from home. One person alone wouldn't need a huge camper and you'd have it to use on vacations later.

Sheila