first time landlord - yay or nay?

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I want to buy a modest home ~ $150k-$200k in an area right next to the public school we want to send our son to in 2.75 years when he starts kindergarten. We would rent the home out for the next 2 years, then move in to establish residency, then sell our current house at that time (which is 15 minutes away). The reason we want to buy now is that prices and interest rates are low, rents are somewhat high. I would try managing the property myself but if it got to be too much I'd be fine hiring a manager. In 2 years we would gut/remodel the place substantially for say another $150k-$200k, so that we could move in to the house we want in the school boundary we want. This should make us somewhat impervious to any renter damage.

We have bottomed out locally and and have gained about 10-15% since we bought our home 18 months ago. We are reluctant to wait two years to buy, as the school is getting more popular and home prices in that boundary, while still modest, are creeping up and buyer demand is high.

I have never landlorded. I live 15 minutes away and the home is right next to the school, so we go there 185 days a year anyway. Is this a good/bad idea? I'd be willing to hire a property manager either now or in the future.

I know there are a lot of real estate folks here...

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yay.
i am a landlord, its exhilarating. theres nothing like snaking out an overflowing toilet of someone's crap at 2AM. opps, I meant to say theres nothing like getting that rent check every month. Please ignore that first part.
Seriously, though. The tax breaks are great, but be prepared to add rent to your income, not sure what that will do for you taxwise. If its a problem, just dump as much money into the place as you get in rent, or as close as you can. Get a 15 year, if possible. And get handy, get a buttload of tools and a carpet shampooer, and you should be good to go my friend.

My vote is yay. Well, it also depends on how much you can rent out with (have your agent runs some comp for you). My rental property is close to an university. If by choice, my daughter goes to that school, I have a house ready for her. I manage my property by my own. Easy and painless. I know good tenant is hard to come by, but thank GOD I had one.

Good Luck.

also screen applicants, look in their car when they show up to check the place out. if they have mcdonalds and WalMart trash all up in the backseat and floors, well thats how your rental will look. Even if they are sweethearts, don't let them move in if they don't make 3x rent. Its not fair to them or you.
Getting an LLC to limit your liability and qualify for AMEX business cards is a good idea lol. But, at least in my jurisdiction of Minnesota, the LLC needs to hire an attorney to conduct an eviction, since the LLC is an entity seperate from its sole member and you therefore cannot appear in propria persona. I'm lucky enough to be an attorney so thats not a problem, but it might be for some.
Check local ordinances regarding rental inspections. If you don't pay your rental inspection fee in my city, you can't evict anyone for non-payment because you aren't renting the place legally. I can go on and on..... Do you have any specific questions I could answer?

Bigger question is are other properties on that block worth $300k.

What would it rent for?
What are your finances like otherwise?
Can you cover the mortgage on the place without rent?

Don't assume a bad apple renter can't cost you a lot of damages in 2-3 years. e.g. 1st renter moves in and tears up the carpet and leaves after 3 months. YOu then have to replace carpet to rerent.

General plan seems fine but it would depend on the details.

It's hardwork - but very rewarding if you have the funds to do it - and of course if you have the right property - we have done two homes for 3 years and things have gone well - interest rate is very good - so go for it!

Smart move. Go for it. No tax on gain of your current house's sale, too. (Well, up to $500K of gain; you will definitely meet the "have lived in it 2 of the last 5 years test" 2.75 years from now.)

My 2 cents: you said twice that the house is right next to the public school. You might be better off buying inside the school's boundary, but not being the house adjacent to the school (playground noise; twice a day cars jammed in front of your house waiting/trying to do drop-offs and pick-ups, etc).

Having been a landlord 10+ years, all things considered, yes, it has been a good thing. It will toughen you up in terms of dealing with people AND you get to learn how to do a lot of repairs yourself, which be a useful skill when you remodel. The fact that you want to stay in the neighborhood for the school is a plus; real estate is the ultimate local business.

I assume you are just asking for general advice/opinions about being a first time landlord; you haven't given us any details about the expenses or rent. One hint about those -- first year expenses will always be higher than you expect, and the amount of time to find good tenants takes longer than you expected. Still, if you see opportunity, go for it.

these are all good points/thoughts, I have a lot to think about.

I guess it is true that there is not a huge reason to buy now rather than in two years; and there's not a great reason to not move now rather than in two years. So it seems like I am actually making the ultimate non-decision, rather than just either a. buying/moving now and selling current house or b. waiting two years and doing it then. (There actually is a reason; I'm required to live within 30 minutes of work and the new area is not, but based on some things going on at the hospital I believe within two years that issue will be resolved and I could live in the new place without a problem.)

For those who have been landlords, what kind of issues do you look for in older (1920's - 1960's) homes when making the decision to buy a house/condo, etc. for rental? I've casually looked into buying one, the biggest things seemed to be to avoid galvanized plumbing, check electrical, roof leaks and foundation damage. As long as those are covered, won't repairs be kept to a minimum?

OliverQuackenbush said:   .....
Getting an LLC to limit your liability and qualify for AMEX business cards is a good idea ......


You mean you're supposed to be an LLC or at least have a business to get business cards?

Anyways, before I turn this thread into an ethics discussion:

I think renting the house definitely beats paying for it sitting empty. Why can't you move in sooner? (Edit: answered by OP prior to me posting. Op It sounds like you're doing a lot of speculating... You're job doesn't let you move there currently, You're going to be doing lots of upgrades in 2 years prior to moving in.)*

I imagine some of those upgrades would also bring a higher rent. (Things you aren't too worried about being torn up.) I also question spending the house's value of higher on upgrades. How old are the houses in the neighborhood? Are there any foreclosures? (sounds like it might be beneficial for you to buy something that needs fixing anyways)

Reasons why I would look more at the residence option:

  • People go out of their way to get residential interest rates even if their true intention is to rent the property out. You're doing the exact opposite You'll be paying a higher investment interest rate even though you plan to live in the house. - You may be able to re-finance later once you live there, but only if rates are still low enough to make it worthwhile.
  • Risk, Stress, Etc. You'd probably be better off with a property manager to make sure you have proper lease agreements, and they don't bug the crap out of you. regardless of what you choose you're going to have the risk of someone living there, that could burn the place down, etc.
  • Getting to know your neighbors vs. stiffing them with renters. How would you feel if someone bought the house next door to you, then let renters trash the place for 2 years? How would you feel about them when they go to move in? - I know FatWallet isn't big into worrying what people think, but I know I would care if I plan to live somewhere for a long time.
  • Getting the tenants to move out. Of course you can have leases, contracts, etc. But what about if the tenants don't want to move out? There may even be laws that prevents you from evicting people in certain situations.



*Op I'm not trying to discourage you, but you should think about whether you really want to be a landlord. I'd suggest asking yourself if you'd be willing to buy the house just as an investment property with no intention of moving in. (I bet the answer is no). Based on that, are you making a sound investment on a house you're not entirely sure you're going to be able to live in? - That said, you may find the ideal house and everything comes together.

** (In reference to the post following mine) interesting point Tim. When I was in middle school I lived directly across from the "county school", which I attended. After living there for a year, my family moved to another part of town. The people's kids who lived there after me had to go to the "City School" several miles away. I'm sure other people have examples not related to "Hickville"

*** Everything I say is pure speculation. I plan to be a landlord at some point, but the closest I've gotten is having roommates that paid an unfair share of the rent, and now having a roommate who's rent is higher than my mortgage (But not quite enough to cover my total mortgage / taxes / insurance)

I agree the timing of your future move-in could be an obstacle. It can take a good month or two to prep a place and find a good tenant if you're picky. If at some future point that means you'd only be willing to lease for 11 months or 10 months, it may limit your pool of interested renters. And then even when the lease is up, it's potentially difficult to get someone out who doesn't want to leave. That's unlikely and depends a lot on your local laws.

I think another important assumption is that if you reside there, you'll be assured enrollment at the school for your children. In my area, that's not the case for the best public schools. People with children flock to those neighborhoods and quickly exceed capacity. Make sure you know what the situation is there now for residents, and keep in mind that it can change over a couple of years.

psychtobe said:   I want to buy a modest home ~ $150k-$200k in an area right next to the public school we want to send our son to in 2.75 years when he starts kindergarten.... In 2 years we would gut/remodel the place substantially for say another $150k-$200k

So you will have up to $400K in a house in a neighborhood of $150k-$200k homes that will probably appraise for not much more than the $150k-$200k you paid? Oh yea, that's a great idea.

Send the kid to private school and save yourself the heartache.

Don't use a f'n management company. They don't do s*** Don't get a home warranty. It is the biggest scam ever.

There is no private school that compares. This is a language immersion program, and the only one of its kind in this part of the state. The fact that it is public is important to us. The fact that it is free is important to us. We are definitely ensured priority in the program by living in the boundary. There has never been a year where local students have filled the allotment; they have always gone to the full school district lottery and then the out of district lottery (the latter is how we got in this year).

The neighborhood is big enough to have diversity, homes $150k (they are frankly sold as fixer-uppers) to $500k new construction with the majority $250k-$350k. I think there is room for a $200k+$200k home if on a decent lot.

I didn't mean literally adjacent to the school, but rather within a block or two. I get the point, but it is an elementary school, not a high school - it's not that big and the traffic lasts for all of 15 minutes.

Finances are otherwise fine.

I am honestly amazed that you'd buy a $200k house and put $200k in renovations into it. If the neighborhood has homes in all price ranges as you say, why not just buy one for $400k that already suits your needs?

OliverQuackenbush said:   . The tax breaks are great, but be prepared to add rent to your income, not sure what that will do for you taxwise..

In my experience, tax breaks are not so great. If you make over $150k a year, passive income means no deductions. I'm writing off the depreciation, but that's it. Doesn't help me now, only when I sell. Is there something I'm missing? I've been a landlord for a couple of years, but should probably bite the bullet and see a professional tax advisor.

Also Op, it is rewarding, just be prepared to replace furnaces, water heaters, etc. on a moments notice...usually around Christmas time

OliverQuackenbush said:   .
In my experience, tax breaks are not so great. If you make over $150k a year, passive income means no deductions. I'm writing off the depreciation, but that's it. Doesn't help me now, only when I sell. Is there something I'm missing?


That post seems to imply that you know you can deduct carryforward losses when you sell, but also seems to imply you are under the belief that you can only include depreciation and not other rental expenses when calculating current (non-deductible) losses. I hope I'm wrong and you know that isn't the case.

Hankdoll said:   OliverQuackenbush said:   . The tax breaks are great, but be prepared to add rent to your income, not sure what that will do for you taxwise..

In my experience, tax breaks are not so great. If you make over $150k a year, passive income means no deductions. I'm writing off the depreciation, but that's it. Doesn't help me now, only when I sell. Is there something I'm missing? I've been a landlord for a couple of years, but should probably bite the bullet and see a professional tax advisor.

Also Op, it is rewarding, just be prepared to replace furnaces, water heaters, etc. on a moments notice...usually around Christmas time


When I wrote that I was thinking about how, assuming the place is 100% used for business, any improvement you make is 100% deductible, or in other words can be considered a business expense paid for by the LLC out of the LLC's assets, which is the rent that the tenants pay the LLC. So at the end of the year whatever is leftover from rent minus the cost of improvements is your "dividend" or income you get from the LLC that you show on your tax form. This gives you considerable control over how much you want to improve your investment and/or how much income you want to earn from it.
I own a duplex. I live on one side and rent out the other side. So if I want a new tile floor in my kitchen, 50% of it is deductable from the LLC's assets. That is my understanding of how its done, you take the deduction, then determine the amount of the property used for business purposes (%50 in my case), then multiply the deduction by the percentage. So half of what I do for the tenant is deductable and half of what I do for myself is deductable.
If OP wants a new tile floor in his rental's kitchen, then 100% of it would be deductable. Then later on he gets to move into the house and still gets to use that snazzy kitchen floor!
I am not a tax expert so I am fearful that nsdp or some other tax expert is going to burst my bubble and tell me I am doing it all wrong.

OliverQuackenbush said:   also screen applicants, look in their car when they show up to check the place out. if they have mcdonalds and WalMart trash all up in the backseat and floors, well thats how your rental will look.

Best Advice Ever (Coming from someone who rents out 2 properties)

allowingtoo said:   OliverQuackenbush said:   also screen applicants, look in their car when they show up to check the place out. if they have mcdonalds and WalMart trash all up in the backseat and floors, well thats how your rental will look.

Best Advice Ever (Coming from someone who rents out 2 properties)
What if they're college girls with worn underwear and energy drinks all over their backseat?

well i can't help but green the two above posts, one for flattery and the other for giving me a really good idea!
crazytree i can't help but wonder, is most of the wear in the front or the back?

snail trails

Landlording? Here are my thoughts.

I have not been a land-lord, and I have been a tenant all my life. I have had good landlords, OK landlords, bad landlords, and slam-lords.

I also had a roommate whose family is a big time slam-lord. All I can say is that in order to hit big as a landlord, you have to be all in.

You have 1 unit? Great. Great hobby.
You have 2 units, 3-4 units. Great. Great headache.
You have 10-15 units. Great small business.
You have 10-15 buildings, with 10-20 units each. Great jackpot. The worse the area, the better it is for you.

Yea, there are factors like buying low (like right now), buying in the right location (like next to a good school), and getting a good deal (like 5-10% below the prevailing prices in the area). But with 1 unit, it is not going to make a difference. You are subject to statistical noise. One bad tenant, one bad town zoning rule, one bad hurricane, whatever.

Also, with 1 or 2 units, it is not enough to justify spending time outside of your $100K job to baby-sit that unit. And if you pay for everything (property management, maintenance, minor construction jobs, etc), you will probably end up breaking even. At best!

OPs situation

Has nothing to do with landlording.

I don't understand why OliverQuackenbush's post, right under OP is getting green. Did he even read what OP said? OliverQuackenbush and OPs situation are so different, it's like day and night. OP does not want to get handy, OP does not want to learn a bunch of stuff, OP does not even want to manage that property. OP is just doing a trade, whereby he is basically buying a futures contract on the house.

OPs situation is basically deciding buying now vs buying later. And a little bit is buying 2 now and keeping for two years. It has nothing to do with landlording. Being a lanlord and renting a place is basically a way for cover a 2-year option to hold that futures contract.

OP, let me ask you this question: do you think that is the best you can do to keep that house for 2-2.5 year while you don't need it just so that you can have a house in that school zone in 2.75 years? If you think so, then go for it. But who is to say that a top popular school zone is not already overpriced now, and it can only go down from here?

JTausTX said:   I am honestly amazed that you'd buy a $200k house and put $200k in renovations into it. If the neighborhood has homes in all price ranges as you say, why not just buy one for $400k that already suits your needs?

Probably the smartest idea on this post out of all of them posted.

Dear ChurnChurn,
Op said he would like to try managing the property. To me that means he wants to do some work. So I am not sure what your beef is. When you rent a property out and you are the landlord that is landlording in my view. Nothing OP says makes me think he wants to be lazy and useless, someone who cannot do work. I bet OP is hardworking.

You also do not understand the benefit to buying a house for $200k and putting $200k of renovations into it while it is being rented. Did you not read my post regarding taxes? If the property is used 100% for business purposes, then OP can deduct the improvements (or they count as depreciation) and he can show a loss for his business, which has benefits. He can't do that if he just buys a house for $400k for himself, or does the renovations when the property is not being used for business purposes.

There are other benefits to "doing it yourself" when it comes to renovations, instead of buying something for $400k and hoping you didn't just buy a cheaply-made flipped house constructed by a contractor with no love in their heart and only driven by profit. If OP directs the renovations, then he will do it with love in his heart, the same type of love one would feel as if they were building a house for their very own family, because after all, it is for OPs family. And he gets to do it burger king style. He can put a hottub on the roof if he so chooses.

And besides, what specifically is your beef with op's idea of sinking $200 in renovations in a house? You don't watch much HGTV I bet. Everyone is doing it. There is nothing about buying a $400k house that is better than buying a $200k house and turning it into a $400k house, that I can think of. Have you thought of something that I have not thought of? Tell me your specific beef.

I'm sorry I wasn't completely clear about this but my daughter is already in the program and that is how we know we like it and that it is good. She is in the program from K-6 so 7 total years and she is in K now. So we'll be going to this school for the next 6.5 years whether or not my son gets in. Which makes it all the more imperative that he get in, or we're going to be driving to two different schools in 2.75 years when he starts K elsewhere.

Crazytree said:   snail trails

oh, those types of girls. you mean the paraplegics without legs that leave snail trails as they move about?

(nice setup)

psychtobe said:   I'm sorry I wasn't completely clear about this but my daughter is already in the program and that is how we know we like it and that it is good. She is in the program from K-6 so 7 total years and she is in K now. So we'll be going to this school for the next 6.5 years whether or not my son gets in. Which makes it all the more imperative that he get in, or we're going to be driving to two different schools in 2.75 years when he starts K elsewhere.

so in other words, no hottub on the roof.

You mentioned low interest rates as a reason to purchase now. Since it is an investment property, you won't get offered the same rates as an owner-occupied. I just refinanced my rental at 4.00%.

Couple questions about renting out to folks. My friend told me he didn't think you could turn people down for any reason, and if you did you could get sued for discrimination. Is this true? Second, my other friend mentioned her parents used to be landlords. They would have renters not pay for like 3 months and then up and leave in the middle of the night with no way to contact them. How do you protect against this?
Thanks!
Mike

dmikester10 said:   Couple questions about renting out to folks. My friend told me he didn't think you could turn people down for any reason, and if you did you could get sued for discrimination. Is this true? Second, my other friend mentioned her parents used to be landlords. They would have renters not pay for like 3 months and then up and leave in the middle of the night with no way to contact them. How do you protect against this?
Thanks!
Mike


You can't turn down a person based on a protected class (i.e.. race, color, sex, national origin, familial status), but you certainly can reject a potential tenant on other factors (i.e. poor credit, eviction history etc.)

As a landlord, eviction rules vary by state, and while sometimes you cant throw someone out as easily, or they will stiff you for three months as you mentioned, you have rights. Yes, you can get stiffed, and that can be the cost of doing business. You can sometimes put a lean on their credit by court order that will require them to pay you before they can get any kind of loan in the future, such as a car or home loan.

Your best bet is to run a credit check beforehand to make sure they have no prior eviction leans on their report, and they meet a minimum credit score (I like to see 650 or higher for my clients, but many are ok with 615-620 minimums). Running credit is your biggest safeguard when choosing a tenant. Will it guarantee you wont run into problems down the road? No, but it will be far less likely than leaving it to chance. You are also allowed to charge an application fee to cover the cost of a credit check. (The easiest way to do all of this is to list with a Realtor. The typical commission is 1 months rent, but they do all the leg work for you in terms of advertising, finding tenants, running background checks, and executing a lease. You simply make the decision on which applicant you want to go with.

Bottom line, being a landlord (or hiring a management company) is always a good thing, because it means you own real estate, which you can never own too much of.

Ozymandias036 said:   You mentioned low interest rates as a reason to purchase now. Since it is an investment property, you won't get offered the same rates as an owner-occupied. I just refinanced my rental at 4.00%.
I would consider 4% very low.
What does a lender need to offer owner occupied rates?
In other words how soon must we move in?

dmikester10 said:   Couple questions about renting out to folks. My friend told me he didn't think you could turn people down for any reason, and if you did you could get sued for discrimination. Is this true? Second, my other friend mentioned her parents used to be landlords. They would have renters not pay for like 3 months and then up and leave in the middle of the night with no way to contact them. How do you protect against this?

That's not at all true. There are some very specific reasons you cannot use to turn down a renter, so you do need to be careful and clear. But there are many, many reasons you can use to turn down rental applicants. Ability to pay, referral information and credit history, incomplete or inaccurate application information. Now maybe someone who regularly generates horrified looks of "I cannot believe you just said that" during casual conversation might feel the prohibited reasons are arbitrary and excessive, but they're really pretty easy to understand and follow. There are professional deadbeats out there looking for a reason to sue, so you do have to keep records so you can demonstrate a consistent pattern in your approval criteria.

And you protect against deadbeat renters by turning down most of your applicants. There's still a risk, so knowing your eviction process and always starting it immediately are vital to minimize those. In some places, a professional deadbeat can make that run for three months, so maybe your friend did about the best he could as soon as the first payment was missed. But I bet he hadn't spoken with that renter's last two landlords before giving them the lease.

Baseline is...Treat people with respect and respect is what you get...
In many of the posts above, though it shows a landlords point of view, those renting are viewed like trash.
However they are the ones who need to be treated with respect since without them the units will not be rented.
Not one has said they got a good person as a rental....
I believe that the first time landlords have been renting for some time. I do not think at any point of time they would like to be treated as not welcome.
Thousands of those renting undergo background checks and are afraid security deposits will get confiscated if the unit is not left in a clean state.
Hence as I said earlier treat people with respect and respect is what you will get.

psych, I think my mortgages have specified 30-90 days for occupancy. There usually seems to be more flexibility the other way - if you then move out and start renting the property, everything is cool with your OO mortgage. I would not recommend trying to stretch the truth on this point. The lender will know when you start renting, because you're going to update your property insurance to reflect that. And as you say, you can currently get pretty good rates for a rental property. The bigger hurdle for most I think is that LTV requirements are stricter. Most of the good options I've seen require 75% max, though you can find 80 and even 90 for a significant premium in the rate. I haven't seen anything beyond that, a big change from 0/3/5% down that still happens quite a lot for primary residence mortgages.

Can anyone recommend a good book or two that would introduce me to the ins/outs of the finances of landlording?

The neighborhood I'm looking at has an area I hadn't seen before, with nicer homes that are rental-ready and would need eventual expansion but are in very good condition, for $300k or so.

Skipping 21 Messages...
sbr9 said:   Krazen1211 said:   As a first time landlord for about 8 months, I've had a generally positive experience. Got lucky with tenants. Property value $240k. I clear about $300/month in rent - mortgage - taxes, and I get an actual tax loss on the property.

How are the utilities, insurance and maintenance?


Utilities - Renter pays. You might have to shell out some limited amount for water or something between tenants.

Homeowner's insurance: $220 a year. It's a condo, not a single family home which is quite pricier. Walls in only policy. I do have monthly HoA dues which I included in the 'mortgage' figure above (I clear $300 after paying the HoA).

Maintenance: Haven't had too much. It was new construction.

Keeping careful records helps. You can write off your personal mileage @ $.24 mile, advertising, mortgage insurance, etc. I had a tax loss this year thanks to the depreciation, but I had only 8 months of rent rather than a full 12.



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