Considering buying a house as a rental property

[fortmyersbride]

DH and I are considering buying GFIL's house. His health has recently declined and assisted living is now the best place for him. In order to pay for the facility and qualify for his military benefits to help fund it, he needs to liquidate a large amount of his assets including his house (sorry if I'm a bit off on how that works). GFIL and MIL are very sad at the idea of the house leaving the family. For that matter DH and I are rather attached to it as well. Additionally, there is a strong possibility that we will move back to the city where the house is about 10 yrs from now, at which point the house is exactly where we would want to live.

So we're trying to figure out the feasibility of buying the house from GFIL and renting it out for now. We would definitely use a property management company as we don't live close by. If you use a property management company, how did you choose them? We worked with one there when we rented there before and thought they were great, but I have no experience from an owner's perspective. How do you decide how much of an additional efund to set aside for the rental? And if you have a mortgage on your primary residence and your rental, did you use the same company or shop around a bit?

Any other advice is appreciated as well! I do acknowledge that I good part of our reasoning for wanting to do this is sentimental and family-motivated. I'm not necessarily looking to turn a profit, but really hoping to not lose a lot of money on the venture. We have our quarterly meeting with our financial advisors in a couple of weeks, and won't make the final decision before that (in case they want to tell me I'm really crazy).

[imojoebunny]

This sounds like an emotional decision, not a financial one. The only way to answer this question is to run the numbers. Keep in mind, that unless you GFIl can afford to owner finance, which might be a good option for him, since it would give him income, but not a giant lump sum that could be sucked up by care, then you will have to put a good bit down, at least 20%, if not 30% in today's loan market. You might also have to qualify without rental income, since the home does not have current renters.

My brother considered doing something similar with my grandmothers house, but ultimately bought a different much more costly house, because the house, though a great price, in a great area, with a ton of space for the area, probably 2x the size of many of the homes in the price range, would have to be completely renovated to be "modern" and he wasn't up for that. If DH and I had lived in that town, we would have bought it in a heartbeat, but we don't.

If it needs work, or even updating, the distance is something to consider. I am renovating a house an hour and 15 minutes from my house, but with the kids and other commitments, it might as well be on the moon. I have to trust the contractors way more than I am comfortable with, but still it is working out ok, just takes a good bit of time. Everyday, I spend at least an hour of two doing something related to it.

[fortmyersbride]

It's definitely a largely emotional decision. My hope is that it's financially feasible in a net neutral sort of way at least. We can afford to pay what i would estimate the mortgage to be without renters indefinitely, but of course there are other places I'd rather that money go. I hadn't considered owner financing, but that would actually be a great option if it doesn't negatively affect his ability to pay for assisted living. He does own the house outright, just needs to liquidate his assets.

I don't know how much updating the house needs. It was built in the 1950s and seems to have been decently kept up, but I suppose an inspection would be the best way to verify that. I'm guessing that's likely the biggest money trap, the hidden renovations and repairs that would come up with renters.

[imojoebunny]

It might be worth talking to someone for your GFIL about owner financing, verses an outright sale. Many assisted living places have spots for lower income people, but if he got cash outright, they will definitely want full price or whatever you can negotiate. This is especially true if he ends up in a nursing home. Owner financing would be treated more lie, an annuity, since it would be a payment stream, not cash up front.

As for the renovations, you can probably identify a lot of them yourself. As people get older, they often stop updating things. The ice maker breaks, they don't fix it. The countertop gets a crack, the tub needs new caulk. Individually, not big things, but in aggregate, it adds up. You have to be prepared for that. Research what rentals are in the area. Call some realtors or potential property mangers and ask them about the conditions of rental properties and the rents. Look on Craigslist of whatever the hot site is in the area and see what people are asking and watch what lingures on the market. Here at least, there is a premium for the condition of the property. Old is slower to rent, even of it is cheaper.

Good luck!

[fortmyersbride]

Thanks! Are you in ATL? If so, can I PM you about where the house is? I'm a bit paranoid to post too many details.

[imojoebunny]

Sure. I will look for the PM.

[littlemisssunshine]

I own a property management company and one thing I always tell my client is they can't have any emotional attachment to that house. Rentals should be business, not personal. No matter how hard you pick tenants something is going to happen and damage will be done to the house. Are you okay with coming back to the house with crayon marks on the walls, chewed up carpet from dogs, and a dead lawn because they didn't care to do lawn maintenance? If you really are going to try to rent it out for 10 years before moving back to the area you will have a lot of wear and tear on the house. You will have probably painted the interior at least 5 times and replaced the carpet just as many times.

One client rented out her home after moving in with a new husband. After three months her wonderful tenants with excellent credit and landlord references got into a nasty divorce, broke the lease, intentionally flooded the home, and smeared poop on the mirrors. It was about 10k in damage and the owner is now letting it go into foreclosure because she can't afford to fix it up to re-rent. My client cried when she finally saw the house after her tenants moved out.

As far as an efund goes I would have at at least 3 mortgage payments saved up (you will have down time between tenants when rent isn't coming in) and at least 3k in a maintenance fund. I've had sewer systems get clogged ($800) air handlers going out ($1800) and a new roof is going to run you at least 4k.

As far as finding a management company, I would get recommendations from people that are currently using a property manager. I get most of my clients through referrals and about 2% from my website. Contact some management companies, interview them, and ask for their opinion what you could rent it for. Crunch the numbers and see if financial viable. At some point though a tenant is going to damage the home and you need to decided up front if that is something you can handle.

[fortmyersbride]

Jan 6, 2013 16:18:03 GMT -5 imojoebunny said:

Sure. I will look for the PM.

Thanks, I sent you a PM

[fortmyersbride]

Jan 6, 2013 17:02:01 GMT -5 littlemisssunshine said:

I own a property management company and one thing I always tell my client is they can't have any emotional attachment to that house. Rentals should be business, not personal. No matter how hard you pick tenants something is going to happen and damage will be done to the house. Are you okay with coming back to the house with crayon marks on the walls, chewed up carpet from dogs, and a dead lawn because they didn't care to do lawn maintenance? If you really are going to try to rent it out for 10 years before moving back to the area you will have a lot of wear and tear on the house. You will have probably painted the interior at least 5 times and replaced the carpet just as many times.

One client rented out her home after moving in with a new husband. After three months her wonderful tenants with excellent credit and landlord references got into a nasty divorce, broke the lease, intentionally flooded the home, and smeared poop on the mirrors. It was about 10k in damage and the owner is now letting it go into foreclosure because she can't afford to fix it up to re-rent. My client cried when she finally saw the house after her tenants moved out.

As far as an efund goes I would have at at least 3 mortgage payments saved up (you will have down time between tenants when rent isn't coming in) and at least 3k in a maintenance fund. I've had sewer systems get clogged ($800) air handlers going out ($1800) and a new roof is going to run you at least 4k.

As far as finding a management company, I would get recommendations from people that are currently using a property manager. I get most of my clients through referrals and about 2% from my website. Contact some management companies, interview them, and ask for their opinion what you could rent it for. Crunch the numbers and see if financial viable. At some point though a tenant is going to damage the home and you need to decided up front if that is something you can handle.

Thank you, I really appreciate the feedback. We are certainly in a position where we can afford to not have renters and pay the mortgage ourselves, but the efund and repairs estimates help a lot. I hadn't thought about the damage that tenants do, but certainly can see that being cumulative over time. We rented a house for 18 mos, and while I was very meticulous, the kids still do some wear and tear. We would however plan to do some major renovations to the house before living in it ourselves, so I don't think this would bother me too much. But I will have to start looking for recs for prop mgmt companies to get an idea of what additional cost that would add.

Thanks!

[imojoebunny]

I sent one back. Let me know if you don't get it. First time I have sent one on here and it is different. I am really familiar with that are.