Rental Properties?

[fidgiegirl]

My DH and I keep being lured by the thought of rental properties. On one hand, I don't want to get involved in a business that is going to suck a lot of time, energy, and worry. But we keep thinking that if we would want to get into it, now would be the time to obtain properties. There are some foreclosed condo units that are attracting us right now.

One reason we like the idea of rentals is because we are both teachers. We are comfortable now, but it would be nice to have a back-up income in case one of us is let go, burns out, if we have a baby and one wants to stay home, etc. Plus every bit gets us closer to FI.

Reasons not to would be the risk, the debt, and that it puts us further from our goal of paying off the mortgage on our current home, plus the life energy invested in screening applicants, dealing with maintenance and accounting, not to mention if something bad happens and having to try to evict or cleanup bad damage.

Is anyone into rentals? What lessons do you have? What resources are good? I can Google 'til my fingers fall off but the best resources always come from people in the know.

Even if we don't go for it, our recurring conversations would be better informed with some research.

Thanks in advance to my SLN friends!!!

[iris lily]

You have to run the numbers to see if it is a good investment. Know the market. What can you really get for rent, realistically, and not an approximate amount some real estate agent tells you that you can get. Most properties are NOT good rental investments. Are you going to amke money soley on appreciation? That's a crapshoot. Will the rental cash flow provide income?

Generally speaking, I would not buy a condo to live in or to, especially, rent out. I don't think they are good investments in most cities (with the exception of very large cities.) In the midwest--nope. Single family houses apprecate best in the midwest, condos do not.

A basic problem in condo complexes is that if many are in forclosure there is not enough money to pay upkeep. Then the complex goes further downhill. Our realtor friend says: don't buy in a complex of less than 12 units because if there is a deadbeat or two, there are still enough paying owners to keep the place up.

I also would be just generally leary of a place that has condo forclosures. They are all over this neighborhood and those associations are struggling.

Even in boom times before the housing plunge I heard way too many stories of financial trouble in the condo associations. I just wouldn't touch one. I don't want a lot of people who know little about building maintenance to be spending my money. They wont' spend it on the things I want done.

Traditional wisdom says that a 4 plex is the minimum unit you should buy to realize sustained positive rental income.

[bae]

I do quite a bit of rental property, but, it's all commercial, not residential. My first job as a teenager was in a property management firm that handled residential rentals, and I saw how easily that can go wrong with a bad tenant, even if the tenant starts out fine with good history.

And as usual, location is everything.

[flowerseverywhere]

The problem our friends have had with their rentals are not the properties but getting good tenants. One got a call on NY Eve at 11:30 pm that a window was broken. He went out and it looked like they had locked themselves out so broke the window to get in but of course denied it. They've had to evict several people. In a rental across the street from a relative they never took the trash out so when they were finally evicted the bathtub was full of trash, trash bags in the corners of rooms etc. A real mess.

Before I had a rental I would get a second job.

[heydude]

This topic comes up a lot. And, from all the posts on the internet, it seems like a bad idea for the amateur landlord. It seems it only pays off (and even then, just barely) if you have a large building where good tenants can potentially weigh against all the bad ones. If you are just buying one place, for one renter, your chances of success are slim. You cannot rely on the income being there (rent will not get paid and not on time) and just a few months of going without rent or without a tenant can set you back to negative numbers. Rental laws are in favor of the tenant (for better or worse). If you cannot do the maintenance yourself, then you are not going to come out ahead. It will suck up a lot of time and energy. If you are wanting this as a back-up plan for income, then seek other backup plans; as you will not be able to rely on this, far from it. You'd actually need a backup plan for your backup plan because your back-up plan will need resources probably from income from what you are doing now.

From what I have read, you would be better off just investing your money.

[heydude]

Don't you have to pay back-dues on those foreclosures?

[iris lily]

Start here, with posting the numbers.

How much rent will you realistically be able to get each month? And then, figuring unrented months, what's the average annual income?

How much are you paying out in dollars each month? How much is the lost opportunity cost the money you've got in equity?


What is a realistic appreciation cost? Over 2 years? Over 5 years?

How much out of pocket in repairs will you be spending each month? When a tenant leaves ?

Then there are the non-financial issues:
Are you willing to devote 1 day a month to this? 2 days a month? You will have showings, repairs (some of them emergency repairs), regular maintenance, paperwork, inspections. You may need to get involved in the condo association if it makes deicsions that aren't beneficial to you. Do you have someone who can back you up when you are out of town?

DH does a lot of work for people around here who are landlords. He has keys to many of their properties and they know that he will usually do their emergecny work "same day."
It's hard for me to believe that they are making much money on these places. I see how often they turn over. And then, our freinds who went into the rental business 2 years ago buy buying 8 units in 3 separate properties are losing the butt and are having to slash prices to keep the palces rented, and then taxes went up hugely on one of the properties (zloned commerical) and that killed any positive cash flow. They are trying to unload this property, but in this economy, there are no takers.

[jennipurrr]

Lots of good thoughts here. You must research your area. You must over project your expenses and make sure to have accurate vacancy numbers. Do not count on appreciation. Tenant quality is EXTREMELY important. You must run a background/credit check on every applicant. The ones that give you a bad feeling that you can't explain will come back to bite you.

I have one long term residential rental and 3 short term rentals. Three are local and one is about 4 hours away. Since they have opposite peak seasons I have the grand idea to one day live in them at alternate times of the year. Who knows if we ever will, but its an option. They are condos, but our short term market is odd...I can rent a condo out for about the same price as a single family, but we paid $200K less. So, that is why they work for us. HOAs have been some what annoying and difficult to deal with. One of our HOAs has a nutcase that has been suing the board since 2007...ugh. Crazy random stuff.

We took a year+ to research and had LOTS of folks tell us our numbers were crazy...well, if we can't find a property that works with the numbers we set out to make money, why would we buy anything? Its ridiculous the things you hear from agents and others in the biz trying to sell you something. A very quick and dirty estimate is that a residential rental will need to return 1% a month in rent to make it worth your while. This doesn't exactly work for condos with association fees, or high tax states like TX. Then you have a totally unpredictable event like an oil spill come along and wipe out all your peak season income one year, so all the calculations are out the window.

If you are conservative with your numbers it can work. We are not going to get rich off of these things, but we are very slowly snowballing the extra money and will have the first one paid off in a few years. Then our plan is to keep the snowball going and eventually have another source of income.

All the money stuff aside...if your marriage is not strong it will not survive being landlords and/or renovating property. If you want to test the strength of your marriage I highly recommend purchasing a property that needs lots of renovation! We have gutted two of our properties and it is incredibly stressful! I feel like DH and I have a strong relationship but we still cussed each other out in the cabinet store one day last year, heh. Its been a lot of work, and we are not seeing any tangible returns right now but I feel like eventually it will be worth it.

[Jonathan]

Bad idea in my opinion. However, MN has a department of commerce you can tap for various publications. You will probably want to set up an LLC (yet more expense) for lots of reasons.

Also check with the cities you plan to buy any rental in - they will have rules and regs to follow, and they are all different. When I looked into this way back when, I quickly came to the conclusion my life energy was worth more than the struggle dealing with just one bad renter would likely entail.

All that said, you can avoid most of this by hiring (yet more money) a professional rental company to manage the renters and units. But I'm not sure how this would impact your cash flow or profit (if any). Finding a good rental company is yet a different story...

[kib]

I have to say that the one rental property I made amazing money on was a co-op. The co-op association was responsible for basically all repair and maintenance except tiny stuff I could do myself. The huge caveat: this unassuming little apartment was within walking distance of the train and a very reasonable commute to NYC, where rents are stratospheric.

Something else to consider on the downside: many condos and co-ops have limits on rentals. 1. They may have an approval process for the tenant, 2. they may have a time limit or other strict rules. Mine wanted owner occupancy for the first five years, had reasonably stringent requirements for tenants, and insisted on one year leases.

[freein05]

I was a slumlord for a few years. When I did my research the only properties that would pencil out were those in the not so good area of town. I did ok and my renters were ok but it was a lot of work and just was not worth it. If I had wanted to take the chance and go slumlord big time I probably could have made some money but with a lot more work. It would have had to be my full time job. Some interesting things did happen when I would do maintenance. One day I was spraying weed killer in the back yard of one of my rentals and the son comes out and says don't spray those plants and I said are you talking about the marijuana.

The only problem I had is when I sold one of the homes the tenant did not want to move out so I had to bribe him to move out.

[Zippy]

We own two rental properties, a fourplex and a triplex, and for us it has been very worthwhile. We got very good deals on them - actually lived in the fourplex and lived free while the tenants paid the mortgage, and then moved to a small single-family, and the money from the fourplex paid that mortgage, so we were able to pay cash for the triplex...etc. It really can work. And I'm REALLY grateful we have this income and will have it until we sell. It's more real to me than social security feels, or my husband's anticipated state pension, because its tangible.

Having said that, I'm at a different place in my life than I was when I bought them, and even now that I see some very good purchases, I can't make myself pursue them because this economy is just still too funky. It's like the rules have changed, but no one yet knows what they are. I think you can reasonably expect that the good deals you're finding today will be there several years down the road.

If & when you do buy, here's some advice: Buy for cash flow or to live free, not for appreciation. A multi-unit property makes good sense, because if one unit is vacant, the others can still pay most if not all of the mortgage. You make your money going into a deal, not coming out (or at least this should be your philosophy), so you should find a good property in a good location (think university area, think the best elementary school in town, where there will always be demand) and structure your offer so it's profitable from the get-go. Keep a year's worth of mortgage payments in easily-tapped accounts, in addition to a year's worth of living expenses.

If you can do that -- then MAYBE it's a good idea. But seriously, now's probably not the time. Wait for the market to hit bottom and buy 12 months after that - if you still want to buy. Another strategy would be to pay off your house and rent it out, buy a fourplex and live in one unit, and go up from there. Not having kids makes this much more feasible.

[loosechickens]

Many years ago, I bought a three unit apartment building and lived in one of the apartments and rented the other two. It was great. Nice building, attracted good tenants, I ended up living "rent free" as the two rented apartments paid the mortgage, taxes and insurance on the building.

Then I bought a duplex in a not so nice part of town, and entered into a ten year nightmare of bad tenants, unpaid rent, interactions with police, evictions, being taken advantage of (you really DO need kind of a hard heart to be a successful landlord, and I was always WAY too susceptible to hard luck stories), and by the time we managed to sell that one after ten years, we breathed a big sigh of relief.

That said, those two buildings (totaling five units) are what provided the money for our first year or two as nomads, because when we sold the buildings, although they were in an area where there was NO property appreciation, the tenants had provided the mortgage payments for ten years of fifteen year mortgages, and we had a very nice amount of equity in them, all paid by others.

So.......it's certainly no "get rich quick" scheme....has lots of headaches.....single family rentals are usually unprofitable, you need at least a duplex, and preferably at least three to four unit buildings.....bae is right, commercial is much more reliable, longer leases, better all around, but requiring much more capital to get started, usually.

Would I do it again? Probably not. Do some people find it a very successful endeavor. Yes, definitely. You just have to understand that your life will not be your own, people will find very inventive ways to damage the plumbing, cause problems, not pay the rent, etc., yet your overhead will keep marching on, regardless.........

[The Storyteller]

This topic comes up a lot. And, from all the posts on the internet, it seems like a bad idea for the amateur landlord.

I haven't found that to be the case. The secret is to buy an under-priced property that needs a little work, fix it up, price it right, get some good tenants (easier than what folks think), and collect the surplus from the rent as the property grows in value.

It isn't really the rent that makes you money. It is the appreciation on the property.

[bae]

It isn't really the rent that makes you money. It is the appreciation on the property.

I don't invest in real estate that doesn't make money on its own, without consideration of appreciation.

I also don't finance my real estate purchases with loans. I pay cash. Because leverage works both ways.

As a result, pretty much every property I own "makes money", throws off income in actual dollars I can use to buy food with, and isn't in danger of being foreclosed if I can't find suitable tenants.

[Zippy]

Also, the equity more than appreciation is important, which the tenants build up for you. If you do finance it, try to swing a 15-year mortgage and it builds up very quickly and nicely.

[jennipurrr]

One day I was spraying weed killer in the back yard of one of my rentals and the son comes out and says don't spray those plants and I said are you talking about the marijuana.

Heh, sounds like me after our worst tenant ever moved out. I was trying to salvage some pyrex dishes and just could not fathom what this crud was all over them. Uhhh, yeah, turns out it was crack cocaine.

[MudPuppy]

We have a small guest house on the back of our property that we rent out. We've only been here since June and are still on our first tenant, but so far it's worked out really well for us, and has made it possible for DH to be in school full-time with only me working. The house itself isn't fancy, but it has a dishwasher and its own washer/dryer, as well as a fenced yard -- an unusual combination for a 1-bedroom rental in our area.

We screened people pretty carefully, and I think the fact that we live here on the property may also have discouraged some troublemakers. At any rate, our first tenant has proved to be fantastic -- he loves having the yard for his dogs, he keeps the place looking clean, and he's even done a couple of minor repairs around the property. He's been late with his rent one time, but he let us know in advance when he would be able to pay, and it was fine.

Anyway, we're still new to this and in 5 years I may have some real war stories, but so far it's been a good situation for us.

[loosechickens]

We did find that LIVING right there discouraged most of the problem tenants, because the last thing problem tenants want is a landlord right there watching them. I never had problems with my 3 until building and always had great tenants because I lived there myself, and when I moved out, those same tenants stayed and a friend of one of them rented my apartment, so it stayed that way.

It is important, if you have a mortgage, that you have a way to pay that mortgage even if you lose your tenants. If you MUST have that rent in order to meet your obligations, you will find yourself with big problems, IMHO But if your own finances are such that you can carry that mortgage yourself for some months if necessary, o.k.

[fidgiegirl]

Well, I have pored over your responses many times in the last few weeks. So know that your information really did that - it informed!!

We are back on a kick of looking at properties. What's alluring is knowing that we could get our house payment down to where one of us would be able to leave work and we wouldn't collapse as a financial entity.

They are two veeeeery different places. One is a fixer-upper (though we don't know how much fixing-upping yet) for only $18,000 a few blocks from our house. There are several places for this cheap in the city but they are all in less desirable neighborhoods. It's only a one bedroom and it for sure needs cosmetic work, new exterior and the garage may have to go completely. But someone loved that house. It looks to me like they cared for it as best they could. I am hopeful that it wasn't trashed on a fundamental level, like the plumbing. But we don't know. Actually, the more I write, the less of a good idea I think this actually is :D The major attraction for me with this place is that we could do it without financing, allowing us to take a little more time fixing it up at the lowest cost, using sweat equity and looking for the cheapest supplies, etc. rather than having to rush to get it all done and get a tenant in there.

The other option we're (more seriously) thinking about is becoming an owner-occupant in a duplex. There are lots of them on the market in move-in ready condition. One that's calling to us is a duplex with two 2BR unit but with an unfinished half story above the upper unit, which would be what we'd finish and then live in the upstairs 3BR unit. It's in a great location and is listed for $299,000. That would make our mortgage about $250 after we sold our place, presuming that's even possible, and finished the upper 1/2 story. The payment would be $1600-1700 and we figure we'd rent the bottom unit for about $1200. These are all rough numbers, and frankly, I don't expect it to actually work out. We'd have to sell this place first and that's not an easy process right now. According to your responses, it sounded like living on site is a good way to control the quality of tenants, though. One teeny thing is that I'm not wild about sharing my laundry, but it would be a small price to pay for (best case scenario) $1200 bucks a month.

Anyway, it would kind of be a dream if it worked out like this. I'm not holding my breath, but thought I'd see if any of you have additional thoughts. The realtor, of course, thinks it's a GREAT idea. :devil:

[fidgiegirl]

I should add that a $1600-1700 mortgage is something we CAN pay if we have to.

I am also curious to know, when people say they have "screened tenants carefully," what exactly have you done?

Thanks!
Kelli

[RosieTR]

Screening: you'd want to do a credit check, and get references. Ask for at least 3 references, one preferably from a landlord a couple of moves ago so it's not just a landlord looking to get rid of a crappy tenant willing to say the tenants are fine to get rid of them. If it's someone who just lost a house and is now looking to rent, try to see if you can somehow see the house they lost (if in close proximity). If it's up for sale you might be able to make an appt with the realtor showing it. Foreclosures are sold as is usually so you can see if they trashed the place. I have heard that the credit rating agencies are going to start reporting rental payments as part of a person's credit report which means 2 things: one, you will have more tools to assess a potential tenants' tendency to pay and two, you may have to submit documentation to credit agencies if you become a landlord. There are some changes in the tax code that requires more documentation than in the past, so an appointment with a CPA or tax attorney regarding these issues might be useful and could be done as part of the process of purchasing the property.

Continuing with the idea of screening, an interview with potential tenants is invaluable. Do you or your DH have a good "people sense"? Are either/both of you skeptical by nature? Do you have friends or family who are skeptical and/or good at judging people and would be willing to sit in on the interview (perhaps for compensation since this is a business affair)? When you do an interview, make a note of your impressions in the first 30 sec to 1 min-how does this person make you feel? What do they say about why they're moving?

There are books out there on better/worse ways to be a landlord so definitely check them out. For a few bucks it's not a bad idea to buy a couple of ones you find most useful to have on hand as a reference. Like any business venture, some people make money and many do not. If no one made money, no one would be a landlord so it is possible but you're smart to carefully consider the different aspects before jumping in.

[fidgiegirl]

@Rosie, thanks for all this info. I hadn't thought of most of it, and it is definitely a lot to think about. Are you a landlord yourself, or have you been in the past?

[RosieTR]

Yes, we rented out our house in CO when we moved to Phoenix. Because we are so far away it's well worth the money to have a property management company handle things. Neighbors across the street own a painting business and we asked them for a recommendation (figuring they may have seen the inside of the managed properties after tenants had moved out). It's been OK though an interesting learning experience. The tenants have been OK so far; each has stayed a year. While some people don't like turnover, after watching a few episodes of Hoarders I'm fine with shorter term tenants because it gives the chance to see how the place is between each. We made sure to get everything set up such that a couple months of mortgage payments wouldn't be a deal-breaker if we didn't have a renter. My biggest surprise with being a landlord was how much maintenance is, though YMMV if you and your DH can do some of the work yourselves. For example, last summer we had to pay a couple hundred bucks for a landscaping issue that I could have done if I lived close or was sharing the property such as with a small apt complex or duplex. Still, you'll have some maintenance costs no matter what: heating and cooling appliances, kitchen appliances and any flooring. (If you renovate I would seriously consider tile over carpet as much as reasonably possible!) It's likely at least one largish appliance (like a dishwasher, oven, fridge) will go per year unless they are all brand-new. They may not but better to plan and have the extra ready. Most people won't put up with you doing a lot of shopping around for a good deal on an oven/range or dishwasher or fridge if they're renting even if they themselves would shop around if they were the ones replacing an appliance. It may also depend on your tenants-sweetening a deal by making rent half-price for the month since they didn't have a working fridge for a week might work if you are in that situation. Anyway, these are all things to think about. Reasonable people will be willing to work with you assuming you are a reasonable landlord (which it seems like you would be). The main issue is getting a reasonable person in the first place. Other than books on the nitty gritty of getting into rental properties, I'd actually recommend Blink by Malcolm Gladwell and The Gift of Fear by Gavin De Becker. Both deal with the idea of making judgments based on incomplete information, otherwise known as "gut instinct". It won't take the place of doing your homework on a potential tenant (refs and credit check) but may help avoid the renter with good credentials who is actually not a good renter/neighbor. I don't mean to freak you out; this could be a great experience but it's more likely to be the more work you put in at the beginning. Good luck with whatever you decide, and hopefully all our comments help out!

[fidgiegirl]

@Rosie, they have been very helpful so far. I really appreciate that. Not many places online (or IRL) where people are so generous and kind with their wisdom. I really value it on this issue and so many others.

[fidgiegirl]

I wanted to update people on where we're at, partly as a courtesy to those who have taken time to answer questions here and partly for my own recordkeeping since we tend to drop an idea and come back to it, sometimes several times, before making a definitive decision.

We have been working with a realtor and have a market analysis on our place. Not surprisingly, it is disappointing. Our house is in a coveted St. Paul neighborhood, but it is teeny and has steeeeep stairs to the upstairs bedrooms. My husband paid $140K in 2001, has easily put in $50K in improvements, and she wants to list the place at $150K. We are not really ready to let it go at that price, plus she tells us at this price point (small, starter homes) people are mostly getting the sellers to pay their closing costs, too. Uffda. So we don't really want to sell this house. We want to ride it out until the market gets better. That would mean:
- Sucking it up and staying here.
- Renting this place out and moving on to a new living space for ourselves.
- Getting over it, crossing our fingers and hoping we can sell it, take the hit and move on to a new property, knowing that our money is then going to the place we plan to stay in for a long time and knowing that more expensive properties have taken the same kind of percentage of decline in price, meaning the dollar amount of the value they've lost is greater, making it an even better deal for us.

Also, we are looking at a duplex that we would NOT owner occupy. I am trying to get my head around how this would move us closer to our goal of living in a bigger place, though. It wouldn't, immediately. What it would do is create some income streams to help us get this place paid off faster. It is bank owned and listed at $112. We think they'd go for less as it's been on the market a loooong time. There are a ton of unknowns with this place. We haven't even seen it. Who knows why it's been on the market that long. We can say that it is in a great neighborhood but is situated behind a closed gas station and overlooks an intersection. We wonder if that is part of it. But mechanically there could be something. We just aren't that far yet. We are kind of still working out potential scenarios in our minds. It is in a great neighborhood, looks ok inside and would be cute with a little paint and whatnot, is super close to a bus line, has a nice yard, etc. So it's got some things going for it. This place is also only about five blocks from our current place, which is attractive to us from a management standpoint. Here is the listing if you are curious: http://msp.themlsonline.com/details,861a44eacc40ef37f142adc7fd4af6ac,1,results ,4012680.html

The other thing we are thinking is to rent our place out and move on to another property, likely an owner occupied duplex or triplex. What I don't know is if we can qualify for enough financing without selling our current place. I really want to have a sit-down appointment with a finance person and run some scenarios.

A friend told us today that on second properties you often need 25% down (if I remember right . . . ) and said we could take a home equity loan on our current house to come up with that. I don't know, if that's not too much $$ that's ok (like for the $112K place) but if it's for like a $300 or $350 place, that's a different story. I don't want to start drowning in debt. That's what's appealing about the less expensive place. The mortgage payment would be low, meaning we could cover all or part of it if need be, and meaning that we could actually tap the income for other needs if we wanted, and if we didn't, it could go to paying off the mortgage faster, establishing a repair fund for the place, etc.

So my head is kind of spinning. We are just starting to get our heads around all the different scenarios and possibilities.

We also have to keep our eye on the goal:
- Get into a bigger place but not pay a humongous bigger mortgage.
- Create some alternative income to lessen our (complete) reliance on our teaching incomes. Things are volatile right now politically for teachers and we're not willing to gamble our future security on it.

We had a char today with friends who have several rental properties and it was reassuring. The husband is the one who has had them for several years, actually over 10 years. He started with an owner-occupied duplex in his early 20s. He pointed out various items that we had read or heard about already (choosing tenants, not discriminating, etc.) But we were able to ask him things like what about when they go out of town, how does he handle the maintenance aspects (he does some of it himself and some he hires out and some he shares with his brother who is also in on one of the properties with him), what was it like to owner occupy (they don't know but he did in more than one of his properties). He said sometimes it is a lot of work but he feels it is worth it. Basically hearing him say it's not a horrible nightmare experience was reassuring. After meeting with them, we are willing to continue exploring the options.

I think tomorrow morning before we go on our vacation, if I have a chance, I will call the finance person and see about an appointment to discuss some of the different options and see what we should even be thinking about. We would like to possibly do this but not in any way get into a precarious situation. Obviously any landlording arrangement involves some risk but in my mind there is a difference between "risk" and "precarious." Right now we have our mortgage down under $80K and we have zero other debt and a fully funded emergency fund. We just set our retirement contributions much higher. We are in a good place, and don't want to jeopardize that foolishly, but we also know that nothing ventured, nothing gained.

So, getting into the landlording business is still on the table. Will keep you updated!!! Any feedback still welcome, and if you made it this far, congrats ;)

[iris lily]

I talked to a guy in my favorite wine bar last week who was celebrating because he had just unloaded his last of 4 rental properties. He lost $65,000 in 6 years. He bought at the high end of the market and kept losing money because he couldn't get tenants to stay, they stiffed him, etc. He was happy to get out from it all.

I think, fidgiebirl, your plan to get a duplex and live in half of it isn't a bad idea and is worth exploring. But as for the rest of it--don't know.

[Zippy]

I like that you're considering so many options. It's also great that you have abut 50% equity in your home and that it's your only debt. What could you rent it out for?

Also, don't feel there's a rush on buying something. Rumor has it the banks are holding onto tons of property/foreclosures yet to come on the market, so things could get a lot worse before they get better. You might just want to sit tight and keep building up your savings or paying down your mortgage and keep educating yourself in no particualr hurry.

[jennipurrr]

It sounds like you are doing your due diligence. I would continue to move very slowly and continue to research and plan, just as you are doing. And remember not to fall in love with any houses, especially rentals! Someone said to me once that they are like a bus, if you miss this one another will be around in 5 minutes...kinda cheesy but very true.

I just had a tenant send a lengthy email this AM over issues with a neighbor, going to be a joy to deal with.

Also, I thought Rosie wrote some great responses, I just wanted to add that we do a criminal background check also. This is after our crack manufacturing tenant adventure, who we didn't do a criminal check on...his prior conviction was in Maine, so I don't know if it would have found it anyway. Our properties are generally decent places (we are not slumlords) but it has stopped us from renting to at least one person.

[RosieTR]

Fidgiegirl, have you refinanced your current mortgage? You'd have to do an assessment with that, too (if you haven't already) but with only $80K and low interest rates you might get payments pretty low on your current place, which would free up some cash flow. If you plan to take any equity out of your current house to put a downpayment on a second property, you'll want to wait to have all that figured out. Every refinance comes with a cost, unless the bank offers an unsolicited free refi with no cash out. It might be helpful to start your own spreadsheet on the different scenarios and your estimates...even a simple Excel file with different tabs for the different scenarios could help you keep all these different thoughts straight.
For someone who has a good plan and the money it's not a bad time to be getting into rentals. People who lose their homes need somewhere to live, people are gun-shy about buying, and not a ton of people have the credit and downpayment now required for a mortgage. This means rising demand for rental properties. Coupled with cheap properties this could mean some opportunities. The key is careful consideration which it sounds like you're doing.

[rodeosweetheart]

I did look at the rental duplex--it looks in nice shape inside. I see the taxes are not insubstantial: Tax w/ Assessments: $3,744. ($312/mo) . So with maintainance and taxes you might be at 300-500 dollars a month before you have any money to put into a new mortgage.

I have owned two properties simultaneously and would not want to do it again--I guess I am low stress, and older than you guys. I would not want to endanger current property by taking out money on current home-- but I am very risk averse.

So I guess this might work for you if you wanted to go into the landlord business, but if you go into the landlord business, will you have to involve your current home? Will this make you stressed?

I think if I wanted to do the landlord thing, I would be attracted to a bigger duplex, with a larger half for me to live in. What goal do you think is more important--a larger living space for you guys, or being landlords? I totally understand the income stream idea, because I teach, too, and you are smart to be looking into other incomes!

[fidgiegirl]

Well, that particular duplex has (we think) been purchased. I agree with what you say about being stressed. We are putting some effort into some other ideas at this point and kind of laying low on the rental property thing, though we are not totally giving up on the idea yet. Mainly we need to talk money with someone. We went on vacation and that kind of helped cool us toward the idea a little - we simply didn't think about it.

[fidgiegirl]

We met with a mortgage person tonight and we are floored. If we hang on to our place, we can still go for up to a $300,000 home. If we sell, we could do $500 or more!! We don't want a mortgage that big, but just to be told we can opens up the possibilities. Maybe then we could do a really NICE duplex and owner occupy and not feel like we are giving up anything to get it. Or maybe we can keep our eyes open for another reasonably priced (well, bargain) duplex to get a positive cash flow going, use that to offset the cost of a mortgage on a single family place for ourselves. The possibilities are endless. Not sure how well we will do with endless! But it's still exciting and unreal. Someone would give us half a million dollars? Geez! There are a lot more considerations and costs and amounts of down payments and all that jazz, but we have a lot more information than we had before.

[Zippy]

No one's "giving" you half a million dollars.

[fidgiegirl]

No one's "giving" you half a million dollars.

Touche. But it did feel like it for a few minutes. :)

[jennipurrr]

We have always been fairly conservative in our borrowing habits and I believe it has been for the best for us. In general, renters aren't looking for a "really nice" place, otherwise they would be owners (I don't necessarily agree with the thought process behind that, but it is the market). Often nicer places have longer vacancy rates compared to decent, nothing fabulous, but cheaper rentals.

[Selah]

We had to move across country suddenly to help my mother-in-law who was suddenly widowed. We left our house, which had tanked in value and was virtually unsellable, in the hands of a property management/rental agency. It took them three months to get a tenant in, despite our offering it as a Section 8 property and at a very competitive price. The tenants have been difficult and started making up lies the minute they got in, paying their rent late, and so on. Please have enough money to carry the mortgage, increased insurance rates, repairs, and a property management company. Make sure the property management company has a good reputation for evicting deadbeats FAST. This house is a chain around our necks that is hard to get rid of! Good luck!

[fidgiegirl]

Well, we carry on in the process of investigating this possibility. One thing we have come to terms with is that we don't want to owner occupy. I just do not feel like I want to share my yard, basically. It seems so dumb, but that's what it is, and I might as well be honest about it. I want to have a dog and not worry about it biting my tenants because they were in the yard, or having to rent to a family (because you can't not) and being worried about the dog biting the kid, or whatever. Whenever I would think about the owner occupy option I just kind of felt like "Oh, we have to do this" accompanied by a pit-in-the-stomach feeling. I am also happy with myself that I asserted myself to express this need, because my DH was really gung-ho on the owner occupy thing.

I wrote that we had a positive meeting with a mortgage company. Well, she obviously contacted the realtor we had been working with because we got a chirpy call not shortly after that. We are not in love with this realtor. We have a bad feeling about her. She is nice on the surface but doesn't really listen to what we are interested. We had inquired earlier about a few properties and I suspect she just wanted us to meet with the finance person before showing us around to them, but she wouldn't just come out and say that, she had to kind of put us off each of the properties - one was "too expensive" (well, turns out it wasn't) and one was "not a desirable property" because it had been on the market for a long time. I would have preferred to be the one to make those decisions, not her. Plus, there is just a feeling we have that we are not at the heart of her best interest - her commission is. So anyway, now it is our turn not to be upfront :|( (realizing very hypocritical here) and we have contacted a different agent. When my husband called the first one back and told her our newest strategy/approach, she kind of pooh-poohed it. We have not signed anything with her.

So we have called the new realtor upon recommendation from our friend, who looked at like 50 properties when he bought, with no pressure from her, and also she has had like 10 rentals of her own so that to me is a valuable perspective to be able to access. Even listening to her voicemail I felt better about working with her than the other realtor.

So on to the latest idea. Our latest idea is to try to obtain a reasonably priced duplex and rent it out. It must make more money than the mortgage right off the bat. And since we learned that any duplex will require a 20% down payment, it has to be probably less than $200,000, more like less than $150,000. The thought is that then with the cash flow available from this property we could, in a year or two, rent out our current house and obtain a larger single-family home.

This is the house (http://msp.themlsonline.com/details,acd49c73010d9d56c56bec7e97e1174a,1,results ,4013931.html) we are currently looking at but haven't seen the inside. It is about four blocks from our place. Needs cosmetic work outside for sure and likely inside, but would generate more than the mortgage and is in a desirable area and right on the bus line and within walking distance to all needs.

We are somewhat concerned that the plan wouldn't actually pan out, because, hey, what really does work out exactly as planned? But the thing with the mortgage is that even in the worst case vacancy, we would be able to cover it.

We continue to be interested in this. We are really taking it slow and crunching numbers, well, to the best of our ability, anyway. We are not 100% committed to doing it but still not ready to dismiss it.

[iris lily]

fidgie, that is a very cute house. How much are the rents? Is the attic apartment all one space?

[fidgiegirl]

The upstairs gets 675 and the downstairs gets 800. We think with a spruce up and adding washer/dryer we could get more. The information is so limited that we have - we don't know if there are currently renters, where they got those rent numbers, if there even are washer/dryers, etc.

The attic unit is a one-bedroom.

We really want to get inside and take a peek!

[jennipurrr]

When I was reading your update, I was going to say Ditch the Realtor! But, then you did :) We bought our house (that we live in) with a family friend as the realtor...when we started considering investment properties it was just so hard with her, so we switched to someone knowledgeable in the field. It was like night and day! She actually helped us (walked us through all the pitfalls, due diligence) buy a foreclosure at the courthouse and didn't even make any money...so one day if we buy of the MLS we will use the same realtor for sure.

[Merski]

A Tip from the show Income Property-get someone to check the inside of the car of the prospective renter to get a feeling for how they might care for your property. I thought this was simply brilliant as most of my friends' car interiors reflect their living spaces! Also if there's a basement consider putting in a washer and dryer and folding table and good lighting with some storage underneath for both tenants.

[fidgiegirl]

@ Merski, makes total sense! I love Income Property. That is actually what got us going on this whole thing.
@ jenipurr, I always felt that was the better business approach long-term. Maybe Realtor #1 would get her commission now, but we wouldn't come back to us. I'd think it would pay off over the long run to be like your realtor, because business will keep on coming back to you.

Now today I talked with the new realtor and am equally perplexed. It was kind of a weird conversation where in one breath she was warning us not to do it and in the next breath saying things like "the rich of tomorrow are buying properties today." I will be calling the friend who referred us to see if this is just kind of how she operates, or what. We had about a 20 minute conversation and really, most of the time she was just talking at me. Very few questions. I was very surprised. I've spoken with her in the past and found the conversations very informative but today I am now even more confused. We are going to meet her in person, though, and perhaps that will be better. I didn't even get to chat with her about the specific property I mentioned above.

It was like she wanted to just say, "Now isn't a good time to get into this," but couldn't bring herself to say it. Or maybe the underlying message was, "proceed with caution," or "go for it." Seriously. Any one of those could have been the underlying message. Maybe when we meet on Thursday I need to just say that I was kind of confused by our conversation and is this is a good time to be trying to do this or not?

[iris lily]

It really worries me that you are going to let a real estate agent guide you as to if this is a good time or not.

You've got to do your own research, find out what rents are in the area that you are thinking of buying, find out what income properties are for sale in the area you have targeted, and why they are for sale. IF it's such a good idea why are owners selling their income properties?.

[fidgiegirl]

It really worries me that you are going to let a real estate agent guide you as to if this is a good time or not.

You've got to do your own research, find out what rents are in the area that you are thinking of buying, find out what income properties are for sale in the area you have targeted, and why they are for sale. IF it's such a good idea why are owners selling their income properties?.

I agree, and probably worded my concern wrong. We ARE doing research, and have spoken with people, but I just meant what was she getting at? What was she really trying to say? We won't be deciding solely based on her, that's for sure!

[iris lily]

I agree, and probably worded my concern wrong. We ARE doing research, and have spoken with people, but I just meant what was she getting at? What was she really trying to say? We won't be deciding solely based on her, that's for sure!

It's impossible for any of us to know what went on in your conversation with her, but in the end, I'd look for someone who can provide clear communications.

[fidgiegirl]

It's impossible for any of us to know what went on in your conversation with her, but in the end, I'd look for someone who can provide clear communications.

Well, it's definitely a consideration. I was feeling very confident that we would work with this realtor. Now I reserve judgment until we meet her in person.

I was thinking some more about it. One thing she kept saying was something along the lines of "If it were that easy, everyone would be doing it." But there is another side to that argument. If it is not worth doing at all, no one would be doing it.

We remain on the quest. Just adding another layer to our research.

In debriefing the conversation further with my husband, we think she may have been concerned/confused about our financial situation and that may have been where her weirdness was coming from. Hopefully we will all become clear when we meet face-to-face.

[rodeosweetheart]

I looked at the duplex and it seems very nice and in nice shape from the photos. Iguess the attic would be appealing to university students or a single worker--are these rents in line with your neighborhood? How is the rental history? does the differential for the bigger apartment seem right--I am thinking there would be more difference between the attic and the lower floor?

Is the deck for the lower floor only? How does the yard work out in a situation like that, where you have two renters (not owner occupied and one renter). I am thinking about shared yard space and how that plays out.

What about utilities? How do they get divided, and what are they where you live? Would you factor them into the rent and pay them for the renter?

I have heard people say that they should be able to sell an older income property for seven times the gross amount. If this grosses 1475, then 12 times that is 17700, times 7 is 123900. So the price is higher on this one. (I have NO experience in this, I am just thinking it out from what I have read and heard, and trying to do the math along with you, since I have thought about doing this, too!)

Now on the realtor, I don't think she's the one if you are already feeling confused about her message. What she may be saying is that she doesn't think you can afford it, and it would be awful if you got snookered in to doing something to show that you can afford it-- (I have done this on occasion and been real sorry). Or she may think the price is too high on this duplex, or did you talk to her about this one yet?

If she says that the rich of tomorrow are buying today, then she is hinting (I think) that you're going to have a hard time making the math work now but you will get your money back in the long run with appreciation. Since you seem to be motivated by income stream, this does not seem in line with what you want.

Anywho, those are my very random thoughts to add to the mix.

I really, really respect you for figuring out you don't want to go the owner occupant route. I have exactly the same thoughts as you re the dog issue and sharing a yard. But I have bought the last four houses now because I wanted a yard for my dogs--these are the most expensive dogs in the world, I think.

[fidgiegirl]

I looked at the duplex and it seems very nice and in nice shape from the photos. Iguess the attic would be appealing to university students or a single worker--are these rents in line with your neighborhood? How is the rental history? does the differential for the bigger apartment seem right--I am thinking there would be more difference between the attic and the lower floor?

Is the deck for the lower floor only? How does the yard work out in a situation like that, where you have two renters (not owner occupied and one renter). I am thinking about shared yard space and how that plays out.

What about utilities? How do they get divided, and what are they where you live? Would you factor them into the rent and pay them for the renter?

I have heard people say that they should be able to sell an older income property for seven times the gross amount. If this grosses 1475, then 12 times that is 17700, times 7 is 123900. So the price is higher on this one. (I have NO experience in this, I am just thinking it out from what I have read and heard, and trying to do the math along with you, since I have thought about doing this, too!)

Now on the realtor, I don't think she's the one if you are already feeling confused about her message. What she may be saying is that she doesn't think you can afford it, and it would be awful if you got snookered in to doing something to show that you can afford it-- (I have done this on occasion and been real sorry). Or she may think the price is too high on this duplex, or did you talk to her about this one yet?

If she says that the rich of tomorrow are buying today, then she is hinting (I think) that you're going to have a hard time making the math work now but you will get your money back in the long run with appreciation. Since you seem to be motivated by income stream, this does not seem in line with what you want.

Anywho, those are my very random thoughts to add to the mix.

I really, really respect you for figuring out you don't want to go the owner occupant route. I have exactly the same thoughts as you re the dog issue and sharing a yard. But I have bought the last four houses now because I wanted a yard for my dogs--these are the most expensive dogs in the world, I think.

Golden Doggies: :D

Rents: I think they are actually low, but we haven't yet done a huge analysis of rents. It's just my anecdotal knowledge from my renting days. The one unit is a 2BR while the other is a 1BR so it makes sense that it costs more. I don't know about the deck, or the rental history. I want to know all these things, particularly the rental history. What if there is a high vacancy rate? Why would that be? I don't even know how we find that out? Just trust the owner to tell us the truth? Hmmm . . .

We had gotten a book from the library and returned it when we weren't using it, but I think I will get it again - Buy It, Rent It, Profit. Seemed like complete information but in lay terms and no-nonsense.

I appreciate your insight and everyone's. You help us think critically through this huge idea.

[fidgiegirl]

We met with the new realtor today and feel much better about it. She is much more our style than the first person and she is very knowledgeable. We also met with her financing person who was willing to run numbers on all our scenarios. Both were straightforward, matter-of-fact, and know what they are doing. We are pleased.

Also as a result of this we found out that we have an opportunity to refinance our current mortgage for 1.5% less and no closing costs, so we are going to do that. Even if we do nothing else, we will benefit from doing that.

We are going to see the duplex I posted above on Monday. We shall see!

[rodeosweetheart]

awesome! Do let us know how it looks, and can she take you to four or five similar places so you can see what kind of rents they are getting?

[Zippy]

For your refi, you may want to consider shortening the term.

[fidgiegirl]

Time for an update, almost a month later. We have put an offer on a short sale single family home. So while we wait, we weigh the choice of whether to sell ours or try to rent it out. Our realtor is up for trying to sell it but knowing it may not, but we don't quite feel right about that. It seems like it's abusing her time and expense, though if she weren't willing and thought there was absolutely zero chance, she wouldn't have offered. She's a smart cookie that way. However, we don't want to take what we think it might end up going for. So we're basically trying to decide should we TRY to sell, but still be open to renting if it doesn't work out, or should we just make the decision to rent?

As we weigh our decision, I wonder about the tax implications? If we decide to keep the home for a few more years and THEN sell it, what are the tax differences between that and if we were to sell it shortly after moving into our new place, or are there none? I hate to hang onto it with the thought that we will sell it when the value goes higher again (we are hoping the market will go up, as markets will) just to find out that because it is an income property we owe a huge percentage of the sale price in taxes. If that is the case we might as well eat it now and save ourselves the headache of being landlords. I don't see our place going higher than $200 at any point, maybe if things reeeeeallllly heat up but I highly doubt it, and we could probably get $150 now. However, if we decide we are going to hang onto it for the long haul, that isn't so much relevant, we would view it more as a source of monthly cash, especially once it's paid off. My husband thinks that if we sell it and apply the money to our other mortgage (our own residence) that we wouldn't have an issue. What kind of professional to see about this? We don't have a tax person now. An accountant? A tax specialist? An attorney?

Those of you who rent, how do you manage your accounting for your rentals? I'm envisioning an account just for this house where in an ideal world all the rent goes in, mortgage payment and other expenses come out, and we have a cushion of $5000+ for expenses related to this house. The $5000+ might be a reach at least initially, but in the past I have always been amazed at how fast savings can grow when we set our mind to really making it happen. Am I totally off base?

@jenipurr, if you are reading, I have been thinking of you often in the last few weeks. How are you (most importantly) and your rentals recovering from the tornadoes?

[benhyr]

Standard disclaimer... I'm not a lawyer. We did own a couple properties that we were going to rent a while back and actually rented in Duluth for a month... until DW decided she couldn't take being a landlord, even though nothing had gone bad yet ;)

If you get the short sale, I'm guessing you'll homestead that? If so, then you'll have increased property taxes on the current home. Your Realtor should be able to address if sales taxes will be higher as well, but I don't think they would be. I have a great attorney up in Buffalo that I'd highly recommend... she does general and real estate law and is also a licensed Realtor.

Given the liability risk with a rental, you'd want to set up an LLC and quit claim the house title over to the LLC (I'd consider this a gray area at best but it's been all the rage for friends with rentals). The LLC should carry an umbrella as well. Technically, the LLC should carry the mortgage as well and it should be financed as an income property (rates will be a bit higher). But, it's highly unlikely the mortgage company cares, since you've had the loan for a while already.

If your current home isn't in a highly desirable rental area (eg, right next to the university, right next to a teaching hospital, etc), then I'd run the numbers with a 10% vacancy rate. So, if I thought I could rent for $1500 then I'd assume a monthly income of $1350. If you had a property manager, they'd charge around 10% as well. You might want to take that amount as income for your time. So, if your at least cash-flow neutral at $1200 a month in rent, I'd consider it (just an example.. use your own numbers of course).

All rent will flow to the LLC and then pass through to you on your return (if you and your DH set the LLC up as a partnership, then the LLC will file a Schedule K and you'll each get a Schedule K-1 from the LLC to file).

If you sell the house, the money will again flow through. So, if the house is paid off by the time you sell, you'll likely pay quite a bit as a sale will push you up a tax bracket or two (or, if you're already at the top, you'll be facing a rough AGI adjustment). One option, though, is you can use the LLC to find SEP retirement plans for you (a fee-based financial advisor could help advise between a simple k, sep, and solo k). If you sell within two years, you may be able to roll the money into your mortgage, but that's where I'd talk to a real estate lawyer.

[fidgiegirl]

@benhyr, super helpful, thanks. Interestingly I have been researching business fillings and just a few weeks ago would not have known what an LLC even is! If you are willing to PM me the name of the lawyer, I would appreciate that. Thanks very much again!

[jp1]

I've never been a landlord, or even a homeowner for that matter, so I don't have a whole lot to contribute to this conversation. But I must say, now that I've read it all at once, it reads like a book called "Diary of a Potential Landlord". Very interesting to see your thoughts and responses to the other posts over time as your knowledge grew.

The one thing I would suggest if you continue to progress towards a goal of becoming a landlord is to spend some time going to look at other rental properties. Other posters have talked about the importance of figuring out what is truly realistic rent for your area, but no one has flat out said that the only way to be able to do that is to look at a lot of places and judge them. As someone who has been renting for the last 21 years, and moved 5 times during that period, I've found that many landlords seem to have unrealistic expectations of what their properties are worth. I can't tell you the number of places I've walked into and said "who the f*** would pay this much to live here???

If I had to guess I'd guess that the people who are trying to overcharge or at least push the rent to the top of what a rational person would pay probably end up taking less than perfect tenants because those are the only ones who apply (because they know they have issues that will prevent them from being accepted at the really good places) and then the landlord nervously accepts them and for one reason or another the relationship doesn't last long. If you are offering good value to the tenant in terms of what the rent is versus the quality of the place I'd expect you will have interest from more than one potential tenant and with good screening you will hopefully pick well and have less problems, as opposed to only having one interested potential tenant and having to decide whether to risk it on them or pass up another month's rent and hope that someone better comes along.

[fidgiegirl]

I really appreciate everyone's take. You have all truly been so helpful.

A girl at a party tonight was telling us that she already signed a lease for September 1 in a place she likes because the rental market is so tight right now. Our neighborhood is very desirable and we have a nice fenced yard and superb access to bus, freeways, etc. We are hopeful we can get a good price.

We were thinking of going to see some places, like jp1 said, to compare prices.

Now I am trying to get my head around the legal aspects. We just might go see a lawyer. That way we can also have assistance in writing a sound lease AND with the business filings and organization. I just wish I knew about the short sale status now. The uncertainty is hard . . .

[RosieTR]

I believe the tax law states that you must have lived in a house for 2 out of the last 5 years to avoid capital-gains taxes. This can be any combination of years (so live in the house year 1, then rent for 3 years, then live in year 5). Or in your case, you could try renting for the next 3 years, then sell and not pay capital gains taxes. If you're doing well on the rentals and making money it may be worth it to you to keep it, if it's a headache then you can sell. As far as taxes and such from the rent itself, it's probably worth speaking with a lawyer or CPA (esp one licensed in your state).

[jp1]

Another idea if you don't want to spend the money on a lawyer would be to research your state's landlord/tenant laws in books at the library and online. Every state is different and you want to be sure that you put in the maximum protections for yourself in your lease and also make sure that your lease doesn't contain anything in it that would be illegal in your state. Details such as the maximum security deposit, notification and reasons allowed for non-renewal, fees allowed for late rent payment, where you have to store the security deposit, etc. I'd assume that you can also purchase online a basic lease suited for your state from somewhere such as the state's realtors' association for a modest fee. Every small landlord I've rented from has done that. You also will want to research in advance what the eviction process is for your state. Hopefully you'll never have to utilize that knowledge, but it would be better to be prepared...

[jennipurrr]

@jenipurr, if you are reading, I have been thinking of you often in the last few weeks. How are you (most importantly) and your rentals recovering from the tornadoes?

Hey Fidgie! somehow I missed this. Everything here in the recovery has been hard...we were so fortunate to have little damage. Two of our rentals are very close (one neighborhood over had houses destroyed) but luckily they both suffered minimal damage. They are both condos though, so I am worried about the assessment...there is some damage to the property, trees, roofs, etc...and then we had to have private security for several weeks due to looting, ugh...so I am fearing an assessment for that. One unit had a mystery 2x4 shatter a window, and the other was fine. They are both short term furnished rentals so we were able to get a guy from FEMA and an insurance adjuster in there pretty quickly. Completely seperate from the storm, one of them was rented entirely through our peak season (football season) but the people renting it had to cancel due to a tragedy in the family. So, that was hard emotionally and also is going to be hard financially because we have to get on the ball renting it now. Luckily, we got a bit of an escape and heading to a friend's destination wedding for a week, so I am relaxed and ready to dig in.

Re your post...there are all sorts of accounting rules. Phantom losses, depreciation, all that stuff. And its all changed about 3 times in the past 10 years regarding personal/rental how long you have to hold it, rules, etc. It would probably be best to find a good book on it and/or a good accountant and also be prepared to have things change on the tax end. You DEFINITELY need to have an account specifically for the rentals, especially if you do end up setting them up as their own corporation. I think they call that Piercing the Veil. We do all transactions related to rentals on separate receipts, accounts, etc.

Except for one we own outright, ours our mortgaged in our own name so a lawyer friend was really iffy on if deeding them to an LLC would even accomplish anything except more paperwork since the limited liability would probably not be valid. So, we just stuck with keeping them in our names and doing the schedule e on the IRS form. We bought an umbrella policy and properly insured all the rentals so we're banking on that. At a point when we do not have them mortgaged and we do have a significant portion of wealth in them, I have read it is best to put each property in its own LLC, so that way all the others are protected if something happens at one.

Your $5000 cushion is probably ok. There could potentially be a lot more damage, and you also need to account for paying the bills when the place is vacant, but if you properly screen your tenants and know the ages of your big expenses (roof, hvac) then probably not. Good luck!

[Mangano's Gold]

Except for one we own outright, ours our mortgaged in our own name so a lawyer friend was really iffy on if deeding them to an LLC would even accomplish anything except more paperwork since the limited liability would probably not be valid.
Also, you may also be breaking the terms of your mortgage if you transfer ownership to an LLC. This is typically a state thing. What happens is that the mortgage company has a security in interest in your property, and they want that property to be in the same name as the mortgage.

On the tax front, kelli, you would have some federal issues. If/when you talk to a CPA be sure to tell them about the ~$50K in improvements. Some or all of that may increase the tax basis of the property, and potentially lower your taxable gain when you sell. Just an FYI.

[fidgiegirl]

On the tax front, kelli, you would have some federal issues. If/when you talk to a CPA be sure to tell them about the ~$50K in improvements. Some or all of that may increase the tax basis of the property, and potentially lower your taxable gain when you sell. Just an FYI.

Yes, my DH seems to think that we can do something with that. We will have to be sure to make an appointment soon.

We are not going to try to sell our place. If we get the short sale, we will rent it. If we don't, we will stay on.

I really appreciate all the advice. It's been an interesting journey and I appreciate everyone's helpful advice and questions.

ETA: Ooh, I just realized this post made it sound so final, like "no more advice needed!" But oh, if you have some, we continue to welcome it! And you will still be hearing from me as we move forward.

[Mangano's Gold]

Good luck with whatever you decide to do, Kelli. It is definitely an interesting real estate market out there.

[fidgiegirl]

Resurrecting this thread after a looooooong time to let you know that tonight we signed a 2 year lease to rent out our current home. We took a lot of the advice in this thread - we consulted with a CPA, we screened the tenants through a screening agency, we consulted Nolo legal books and talked to lots of landlord friends. Mr. Money Mustache (http://www.mrmoneymustache.com/2012/01/27/the-foreclosure-project-final-numbers-and-pictures-are-in/) was somewhat of an inspiration as well :) It helps that we are in a high-demand area, and we considered our pricing carefully.

While we can never be 100% certain, we have a good feeling about our tenants and are hoping for the best from this experiment!

I thought that after all the help and advice the community offered us that you deserve to know what the outcome has been!

Thanks all! No turning back now, so wish us luck! :D

[Rosemary]

Wow, Kelli! All your hard work will be paying off now in the form of an income stream from your old property and the beautifully renovated house you'll be moving to. Congrats!

[jennipurrr]

Great news! Glad to hear about the successful rental.