View Full Version : 3 houses, 2 houses...or 1?
Good evening (or VERY early morning) to you fine people of the SLF! I would like to hear some outside perspectives on my situation.
Currently, we own 2 homes outright - 1 is worth about 150k and the other is 125k. Roughly speaking, after taxes, insurances, hoa dues and the like, it looks like we are paying about $10,000 a year for the pair, even though we don't have a mortgage on either of them.
I have been considering moving my family. If that is the case, I estimate that we will be making about $1,500 or so a month after all the bills are paid, and factoring in one month of non rent for the year for both properties.
If we move, we will probably be going into something that is about 250k or so, which means perhaps right around $1,600 or so a month on a 30 year mortgage with 50k down.
Doing so would put us at quite a bit lower in the reserves than I would like (which is very unnerving for me), but we would have 2 income producing properties to rely on, which would ultimately take care of most/all of the monthly note (which again, I would hate having). A major freeway has actually just been put up in the past 2 months in front of our subdivision. (Both homes are essentially in the same neighborhood.)
So, the question is this: if we were to move, what would you advise?
- Rent out both places and potentially deal with the mess of renters, things breaking down/going out but basically living "mortgage free"
- Sell the 125k house to put put mostly into the mortgage on the new house, and drop the payment to 950 or so a month and draw $900 or so after bills on the 150k house in rent
- Sell the 150k house to put mostly toward the mortgage on the new house and drop the payment to $800 or thereabouts and draw $600 or so from rent after bills on the 125k house
- Sell both, pay cash outright on the new 250k home and have some extra month in the bank. (If we did this, there may be an apartment on the property that may draw a small monthly income.)
I see pros and cons in all areas. What are your thoughts?
Having rented with all the challenges involved, having a home outright now that I love in a neighbourhood I love, wanting to focus on my priorities free from outside forces like economic downturns etc., affecting tenants, I will vote to sell both houses, realize any profit and have peace of mind in a new-to-me home that meets your needs for now and the future.
I would need more info, such as: how old are you/spouse? How secure are your incomes? How close to existing homes will #3 be? Can you manage the rentals and repairs yourself, or will you need to engage a management company? How long would you keep all 3?
With none of the above info, I think I would sell at least one...I don't like to feel financially stretched. But that's just me.
I've been renting our condo for the past six years. It's 2000 miles from us. We rented to our kids and then to a good lifelong friend. Best possible setup as no one bugged us to fix stuff - it was part of the arrangement of having lower rent that they fixed things while we simply reimbursed costs.
We will close on it in two weeks and finally be done. I can't wait. Even though it was a good arrangement with very little bother, I didn't like owning something so far away. I can't wait to move our investment to index funds.
I'd sell them both.
iris lilies
7-28-16, 10:22am
Too much is missing from you pr post. If you keep both houses and rent them, how much of your assets are tied up in real estate? Is it a big percentage of your assets? Is that smart?
not for me, I dont like real estate for investments because I loathe dealing with tenants. But if you dont mind that, the main determination is diversity--are your assets diversified?
If you want a good analysis take your questin to the Mr. Money Mustache. Those guys are bears about ripping apart dreams of landlording.
SteveinMN
7-28-16, 10:30am
Another one in the "sell them both" column -- and I am a landlord. lmerullo covers most topics I would have raised.
Being an active part-time landlord -- especially for more than one property -- is time-consuming and the antithesis of "simple". Just one bad tenant -- or having no tenant for a significant period of time -- can be a big drag on your experience. Plus there's the planning for big expenses (roof replacement, new furnace) on two houses. And everything costs more for rentals: property taxes, insurance, required inspections,...
I certainly would not stretch myself thin financially (or timewise, but that's me) to do this. The simple thing is to sell them off and apply the proceeds as you wish.
I've never been a landlord, and don't think I really want to be. There are certain situations where I would consider it. For instance if I was moving to a new city for a job but wanted to come back to my house at some future point. That doesn't seem to be your situation. Another time I'd consider it would be if housing prices were going up in my area at a decent rate. You don't mention where you are so I have no idea if this is the case. In most cases though I'd want to invest my money elsewhere in assets that don't require you to either put in a fair amount of effort or pay out money for someone else's effort.
Having been a landlord with a house only 30 minutes away, I'd say sell them both and make your new home more secure financially. We rented out the house for nearly 10 years, 3 tenants, 2 OK one a nasty soul who soured me on ever renting again. So I was relieved to have it off my radar. But, your experience might be different.
Thank you so much for all of your input! I can't believe the responses are so flush with selling. Perhaps it is because this is the simple living network, and less = simple? Anyway, here are more pieces to the puzzle that you all have been asking about.
- I am a freelancer, and do a few different things which net me around 60-80k a year, depending.
- The houses are in the Houston area, and the new house would probably be within 30 minutes or so of the would-be rentals.
- Currently, we have around 90k in savings, and 20-25k mutual funds. I would say that this wouldn't happen for a year or so, so if I work hard, we may be able to get the savings to 125 or so....maybe. You never know what could happen though. 2 a/c's could fail and work may not come in, so who knows ...maybe it is 50k in a year? I sure hope that isn't the case!
- Both the house we live in and the house we are currently renting are paid off. Taxes/insurances are high though, as a combined 10k a year or so.
My personal thought is that I like the possible feeling of 2 income streams to help pay off a third mortgage, while the value of all 3 have the potential of growing. It sounds like a good investment ... on paper, that is. Hearing so many opposing this gives me something to think long and hard about.
I am also a landlord. In general, my advice would be "Sell", especially residential rentals. (I avoid residential situations in my own real estate practices, because my very first job ever was as an office-boy/odd-jobs/repair person at a property management firm that did residential rentals, and the horrors I saw...)
There are exceptions, but they have to be the result of hard-nosed analysis, and you have to have deep enough pockets to make it work.
One anecdote to think over:
My mother a few years back purchased a lovely, newish, small home only a 5 minute walk from her house. She bought it with funds from her IRA, and kept the house in her IRA. Her thought was to be able to provide year-round rental property to working-class folks in the community, while participating in the outrageous real estate price increases happening in this area.
Didn't work out so well.
Finding tenants wasn't hard, there is a lack of year-round housing here. But one of the nice tenant families, who passed all the background checks and had great references, divorced about 12 months after moving in, and the husband moved out, leaving the wife and 3 kids. The wife got into drugs, started hosting drug parties, and so on. The decline was swift, she went from bright-and-shiny-and-upstanding to...not....within about 5-6 months. All while paying the rent. When I showed up to do an inspection as a result of complaints by neighbors, I found the floors buried in filth, her children sitting in it, her stoned and unconscious on a sofa, appliances and walls ripped out, lots of water damage, etc. etc. Took about $50k in renovations to make it habitable by humans once we evicted her. For a new-ish home worth about $225k at the time.
Then the next year Mom got hit with thousand and thousands of dollars for tree work, to prevent some large dangerous trees on the property from destroying the house and neighbors' homes...
She would have made more money over this time period keeping the house empty of renters.
I suppose this is why most people here who do residential rentals prefer to do short-term day-by-day rentals during our high tourist season, under the watchful eye of a vacation rental firm.
I am also a landlord. In general, my advice would be "Sell", especially residential rentals.
There are exceptions, but they have to be the result of hard-nosed analysis, and you have to have deep enough pockets to make it work.
Interesting ... what are your thoughts on putting the 260k into ... non-single family rentals, or commercial?
Interesting ... what are your thoughts on putting the 260k into ... non-single family rentals, or commercial?
(note I just expanded my previous post a bit probably while you were typing that, so some more info just above.)
Non-single-family units I lump into the same "avoid" category. The company I worked for when I was a teenager managed mult-unit buildings. You had the same issues of tenant selection, property damage, cleaning, maintenance, and so on, but in my view it was even worse, as so many of the tenants seemed to be transient or lower on the "knows how to live in a building" skill scale than single-home renters. You need solid capital reserves as building maintenance is expensive.
You can price all this in, of course, including the vacancy rate and the time it takes to manage the building, and it can be a good business, I just don't think it's for the casual investor unless they want to make a career out of it. Buy into a REIT or a limited-partnership real estate business instead, and let someone else deal with the hassle, for which of course you will pay them dearly.
Commercials I like, and it's what I do exclusively, but I don't buy just any old building, I buy very specific properties that have solid boring tenants - like our town's post office and small mall, chamber of commerce building, the building with one of our main internet service providers, a private school, ... - the tenants stay, they have boring businesses that serve the year-round population so they have predictable income streams, they don't destroy the property, etc. I also only buy a property if it looks like it will make me comparable/better money than treasuries/local bonds.
For any of these situations, I will restate - it is important to have enough working capital on-hand to deal with "minor" maintenance/repair/disaster issues. My post office/mall building has pretty predictable ongoing costs, but - one year a wind storm ripped off the roof to the tune of $60k, every 3-4 years one of the entry doors gets destroyed in a wind storm for $5k, this year one of them I replaced with a bank-vault-like automatic door for $20k, parking lots get eroded from unexpected truck traffic or rains or failures of a neighbor's drainage system so you eat $20-30k in pavement, your new paint falls off the next year because the (now long gone) painter did a poor job, some cruel person drops a few bags of cement and rocks into your storm drain and the first winter storm floods the building ($50k in damages), etc. etc. - not all of this is covered by insurance, and even when it is, you may need cash-on-hand to deal with the immediate emergency...
So if your goal is simplicity, I'd avoid real estate :-) I worked really hard to make sure my properties were low-bother, and they mostly are, and I have a management company help with some, and yet I'm still slowly reducing my inventory and switching to more boring investments, so I have less fuss in my life. Which raises another point - real estate isn't very liquid when you want to cash out, and there are significant transaction costs...
(note I just expanded my previous post a bit probably while you were typing that, so some more info just above.)
Non-single-family units I lump into the same "avoid" category. The company I worked for when I was a teenager managed mult-unit buildings. You had the same issues of tenant selection, property damage, cleaning, maintenance, and so on, but in my view it was even worse, as so many of the tenants seemed to be transient or lower on the "knows how to live in a building" skill scale than single-home renters. You need solid capital reserves as building maintenance is expensive.
You can price all this in, of course, including the vacancy rate and the time it takes to manage the building, and it can be a good business, I just don't think it's for the casual investor unless they want to make a career out of it. Buy into a REIT or a limited-partnership real estate business instead, and let someone else deal with the hassle, for which of course you will pay them dearly.
Commercials I like, and it's what I do exclusively, but I don't buy just any old building, I buy very specific properties that have solid boring tenants - like our town's post office and small mall, chamber of commerce building, the building with one of our main internet service providers, a private school, ... - the tenants stay, they have boring businesses that serve the year-round population so they have predictable income streams, they don't destroy the property, etc. I also only buy a property if it looks like it will make me comparable/better money than treasuries/local bonds.
For any of these situations, I will restate - it is important to have enough working capital on-hand to deal with "minor" maintenance/repair/disaster issues. My post office/mall building has pretty predictable ongoing costs, but - one year a wind storm ripped off the roof to the tune of $60k, every 3-4 years one of the entry doors gets destroyed in a wind storm for $5k, this year one of them I replaced with a bank-vault-like automatic door for $20k, parking lots get eroded from unexpected truck traffic or rains or failures of a neighbor's drainage system so you eat $20-30k in pavement, your new paint falls off the next year because the (now long gone) painter did a poor job, some cruel person drops a few bags of cement and rocks into your storm drain and the first winter storm floods the building ($50k in damages), etc. etc. - not all of this is covered by insurance, and even when it is, you may need cash-on-hand to deal with the immediate emergency...
So if your goal is simplicity, I'd avoid real estate :-) I worked really hard to make sure my properties were low-bother, and they mostly are, and I have a management company help with some, and yet I'm still slowly reducing my inventory and switching to more boring investments, so I have less fuss in my life. Which raises another point - real estate isn't very liquid when you want to cash out, and there are significant transaction costs...
Great info, thanks! I don't think I answered you (or someone else) - I am NOT a handyman, nor do I have any interest or desire. I broke the lever off my toilet the other day. I replaced with a new one, and nearly broke the toilet doing so.
I guess I'll just keep on keeping on until we do decide to move. Real estate sounds scary to me now! Maybe I'll start playing the lottery instead.
iris lilies
7-28-16, 3:14pm
The tirst rule of thumb that the guys over on MMM use is that a rental needs to bring in a minimum of 1-2% each month of the market price. This is gross, and doesnt figure in expnses. It is a very simple measure to start out with in analyzng any income property.
Your deal doesnt meet that standard, if I am reading the numbers right.
total market value for both: $275,000
monthly income: $1,500 rent + $833 taxes, maintenance, etc that you have identified=$2,300
that is not 1%
professional income property investors analyze 40 properties before they buy 1. Just because you own a property doesnt mean it is a good candidate for rental income.
professinal income property nvestors analyze 40 properties before they buy 1. Just because you own a property doesnt mean its a good candidate for rental income.
Truth.
I have looked at every single commercial property in my village multiple times over the past ~20 years, and I've ended up only moving on a handful of them. One of my "competitors" simply snaps up anything that comes on the market, and most of hers end up sitting empty as she drives the tenants out when she has to raise the rents to try to break even with the inflated price she paid. She has deep pockets to buy, but apparently uses a different calculator when looking at her income stream... It's a shame though to see the empty places in the village that have "toxic" rents. Sometimes an incomer to the community will rent one of them and try to start a business, but they usually can't do math either and die within a season or two.
I think they need to do a better job teaching life-skills-math in high school...
To me it depends on your reasoning for rentals. Is it a long-term goal ie: doesn't matter much now, I'm interested in what our landscape will be in 25 years? You don't give much backgroud on the why and the situation.
I have no interest in landlording even though retirement planners often speak to income property. I'd rather earn less in the market and be stress free of all the hassle many landlords have and have been described here in this discussion thread.
Best of luck with your decisions.
ToomuchStuff
7-28-16, 11:14pm
It's a shame though to see the empty places in the village that have "toxic" rents.
Count me on the sell both and buy what you want. I have heard a few good situations, but mostly horror stories from the landlords I know, and some funny ones as well (recent one, person didn't know you had to change it from heat, to a/c and not just adjust the temperature to get it to drop).
Years ago, my two bosses and myself were offered the building my work is in. I was much younger and certainly wouldn't have qualified for 5% of the cost, let alone be ready for the emergency expenses. I knew some horror stories (former boss was once property manager and was asked to leave work by a tenant to come plunge a toilet). We have gone through a couple of owners now. The most recent, acquired a new tenant, who remodeled and moved in. The next year, they tried to double the rent, thinking the tenant wouldn't move after getting all that done. Tenant moved out to a place with 1/2 the rent and 2x the traffic, while the landlord who was trying to make up for vacancies, is driving more people out. (we are the one tenant they want to keep and were the only one with a lease)
To me it depends on your reasoning for rentals. Is it a long-term goal ie: doesn't matter much now, I'm interested in what our landscape will be in 25 years? You don't give much backgroud on the why and the situation.
I have no interest in landlording even though retirement planners often speak to income property. I'd rather earn less in the market and be stress free of all the hassle many landlords have and have been described here in this discussion thread.
Best of luck with your decisions.
My thought is mainly just for investment purposes in the long distant future and cash to move in the near future. It is amazing to me how many folks are saying sell, but I am really starting to connect with it. Heck, I am NOT handy, nor do I want to deal with the stress of going in to do fix ups and worry about things breaking.
I say that the issue of "not handy" is really important. My friends who have done well land lording do some of the repairs themselves and know how to supervise contractors when they don't have time or energy to do repairs. They both own a number of houses, not only one or two. It's a serious job and you may want to do something else like bicycling! Bicyclist
Simplemind
9-2-16, 11:56pm
I would sell both. Have had to deal with renters and will never do it again.
Gardenarian
9-4-16, 8:59pm
I agree with the others who say to sell.
If I may ask, why do you intend to spend so much on your new place? Are you moving to a pricier location?
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