Rental Properties?

[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,...s,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.