Ask the Readers: Should I Buy a New House?
Published on - July 27th, 2012 (Modified on - January 3rd, 2013) (by J.D. Roth) Sometimes personal finance problems have clear solutions: There’s a right answer and there’s a wrong answer. When you’re new to money management, these answers might not seem clear, but they become clear with time. But my favorite personal finance dilemmas are those to which there are no wrong answers, only good solutions.
For example, an anonymous GRS reader recently wrote wondering what to do with a large chunk of money. Here’s her story:
This has been a good year. In fact, it’s been a great one. I’m 48, self-employed and thanks to a variety of circumstances, I’m going to pull in four times my usual annual income. I’ve paid off my car and student loans, have no credit card debt, and my emergency fund is fully stocked. I’ve refinanced my underwater house and, with insurance and taxes, my monthly housing cost is $750.
So here’s the question: Should we put our house up for rent (the rent would cover the mortgage and all the property management fees) and use this year’s windfall as a major down payment on a country property we’ve always dreamed of having? Or should we just invest the money?
Paying off the current underwater mortgage doesn’t seem to make sense, especially if a renter will do it for us. Buying another house seems a little wild, but interest rates and prices have never been lower, and it’s a property we’d always planned to buy when we retired. Is it crazy to think of buying it now, as long as the new mortgage and the old still fit within a more normal year’s income?
Our anonymous friend is in a great position, and each of these choices is good. The questions is: Which choice is best? Unfortunately, there’s no way to know.
One problem we face when making any sort of investment is that we can’t see the future. If we could, investing would be easy. Sure, we can look at the past and make some educated guesses about what’s likely to happen. But these guesses — even when made with the best information available — are still nothing more than guesses. In the end, we have no way to be sure which investment will provide the best return on our money in the future.
I’ve actually been wrestling with a dilemma similar to the one faced by this anonymous reader.
For the past six months, I’ve been renting an apartment. My lease goes through the end of January. But mortgage rates are very low right now. Home prices seemed to have stopped falling. In fact, I’ve heard tales that the real estate market in Portland has begun to sizzle again. (It’s not uncommon to hear tales of houses selling after just a few days on the market.) It seems to me that now might be a great time to buy.
On Monday, I had lunch with a GRS reader who rents the top floor of a home near me. She told me her landlord plans to put the place on the market. She says it’s a lovely building and her landlord has put a lot of effort into making the place shine. I could afford to buy the place with a good rate, thanks to my good credit score and could then rent out the top floor to offset part of the mortgage.
But should I buy a home just because interest rates are low and prices are good? And should our anonymous friend by her dream home just because it’s now within the realm of possibility? These are tough questions. And they’re big questions. Buying a home is usually the biggest financial decision any of us make in our lives!
I’m not sure what I’ll do in my case. (I know I won’t make any sort of serious moves until mid October, after I’ve returned from my trip to Turkey.) But what about the reader who asked this question? What’s her best option?
If you were in this position — your only debt was your mortgage, you had ample emergency savings, and you had an extra chunk of cash — what would you do? Would you consider buying your dream property while renting out your existing home? Would you invest the money in some other way? Would you pay off your current mortgage and save even more before buying a new home? Is there any one right answer?
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I think it’s all about priorities. If the author’s true #1 priority in retirement is this house, then go for it. I assume she’s smart enough to think the situation through clearly, and it seems she’s set herself up financially to have the freedom to do what she likes (conscious spending!!), so she should. She just needs to spend the time to be sure she’s certain that’s what she wants. I guess the most I would council is a nori torun in action. Give yourself some appropriate amount of time to be sure this is what you want and you’re not jumping because of supposed financial incentives.
Same for JD – you don’t want to be the dancing monkey. Being a landlord is a commitment and can come with trouble. It might make some sense financially, but if it’s not what you want (and you’ve also set yourself up to do what you want), the monetary gain will probably be ‘worthless’ to you.
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Chasa, I agree that being a landlord is no walk in the park. However, if you own 2 or more rentals, you can make a nice profit as a landlord. The trick is to have several rentals to spread out your risk.
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Trick? I own 7 rentals and trust me, it’s no ‘trick’. You either answer the 1am calls that a toilet is overflowing or you pay a premium to have the property management company respond. That’s not ‘trick’ – that’s a decision.
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I bought my apartment because interest rates were low and yhe price was good relative to my market (prices never really fell, they just stopped going up) and I was worried about being laid off.
I always wanted to own and rents just kept going up. I had the money for a downpayment etc and figured why not? I work in finance, my company isn’t doing great and my compensation has been droping each year. Even if I got another job it would be for less money. The way I saw it was that if I bought my own place I would have fixed costs in terms of mortgage and if I did lose my job and needed to dip into savings I would be putting the money into equity not rent. Also, what landlord would rent to an unemployed person if I had to move, and the odds of getting a mortgage would be even slimmer.
My current mortgage and maintenance (I live in co-op) is less than my old rent. The place is small and needs a lot of work but I feel more secure having it than not. It may or may not have been the best strictly *financial* decision. The market was down, I could have invested the money instead for example, but it was the best decision for me and my personal finances.
There’s rarely ever an ideal time to buy a place. I say if you’ve always wanted a place in the country and you can afford it go for it.
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Buying a house/apartment because you think you are going to lose your job is a terrible idea.
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Yes, it’s a terrible idea if you live in an area where you can rent for less than a mortgage payment (which I understand is most of the country outside where I live) and you don’t have a large cushion to carry you through any tough times.
I have watched a lot of friends deal with unemployment over the past couple of years and those that battled the most to get back on their feet were renters and those who borrowed at the top of what they could comfortably afford.
I am paying less out each month than I was when I was renting a comparable space. If I moved somewhere with cheaper rents other expenses would increase, so buying actually allowed me to increase my safety net of savings each month. I easily save 50% of my take home pay each month and have a few years worth of expenses saved up.
If I lost my job while renting, I’d have to use my hard-saved money to line someone else’s pocket and would be at greater risk when the rent was raised or building sold and I had to move. If I lost my job now, my savings would go towards building equity in my property, so I’d be in a much stronger position than if I were renting as I’d essentially be shifting some of my money from savings to my property.
If I don’t lose my job and the market picks up again, I’ll be saving even more than 50% of my take-home pay and exponentially increasing my net worth by paying down my mortgage instead of rent.
I realize that my circumstances differ from the average. I make an ok salary, even for my HCOL area and, since digging my way out of debt and crazy spending, I am now super conservative with my money.
The point of my original post was that conventional wisdom is one thing, but it doesn’t apply to everyone. In my case, financially I’m in a much more solid position than I was before I bought my apartment, and should I lose my job (which in this current environment should be a worry for almost everyone) and have to dip into my savings it will “cost” me less.
Of course the downside is that I live in a 500 sq ft apartment, waste time cooking from scratch and flirt with making my own laundry detergent
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I think your idea is spot on. It would be different if you didn’t have a large cushion and potential for getting another (albeit poorer-paying) job but you do, so don’t listen to that previous poster!
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The wisdom also depends on the type of work you do. In my industry, changing jobs has almost always meant cross-country relocation (at least for better opportunities), in which case buying a house WOULD be a terrible idea. If one lived in an area with lots of other opportunities in his field, or was financially-secure enough to wait for a better job or take a lower-compensating position, then buying could make sense.
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Be careful about renting. When you finally do go to sell, you will have to pay capital gains tax on any profit, PLUS taxes on the recapture from the depreciation you take off your taxes every year. Either that, or you have to do a 1031 exchange.
I inherited a house and rented it out for several years, then traded ( 1031 ) for a rental property in a place I thought I might want to retire to. My plans have changed. If I sell and do a 1031 exchange, I have to rent that property out for 2 years before I can move into it, or I have to pay about $150,000 in taxes. The value of the place I bought in 2005 has gone way down, so I can’t make a profit, and would probably have to come up with a bunch of money to pay taxes.
It’s a big merry-go-round, and I want off of it, but I can’t ( yet ).
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What if you were to apply the windfall to the mortgage so you can pay that down and refinance it to a lower % (since you can’t get refinancing on a underwater mortgage).
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Lady Meow,
Capital gains and depreciation are certainly something a potential landlord should be aware of. In this case though they are currently underwater so theres no capital gains.
Depreciation capture is real thing to consider but only applies to the amount you depreciated in the first place and for many underwater houses it may not matter since the houses actually did depreciate.
e.g. Buy a house for $160k in 2003. Write off $6k depreciation for 9 years. Sell it today for $100k. Tax bill = $0 Of course thats not a typical situation, but it can easily happen nowadays with underwater homes.
My dad bought a house ~30 years ago for $20k. He depreciated it entirely. Its now worth $80k. If he sold today the tax bill would be ~$14k. Thats a hefty bill.
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My only caution about a “country property” is that, if she’s talking beautiful old farmhouse on a big lot, it can suck up a lot of her free time and/or money on maintaining it.
Ten years ago my husband and I bought the beautiful old farmhouse. It was great for about 2 months, until we got tired of spending a half a day every precious weekend just mowing the lawn.
Good luck with your decision, Anonymous Poster!
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Hi –
Believe it or not, the work is part of the appeal. I’ve done lots of traveling, and have gotten to the point where taking care of my own place — and being able to work from home and enjoy it — is a genuine pleasure. I’ve got an old house now, and its quirks (and the work that results) is actually part of the charm!
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Renting out a house is a PITA. Only do it if that’s something that you think wouldn’t stress you out. Some people enjoy the challenges of being a landlord, but most people don’t, even with a property manager.
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This times a million. I’ve spoken to several Realtors about this subject, and they all say that people should think long and hard before renting out their home. Not everyone has the stomach to be a landlord. If the OP – or anyone else in her shoes – decides to become a landlord, talk to an attorney and/or see if your city or county offers classes on how to be a landlord before putting up a “for rent” sign.
And yes to the comment above about houses in the country (maybe) sucking up your time with maintenance.
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If I read correctly I believe she plans on getting a managment company (which usually only charge about 8-10% of rent).
Honestly this is my dream and something I do plan on doing in the next few years. In my city there are many properties that have multiple units on them–mainly in-law suites.
I would love to have at least 2 additional properties, in the more historical areas, buy them dirt cheap, fix them up (I can do a lot of work myself, and have family who are handy as well), and rent them out using a mangement company.
Like the reader, my total house payment is low enough and I would hopefully have a low-enough payment on the second property to where I can afford months without a renter and can pay two mortgages. Yes, you can argue that home values are in slow or non recovery, but it’s hard to deny that in many areas of the country rent continues to go up.
It’s not a get rich quick scheme, but if you hold onto the properties until retirement you can either sell them and add to your funds, or continue to live off of the rent, and depending how long you have until you retire can be quite a decent chunk, as well as hopefully the mortgage would have been paid off for sometime.
If your managmenet company is on point you should not have to have too much involvement.
Also, per Zillow (which yes, I know is not always accurate) the rent value of my house is twice what I am paying for it, taxes, insurance, mortgage included. I would not be able to afford to rent my own home. In my area homeowners definitely tend to get a better deal than renters so it definitely also matters where you live.
One last thing. If you decide to do this I HIGHLY suggest you treat it similar to a business and keep the finances separate from your own. Collect profit in a separate account (that I personally would not touch), spend out of that same account (repairs, management fees, “empty” months), and use a separate credit card. It will be easier to track if/ when it becomes a financial burden instead of a benefit.
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ITA. My friend just returned to her house after renting it out for two years via a property agent.
When she returned home she found that the tenants had damaged the property and painted rooms (even though they were prohibited from doing so.) The property agent returned the renters’ deposit without verifying the house was in its original condition, so now my friend has not way to get restitution.
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In business parlance, this is called vendor management. The management companies can be just as lazy and be as bad a liability as the tenant. If it was as easy as writing a check for 8-10% of the rent, that would be one thing. But they require just as much supervision as tenants.
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I think you have to look at the numbers (at least a little bit). You are essentially considering turning your house into an investment property. What can you rent it for? Is the return on the rental income better than you could expect from whatever investment you might make?
Also, consider that the rental property can give you positive cashflow every month until you decide to sell it. If you pay off the mortgage on it, it could be a substantial additional income when you get to retirement.
Depending on how the numbers work out, you could get your dream home, and have a little extra cash in your pocket each month, too.
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It’s a no brainer to buy real estate now after the downturn and with rates imo.
Just make sure to stay for 5-10 years++!
Sam
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Japan’s real estate bubble is STILL going on – more than 16 years after the peak. I am still concerned that 5-10 years may not be enough. Best to be prepared and enjoy the house for the pleasure it will give you right now.
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It is hard to know the future, but if it were me, I would be more inclined to reduce the amount of debt on the first mortgate before getting a new one. Sure, a renter could pay it off, but that does assume you have a full time renter which isn’t guaranteed. Also, as Chasa says, it necessitates being a landlord too. Interest rates are low right now, but once the first house is paid off, then it could be sold later and the retirement home could possibly be bought with cash.
I’m a bit of a Dave Ramsey fanatic, and so if I had my way, I’d never borrow again. I’m not saying it’s the right thing to do either… just what I’d do.
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Whatever you guys do, please know that being a landlord isn’t “passive income.” It takes work. Maybe it’s a good return on the work but it’s still work.
My landlord has to deal with a number of tenants.
On the one hand there’s tenants like me, who pay on time and take care of everything but also call whenever anything goes wrong– the faucet is dripping, something smells funny, we need new recycling trash bags, the mailbox is askew.
On the other hand there are the crazies that don’t pay on time and trash the place and need to get evicted and taken to court.
I also have a friend who is renting his old studio. The tenant is nice enough and is an able worker but apparently spends too much money on weed and is three months behind in his rent. My friend is sick and doesn’t need the drama of collecting from a friendly acquaintance.
Being a landlord is a job. If you want it, you can probably make good money. Running things by remote control or expecting the money to just appear in your mailbox however is bound to cause headaches.
And speaking as a tenant, property management companies are horrible to deal with.
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Oh my, you reminded me of one of my tenants. She is nice enough…but calls for strange unfixable things. For instance, she thought that her bedroom wasn’t getting as warm as the rest of the house this winter. My husband went to check it out and her vent was closed. Another time, she had me call a technician to come look at the furnace. Unfortunately, I paid almost $100 for someone to replace the batteries in the thermostat. In hindsight, I should have gone and checked the situation out myself but when someone says the furnace isn’t working I tend to take it seriously.
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Speaking of strange, unfixable things, my neighbor called the landlord to report that a snake was living under our stairs. It was a harmless garden snake, but she wanted the landlord to come over and remove the snake. This same neighbor is currently wanting to buy a home. I can’t imagine how she will handle her own home if she can’t even handle a garden snake living under the stairs.
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Ha ha, I don’t call for anything that’s “strange, unfixable” but here’s one example for you:
Early this year the roof was leaking above the bathroom closet and showing up as a wet crack in an adjacent bedroom closet. It leaked so bad that it ruined a stockpile of toilet paper (yes, I shop at Costco)– luckily there was no drip in the bedroom closet where there are clothes.
The roofer came and spread his tar or whatever but later it kept leaking. Only a little, but a leak is a leak, and it made me nervous. So I called again.
The landlords came, checked it themselves with my help and agreed it was wet but couldn’t see where the problem was. I measured the distance from the walls where the roof was leaking and then I measured from above and sure enough in the same region there was a crack at the meeting of these two sheets or whatever they are that get coated with tar. So it needed patching, and they patched it themselves.
Now a few months later I spot a loose light fixture in the bedroom closet (there wasn’t a drip in the closet per se, but the crack was above it). At the same time, there is a musty smell in the closet that wasn’t there before (no, it’s not my clothes). Should I call them to check for mold in there? I live in a desert where mold is infrequent, but a leak is a leak, and maybe something got soaked and rotted. So, should I call?
My magic eightball says YES, DEFINITELY.
Then again, landlords may have a different point of view
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I don’t call either situation “strange and unfixable.” Oddly, even with the vent thing… I found myself in the same position. For those used to renting older models, there’s one radiator or something like that. I’m 30 years old, and this is the first apartment I’ve had with a vent, and yes, it’s taken me awhile to figure it out… because my bedroom is at a different temp than the rest of the apt.
With the batteries in the termostat… well, *something* was wrong, right? It’s a little weird to expect tennants to know how to fix even the basic things, because *somebody* still has to tell them the first time. I know that if my furnace stopped working for whatever reason, I’d call the landlord ASAP and the maintenance guys will take care of it. Why should I waste any time trying to fix it myself? I rent for a reason.
I’m not trying to be combative here, just trying to illustrate that one person’s “strange and unfixable” is another person’s “I pay you to figure that out.”
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Really? If your bedroom was feeling cold, you wouldn’t check to make sure your vent was open? Hmmmmmm…
It is definitely a landlord’s job to fix things that are actually wrong…but it isn’t a landlord’s job to fix basic common sense situations for people. With that being said, the tenant that I am speaking of is really nice and she takes very good care of the place. I have just learned to take her phone calls with a grain of salt and check out the situation myself before calling a technician to fix something that doesn’t need to be fixed. Once, she also told me that it bothered her that the fan blew for a few minutes after she turned the furnace off. Obviously, that was nothing that could be fixed.
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Exactly!
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@ Holly
I think the landlord owes the tenant a tour and explanation of how things work in their property. Not everyone is good at figuring out mechanical/electrical things.
Anyway my original point was– being a landlord is a job and not always an easy one. And these things come with the territory. Yes?
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Yeah, I totally agree with that!
She now does understand the basics of how the furnace and air conditioning work thankfully!!!
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Additionally, I agree that it can be a major pain. We had a tenant last year move out and leave over $6000 in damage. It took over a month to repair everything. In the end, since we had to replace most things (carpet, refrigerator, picture window, all of the interior doors) it ended up being a nicer place than when we bought it. However, it was a giant undertaking.
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Holly,
“It is definitely a landlord’s job to fix things that are actually wrong…but it isn’t a landlord’s job to fix basic common sense situations for people.”
I have to say that this is actually pretty patronizing. I’m sure there are things in your life that you find to be a complete mystery that are completely obvious to someone else.
As a lifelong renter (I’m 32) I don’t need to know anything about basic dwelling maintenance. The only thing I really need to know how to do is change a light bulb. I’m not going to do basic troubleshooting (nor learn how to do it) because that’s the landlord’s job, not mine. I mean, even if the batteries are dead in the thermostat? Well, I’m still going to call you, and you’ll diagnose it as an easy fix. It’s simply not my job to do basic troubleshooting on a system I don’t know at all. Leaky faucet? I call you. Plugged up drain? I call you. (Yes, I won’t even buy a bottle of draino because my maintenance guy will take care of the problem.) Sliding door comes off the tracks? I call you.
Go ahead and flame me for not having any “common sense”, but this is actually a good discussion for those thinking about getting into the landlording business. Landlords are in the customer service business, but I can tell from the tone of your posts that you resent that aspect of it.
I’ve rented from large corporations and mom and pop landlords. Corporations have maintenance staff on hand to take care of exactly these things, and mom-and-pop don’t. Yet, mom-and-pop want market rate rent for their rentals.
“With that being said, the tenant that I am speaking of is really nice and she takes very good care of the place. I have just learned to take her phone calls with a grain of salt and check out the situation myself before calling a technician to fix something that doesn’t need to be fixed.”
There you go with the patronizing thing again. If I *owned* property (that I inhabited or rented out) I’d learn to do the common sense repairs so that I could save a bundle of $ instead of calling a technician. Something’s not working right? I’d take a look before opening my wallet. Common sense should tell *you* that, right? It’s just that as a renter, I have no incentive to save you time or money, so I’m not going to.
Don’t get me wrong, I’ll help you out in those situations, but I want something in return. I wouldn’t nickle and dime you over repairs, but what I would do is feel you out about your expectations before I rented from you and then negotiate a discounted rent in return for taking care of the little things. Otherwise, I’d go rent from the big bad corporation who will take care of those things for me.
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Dan,
How did you manage to age two years — from 30 to 32 — in less than one day? I’m guessing Holly is thrilled that you’re not her tenant. Not only do you not have a clear idea how old you are, you expect your landlord to exercise all the common sense on your behalf. Be careful. There are laws in most states that require the tenant to take measures to prevent a known problem from becoming worse. You could find yourself paying a hefty repair bill if you cavalierly walk away from, say, a broken toilet without immediately notifying your landlord or, please, at least turning off the valve before the entire bathroom is inundated.
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Dan,
After reading your reply, two things have become apparent to me. 1. You don’t like renting. 2. You don’t like thinking.
First, “mom and pop” landlords have no incentive to give you some sort of discount for renting from them. Landlords have no reason to set rent at whatever you perceive is a fair price. Rents are based on what the market will bear. They charge what you will pay. And I have to tell you that I am NOT in the customer service business. I am in the business of making money. My only goal is to keep a property rented out and hear from the tenants as little as possible. I have no reason to jump through hoops trying to please people because there are a lot more renters in my area than rentals. Each time a house becomes vacant, I have had many many applications to rent it.
With all of that being said, I do agree that it is in my bet interest to keep my rentals well maintained and nice. For that exact reason, I always call a professional to work on the furnace, air conditioner, plumbing, etc. Calling a professional does not signal incompetence or lack of common sense on my part. I don’t mind paying an expert to fix or replace something that is beyond the scope of what I can do myself. I also work 40-50 hours at my regular job…so showing up in person isn’t always possible.
If you want to call your landlord to change a lightbulb or your toilet paper roll that is your business. If you want a tutorial on how to turn your oven off and on, then by all means…ask for it. Just know that someone- somewhere- is making fun of you for it.
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I’m really glad that Holly is not my landlord and I feel bad for anyone who would be her tenant. One of many reasons I rent is because I don’t want to deal with the hassle of fixing things myself, that’s the landlord’s job. If I wanted to become a handyperson I would, but it’s not necessary. Besides, why should I pay for improvements to the property I don’t own?
I’ve had landlord’s that slow-rolled repairs because he did not want to do them and it’s not pleasant (Some were pretty serious repairs that violated housing code in our city). Don’t become a landlord if you don’t want to put in the work.
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Emzee appears to be drinking the “mistreated tenant” kool-aid as well. Holly said she fixed anything that needed repaired. She was just stating that teaching someone how to open their bedroom air vent was not a “repair.” Don’t lump all landlords into one category just because you have been “slowrolled” by your own.
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Those must’ve been some expensive batteries!!! (hehe)
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Holly, as others have said, “common sense” is not the same for all people.
As someone who grew up in a full-service apartment building with a superb superintendent, I can tell you that I’m clueless when it comes to fixing things around the house. In my first apartment, I did, in fact, ask my landlord to replace a lightbulb for me. I couldn’t figure it out.
I’m not an idiot, and I don’t lack common sense. I bet I can figure out a subway system in any city in the world better than you can, because I grew up using one. Our ideas of “common sense” are highly dependent on culture. I encourage you to keep that in mind when dealing with your tenants!
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Well said, El Nerdo!
Clearly the anonymous poster knows they can make the finances work either way, so I think this is more of a question of time, energy and commitment than money.
An extra property is extra work, so the real question for anonymous (and J.D.) is “do I want another job?”
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One thing for the anonymous reader to consider is whether she really wants to be a landlord. We have two rental homes and while it is mostly uneventful there are many times when it can be quite inconvenient. Whenever someone moves, getting the place ready to be rented again can be time consuming. Additionally, it can be a hassle to find a suitable tenant.
I am in a similar position to her. We are debt free besides our mortgage (and the rentals that our renters are paying off.) We have thought of renting out the house we live in as well and buying a country home or a lot to build on. Ultimately, we decided that the best thing to do was to stay put for now and pay off the home we live in. Then we can decide what to do. I just don’t like being in debt and the thought of starting an additional mortgage over was unappealing. Yes, interest rates are low…but I (and she) would still be taking on additional debt.
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Having sold a property earlier this year to get out of the landlording business, I would be cautious in this situation. Will the reader be interested in the hassles (and cost) of maintenance & repairs for 2 places? Trying to find good tenants who pay on time? Does the reader understand that she is likely to get a lower sales price when she does decide to sell (the tenants’ furniture isn’t suited to the place, it isn’t decorated nicely, and even good tenants start to make a place feel more run down)?
If I were in her place I’d sit tight until I decided to sell, and then just buy the house in the country then. If she continues to save up her money, maybe she can pay for it in cash, making the whole interest rate issue a moot point.
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You know the best part of life is when you can make a dream a reality. If this house is what they really want, they understand the risks and potential costs, they are willing to be landlords and what that entails, and they can afford it, which it appears they can, then why not go for it? Most here would support them if they were looking at another goal and seemed as prepared, like switching careers or traveling.
For what it’s worth, I’d say go for it.
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I would sell rather than rent the house I don’t want, and then buy the country house. I have no interest in being a landlord.
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Sounds like it’s still underwater though. Yeah, you could say it’s a sunk cost but lots of people have also become well off through real estate rentals. No reason they couldn’t try it for a year, see if they like it or not and if they don’t, then sell at that time (win win because hopefully they would have made more AND bought the dream house cheap.)
My only hesitation is that *one* year of good self-employment income doesn’t mean much – unless you’re in a business with guaranteed contracts or something like that.
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Whether the house is underwater or not is only material if you expect that the value of the house will climb back up if you hold onto it longer. If the value of the house is down for the long term, it doesn’t really matter if you sell it now or later.
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I’m afraid you’ve lost me on this. Yes, I owe the mortgage money. By renting the house, however, I can have someone else PAY the mortgage, while if I sell the house, I have to pay it. Am I missing something here?
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How long is it going to take for you to no longer be underwater on the house at your current rate of mortgage?
Unless you are very far into it, most of your payment is going towards interest anyway. I imagine it is going to take you a LONG time to make it up just on the mortgage.
So if your property doesn’t appreciate (which is likely in this down market), it means that you are probably going to have to sell the house and bring money to the table anyway. That is, unless you want to be a landlord for decades.
And who knows what will go wrong in the house while you are renting it in the next few years. What if you have to replace something major? You could lose money on a renter for sure and decide to pull out and sell at a loss in two years, leaving you with less money than if you had just gotten out now.
Now, correct me if you are somehow clearing hundreds of dollars more a month and can put that directly towards principle. That would certainly change this equation. But Tyler is right if this isn’t the case.
How far into the mortgage are you?
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If you can refinance the mortgage, then you must have gotten an appraisal greater than your mortgage balance, right? That’s not underwater. I believe “underwater” suggests negative equity in the house. Now, you may not make a great profit, and you may sell it for less than you bought it for, but the ability to refinance would suggest that you have equity in the house and thus, are not underwater.
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I would look over the pros and cons and talk to anyone you know who is a landlord (and not one for a major renters company). Being a landlord with little experience can be risky. You’ll have to deal with any maintenance on that home while dealing with maintenance on your new home.
Also, you never know how your renters will end up. Not to say it’s a bad idea, because you could get excellent renters who always pay on time and have very few problems or you could get the pay late type who always seem to have a leaky faucet. Just making sure you have the time and patience to deal with being a landlord is most important.
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JD wrote something interesting.
“Home prices seemed to have stopped falling. In fact, I’ve heard tales that the real estate market in Portland has begun to sizzle again. (It’s not uncommon to hear tales of houses selling after just a few days on the market.) It seems to me that now might be a great time to buy.”
It might still be a good time to buy, but why do you now see it as a better option when you have increased competition. You’d really rather be one of 5 bidders on a house rather than the lonely single buyer?
My point is that it seems you’re more interested in buying because others are more interested in buying.
To the OP, I would pay off my own house before buying a second. You didn’t state a real reason to move, so I’d stay put and not take the risk.
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I took that to mean that the increased interest in buying might signal that prices are going back up, so if buying was something he wanted to do in the near- to medium-term, it might be better to do it soon rather than wait.
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Yeah, I bought my house when interest rates had bottomed out (2.99% in my case), and when it looked like the local housing market had also bottomed out (I bought for the same price as the previous owner, who had put some major remodeling into the place over the last 8 years).
The timing was not intentional on my part, as I had just relocated, but the market factors helped me feel comfortable paying a bit more to be in the best local school district – in addition to having just paid off my previous mortgage.
According to Zillow, the estimated value of my place has risen 12% in the four months since I bought it. I’m not getting too excited about that, partly because much of the rise may have been triggered by my buying it after it had been on the market for a year, partly because Zillow uses some automatic equation to price the homes, and partly because I’m here for the long haul, anyway (assuming the new job holds steady).
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As long as you can handle being a landlord or can find a good property manager you trust, I would say go for it. If it really is the house of your dreams and you have the means then it is worth it.
For JD, I don’t see you as being the landlord type, visits to Turkey and South America don’t make it any easier. You don’t need it financially, so I don’t think it would be worth it.
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No. In a word, no.
Landlording is a major hassle. Moving is a major hassle.
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The comments asking if you want the “hassle” of being a landlord are funny to me. They should be asking, “Do you want the RESPONSIBILITIES of being a landlord?” Finding tenants, making repairs, responding to high maintenance renters, etc., are exactly the duties of a landlord, not “issues” that have to be put up with. It’s like saying “Are you sure you want to be a receptionist? What about the hassle of answering the phone and greeting clients?”
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Allow me to clarify–landlording was a major hassle for me as I was located 8000 miles from my property and had the world’s worst property mgmt company who bailed on me 6 months before I came home to reside in the property again after they butchered relations with previous tenants. Major hassle for me involved collecting rent via paypal due to the superslow mail, vetting people I couldn’t meet face to face, and wondering on my very long plane ride home what exactly I would find. None of this was what I had originally signed up for.
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Very good point about the distance between Rental and Dream House. Anonymous Poster said: “it’s a property we’d always planned to buy when we retired.” Is it A property or THE property?
Many years ago, I renovated a house to create a 2BR/2BA space for me plus a one-bedroom rental. In 18 years, I only had one renter who was a PITA. Knowing they were going to be living next door to me tended to weed out the people who were not going to “fit,” either because we didn’t hit it off or they had some purpose in mind they realized was not going to sync with living under the same roof as their landlady. Some of them I actually liked, and some I seldom saw. The great part was that I successfully raised the rent with each new tenant, and that income eventually paid my mortgage, even deducting costs for inevitable repairs, minor and major.
Then I took a job 6,000 miles away. . . and “rented” my part to someone who was just meant to be a caretaker. The tenant took advantage of her; she took advantage of me. There was no physical damage to the house but the whole thing got way out of hand.
If the house in the country is The House, and it’s one you’ve had your eye on, go for it while you’re still young enough to “mow the grass.” If it’s just a vague dream, wait to see what happens. You’ve already re-financed one “underwater” house. What would happen if you ended up with TWO underwater houses? Ouch.
I’m with most of the other commenters. Never met a really good management company (and I’ll leave it at that, blech).
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Same as a majority of the comments, not a fan of being a landlord.
I did exactly that, underwater in the market, but was ready to move. It started off easy enough. First tenant stayed for a while, but left the place in a disaster. Then the heating broke, then the property above leaked, etc etc. Whenever an issue arises, it’s always at the worst possible time. Working full-time & maintenance on the property I live in, is enough to keep me busy. Adding the extra overhead managing the rental property, just about breaks me. It certainly takes away from the enjoyment I got from buying my new home, at times.
It just barely covers the mortgage on the property.. but if I could get out of it, I would. There are simply other things I’d rather do with my time…
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If I were lucky enough to be in your position, here’s what I would do: do the research regarding renting your house. Get as ready to do that as you can without pulling the trigger. Then start looking for your dream home. If you find it, jump on the opportunity. If you don’t find anything you’re *truly* in love with, wait a few months, and start looking again.
You are lucky to have no pressure to immediately buy or sell, so you can take your time finding a home that has everything you want.
You can also leverage your position when making an offer on a new house. You can make a lower offer, and again, since you’re in no desperate need to move, you can hold out to see if the seller accepts (or comes back weeks after rejecting it to accept it if the home doesn’t sell).
Bide your time, and your patience will be rewarded.
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For the reader: It seems like with good planning and a bit of good fortune, you find yourselves in a position to make a big dream come true. Why wait until retirement when you can have 15-20 more years of enjoyment? If you can afford to carry both places in the event something strange happens with the rental situation, I say seize the opportunity to make the memories.
As for JD, you have to live somewhere.If you can carry the mortgage without the renter and it’s an area you see yourself enjoying for many years to come, it could be worth taking the leap. There are many intangibles that make owning the right home a wonderful experience.
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JD,
I hate this irregular posting schedule. Part of the fun here is the comments section, and if there’s not anything posted for the day when I get to work mid-morning, I’m likely to miss the comments.
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I like the irregular schedule as it is fairer. Everybody has a chance of being the first commenter.
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Dan, When you get to work, AREN’T YOU SUPPOSED TO BE WORKING? Please do give us the name of your employer. And if you’re self-employed, lotsa luck, buddy.
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THAT’S RIGHT. No breaks for this century’s workers! You should be working nonstop from 9am to 5pm. Longer, if you really want to keep your job.
(On a more serious note: ever notice that when we see someone browsing the web at work, we assume that they’ve been doing it for hours? Why is that?)
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Like many others have said, I’d be leery of being a landlord. On the flipside though, if you were to get a great tenant then it could work fine. In terms of buying the house, it is definitely a buyer’s market and with the rates I’d probably do it.
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To the “OP” –
As many others have mentioned, think twice (maybe 10x) before becoming a landlord. I once rented from some people who were in it for the passive income, and thought they could be DIY property managers… living 20 miles from the house. 20 miles isn’t bad, unless you’re in Los Angeles.
Anyway, I’m sure if you ask my old landlady, she’ll tell you that my roommate and I were “those guys” and that we were nightmarish tenants. Well, she was a lazy landlady who wasn’t up to the task, and didn’t have any people skills to boot.
So, learning the “system” as I did, all I can tel you is that being a landlord is *not* passive income. You have to work at it. If you’re not willing to do that, then sell the place. After having been “that guy” I’d have to think long and hard before getting into the landlording business.
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For me diversification is essential and I would not like to put all my money in real-estate. And paying a mortgage is something I have never liked. So based on that I would first reduce the mortgage as much as possible. Nothing feels as nice as owning a house without a mortgage. If there is money left, I would invest it for now in blue chip dividend paying shares.
The end-result being what I have now, a house without a mortgage, a small but nice income-stream from dividend paying shares and my own profitable one man company. Crisis, crisis, what crisis?
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I think there is no harm in looking. If it really is your dream to own a home in the country, why not make steps towards it. At least research it and look around. You never know, you might change your mind and pursue a different dream or you might start living in your dream home soon!
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Regardless of this reader’s choice in terms of becoming a landlord and renting out their current home, it seems like their circumstances (no debt, stocked emergency income, this year’s windfall) currently allow them to pursue a long-held dream. I think investing wisely and preparing for the future is important, but I think it’s also important to recognize that the future is not always guaranteed and since they already seem to have put themselves in a good position to handle an emergency that may arise, they should decide if this dream is important enough to pursue in this moment. I don’t think this would be a wise choice if they were still paying off student loans, had credit card debt or were not diligently contributing to savings. But it seems like maybe they are in the perfect position to really pursue this idea of buying their dream home.
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Since she is self-employed, I would wait another year to see if she can repeat or come close to the same income. I’d bank this windfall for future business use during the lean times, since nothing is guaranteed.
If by next year she is still in the same postion, then go for it, I doubt anything major will happen with housing that she can’t wait a little longer.
I’d rather have the money tucked away than faced with more debt.
Congrats on your success though.
)
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I agree with the majority of comments about landlording — been there, done that, never doing it again.
Also, it’s much harder to get a home loan these days — an underwater mortgage might make it difficult to get financing. Check it out BEFORE you make your decision. My husband and I have excellent credit (814/822), yet our recent refi was a maze of difficulties I would have never imagined.
I personally would love to hear what you decided to do.
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Whatever you, Ms. Anonymous, choose to do, don’t forget to pay taxes on that windfall (if there isn’t already automatic withholding set to the new income level) or you will be in for a shock come April.
I own rental houses, so have no problem with that choice, as long as there is additional income available in future years to pay for whatever repairs a ‘country home’ might require, and for whatever repairs are required after tenants live in house #1 for several years.
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How’s your retirement account doing? Make sure you’re on track with that before putting the extra cash towards a second home. Otherwise, I’d say go for it.
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My question is what is the status of her retirement nestegg? There is nothing more depressing than being close to SS retiremanet age and realize that your managed retirement account does not have what you had expected it to have by this point. I would pay off the current home, add money to retirement fund if necessary and then save some toward the new house NEXT year. I know my age has a lot to do with my answer.
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My grandfather was a landlord for a while. One time he got a call at midnight because either the furnace or the thermostat had gone wonky and the house had gotten hot enough to melt all the candles in the home.
Are you good at fixing things? Or can you afford to pay a property manager to take care of things for you? What happens if you can’t find a renter for 2-3 months? Do you have enough saved up for that?
If you don’t have a property manager, what do you do when you go out of town or on vacation? Will your renter be able to reach you to call in emergency maintenance requests? Will you have someone else lined up who can take care of emergencies for you?
If you’re self-employed, I can understand the value of having a regular income stream coming in (such as from a renter). However, you also mention that you’re currently underwater on the home. So, that income stream is not really adding to your salary. (Really, what are the current rental rates for your size home in the area? You say you only pay $750. What can you rent it for? You need to have enough to cover that $750, plus maintenance costs and some extra for when you have a vacant home 1 to 2 months each year.)
What happens if you have a worst-case scenario: Your house doesn’t have a renter for a few months and you have something come up (like a car accident or something) that prevents you from working? Is your emergency fund big enough to handle living expenses and TWO mortgages for 3-6 months? If not, I’d seriously consider paying down the underwater mortgage.
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A lot of people have made the point about the pitfalls of being a landlord. You might find you like it, but it doesn’t sound like you would be doing this except to get out of your current home.
The problem is that you are considering going from being trapped in a house that is under water to being trapped as the landlord of a house that is under water. Once you go through that door, you have no way of getting back out of the landlord business without selling your new home and moving back into your rental.
The other alternative is the same as you have now. You could come up with the money needed to sell an underwater house. That might be a better plan.
Also, have you actually talked to a lender? I suspect you may find it difficult to get the best interest rates on your new mortgage with that existing underwater mortgage.
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I say yes. There are two things I picked up on in the story. One is that this would be their Dream House. When you have a chance to fulfill a dream, and you can afford it, do it! The other thing is that the person has already accounted for management fees, so he won’t have the hassle if dealing with tenants directly.
If I had the chance like this, I would take it.
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“Is it crazy to think of buying it now, as long as the new mortgage and the old still fit within a more normal year’s income?” THIS is where you need to stop and answer for yourself.
You have to ask yourself what would happen to the housing market if rates were allowed to go back to 7-10% tomorrow (pre-bubble). Which they won’t but could be argued that they should. Right now we are under the magical spell of the Fed’s buying of mortgage backed securities and Treasuries. Allowing for this super unrealistic low interest rate environment we are in.
Interest rates affect the real estate market in many ways by reducing the costs for buyers for one. Take a look at the difference in monthly payment of buying a home at 3% and at 7%. Take a look at that number from both a buyer and seller’s point of view. If you’re going to stay put, good idea. If you are looking for a place to put your cash and sell if you have to—think long and hard first. I think the low rates are behind the current mini-surge of cash investments we’re seeing in the housing market (excluding this last national housing report) as “investors” are trying to escape the low-rate yield in the market. They can buy houses for cash, or at very low rate, and make a greater return on rentals than they can in the debt/bond markets. Also, cash investors are worried about inflation and the future of the dollar. Inflation is a gift to the mortgage balance gods by inflating the balance away—but that assumes that incomes track inflation too which is not currently the case. This is forcing lots of money into housing by squeezing people out of their typical positions because they (I accuse the Fed here) are trying to reinflate asset prices (including houses). Who knows what the long-term implications of this will be, but I think the little guy in all of this needs to proceed with caution. Lastly, if you do keep your mortgage on the 1st house—you need to make sure your current mortgage terms even allow for renting since many don’t. And, you’ve got self-employment income. It’s not easy for the self-employed to just grab a mortgage anymore–expect a rectal exam. Very confusing times.
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Ugh, the real estate market in Canada is absolutely beyond ridiculous right now (especially in Toronto and Vancouver). The Federal government lovingly decided to fight the Great Financial Crisis by easing credit and offering 0 down, 40 year mortgages for first time buyers…this has been slowly restricted now so that you need 5% down and 25 year mortgages to get the Fanny Mae equivalent insurance but only as of July 9th. In the meanwhile housing prices are 6 or 7 times household income (or 8 times it in Vancouver) rather than the historical 3 or 4 times income.
So if you lived here, you’d be well off to sell any RE you didn’t live in right now and rent because our bubble is about to burst.
I’d like to live in a country where cheap easy credit didn’t drive up RE to artificial highs. It’s sickening to see how much debt Canadians have taken on (record high levels of debt to income ratio in Q1 2012 – 152% about to be broken in Q2 2012).
And no, I wouldn’t want to be a landlord. One eviction gives could cause so much stress that no money is worth it. Just my 2 cents.
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Often in the past I have toyed in my head with the idea of being a landlord in order to diversify assets. But I always reject it, mainly because I know myself too well.
I think being a landlord would majorly stress me out. Plus being a landlord only makes sense if you have a ton of equity in the property. If you are only clearing a little bit of money each month or just breaking even – what’s the point? It’s unlikely that you will be building that much equity, at least not for a long time. I don’t think rental properties (at least in my neck of the woods) tend to appreciate that much. Unless rent is going up quickly, why would the actual building appreciate? Who would purchase it?
If you’re eventually planning on selling this home not as a rental someday, it is likely you are going to have to redo a lot of things, which means more money sunk into the property.
I think a good landlord is someone who is attentive but not overly anal. Does the thought of a tenant ruining something in your home bother you immensely? If so, you might think twice about being a landlord. I think a good landlord is someone who is not too attached to the property.
We were not underwater on our first home, but it is worth significantly less than we paid. I thought about renting it and buying something bigger, but this is our first home. Our sons came home to this place. The thought of someone not taking care of it and having to see the damage is too much for me.
So, instead we bumped out the back of the house and plan to stay in it forever.
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I was in this exact position, and I bought the house. For me it came down to priorities: I love my city and am happiest being a homebody here and raising my son, but I wasn’t happy in our small condo. I was saving tons every month because the mortgage was so low, but couldn’t figure out what I was saving FOR if not for a new house (college is taken care of, retirement is always a question mark but looks good right now). So I took the plunge, and couldn’t be happier. It kind of amazes me now that I lived as long as I did in that small space, when the new house suits our lives so much better. I did agonize, because it seemed counter to all my personal finance principles to take on a new mortgage when I could have been completely mortgage-free. But again – what’s the use of having money if you don’t put it toward the things that make you happy?
Oh and I am also a landlord, kept the old place as an investment and am renting it out. This seemed a no-brainer as rent is 3x the mortgage and high-quality tenants are plentiful around here. For example, my tenants signed a lease in May and have paid me faithfully ever since, but won’t actually occupy the place till August. Inventory is very low here, and they wanted to make sure they secured the spot. So it’s been a cinch so far, though I’m sure I’ll have to put in a bit of effort once they actually arrive
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We chose to pay off our mortgage. We paid off a 129,000 loan in 6.5 years. It was at 5.625%, which was a great rate when we got the loan in 2004. After we were debt free for a year, I quit my job to be a SAHM.
Since then, we’re saving to pay cash for a new to us vehicle this summer and then we’ll be saving toward buying a new house in a better neighborhood.
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There’s a lot to consider that’s not included here – what about stability of income, how long you plan on staying in a place, how equipped are you to deal with the everyday adventure that owning a place can be? Unlike renting, homeownership costs are generally a lot more irregular, especially if you don’t have an escrow account for things like taxes and insurance.
Over the last 3 years, we bought 3 pieces of real estate – our home, a duplex that we rent out, and an undeveloped residential lot in a nice area. We took on almost $200K in debt to purchase the 3 properties (so now we’re pretty focused on paying that down), but considered the price drops in South Florida to be a great opportunity for us to do a lot of our real estate investing.
So far it’s been a lot of hard work, but great payoff so far. Even with the shakiness of the RE market around here in that period, we have never been underwater on any of our properties because we took a lot of time to figure out what properties were undervalued and just needed some tlc.
My advice – don’t jump into anything, and especially don’t buy just because you think prices are going to go up. Figure out what the inherent value of a rental unit is, figure out what all your expenses are going to be before diving in head first.
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It may be a great time for them to buy. Interest is dirt cheap right now so it makes sense to buy today if thats the plan. But we need to make sure the details work out…
1) save adequately for retirement
2) make sure the new house payment is easily affordable for them.
3) ensure they really want to be landlords and understand what all that entails and that they’ve ran the numbers considering vacancies, maintenance costs, etc and not just compared gross rent to mortgage.
Don’t underestimate the details on #3. For example one house we rent, my wife used to live in. When she lived there insurance was $400 and property taxes with homestead were around $1500. Today as a rental we pay $600 insurance and $2300 taxes. Thats an extra $1000 a year in tax/insurance you might not have expected. And do you usually have a 2% or 10% vacancy rate in your area? Cause those numbers cut your rental income. Theres a lot to consider past just rent minus mortgage.
4) After really doing good research to fully understand the finances on renting then figure out what you might be losing or gaining each month. Compare the rental cash flow to what you are underwater right now and decide if it really makes sense to become a landlord for many years just to eventually break even. Or if it makes more sense to simply sell the current house and write a check today to cover the equity gap. I mean it may not make sense to bleed $400 a month or $4800 a year for several years for the *hope* that you’ll get above water eventually compared to simply writing a $20,000 check to dump the place today. But if you’re really breaking even and are inclined to be a landlord anyway then renting it might make good sense.
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I think it depends on how much they really want this “dream house”. If it’s really for the lvoe of the house, then they should consider it. But for a lot of people, where a house is just a place to live, buying is almost always more expensive than renting, when you consider ALL the costs associated with owning.
However, as I said, some people (your truly included) want to own their home. They don’t want a landlord. They don’t want to worry about moving, etc. So it’s all a matter of priorities.
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No answers here, but some things to think about if you rent out your house. (I moved states for work and did not sell my home, I currently rent it out and have a property management company run the details of that for me). All this data is just my experience, and may vary a bit for you:
1) The property management Co. keeps 10% of the rent per month. So make sure you can cover your bases if the house doesn’t rent for as much as you hope AND with the fees taken into account
2) Any repairs done on the house either cost me immediately out of pocket or are deducted from the rent – so some months whatever that rent check is will not cover your houses mortgage payment, escrow, insurance, etc.
3) When/if the renters renew their rental agreement, my rental company takes an extra 25% of the rent for their work in retaining the client (don’t get me started on how much I dislike this rip off…) Again, there’s another month in the mix when you will most likely not clear enough to cover your house’s costs.
4) Beware the costs of prepping/cleaning/upkeep on the house in between renters. While my rental company only charges about $50/month when the house is empty, the repairs and upkeep plus the mortgage can be costly (and rediculous – winterizing pipes in TX? but I didn’t find out till after the bill came). Add any new requests the new renters make for repairs when they first move in and there’s another block of time you won’t be earning enough to cover your expenses most likely.
5) lest I sound exactly like Debby Downer – I do recommend a property management company – they can run credit checks on clients. They get the call for help at midnight. They have to deal with clients that don’t pay and will do all the court appearences and such if you have to evict. Quite a weight off your shoulders really.
Just make sure you know and trust your property management and that you can afford the house and your new country dream house when reality sets in and you don’t end up making enough rent to cover all the true costs.
Good luck on your decision!
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Wow, thank you so much for this! As a homeowner who is planning to purchase an additional property to rent out, but does not want to be a landlord…ever, it’s refereshing to hear a pretty balanced experience.
When I rented a house for a year I had no contact the entire year with the owner. Yard service came out a couple times a month, I dealt only with the property management and that’s it. Of course I was a model tenant, but I bet it sure was nice for the owner not to have to deal with anything, or showing the house to interested parties, when I decided not to renew.
To be honest, yes, of course I look forward to monthly profits, but if I I profited enough just to cover vacancies, taxes and insurance, maintenace, repairs, etc, I would still consider it a plus, because now I have an asset that has been paid for, a majority of anyway, by other people. They don’t get to keep the profit from selling, I do.
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Thanks for the breakdown of your actual experience. My husband retired and we have moved to the mountains as we had always hoped to do. We are in a financial position that allowed us to go ahead and buy a new home before the old home sold. The old home has been on the market for 5 months without a single offer. Obviously we have a problem with our listing agent since he cannot explain to me why 3 other homes listed at the same price per sq. ft. as our have sold but we haven’t even gotten an offer. So we are trying to decide whether we would be better off financially to rent the house (it will be paid off in 5 years) or to secure the services of a different listing agent to sell it. Since we are 3 hours from the house we know we would have to use a property management firm. I have no idea how to proceed with educating myself about renting property and the financial implications, especially tax implications. We have owned the home since 1996 and the idea of paying taxes on the 40K or better that the house has appreciated if we decide to sell 5 or so years down the road is heart stopping to me. I learned that we could depreciate improvements we make to the house, but until I read this posting had no idea that we would be liable to to pay taxes on the depreciation we realized later on when (or if) we sold the property. The fear of being blindsided with gotchas like that is immobilizing for me. Does anyone know how I can get myself educated quickly to make an informed decision?
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“Obviously we have a problem with our listing agent since he cannot explain to me why 3 other homes listed at the same price per sq. ft. as our have sold but we haven’t even gotten an offer.”
Just because your house has the exact same square footage and the same price doesn’t mean the house will sell in the same time. Is the layout different? Are the finishes the same? What about the yard? What about the location?
Usually if the house doesn’t sell, it’s not the agent but the price. Or there is something about the house that limits the buying pool. I’m not saying there are not bad agents out there, but good houses will sell even with bad agents. The guy who was selling our house when we bought it was TERRIBLE for a variety of reasons, including skipping out on a scheduled open hour an hour early. But we bought the house all the same.
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Jane, I don’t disagree with anything you said as far as why our home may not have sold. My problem with the listing agent is that I would expect HIM to tell me why our house is languishing on the market, not leave it to me to figure it out for myself. I have some ideas of what is/was holding it back – wallpaper, paint color, condition of the carpet in some rooms for starters. I was ready to address those items before we put the house on the market; he told me it wasn’t necessary. For 1.5% of the sales price, I expect him to give me good advice and to market the house. He has done neither.
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I guess I’m surprised at how many people do the landlord thing themselves. We have a property manager to take care of the property for us and find good tenants – it’s a great company. Sure it’s a little pricy when they need to find a new tenant, but otherwise we pay $100 a month to them. It’s totally worth it to us – probably because we acknowledge we’re not the landlord type – plus I’ve read horror stories of being the landlord of your own property. In the future when we can afford to buy a little bigger of a house (current is 2 bed/1 bath for 4 people) we’ll continue to keep the little house and rent it out.
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Hear hear! I honestly couldn’t see myself selling any property until I am ready to retire and no longer need to collect as much income and assets as possible.
I feel too “saavy” about the possibilities property-ownership can still have. I accept it’s no longer a get righ quick scheme, but this is getrichslowly afterall.
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I’d like to hear more comments from people who have a property manager, as this anonymous reader plans to have. We also want to rent out our house, but don’t even want to attempt the landlord route because I know it would stress us out. Do folks find that takes the burden off when renting or is there a new category of stresses when dealing with property managers? We don’t mind paying the fees to not have to deal with landlord issues. If all goes according to plan, we plan to have the house paid off in 5 years and want to rent it after that.
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Susan,
My wife has had 3 property managers now on one property thats out of state.
manager #1 : great, but she retired
manager #2 : awful to the point of running off with some of our rent never to hear from her again
manager #3: OK but not great. She’s cheap which is nice, but we do have to get involved to do things ‘right’ and handhold her sometimes.
A bad manager can be far worse than a bad tenant. Its a sure bet a bad manager will get you bad tenants plus do a poor job of managing the property.
Finding a good property manager is key. Unfortunately I have yet to find a good way to find a good manager. (note that manager #2 came as a recommendation from manager #1)
I’m sure we’ve just had had some particularly bad luck especially with the 2nd manager. I assume most managers do a good job.
But yes a bad manager can lead to all sort of other headaches.
- Bad tenant selection. A bad manager will just rent it to the first person who shows up cause thats easy. Thats a disaster waiting to happen.
- Poor communication. Did the rent come? Why not? Hello…? Why isn’t the manager answering her phone?
- Not handling issues well. AC needs repair? Ok the managers unemployed brother in law’s cousin knows how to use a wrench so he can do it right? He’s cheap!
- Not filtering tenant issues or mishandling tenant complaints. She either tells us about stupid tenant complaints that no reasonable landlord would do anything about versus fails to tell us about important problems.
You get the idea.
Again, this is probably bad luck for us, but I’d emphasize that finding a good manager is very important.
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I also used management companies for my rental house. The first management company was an arm of the national realty company I bought my house from. They listed my property on MLS, did background checks on potential tenants, and found me a couple who earned more than I did. After a year, the mgmt company got out of the business, and I found a second mgmt company through my original realtor. They took care of everything—broken water heater, pool issues, etc. I requested that I could take a tour of the property once a year, accompanied by one of the mgmt company agents, so I could see the condition of the property.
My tenants stayed for 4 years—they were responsible, clean, and paid promptly. I never raised the rent in the 4 years because my expenses were covered by the rent, and I liked having decent renters. When they decided to move, it was because they were having financial problems (they still paid me every cent I was owed!). At that time I decided to live there because I was selling my parent’s home. So it worked out well.
So, I can testify that not all renters are destructive party animals or meth dealers. I think that the most important issue is doing a thorough search to find a qualified renter as well as a good property management company. And do a yearly tour of the property to make sure things haven’t deteriorated.
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Hi Susan,
I have a few thoughts from our experience. My mother-in-law lives in the basement apartment of a duplex in a different state, and we rent the top apartment to pay (a good part of) the mortgage, insurance, taxes, etc. Last summer we had our tenants move out, and we had to find new ones. At the same time we had a new baby at home (about 3 months old), so we were a little preoccupied. We took our son to meet his grandma and do some cleaning of the apartment to get it ready to rent to the next tenants, and we hired a cleaning woman who could help my mother-in-law and get the apartment and garage ready for new renters. The woman we hired mentioned that she also did property management, and she gave us references that were great, so we hired her. We thought she was a lifesaver, and that our worries about the house were over.
Biggest mistake ever. I found out later that in some states a property manager that collects rent must be a licensed real estate broker or agent, and after working with this woman (who was neither) I can see why. She was horrible. Makes my blood pressure go up to think about it. She found renters, and we should’ve picked up on the red flags, but after a few months of no income you start to loosen your standards. The renters couldn’t pay the full deposit, so she gave them permission to pay in installments, they only paid in cash, and they couldn’t pay their rent. Then one of the tenants killed himself in the apartment. What do you do when that happens? His family cleaned out his stuff, but the apartment needed cleaning, painting, and carpets cleaned…. on and on and so much more than the deposit that was only half paid. We grieved for this young man we never met and worried that the financial stress of renting this apartment was too much for him, and we wished our property manager had better screened the tenants.
Lesson learned: your property manager doesn’t care that you have a new baby or are renting the place to give your family member a safe place to live. She’ll buy the expensive paint… she’ll paint the kitchen cabinets shut… she’ll tell you she put up window treatments and never do it (but charge you for it). My husband called on the 4th of the month to tell her she was fired, and she sent a bill for 1 week of property management, which I did not pay (she hadn’t been to the house for 2 weeks). She tried to double bill us and her expenses were outrageous, but we were out of state and couldn’t check. She left us messages about how we’d never be able to rent the place, and if we just did it her way we could have someone in the following week.
The apartment stayed empty for two months, and we found a single mom through craigslist who rents the place, and so far we have had a mostly worry free experience. We did our own checks on her, and we felt like it was a good decision (she has kids in school, so we are hoping will be staying for the long term). We will be visiting soon, so maybe I’ll be surprised at what I see when we are there. Hope not.
Be sure to check many references for your property manager and call your local real estate organization for advice about property managers. I think we should’ve reported this woman to someone, but we had no real evidence of anything, just a gut feeling.
Good luck!
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I think it is a very individual decision, but I would look for the best return for my investment. The combination of good home values and low interest rates makes it attractive. I would definitely consider it!
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One thing that stuck out at me was that Anonymous said he would buy a property he’d “always dreamed of having.” His other option would be to invest. But, what do people invest for? Often, it’s so that they can buy the things they’ve “always dreamed of having.” Maybe Anonymous’ “someday” is here.
I don’t think the housing market has bottomed out, in general; there’s a glut of foreclosed properties that banks are holding off the market in a vain attempt to keep prices up. I think prices will fall. But so what? If it’s always been your dream to have a cabin on the lake, don’t time the market, time your life!
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Jim – you said your dad depreciated all $80K that his house was bought for 30 years ago. What about the land underneath it? Land doesn’t really depreciate – and buildable lots in good areas have value, even I’d the house on top of them has technically been depreciated to nothing. Check what empty or tear down lots are selling for in the area before assuming that the tax bill would really be that big.
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Like most have said, becoming a landlord could cause unwanted stress if you get a bad tenant. That being said, if I had extra money right now I would put it in to real estate. The rates and prices make it too much of a buyer’s market.
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don’t take on any extra expenses (don’t buy another house).
instead invest extra money and retire earlier.
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What is the point of retiring early if you don’t even live somewhere you like? And since you’ve retired early you’ve pretty much strangled the chances of someday affording that place, since you’re not creating much income (and I have a feeling they don’t have enough cash to generate enough revenue to save for their dreamhouse).
Retiring early means you are no longer earning additional income. Retiring early in of itself does not earn you more money. If they wanted to invest their money now, they could..they don’t need to retire to do that. That would be a terrible move if it’s not something they are seeking to do at this time.
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