Ask the Readers: Should I Buy a New House?

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.

Note: It's for this reason that diversification is so important. When you diversify your investments, you spread the risk. You opt not to put all your eggs in one basket. Sure, your investment returns won't be as great as if you'd have guessed right; however, they'll be significantly greater than if you guessed wrong.

 

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?

More about...Home & Garden

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others

162
Leave a Reply

avatar
newest oldest most voted
Chasa
Chasa

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… Read more »

Josh @ Live Well Simply
Josh @ Live Well Simply

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.

Jay
Jay

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.

clsr
clsr

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… Read more »

Mark
Mark

Buying a house/apartment because you think you are going to lose your job is a terrible idea.

cls
cls

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… Read more »

Doug H
Doug H

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!

Tom
Tom

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.

Lady Meow
Lady Meow

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… Read more »

Ash
Ash

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).

jim
jim

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… Read more »

Holly
Holly

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!

Anonymous Poster
Anonymous Poster

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!

Nicole
Nicole

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.

Megan
Megan

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.

Lmoot
Lmoot

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… Read more »

Holly
Holly

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.

Kris
Kris

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.

Mark
Mark

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… Read more »

Financial Samurai
Financial Samurai

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

Kris
Kris

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.

Ethan
Ethan

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,… Read more »

El Nerdo
El Nerdo

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… Read more »

Holly@ClubThrifty

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… Read more »

Christine
Christine

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.

El Nerdo
El Nerdo

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… Read more »

Dan
Dan

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… Read more »

Holly@ClubThrifty

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.… Read more »

El Nerdo
El Nerdo

one person’s “strange and unfixable” is another person’s “I pay you to figure that out.”

Exactly!

@ 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?

Holly@ClubThrifty

Yeah, I totally agree with that!

She now does understand the basics of how the furnace and air conditioning work thankfully!!!

Holly@ClubThrifty

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.

Dan
Dan

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… Read more »

Oleron
Oleron

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… Read more »

Holly@ClubThrifty.com

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… Read more »

Emmzee
Emmzee

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).… Read more »

Major Cents
Major Cents

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.

Matt
Matt

Those must’ve been some expensive batteries!!! (hehe)

imelda
imelda

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… Read more »

Elizabeth
Elizabeth

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?”

Holly@ClubThrifty

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… Read more »

A-L
A-L

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… Read more »

getagrip
getagrip

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.

Tyler Karaszewski
Tyler Karaszewski

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.

Jacq
Jacq

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.

Tyler Karaszewski
Tyler Karaszewski

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.

Anonymous Poster
Anonymous Poster

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?

Jane
Jane

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… Read more »

Tom
Tom

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.

Derek H.
Derek H.

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… Read more »

ShackleMeNot
ShackleMeNot

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?… Read more »

victoria
victoria

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.

Tom
Tom

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… Read more »

Mark
Mark

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.

soledad
soledad

No. In a word, no.

Landlording is a major hassle. Moving is a major hassle.

Katherine
Katherine

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?”

soledad
soledad

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.

Oleron
Oleron

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… Read more »

R S
R S

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… Read more »

Lynn
Lynn

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… Read more »

Shannon
Shannon

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… Read more »

Dan
Dan

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.

Jerome
Jerome

I like the irregular schedule as it is fairer. Everybody has a chance of being the first commenter.

Oleron
Oleron

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.

imelda
imelda

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?)

JohnS
JohnS

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.

Anonymous
Anonymous

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.… Read more »

Jerome
Jerome

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… Read more »

Jenna, Adaptu Community Manager
Jenna, Adaptu Community Manager

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!

Kyla
Kyla

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… Read more »

Alea
Alea

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. :o)

Michelle Nicolson
Michelle Nicolson

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.

JanS
JanS

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.

Lindsey
Lindsey

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.

Kathy
Kathy

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.

Michelle
Michelle

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… Read more »

Ross Williams
Ross Williams

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… Read more »

Patb
Patb

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.

KSR
KSR

“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.… Read more »

Adam P
Adam P

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… Read more »

Jane
Jane

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… Read more »

Kiernan
Kiernan

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… Read more »

Jessica
Jessica

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.

Mrs PoP
Mrs PoP

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… Read more »

jim
jim

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… Read more »

Robert Henderson
Robert Henderson

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.

Amy
Amy

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… Read more »

Lmoot
Lmoot

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… Read more »

Jill
Jill

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.… Read more »

Jane
Jane

“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… Read more »

Jill
Jill

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… Read more »

Kris
Kris

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… Read more »

Lmoot
Lmoot

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.

Susan
Susan

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… Read more »

jim
jim

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… Read more »

butterbean13
butterbean13

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… Read more »

Tracy
Tracy

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… Read more »

krantcents
krantcents

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!

Stephanie
Stephanie

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… Read more »

Mrs PoP
Mrs PoP

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.

John S
John S

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.

*
*

don’t take on any extra expenses (don’t buy another house).

instead invest extra money and retire earlier.

Lmoot
Lmoot

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… Read more »

shares