Advice for Rental Properties

[Scogin]

Hey guys, I am looking for some help from anyone who owns or knows a lot about owning rental properties. The wife and I are looking to buy our first home in the first quarter of next year. My plan is to buy a less expensive condo or townhome, $150k or less. I believe we can pay this off in 5 to 7 years. I would like to then turn it into a rental property and use the money from renting it to fund buying another rental property. Continuing this process until I am a land baron and own my own country.
I am looking for info on what I should be looking for in a good future rental. I know schools and neighborhood are important. But is there anything that really jumps out as essential?

[Wulf202]

Tons I have well over a decade of full time+ and part time about the same. Ill give you a novel later but im on my phone now.

Skip condos townhouses and anything with an hoa.

[dwalker460]

Defiinitely skip HOA, Condos can be a PITA for sure, but I have done ok with a couple in the past. I currently have no rentals in the US.

In this housing debacle we have and in some cases still are going through, I have had friends do well and others nearly lose thier ass. My buddy Steve had several properties in Florida and dumped them all because the market is so bad there. My buddy Austin here owns three houses and is doing decently well with them. Success depends largely on making a plan and sticking to it, and part of the plan has to be how you cover the note if it sits empty 6 months.

I personally do not believe in a throwing out any more cash on a rental property than necessary. You definitely want to put down enough to get the note where you need to be, but make sure the numbers will add up. A strategy that will work is to put as little down as possible and keep the note around 2/3rds of what the average comparaple property rents for. So lets say you buy a 110K house, with an average rent for similar property in the area is $1200 a month you need the note to be no more than $800 if possible, and you need to work with your lender to get those terms where you want them.

There are many decent homes out there now in the 60K or so range that will make great rental properties, depending on where you want to be. If your looking 6 or so years down the road there is a lot that can change.

[HoneyBadger]

Skip condos townhouses and anything with an hoa.

What if the neighborhood is the nicest neighborhood in town and the HOA is only $20 per month?

[spqrzilla]

Keeping HOA fees down is good, but the issue with HOA's are boards dominated by the busybodies and those who hate renters.

You will find no condo's without HOA's.

[T-Giv]

My wife and I just bought our first home a few months back. Since it's our first home we had to get the Mortgage Insurance which is almost $400 extra per month. We get to cancel it in 5 years. At that point we are going to evaluate again and potentially look at renting our house out. I have no plans to get rid of this house. I will either be living here or maintain as it a rental when I move to the mountains or to the Springs.

[Wulf202]

What if the neighborhood is the nicest neighborhood in town and the HOA is only $20 per month?

Nice neighborhood is not a good reason to shell out extra on the investment. You'd look at $120k for a house in the nice hood but $60k in the crappy hood. You can get maybe $1400 for the nice house but $900 for the bad neighborhood. You can get two houses for the price of one and genrlerate a better roi and reduce your vacancy losses.

I have a 4 bed that I more than double my mortgage on. Didn't put more than %15 into and im under market by alot. Ill be raising the rent by a min of $100 a month.

No hoa ever for me. For so many reasons. What do you get for your fees. When can and will they raise their fees.

If you want to look at mind numbing profitability run the numbers on time shares...

[Wulf202]

My wife and I just bought our first home a few months back. Since it's our first home we had to get the Mortgage Insurance which is almost $400 extra per month. We get to cancel it in 5 years. At that point we are going to evaluate again and potentially look at renting our house out. I have no plans to get rid of this house. I will either be living here or maintain as it a rental when I move to the mountains or to the Springs.

You had to have insurance because you are less than %20 ltv not because it's your first

[T-Giv]

You had to have insurance because you are less than %20 ltv not because it's your first

Well yes it's because we didn't go conventional but most people know that since it's my first I wasn't able to go with the 20% down coventional. Plus being only 23 I haven't had the work time to save up enough for 20% down.

[ChunkyMonkey]

If it's non conventional, then the MI will be required no matter the LTV is.

Either go big or go small - I'd either go finance a 8 - 16 unit apartment or buy smaller condos that cost you $50-70k. Don't buy a condo/townhomes for $150k. Your dti ratio would be out of whack due to high HOA payments. At that much, I'd go for a small house.

[MrPrena]

What if the neighborhood is the nicest neighborhood in town and the HOA is only $20 per month?

Good argument.

LOL. We bought a house at a HOA. Very clean and quiet. I bought this over other houses, because HOA was only 25/mo, and takes our trash out, exterior property tree/grass work on HOA property, and snow removal.
Within 2 years, they raised it up twice. It was like $67/mo.
They were really really really strict.

Community got fed up, and they changed the manangement. New company made the HOA about 56/mo, and stained and refinished the exterior wood fences. My next door just put their property for rent/lease for ~$1800/mo! [Eek2]

With HOA, gotta pick the right tenant.

[Wulf202]

No, stay below 5 units, anything 5 and over you're in commercial range, it sets you into a whole nother set of issues. Including any non maintenance electrical and plumbing MUST be done by a licensed electrician there is no DIY option for this. You MUST have 20% down and a business history of 2+ years for most banks to even consider financing commercial. Insurance is a bitch, many other issues and ordinances apply. Once you get to a certain point extra fed regulations apply.

If you have no experience the pitfalls of commercial properties will swallow you. Going too big too quickly is worse than doing nothing.

Condos you don't even own the dirt, if it's paid off you have to still pay your condo dues for building maintenance (usually 100-300/mo). All the downfalls of apartments and HOA's and houses with very few of the benefits. You can buy whole houses for the price of a condo if you look hard enough.

2-4plex units are usually good starter investments and you can do conventional financing , have rental income while you build your land baron. I prefer them over single family homes especially for a first purchase since you still qualify for the first time home buyer programs.

If i'm looking at a single family house I usually don't consider them unless they are 4+ bedrooms since apartments can't offer that.

[ChunkyMonkey]

Wulf is correct. I personally dont have enough time to do DIY on rental properties. So my manager takes care of everything.

Financing wise however, unless you go to retail banks, there are plenty of options. Many hard money guys do upto 70% of future value. You can pick up a distressed property and get the purchase and remodelled financed. You do have to have either good relationship with the hard money lender or experience in fix and flip to be considered. Furthermore, since it is asset based loan, they don't look at your credit etc.

If you haven't done FHA loan yet? Most folks start with FHA loan on 2-4 units. Lowest rate possible w/ 3.5% down. You can use the rental income to automatically qualify for the purchase.

[Aloha_Shooter]

Hey guys, I am looking for some help from anyone who owns or knows a lot about owning rental properties. The wife and I are looking to buy our first home in the first quarter of next year. My plan is to buy a less expensive condo or townhome, $150k or less. I believe we can pay this off in 5 to 7 years. I would like to then turn it into a rental property and use the money from renting it to fund buying another rental property. Continuing this process until I am a land baron and own my own country.
I am looking for info on what I should be looking for in a good future rental. I know schools and neighborhood are important. But is there anything that really jumps out as essential?

Make sure your buyer's agent researches time-on-market for comparable rentals and look at rents being charged by comparables as well as mortgages for comps. You want to 1) make sure you aren't sitting vacant for 2 months to get a renter, 2) maximize your return on investment and 3) avoid getting caught in a neighborhood or situation where the renter could just about buy the property.

[Irving]

You should always avoid paying retail for a rental if you can help it. If you don't want to start with commercial (5+), then I'd at least try for duplex to four-plex. That way you stand less of a chance of having a full mortgage due with zero rent money coming in at the same time.

[Scogin]

Okay, so taking the advice given the wife and I are going to looks for either a single family home for us to live in as a starter house, or try and find a duplex. If we go for a house we are looking for something we can completely pay off in 6 or so years, about $140k. Then we will be able to rent it out and use the rental income to buy another rental. It sounds like a duplex might be a better option though. It would need to be at a price that I could cover the mortgage completely if there is no renter for a period of time. I am thinking about $220k. Here are the questions I have come up with so far.

This will be our first purchase so FHA is still an option. If we roll a stock portfolio and a 401k account into our down payment we should have a little over 10% down on the duplex. My understanding is that using a retirement account for a down payment eliminates the early withdrawal penalty as well as any taxes due. Does anyone know if this is correct?

Next, with an FHA loan can the loan be taken out for more than the purchase price of the house so we can use the extra for any necessary repairs to make the property ready to be rented? I realize the loan can’t be more than the property is worth so we would need to find something under the appraisal value.

Do we need to look at forming an LLC or something similar to limit our liability? Can this even be done if we are using an FHA loan?

And lastly for now, does anyone have any experience owning and living in a duplex while renting out the other unit? I can see a million potential issues when the neighbors realize you are the landlord. Would it be better to have them mail payments to a PO Box so they think you are just the maintenance guy/ next door neighbor?

Thanks for all the help guys.

[T-Giv]

That makes sense to me. I don't think I would want someone renting from me to know that I live right next door. There is a flip side to that coin though. What if them knowing you are next door would make them behave better?

[Wulf202]

Next, with an FHA loan can the loan be taken out for more than the purchase price of the house so we can use the extra for any necessary repairs to make the property ready to be rented? I realize the loan can’t be more than the property is worth so we would need to find something under the appraisal value.
yes this is a 203k type loan and takes into account appraisal after repairs.



Do we need to look at forming an LLC or something similar to limit our liability? Can this even be done if we are using an FHA loan?

Yes, after it's paid off, if they find out you've claimed it over to an LLC they can pull your FHA loan



And lastly for now, does anyone have any experience owning and living in a duplex while renting out the other unit? I can see a million potential issues when the neighbors realize you are the landlord. Would it be better to have them mail payments to a PO Box so they think you are just the maintenance guy/ next door neighbor?
You can play 3 angles;

you're the landlord. It keeps them in line since you're right next door.
you're the landlord's agent, you need a plausible explanation for that.
you're just a renter, you need to hire an agent and hire out all repairs.

I personally use the landlords agent game. They don't need to whine to my why they're late for rent i have a manager that deals with paperwork and late payments, i handle repairs as the maintenance guy. It takes money off the top but it's worth it to me. Then again I'm burnt out.

[Danimal]

OP: There are a lot of different ways to go about real-estate investing, but what you have described is financially the worst way. There is a lot of reading to be done about it, and I would recommend that you look into some of it prior to making any decisions. But there are a couple of general rules:

1) Location Location LOCATION! It is desirable areas to live that increase in value the fastest. Anything with an HOA is going to be a headache.

2) Better to buy the cheapest crappiest house on the block than the McMansion in the Ghetto.

3) Invest minimal private capital per purchase. Meaning that you are better off to save up 20% down and finance the rest. You will have no mortgage insurance and you can save the rest of your money for another property while that one is being rented out. If you pay off $150k property that could have been the down payment for 5 equal properties. Then get your mortgage patments as low as possible so that you make a passive income on each of the rental properties beyond the cumulative mortgage payments.

4) Become good friends with mortgage broker and a Realtor or become one yourself.

If you are serious about becoming a real-estate investor you should get certified as something in the trade, say an inspector or appraiser. Not that you will be allowed to appraise the houses you intend to buy, but you will be on houses right away when they come onto the market and have an inside edge. Many inspectors just do it on the side of their normal careers and make a quick couple hundred bucks when someone else is buying a property.

[Danimal]

Okay, so taking the advice given the wife and I are going to looks for either a single family home for us to live in as a starter house, or try and find a duplex. If we go for a house we are looking for something we can completely pay off in 6 or so years, about $140k. Then we will be able to rent it out and use the rental income to buy another rental. It sounds like a duplex might be a better option though. It would need to be at a price that I could cover the mortgage completely if there is no renter for a period of time. I am thinking about $220k. Here are the questions I have come up with so far.

This will be our first purchase so FHA is still an option. If we roll a stock portfolio and a 401k account into our down payment we should have a little over 10% down on the duplex. My understanding is that using a retirement account for a down payment eliminates the early withdrawal penalty as well as any taxes due. Does anyone know if this is correct?

Next, with an FHA loan can the loan be taken out for more than the purchase price of the house so we can use the extra for any necessary repairs to make the property ready to be rented? I realize the loan can’t be more than the property is worth so we would need to find something under the appraisal value.

Do we need to look at forming an LLC or something similar to limit our liability? Can this even be done if we are using an FHA loan?

And lastly for now, does anyone have any experience owning and living in a duplex while renting out the other unit? I can see a million potential issues when the neighbors realize you are the landlord. Would it be better to have them mail payments to a PO Box so they think you are just the maintenance guy/ next door neighbor?

Thanks for all the help guys.

Going incorporated or developing an LLC is a good way to limit your liability and protect yourself personally. However it is not as simple as it seems. There are more rules and regulations that you need to abide by to be legal. For instance with an LLC you need to have a permanent address associated with your business for tax purposes. Many counties only allow them in certain areas meaning that if you have your home address you could face penalties. There are also tax implications that could help or hurt you depending on where when and how you start your business. That is another area that needs a lot of research on your part prior to making a decision.

Not knowing you personally, it sounds like you have a good income source and that you are financially set up to do this the right way. I would find a good property and buy it for your first house. I would finance it because the rates are super low, then save every penny you can towards another down payment for your next house. During the time that you are saving I would research the hell out of licensing an LLC and real-estate investing. It is a blood bath out there right now that there are a million investors and flippers buying properties like crazy because the interest rates are so low. You will be looking at a lot of competition in that area because banks like lending to people who they know and who has the assets currently in possession.

[Danimal]

Also about renting out a duplex: You are the land lord, you pick the tenants so they will know who you are. Pick them wisely and there will be no issues. You can go with a property manager, but until you have several rental properties it will be a waste of money. They charge 10 - 15% of the monthly rent and the services they offer can vary. When you have several properties it is a must to have a management company because they maintain the legal means to evict tenants and pursue them for non payment. You could do this too, but it is a nightmare of paperwork and heartache. Don't worry about having a tenant next door, if anything they will be more behaved than they otherwise would.

[Aloha_Shooter]

One of the nice things about having a formal property manager even if you only have 1 or 2 rentals is that someone else deals with irate renters (if something happens), gets the calls in the middle-of-the-night when the toilet starts leaking, etc. The anonymity afforded by going through a property manager can be well worth the 10% fee.

[rockhound]

I am and have been a manger and investment property seller for the better part of my life. If i wasn't managing them I was selling them if i wasn't selling them i was remodeling and building them.

a couple of things i like have been mentioned,

location location location,,, the better location will attract a better quality of tenant and save you on repairs, itwill be easier to sell for reasonable market value in the end.
buying a low cost rental in a crappy neighborhood will attract that type of tenant,

the investment dollars and LTV ratios don't really mean anything to you if you really plan to pay it off before turning into a rental. you will have no debt service and will cash flow immediately anyway.
if you are using it as your primary residence when you move in you can purchase the home with FHA or other govt backed loan, you initial investment can be done with a lower downpayment. If you plan to use it as your primary residence, what you do down the road is not their concern.

remember that you will lose your capital gains tax shelter after renting for three years, so if you do have a large capital gain (market comes back strong) you will be subject to taxes unless you move back in

stay away from renting any type of common owner situation (condos or townhomes) where an HOA is in charge of common area maintenance. even if you own it free and clear the HOA fees and any potential large repair could cost you everything you have gained. The Village at Breck is a good example. They upgraded the building season before last. The assessment was over $55,000 per unit.

foreclosures are tempting, but most needs heavy repairs so be prepared.

[rockhound]

one other thought,

it is not necessarily the best idea to have paid the home off yourselves before turning the home into a rental. yes you will cash flow, but you are all in with your investment then. some of the idea of owning a rental property is that you get some one else to buy you a house

if you have $150,000 of your own money in the property then you will need to recover $150,000 in rent before you break even.

just some round numbers, if you buy a $100,000 home on FHA with $3500 down and live in it for three years and turn in into a rental. round number you have an $800 per month mortgage, your investment would be consider your living expenses for the three years, something you have spent anyway.
if you rent the home at $1000 you would cash flow almost immediately, the $200 per month in additional over the mortgage and $200 a month that is being paid down on your loan with money that came from someone else. in the end you have an asset worth $150,000 that cost you nothing

in your scenario, you paid for your own asset, you have not gained anything, but cash flow, the idea is to gain an asset that does not cost you anything to own.

let the renter buy you your rental

[Wulf202]

+185,000 for rockhound

[Irving]

I'm impressed and pleased with how many people on here personally have experience with investing in real-estate.

[encorehunter]

Rentals can be great, but they can also be a nightmare. The tenants seem to have all the rules on their side. I finally got a good tenant after owning the rental for six years. He is a contractor, and he fixes all of the problems that occur. I give him a discount on rent when he gives me the receipts. If and when you get more rentals, I would suggest finding some one who is a handyman to rent one of your properties. He can take the calls to fix things night and day for a break on rent.
Does anyone know anything further about rolling a retirement into a down payment for a house tax free? I have been considering this, but the only way I knew was to pull the money out and take the BIG tax hit. If there is a way, it would save me around $40K in taxes to purchase the ranch I want.

[ChunkyMonkey]

I don't know what kind of retirement you have, but IRA only allows up to $10k in non taxable down payment toward your primary residence. If you have self directed IRA, you can purchase the property as investment as simple as a money manager would purchase bond/stock as portfolio. The issue is you can only contribute unto $49k a year as a company or $5k as individual. In short to purchase a commercial building worth few hundred thou will require a seasoned account.

Isn't someone on the board a CPA or fund manager? I'd be interested in other options too.