In terms of financing, my husband and I would be relying on a family loan for the entire cost of the house (probably $155K) at 4-5%. We have already gotten the green light on taking out this loan from the family member in question, but again, don't want to jump into something that isn't a good idea.
Any thoughts or advice? I would be very grateful for some basic guidance.
How much of a good deal is this? Are you hard-wired to be landlords, eager to learn something new, or merely reluctant to pass up a possible opportunity due to fear/ignorance?
Do you really want to be next door to your tenants? Have a plan for the Sunday-night dramas or the "Oh, I'll just pop next door and talk to the landlord about this".
Is the sale price a bargain at $150K? You don't necessarily need an appraisal but you might want to check the tax assessment and Zillow for neighborhood comps.
If you're renting to college students then feel free to have their parents co-sign the lease for rent payments-- it's common in Houston when our daughter moved off-campus to an apartment complex owned by TIAA. It's probably also smart to have move-in/move-out videos, inventory lists, and an eviction plan. College students can be extraordinarily ignorant of what not to put down a kitchen sink disposal or how to clean or what appliance behavior might be a big problem. They won't read your tenant notebook, either.
If you're near a military base (or the college has a military ROTC unit or Yellow Ribbon program) then consider a landlord listing on AHRN.com.
Keep good records of your cost basis (including closing costs) for depreciation and tax tracking.
Newbie landlords occasionally attempt to depreciate the property's land, not just the house on it. Don't do this. (The IRS really hates it and may sign you up for the lifetime audit program.) Your cost basis is going to have to value the structure separately from the land, whether that's done by you or a home-building contractor or an insurance company or an appraisal. It might also be on your tax assessment.
This is a great opportunity to chat up the existing tenants, and your last chance to be friendly with them before you become "Snidely Whiplash". You want to find out what nagging little problems are in the duplex (slow toilet flushes? water pressure problems? washing machine noises? high heating or air-conditioning expenses?) and what peeves they have with the current landlord. Do you and the tenants both have copies of the local government's landlord/tenant code?
If the current tenants are staying in the duplex after you close the sale, then figure out what you and the seller are doing about their security deposits. You may also be obligated to pay interest on the tenant's security deposit (this varies with state laws).
We've contemplated lending to family members, and there are questions which can suck the commitment out of any good handshake deal. You're probably within the IRS rules for the interest rate on the loan (
http://apps.irs.gov/app/picklist/list/federalRates.html), but how long do you want the loan? What do you want to do for payments, accelerated principal payment, early payoff, or late payments? Who's going to do the 1098 reporting? What's the lender's estate plan if they die (or divorce) with the loan still outstanding, and what happens if you/spouse die or divorce with the loan outstanding?
Rental properties are a great opportunity for child labor, but if you're going to deduct their wages on Schedule E or contribute to their Roth IRAs then you'll want to know local labor laws, comply with local/state tax rules/paperwork, and keep squeaky-clean records.
