Author Topic: Looking for first rental property. It's nerve wracking. Am I really ready?  (Read 1140 times)

nyxst

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Question - am I really ready to invest in a rental property?
I have been working and saving and being as mustacian as I can muster for about 7 years now. Between the retirement funds I have invested and the emergency fund I have now, I am feeling pretty comfortable. I don't have a very high income (around 60k, as a single parent with three kids, it has to stretch a lot at times), but it is steady and I find it is definitely enough to get me working on the right path. Finishing up my bachelor's degree now, so hopefully the income will only go up. I'm 37 now, and one of my goals is to have one or two rental properties before I turn 40 so that I start a passive income stream. We live in a decent area in a small ranch house (about 1200 square feet) that I hope to rent out some day once the kids leave the nest. I checked with the bank and they will give me about $140,000 on a HELOC for my house. It's worth about $220,000 and I owe about $45,000 on the mortgage.
I have been looking at the local market and talking to other rental property owners I know, trying to get my finger on the pulse. I can do most basic repairs myself, but am not capable of a complete gut of a house, so it would have to be in relatively decent shape. Since I'm only looking a cheap places, I know I will be putting in some repair hours. The thing is, I'm really nervous that I will unknowingly pick the worst property imaginable and be stuck with the fallout.
I don't want to use too much of my equity for one rental....
Did any of you start by using you primary home equity, or should I be waiting to build a separate cash fund to finance this type of thing? I applied for the HELOC so that if I find something I think is the right property, and all the math works in my ROI calculations, I would be ready to pull the trigger.  How did you start? How much equity did you use? What checks and balances did you hold yourself too so that you didn't get caught in a bad spot? All feedback is greatly appreciated!
« Last Edit: September 04, 2017, 09:57:36 PM by nyxst »

zinethstache

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #1 on: September 04, 2017, 10:18:56 PM »
We did use a HELOC for our third rental. We had a 160k mortgage on a 400k residence and decided to get a loan up to 70% for the lower interest rate. Our Credit Union would lend up to 90% if I recall correctly. We used clever financing for all three of our rentals and never regretted it!

We did not know if we were ready to be landlords. Like you my DH has DIY skills and isn't afraid to learn more. He did all the maintenance on our rentals until we started slow travel.

I do recommend you consider using a Property Management Company. They know the laws and can assist in any maintenance you don't feel comfortable with.  Some PMs will not take on properties with the owner doing maintenance, we had to search for a good PM fit that would allow that.

Good Luck!

snacky

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #2 on: September 04, 2017, 10:27:22 PM »
I'm a mid 30's single parent and started being a landlord this year. It is nervewracking! Also it has been nicely profitable so far. I moved out of my house and rented it out. I get a nicer house and a sweet cheque every month. Next I want to get a duplex, I think.

My perspective is that I'm being paid to take on more responsibility. I already had these kids and this life, and now I have tenants and another house to be responsible for.

I have no regrets, so far. Also one of my kids has started saying that he wants to be a landlord when he's an adult, after watching what I'm doing. That's pretty gratifying.
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nyxst

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #3 on: September 05, 2017, 04:51:20 AM »
We did use a HELOC for our third rental. We had a 160k mortgage on a 400k residence and decided to get a loan up to 70% for the lower interest rate.
Did you eventually refinance the 3rd property to put the debt where it belonged,or did you leave it against the 400k house? I will definitely look into property managers and search for one that is a good fit should I decide to use one! Thank you for your feedback!

nyxst

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #4 on: September 05, 2017, 05:04:05 AM »
I'm a mid 30's single parent and started being a landlord this year. It is nervewracking! Also it has been nicely profitable so far. I moved out of my house and rented it out. I get a nicer house and a sweet cheque every month. Next I want to get a duplex, I think.

My perspective is that I'm being paid to take on more responsibility. I already had these kids and this life, and now I have tenants and another house to be responsible for.

I have no regrets, so far. Also one of my kids has started saying that he wants to be a landlord when he's an adult, after watching what I'm doing. That's pretty gratifying.

Thank you for your comment! It's nice to know I'm not alone, and great to hear you are successful! My son is 12 and is incredibly interested in the process. He's been scanning around for open houses and telling me what he thinks of properties we look at.
I like that you moved up and rented your first house... I am trying to look both at "move up" properties, some just below my current level, and ones equal to what I have now... i would love to move up to a nicer place and rent out this one... my kids are very attached though and don't seem keen on the idea.  I guess whatever shows up as the best deal first will be the winner.
Did you use a home equity loan to get the move up property, or separate financing completely?
There aren't a lot of duplexes in my area, but I am keeping my eyes peeled for when they show up on the market... The only ones available now are in a neighboring town than has rediculously high taxes, which is out of the question for me.

snacky

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #5 on: September 05, 2017, 06:44:42 AM »
I got a new mortgage on the new house, which was actually pretty hard to do, and used my HELOC to get through a few rough months when I was transition.
The best would have been moving into a duplex. Then I automatically would have had two rental units and a place to live.
I have a realtor that knows me well and understands my plan, and he was incredibly helpful. He knew what to look for and was generally awesome. Also my carpenter/ handyman worked miracles to help this work out. Build a team of pros that understand what you're doing. They can make it so much easier.
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zinethstache

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #6 on: September 05, 2017, 10:45:07 PM »
@Nyxst - In order to answer your question I have to explain what happened after that purchase. During the purchase of the third rental in June of 2013 I was injured and had emergency back surgery which failed. 2015 was hell, I spent 11 months of the year dealing with a major back injury and two surgeries. The third surgery did the trick but it really made me think about life. During that hellish year, our home hit our target price to sell after living there for 15 years (Our pact was something like - when our house doubles its value we WILL sell it). The required monthly HELOC payment was interest only, so while we figured out what was to come next, we only paid the interest on that HELOC until our home sold (slightly over two years). We went through various housing/lifestyle scenarios and in the end I took the plunge and FIREd in Jan of this year. Not only have we become landlords, now we are nomads and travel full time with no home to return to. We likely "should" have immediately bought a duplex and lived in one unit, but I was ready for a major life change. Sorry for the digression, now on to your question..

I would speculate that I would have left the HELOC on our residence. Had I stayed working we would have chipped away at the balance until getting it down enough to buy the next rental. We were capped at max mortgages (the first four are easy to get, from the fifth one on, things get tricky). We would have done something like pay the HELOC down using net rental income (around 3k/mo) and would throw my annual bonus at it as well. In this speculation I would have kept my job until I was 55.

As we travel we will be looking for property #4, and will likely end up with a fourth mortgage again (it will be a small one), we will stop shopping at that point. We gave up my high paying job so financially everything has slowed to molasses for us:)

I hope this answered your question:)

waltworks

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #7 on: September 06, 2017, 09:34:07 AM »
I would not do a HELOC to buy a rental unless you've got a solid emergency fund and at least 6 months reserves in cash for both your primary and your proposed rental. If you aren't totally financially solid, just a little bit of bad luck with a rental can kill you (tenants refuse to pay rent or sue you, house has a major problem that costs 5 figures to fix and is uninhabitable for 2 months, etc).

Just make sure you can tolerate 6 months of no rent with some repairs thrown in, and you're golden. If you're not in that position, invest in something (index funds) more boring that doesn't involve leveraging the house you live in.

-W

nyxst

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #8 on: September 06, 2017, 09:18:09 PM »
I would not do a HELOC to buy a rental unless you've got a solid emergency fund and at least 6 months reserves in cash for both your primary and your proposed rental. If you aren't totally financially solid, just a little bit of bad luck with a rental can kill you (tenants refuse to pay rent or sue you, house has a major problem that costs 5 figures to fix and is uninhabitable for 2 months, etc).

Just make sure you can tolerate 6 months of no rent with some repairs thrown in, and you're golden. If you're not in that position, invest in something (index funds) more boring that doesn't involve leveraging the house you live in.

-W

Yes. I agree with your points here. I have a decent emergency fund and reserves set aside. Still, I'd prefer NOT to use either.... And I feel like I should have a separate emergency fund for this specific purpose just so I won't lose any sleep if something happens. I am very patient and will be waiting for a property that is a good fit to show up at the right price (it will probably take some time!) So I have time to get myself a little more padding.
Thank you for bringing up these concerns, since they are what is nagging at me already. I just don't want to be SO overly cautious that I never get started at all :)

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Re: Looking for first rental property. It's nerve wracking. Am I really ready?
« Reply #9 on: September 07, 2017, 09:33:56 PM »
Firstly, well done on the seven years of hard work to get this far, and being organized enough to look after three kids and be teeing up this investment!

I'd say that if you weren't scared, then you're not ready. Making a large investment, especially for the first time, should be nerve-wracking. I remember how any hint of even a slightly unhappy tenant or upcoming repair would send me into a panic when I first got started.

One thing that made a big difference to me, as you hint at, was having a comfortable cushion dedicated solely to the real estate business. When you know you can handle a major repair or a vacancy without feeling too much of a bite, it helps you continue to make good decisions. In particular, stumping up for repairs and refurbs when you are already on the wrong side of a leveraged position can be psychologically difficult, but maintaining the property to the level that your local market requires is of paramount importance to getting/keeping good tenants. Sacrificing maximal balance sheet efficiency to avoid living on the edge is a good trade-off in my view.

Another thing I wish I'd done more of was just ask for help from those with more experience - I think that when I started I felt that other local landlords were perhaps rivals in some way, when the truth is that most are happy to share their experience with others walking the same path. As snacky says, a good team of contractors etc are also great - if you find the right people, they will understand that a quick buck for them is a lot less important than a longer term, mutually beneficial relationship. I was pretty suspicious at first, but leaning on the far greater pool of experience around me helped me to make some good decisions.

Reading back over my text it sounds like the process is full of deadly pitfalls - and I suppose in theory it is - but whenever I've paid the right price to start with, it's pretty much been a gravy train, so I'd highly encourage you to keep pushing forward.