Advice on buying house with rental property on first floor

[jeastith]

My husband and I are seriously considering buying a house, but are hesitating on making the leap.  This house is large, and quite frankly, coming from a small house in the city, we are intimidated by it.  There are very few houses to choose from in this particular market. 

We are debt free except for our current mortgages - one rental property which we are under contract for to sell at the end of July, and we also plan to sell current house at a profit after finding a new one.

Why are we moving you ask?  We love the location of this new house, love the design of the house and layout, closer to husband's work, property taxes are low, and there is a rental property downstairs which could bring in significant income.  It is a very unique community, with hiking trails all through the 3 little towns.  Lots of woods and green space. 

We have an agreement of sale, but have not made the final commitment yet bc we just had the inspections today.

Agreed upon price is $295K with 3% sellers assist, with interest rate of 4.25% (any tips for talking this rate down?)  We both have excellent credit scores. 

The house is a ranch built in 1960.  2700 square feet - 1800 square foot 3 BR, 1.5 bath upstairs which we would live in (family of 3 now, planning one more baby), and then a 900 square foot 2 bedroom apartment in the downstairs.  Property taxes are $2500/year.     

Prior owner had been renting downstairs apartment for $900/month.  The rental could definitely use updating - new kitchenette, new carpeting and some minor plumbing and electrical fixes.  After improvements, we think it could rent for at least $1000/month.  The house in general needs a new water heater, new sliding glass door, new oil tank, and again some plumbing and electrical fixes.  The work that needs to be done right away totals about $9000.  Cosmetic stuff we want to do to the house to update it is going to total about $8,000. 

While we really like the house, location, and potential for income, I'm afraid a house this big will require a ton of money and time in upkeep. 

I'd be happy to hear other perspectives on this situation as I've found the Mustachian crew to be quite a wise and clever bunch.  It's a big math problem, but I'm too tired for it at 12:15am, so maybe one of you night owls can help me see the big picture.  Good overall investment?

[gimp]

Let me rephrase the question the way I understand it.

- House: $295k, 4.25% (I assume 30-year).
- Reno: $20k or a bit less
- Can rent part of it for $1000/month

If you were to follow the 1% rule, that would mean you're buying a $100k rental property and a ~$215k home.

Would you buy the rental property, as it stands, for $100k? Add the benefit of not needing property management (you do that yourself, I assume, since you live there).

Would you buy the rest of the house, plus reno, for $215k? Downside: you have a neighbor very close to you.

If the answer is 'yes' for both, then, sure, sounds reasonable.

If you're wavering, ask: can you in fact find such a place for $215k? Does having the rental property downstairs make it cheaper, and a better deal? Does it make it more expensive, and a worse deal? How much would you pay for the place by itself?

My two uneducated cents.

[jeastith]

Let me rephrase the question the way I understand it.

- House: $295k, 4.25% (I assume 30-year).
- Reno: $20k or a bit less
- Can rent part of it for $1000/month

If you were to follow the 1% rule, that would mean you're buying a $100k rental property and a ~$215k home.

Would you buy the rental property, as it stands, for $100k? Add the benefit of not needing property management (you do that yourself, I assume, since you live there).

Would you buy the rest of the house, plus reno, for $215k? Downside: you have a neighbor very close to you.

If the answer is 'yes' for both, then, sure, sounds reasonable.

If you're wavering, ask: can you in fact find such a place for $215k? Does having the rental property downstairs make it cheaper, and a better deal? Does it make it more expensive, and a worse deal? How much would you pay for the place by itself?

My two uneducated cents.

Thanks for taking the time to write!  This re-framed it in my mind in a very helpful way, because the fact is that the rental is definitely making this house cheaper.  Similar houses smaller than this without the rental are selling in the $300K to $400K range in the neighborhood.  I think other buyers are just scared of the crappy-ish looking rental downstairs, although we did have another couple who made an offer the same day as us.  Our offer won out.  Inspections revealed that most of the crappyness of the rental is cosmetic.

If we were just buying the upstairs (the 1800 square feet) we'd easily be paying way more than $215K.  In fact, we'd be paying at least $315, probably more, so this deal is seeming better and better. 

Plus, my parents currently live 4 hours away, and are planning to move closer and said they'd like to rent the downstairs for a year while they are house hunting.  I know for some people that wouldn't work, but my parents are super respectful of our space, extremely helpful and wonderful with our daughter (free babysitting!), and my dad is pretty handy so maybe can help with some fixes.  So looks like this will work out for everyone very nicely!

Moving forward, thanks for the input! 
Jeannie   

[TrMama]

Well, we bought an almost identical house to the one you describe, except that it cost twice as much because property is much more expensive here.

It's been a great deal for us. We'll have the option of $1200/mo income for as long as we own the house, even after the mortgage is paid off. That income is absolutely part of my FIRE plan.

I also like the idea that we can have either of our parents live in the suite if we all choose to do so. In fact, MIL is our current "tenant". When I get old and decrepit and don't want to deal with the stairs/upkeep of the main living area I plan to move into the suite and rent out the upstairs.

The only red flag I see in your post is that it's a smaller community. If your DH ever needs to look for another job, will he end up with a long commute?

As for the mortgage, we've always used a fee-based mortgage broker. They shop the market for you and find the best rate. Their fee is paid by the lender in exchange for finding them a new client (you). Ask for referrals since in our experience the quality of brokers is highly variable, even within the same brokerage company.

[totoro]

We have a similar set-up but side with an up down duplex with carriage house in the back.  I am a fan of subsidizing the primary residence with rental income due to the dramatic impact on lowering cost of living and upping equity and appreciation over time.

Only caveat with up down is sound transfer.  Ours is professionally sound-proofed so it is good but you'll want to test the suite sound proofing out by having someone bounce around upstairs while you are down listening :).  If there is not much sound-proofing you'll want to consider this cost for the future - not all that cheap to do.

[GrayGhost]

It seems like a good investment, so I'm not going to complain about the large size of the house--2700 sq ft for just two people is a lot of idle space!

On the other hand, an interest rate of over 4% is quite high. We got commercial, non-owner occupied properties back in February for something like 3.5%, but then, we were highly qualified for it.

Still, especially since you're owner occupied, I bet you could get a much better deal. As far as how to get it goes, I don't think there are any shortcuts to shopping around. Check local branches of the big banks for sure, but don't be afraid of local credit unions either.

[jeastith]

We have a toddler and are planning to have another baby, so the 1800 square foot floor will be for all if us.  I do agree though that 2700 sf is way more than we wanted and we would have been happier with a smaller version if this house, but there isn't a lot on the market and it was the one trade off we feel we made.  We really like everything else about the house and rental situation.

It seems like a good investment, so I'm not going to complain about the large size of the house--2700 sq ft for just two people is a lot of idle space!

On the other hand, an interest rate of over 4% is quite high. We got commercial, non-owner occupied properties back in February for something like 3.5%, but then, we were highly qualified for it.

Still, especially since you're owner occupied, I bet you could get a much better deal. As far as how to get it goes, I don't think there are any shortcuts to shopping around. Check local branches of the big banks for sure, but don't be afraid of local credit unions either.