Author Topic: Am I nuts to consider another mortgage for a college student rental?  (Read 6072 times)

dpfromva

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Me:  Late 50s, honking big mortgage in expensive metro area for downsizer house bought 2012 near public transport, which is appreciating nicely, very saleable, about 3 years to retirement, generous federal pension, healthy if not stupendous retirement account. Right now I'm double-paying principal, hey just because I can.

DD:  Beginning sr. year at a Philly university, she and roomie have been paying through the nose for 2 yrs. for dump 2 BR, 1 BA apt in Center City with disturbingly huge electric heating bills, she has already had paid gigs, will have a job at graduation (not high-paying but high-enjoyment), loves Philly and will stay there for foreseeable future.

I could manage 10% down and monthly payments on 2-3 BR, 1 1/2 -2 BA gas heat $260,000 condo/townhouse in Philly in less-than-luxury neighborhood, without crimping my style (I'd stop double-paying on my residential mortgage), rent it to the kids for less than they're paying now. It would not quite cash flow including taxes/utilities. I could even have financially astute DD contribute $5,000 of her savings to the down payment and put her on the deed, let her rent to roomie, and pay small share of mortgage payment. She's uber responsible.   

Within my retirement window, my industry certification will be transferrable from my state to PA. I could always sell my place and move to Philly. I like Philly (no state tax on my federal pension, for one thing). Whaddaya think?

ShoulderThingThatGoesUp

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #1 on: October 05, 2015, 03:29:21 PM »
I think you can definitely get cheaper than that in Philadelphia.

iamlindoro

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #2 on: October 05, 2015, 04:38:06 PM »
My humble opinion is that in light of the fact that:

1) You could only manage 10% down payment with your current assets (and would thus likely be woefully undercapitalized)
2) This property would not cash flow
3) It's mixing business with family

This is not a wise investment.  Whether it might or might not be a nice gift/indulgence to take care of your daughter is another matter, but if the idea is to wisely invest your wealth, this isn't a good example.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #3 on: October 05, 2015, 04:39:31 PM »
Oh, agreed. But is the whole idea insane or not? I HATE that DD is paying so much for her cold crummy apt. with bupkis to show for it. I found one that has cash flowing tenants currently with 45 days on the lease. Then DD and roomie could move in, with 3rd BR to rent out also.

iamlindoro

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #4 on: October 05, 2015, 04:48:58 PM »
I don't know how to evaluate whether something is objectively insane.  What goal are you trying to achieve?  That will make it easier to determine if this is a wise course of action.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #5 on: October 05, 2015, 05:54:28 PM »
Thanks for the engagement! I guess my perspective is different, I think of DD and myself as more of a unit. She's paying $600/month in rent plus her share of utilities (which goes up another $150/month in the winter despite the towels she stuffs in the leaky windows). This is coming out of her 529 plan. Why should "we" pay some landlord all that money for a shitty apt. when "we" could be paying ourselves rent?

When I do retire, I'll be doing quite well in pension benefits without counting use of my retirement accounts. No home value is bullet-proof, but given my property and location, I'm as close as you can get. I'm retirement eligible now and I'd clear $150,000 if I sold today.

I'm still carrying a chunk of life insurance as the 2 DDs are not yet launched (We're getting close, other DD just got a nice "real" job with good pay and benefits.), and I can drop that eventually but still carry health and long term care insurance into retirement.

The house and minor student debt is all there is (we told the DDs we'd cover undergrad), so I've been extra-paying both of those. But now I'm thinking, why shouldn't I leverage even more? Essentially "free" rent for DD (considering us as a family unit and DD1 splits the inheritance with DD2), roomie rental income to offset the condo purchase, which could turn into a retirement condo for me if I pulled the trigger.

I just was so focused on paying off the existing mortgage and leaving this earth with 0 debt. I guess that is what I am now questioning. DDs lease is up this spring and she wants to get the hell out of there and get more bang for her buck in South Philly or West Philly. So it got me thinking . . . that's all. What a fortunate set of problems I have. Very grateful.

K-ice

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #6 on: October 05, 2015, 05:55:36 PM »
I know parents who can trust their children and putting them on the deed is a great idea.

Or just getting rental in your portfolio may also be a good idea.  You may want to post a more detailed CASE study or plug in some real number into a rental ROI calculator.  Cost, interest, estimate rent from roomies, current rent lost by DD...

Also, what will happen in 2 years when DD is done school? Normally with closing costs etc you should plan to hold onto RE for 5 years unless you are an experienced flipper.

Finally, getting a place that is not cash flow positive once your DD and her roomies pay their "fair share" does not make sence to me.


DaveR

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #7 on: October 05, 2015, 06:26:26 PM »
This is coming out of her 529 plan. Why should "we" pay some landlord all that money for a shitty apt. when "we" could be paying ourselves rent?

Using 529 dollars to pay yourself... "we" might soon include your favorite IRS auditor.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #8 on: October 05, 2015, 07:04:36 PM »
I'd research it of course, but as long as the transaction is arms-length and market rent, not sure what the issue would be. DD can use her 529 funds for room and board wherever she rents (up to the amount charged by the school which is roughly an arm and a leg) and I can deduct rental property expenses if renting to a relative as long as it's market rate. I.e., she would spend the rental money regardless.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #9 on: October 05, 2015, 07:12:43 PM »
Yes, K-ice, non-cash-flowing only makes sense 1) to the extent I already have to "help" (or excuse me, generously choose to help) with DDs expenses anyway or 2) if I'm going to retire/vacay there myself (and the big bedroom with the master bath is MINE! bwahaha).  DD and I get along and we could co-habit nicely if it worked out that way for some period. I would just look the other way regarding overnight guests . . .

humbleMouse

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #10 on: October 05, 2015, 10:27:01 PM »
$600/month plus utilities seems like cheap rent. 

rothnroll

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #11 on: October 05, 2015, 11:29:01 PM »
Probably easier to just pay for her to move to another apartment that doesn't have leaky windows.  Possibly help pay 200 dollars a month towards a nicer place for the next 2 years. That way when u are retired you don't have the extra mortgage and the hassle of a non cash flowing investment.

Ricky

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #12 on: October 06, 2015, 06:26:44 AM »
Don't buy something that doesn't cash flow with financing, just don't. It won't be worth the headache, I promise. Only if you have all cash would it even begin to make sense - and even then, still might not be worth the headache.

thd7t

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #13 on: October 06, 2015, 06:36:30 AM »
Financially, this is a bad decision.  It's too expensive.  For it to meet the 1% rule, it would have to rent at $2600.  You won't get there.  Philadelphia has a really huge set of options for rentals in great neighborhoods.  This is a time in her life where she should be learning to explore and find better options for herself. 

CowboyAndIndian

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #14 on: October 06, 2015, 07:42:42 AM »
Nuts.

Not a good financial decision to buy for $260k.

That part of Philly is very close to downtown as well as close to Upenn, Drexel a couple of hospitals etc. Lots of tenants available.
Excellent for transportation.

I believe that you can buy a studio for around $120k (check the River West condos).

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #15 on: October 06, 2015, 07:56:55 AM »
Thanks all, I think you have talked me down from the ledge! Unless I find something that would make an excellent future retirement home for me, I'll stop shopping for Philly condos for now.
From what I've read, those who take a path of buying a place for their student, and collecting rent from roomies, can break even if planning carefully and continuing to landlord for 5 years or more. But so many things can go wrong with college tenants, and I would not be in town to deal.

K-ice

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #16 on: October 06, 2015, 10:16:38 AM »
I don't think you need to be in a situation where the roomies make it cash positive and DD lives for "free". 

But the scenario where complete strangers were renting needs to be cash positive.  Or roomies +$600 from DD should be cash positive,  I think that is what you are aiming for. 

So crunch the numbers:

Consider your income the rent from roommate(s) + $600 from DD. (maybe even a bit more than $600 if you can justify the market value of her share should be more than her current crummy apartment)

Take into account all expenses including:
mortgage
taxes (property and there wil be a bit of income tax for rent over and above expences)
HOA
insurance (property and liability, this is more for a rental than just your house)
utilities (who pays for this)
5-10% maintenance (depends what HOA covers, current state of the property, and how handy you are)
5-10% management (I know you will "manage" yourselves but to evaluate the value of the property you need a hypothetical 5% management fee)
vacancy 3-10% (depending on your area)
any other expense

Remember students (roomies) sometimes bail on you for the summer months, that is like a 33% vacancy rate. That is extreme but be prepared to cover all expenses for a few months just in case.

With a 2 bedroom for $260K you are not there. My quick estimate with lots of assumptions is ~ NEGATIVE $4-5K/year even with your DD "contributing" $600/month so the condo will cost you about $11-12K per year.

With a 3 bedroom it is close to breaking even with DD still "paying" $600, depending on all the tax and mortgage details.

But it sounds like you and DD have a great relationship so I do not think you are "nuts" for considering this option.  Maybe one day you will find the property and it will make sense to become landlord partners with DD.

mpcharles

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #17 on: October 06, 2015, 05:52:59 PM »
Oh, agreed. But is the whole idea insane or not? I HATE that DD is paying so much for her cold crummy apt. with bupkis to show for it. I found one that has cash flowing tenants currently with 45 days on the lease. Then DD and roomie could move in, with 3rd BR to rent out also.
It's called life and growing up. Let her stand on her own feet.

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dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #18 on: November 23, 2015, 11:06:06 AM »
I'm b-a-a-a-a-c-k. Daughter and I ran the idea of buying and renting to her vs. her just renting from some random landlord in her city by the "family council." Result -- the family is chipping in gift money to fund a cash purchase of a (very) modest row house. We have found an agent who has shown us a few things, feel we've found areas to target. This will be her home as young professional for the next 5-10 years, and she'll have a roommate. I will own the home and tenants will pay market rate so the family can benefit from expensing repairs, etc. These are rapidly gentrifying areas in Philadelphia -- any tips on beating out the flippers and rental unit investors on purchasing? Properties in our price range can be on the MLS only a week before disappearing. We want an inspection and an independent appraisal before writing our big check. I can see us continuously being outgunned by investors with bags o' cash who eyeball-inspect and buy on sight. We could pick up an existing property with a current tenant as her lease doesn't expire until summer 16, but when I look at the listings and see "long term tenant" and kids' toys in the photos . . . well, we don't want to be those people that kick out a family. I know if it's not us, it will be somebody else, but it's not going to be us, so we want to buy from a resident owner, family, or estate. That further limits our choices, of course. Any strategic thoughts appreciated. Thanks, y'all.

iamlindoro

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #19 on: November 23, 2015, 11:22:28 AM »
I'm b-a-a-a-a-c-k. Daughter and I ran the idea of buying and renting to her vs. her just renting from some random landlord in her city by the "family council." Result -- the family is chipping in gift money to fund a cash purchase of a (very) modest row house. We have found an agent who has shown us a few things, feel we've found areas to target. This will be her home as young professional for the next 5-10 years, and she'll have a roommate. I will own the home and tenants will pay market rate so the family can benefit from expensing repairs, etc. These are rapidly gentrifying areas in Philadelphia -- any tips on beating out the flippers and rental unit investors on purchasing? Properties in our price range can be on the MLS only a week before disappearing. We want an inspection and an independent appraisal before writing our big check. I can see us continuously being outgunned by investors with bags o' cash who eyeball-inspect and buy on sight. We could pick up an existing property with a current tenant as her lease doesn't expire until summer 16, but when I look at the listings and see "long term tenant" and kids' toys in the photos . . . well, we don't want to be those people that kick out a family. I know if it's not us, it will be somebody else, but it's not going to be us, so we want to buy from a resident owner, family, or estate. That further limits our choices, of course. Any strategic thoughts appreciated. Thanks, y'all.

The fear of investors or other buyers beating you out on a property is already putting you in the wrong frame of mind.  Rule #1 is never be a motivated buyer.  Your first, or fifth, or tenth offer may not be accepted.  This is absolutely fine, because there is always another deal.  Do not let frustration or a longer-than-expected search make you act irrationally.  Decide what you want, what you're willing to pay, and under what terms, and do not substantially deviate from that plan. 

When you write an offer, you will have the opportunity to define the contingencies.  An inspection (and to a lesser extent, an appraisal) is a completely normal contingency, and 99% of sellers are not going to reject an offer because that contingency is present.  Once you have an accepted offer, you'll have a short time (a week is common) to release the contingencies or back out of the deal.  If the inspection is not acceptable to you, you back out of the deal and are only out the cost of the inspection.

The best thing you can do is take your time.  As you said, your daughter's lease still has months and months on it.  There is absolutely no rush.  This is Philadelphia, not San Francisco.  A week on MLS before going under contract is a lifetime (and as mentioned above, disappearing from MLS just means the offer is accepted, not that the contingencies have been released).
« Last Edit: November 23, 2015, 11:27:07 AM by iamlindoro »

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #20 on: November 23, 2015, 12:01:06 PM »
Excellent advice! I've already told me daughter, "Don't fall in love, there is always another house!" Maybe a third of the potential properties, in my survey, will be foreclosures or as-is. No contingencies. That's one reason we're ponying up all cash. I do think I need to line up an inspector who can do a quick turnaround when called upon.

K-ice

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #21 on: November 23, 2015, 01:37:19 PM »
I'm b-a-a-a-a-c-k. Daughter and I ran the idea of buying and renting to her vs. her just renting from some random landlord in her city by the "family council." Result -- the family is chipping in gift money to fund a cash purchase of a (very) modest row house. We have found an agent who has shown us a few things, feel we've found areas to target. This will be her home as young professional for the next 5-10 years, and she'll have a roommate. I will own the home and tenants will pay market rate so the family can benefit from expensing repairs, etc. These are rapidly gentrifying areas in Philadelphia -- any tips on beating out the flippers and rental unit investors on purchasing? Properties in our price range can be on the MLS only a week before disappearing. We want an inspection and an independent appraisal before writing our big check. I can see us continuously being outgunned by investors with bags o' cash who eyeball-inspect and buy on sight. We could pick up an existing property with a current tenant as her lease doesn't expire until summer 16, but when I look at the listings and see "long term tenant" and kids' toys in the photos . . . well, we don't want to be those people that kick out a family. I know if it's not us, it will be somebody else, but it's not going to be us, so we want to buy from a resident owner, family, or estate. That further limits our choices, of course. Any strategic thoughts appreciated. Thanks, y'all.

First I find the family cash offer very generous and a great option for you to find a good deal.  You now no longer need "subject to financing" in your conditions which should help in closing a deal. Just be sure you have the entire family gift in your account before making the offer "not subject to financing". Once I even had trouble with my own money clearing in time for a closing date.

You must get an inspection. Walk away from a deal pressuring you with no inspection.

Real-estate is exciting and I hope you find a deal that works for you.

But I highlighted the area I find contradictory. I am going to ask some nasty questions now so you guys can work something out that is fair.

I have lots of questions. Some are rhetorical.

Will DD continue to pay market rent but to you?
How is this a good deal for her? (maybe she lives rent free)
Is she now obligated to stay 5-10y in this place?
Does the "family council" know how you want to structure this?
Will she put any sweat equity into this place? Painting etc. Yes DIY is fun and expected of owners but not of tenets.
If she feels ownership of the place she will probably be happy to DIY.

Do you want her to own/inherit the place one day?
If yes, you are probably better to get her on title now.
The place would then be her primary residence and this would help reduce future capital gains and estate taxes.

I can see things ending badly one day. You call it "her home", she pumps rent money & DIY into it for 10years, then she realizes on paper it isn't hers at all. What if some change in your life, marriage, divorce, death leaves her without this place? 

If you do get her on title 40%, 50%, 100% whatever you want, be sure she has a co-habitation agreement with any "roommates", especially if they are boyfriends.  Better yet, if you are a co-owner the BF "rent" check goes to you. If she is a co-owner you will need to split the rental income according to % ownership for taxes. But at least the BF sees the check going to you so he won't think he has a claim to the place later.

Speaking  of BF etc.  what is the exit strategy for her if she does get married and wants to move into her own house with DH? 
 

How big is the family gift?  I think there are tax implications to gifts like $14K max per year. I'm not sure, check.

Why do you not want a mortgage on the place?  You may not want one at the time of closing but I would get one soon after. You can then deduct the interest as an expense.  This is a big debate of pay off mortgage vs. invest that can be found on other posts. With the mortgage interest tax deduction it is almost always better to pay off a mortgage slower & investing the difference. But the "family council" may not like you taking their money and investing it. Maybe the "family council" should hold the mortgage. If lawyers draw this up  the "family council" can make a bit of interests off of the mortgage and you can still deduct the interest as a business expense.

I am asking lots of questions because I was once part of a family deal. But no deal was ever made because, once the tough questions were asked, we had different views of what deal entailed. 


norabird

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #22 on: November 23, 2015, 02:21:20 PM »
I will say that my parents just bought an apartment in Brooklyn for me and, looking back, it's too bad we didn't do this when I moved to the city a decade ago. Their home is paid off and they are retired with pensions + SS plus other savings, so it didn't make as much financial sense then. Technically my condo could be an investment for them and has already appreciated, though I know to them it is more like a beginning on transferring my inheritance. Not encouraged much in MMM parts, but I'm very grateful and there don't seem to be many disadvantages. They are out money every month because I'm renting it for the mortgage but not for the maintenance and taxes, but it certainly could be income neutral if we altered the setup. So you could always think of giving her a dowbnpayment once she settles somewhere.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #23 on: November 23, 2015, 03:26:05 PM »
Good questions! Yes there are gift tax implications but the gifters are cool with it.

If joint tenancy or joint tenancy with right of survival, any future creditors of daughter's, although she is uber responsible, could come after the house. Plus I need to be fair to daughter #1. She lives in a location that no amount of money our family could come up with would suffice to buy even a parking spot.

I've already discussed with daughters that they would inherit the house at a stepped up basis 50-50. Daughter #2 (the tenant) would have to pay daughter #1 imputed rent for her "half," plus half the other renter's rent payment, or buy her out. I've warned that money causes people who have always gotten along not get along. Actually, in my experience the prospect of money, especially a windfall, makes people purely insane. But I'll be dead at that point, so I won't be able to worry about it. Seriously, though, you are right, I don't want to sow the seeds of family dissension, like some poisonous plant that will sprout after my demise. Ugh.

I am exploring legal and tax implications of a trust owning the house, but I want to keep this simple. Sweat equity for leasehold improvements could be credited against rent due, but it's probably cleaner if I as the landlord pay for any improvements. The basis will go up, my depreciation will go up, the stepped up basis of the property will go up when/if kids inherit.

If daughter #2 wants to get a mortgage and buy me out after she's been in the working world awhile and accumulates a war chest, fine with me. Also I will probably hire a management company, so the roomie cannot torture my daughter with pleas for delays in rent payments, etc.

Both kids have all my financial information, we don't have any secrets in this family. The gift is being offered for this purpose to me (plus my funds) so we will go with the flow on this amazing generosity. For me to leverage the gift by converting it to a mortgage seems to be bad form.

Since it's an all cash deal, if daughter leaves for Bora Bora with BF, I'll sell. At a loss or at a gain, so be it. Or maybe I'll like being a landlord better than I would imagine . . . haha . . . anyway, this will be a learning experience for us all.

clarkfan1979

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #24 on: November 29, 2015, 06:24:01 PM »
I stopped reading after you mentioned that it wouldn't cash flow. In my opinion there is a small up-side and large down-side.

dpfromva

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Re: Am I nuts to consider another mortgage for a college student rental?
« Reply #25 on: May 02, 2016, 04:45:40 PM »
Hi, back again with an update. I did it. Bought an 840 sq ft 2 BR 1 bath rowhouse in S. Philly for under $90,000, all cash, habitable, needs cosmetics (and oh yeah, I immediately replaced the rotted door anyone could kick in, and the 4 front windows that didn't close/lock, and sealed the leaky roof). Charging market rate rent around $800 to DD. I couldn't have done it without: the Philly contractor I found/rented, who I gave a large envelope of cash to and dragged from house to house doing mini-inspections before I bought, the HVAC guy who confirmed the boiler was fixable, George the "pipe whisperer," who snaked all the pipes to determine that the nondraining drains and the nonflushing toilet were not caused by a blockage that would require digging up the sidewalk, again before I bought, and my Philly RE attorney who dealt with piles of liens and judgments and an illegal tenant situation. (Some guy actually broke into the house, changed the locks and fraudulently rented it out between offer and inspection! RE agent: Funny, the lockbox key doesn't work. Me: Why is there furniture in a vacant house?) The bricks need to be repointed, which will happen next year, but my questions to you experienced folks are:  1. What other improvements should be focused on for the long term well being and appreciation of the house? Half bath? Dishwasher? Finish the creepy 1925 basement? 2. What can we reasonably do ourselves? We just installed a locking mailbox on the brick front. I think we could figure out a disposal and dishwasher with an end panel and maybe a butcher block top so as not to disrupt the existing counter, or am I delusional after viewing too many DIY YouTubes? Will it just cost less in the long run to hire pros? I did proudly spell out "landlord" on my canvas toolbag with duct tape, and between me and DD we are fairly intelligent and resourceful, but I don't want to get in over my head. On the other hand, life is just a big learning experience, yes?