Author Topic: Am I crazy for considering buying this rental property?  (Read 2690 times)

BMEPhDinCO

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Am I crazy for considering buying this rental property?
« on: December 29, 2014, 02:48:15 PM »
Hi all,

So I've been mulling this over in my mind and wanted to see what you smarter, more experienced people thought.

My best friend lives in KC and works in a very poor part of it (zip: 64127).  She really wants to move out of her parents house and into that area... but she can't quite afford it yet.  However, I can - houses here go for <$30k...

So here's my thought, please let me know if this is too wild...

House cost: $25,000 (it's a short sale, as is)
Property Taxes: $300 per year

I'd put down 100%.

It has 5 bedrooms and 3 bathrooms - my friend would stay in one with reduced rent ($150 per month).  I'd rent out three more rooms at $250 each.  No utilities included in rent. The last room would be a bonus room - this could change once the house was completely renovated but for now it would be available for SHORT term guests, tv room, study room, etc.

This would net $900 per month - $25 for taxes = $875 per month. 

Of that, I'd put $575 per month in for repairs for the first year ($6,900) and then allocate $275 per month afterwards.  I'd also put in a security system (cost = 1 month's rent initial) and on-going that would be around $30 per month.

So for the first year, that would be $2970 (or around 10% of the purchase price).  Following years would be $6840 per year.

I also anticipate that my friend would eventually buy this house from me once she built up her own money.

Things to note: the house sold in 2007 for $14k, so maybe it is priced high now, but with a short sale there isn't much I can do.  The neighborhood is really bad, but this is right next to where my friend works and I would only rent to those who qualified.  I would allow pets with additional monthly and pet deposit - that would all go into a separate fund. 

Thoughts? Anything I need to do to this post to make it more clear?  Thanks!

*Edited to add: Insurance on the property would probably be fairly low, I would assume $80 or less per month, but let's say $80 - that would put the first year at $2000 and later years at $5880.
« Last Edit: December 29, 2014, 04:15:12 PM by BMEPhDinCO »

Clever Name

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Re: Am I crazy for considering buying this rental property?
« Reply #1 on: December 29, 2014, 03:16:01 PM »
Is your primary intent to make money or do a favor for your friend? If your friend was not interested in living in this property would you still be considering investing in it?

BMEPhDinCO

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Re: Am I crazy for considering buying this rental property?
« Reply #2 on: December 29, 2014, 04:17:16 PM »
@Clever Name,

Good question - I do think RE is a good way to diversify investments, but if she wasn't going to be living there, I would probably delay buying anything for a few more years.  I am graduating in the spring with my doctorate and this would take most of our cash right now so I'd likely wait until we had more built up.  Also, if she's there fixing it up and making sure it is secure, that makes me feel better about buying in a less than nice area. 

So I would like to make some alternative income source, but my timeline is adjustable based on the friend.

escolegrove

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Re: Am I crazy for considering buying this rental property?
« Reply #3 on: December 30, 2014, 12:56:12 AM »
I am not a big fan of mixing friends and money. I can tell you from my non-real estate but business for tays they have not worked out well.

Few Thoughts
*Would you buy in that area if it wasn't for you friend?
*Would you have a clientele if your friend wiped his hands clean of the house (remember thats why people are renters to not have to deal)
*What ownership does your friend have to make sure the house is in as good condition as possible/ Will he want to do all the work when you are getting the gain?

Again not trying to be debbie downer. Just want you to be successful. At a minimium PLEASE for your sake have a great LEASE. The only time I went against my instinct, and didn't have a roommate agreement it BIT me in the butt.

Professor Ecks

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Re: Am I crazy for considering buying this rental property?
« Reply #4 on: December 30, 2014, 07:53:43 AM »
Yes, you are crazy!

Just kidding. Sort of.

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So I've been mulling this over in my mind and wanted to see what you smarter, more experienced people thought.

I see all sorts of potential problems with your plan as you have it presented currently. I may not be smarter than you, but I am probably slightly more experienced than you, having purchased a house in a bad part of Kansas City that I then rented to family.

First, as you seem to already know on some level, that is a REALLY shitty part of town. REALLY. I have no idea what your friend does in the area, but if she spends any time at all there, it boggles my mind that she would actually WANT to move to the area. "Northeast," as the area is known, is the kind of neighborhood where people try to get out, not in, which means if your friend DOESN'T end up buying the place from you, good luck trying to move it. Personally, there is NO WAY I would buy in that part of town.

I paid $40k three years ago for a 3 bed, 2 bath, 2 car garage home in a better part of town with better schools, close to dining, shopping, and entertainment, easy highway access and a quick commute to downtown. I have very little confidence that I will be able to sell my house without taking a loss.

But location aside, here are some other thoughts regarding your plan.

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It has 5 bedrooms and 3 bathrooms - my friend would stay in one with reduced rent ($150 per month).  I'd rent out three more rooms at $250 each.  No utilities included in rent.
Quote
I would allow pets with additional monthly and pet deposit - that would all go into a separate fund.

So are you going to set up separate meters for every room? Or are you just expecting this random group of individuals to work together to ensure utility costs are kept low, divided equitably, and paid in a timely fashion? What happens if you have a great tennant who conserves energy, pays timely, etc, and then you decide to rent another room to a person who meets your screening criteria, but turns out to be an energy hog. Now this great tenant is potentially saddled with increased utility expenses through no fault of their own. And what if this new tenant always pays the rent to YOU on time, but never gets their portion of the utility bills in on time to his or her roommates? Your great tenant is forced to not only pay higher costs, but now they have to cover other people's expenses or risk having utility shut off.

It turns out your great tennant is also alergic to cats and dogs. Now they are forced to decide "Do I live in a house with pets and be miserable or do break my lease and move," all because YOU decided to rent a room to a pet owner.

You can see where this is headed. There are countless other potential problems that could arise in the situation you envision.

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The neighborhood is really bad, but this is right next to where my friend works and I would only rent to those who qualified.

BECAUSE the neighborhood is really bad, good luck finding people who qualify AND want to live there. The main reason people live in Northeast is because the can't qualify or afford to live anywhere else.

Some other thoughts...

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My best friend lives in KC and works in a very poor part of it (zip: 64127).  She really wants to move out of her parents house and into that area... but she can't quite afford it yet. 

I see you are new to the forums, but have no idea how much of the actual site you've read. In my opinion, one of the main tenets of the MMM philosophy is not taking on financial obligations (buying a house, having kids, etc) until you are ready for it. From your own admission, your friend isn't ready for this responsibility yet, so it doesn't seem to me to be a wise decision to take it on for her.

Is she paying rent to stay with her parents? If not, then moving to a place where she WOULD pay rent isn't going to improve her financial situation. I get that she doesn't want to stay with her parents any longer, but if she is not in a position to move out WITHOUT your help, then frankly she has no business doing so, and her focus should be on getting herself in a better financial state.

Look, it would be great if you could help a friend out while earning some cash on the side too. Sounds like a win-win. However, in my mind, there are too many red flags with the house AND you plan to recommend moving forward.

OOBER

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Re: Am I crazy for considering buying this rental property?
« Reply #5 on: January 03, 2015, 03:42:02 PM »
I live in KC and have also been working on purchasing a rental property lately.

For the last couple of weeks, I have been driving around that side of town during my lunch breaks. There are a whole slew of houses that can be had in KC,MO for $15-30K all day long. There is a reason for that though... I am uneasy driving through those neighborhoods in my locked car, much less going there at night for a maintenance request or buying a property there.

Because of that I have been looking on the Kansas side (better schools, better neighborhoods). The houses are not as cheap, but I have a couple that I have my eye on.

I would be up for meeting up with some of you if you wanted to (not sure if you are also in KC BMEPhD)? Send me a PM. It would be nice to have some people to talk to that are headed the same direction.