considering first rental property

[BooksAreNerdy]

We are in an interesting situation. DH has recently been bitten by the MMM bug. He is selling his classic corvette and has been biking to work (15mi each way!) 3-4 times per week. We have been deeply considering selling our home (hobby farm). And moving into town. This would allow DH to retire 4 years earlier than if we kept the farm. Plus, once he retires we would need to downsize living on the farm anyway. The other benefit is that we are not willing to put our kids on a bus for 45min each way to send them to school. So, in two years, I will be facing 2 hours of commute time daily. With a 2 year old in the back seat. Yay! We have about $140k in equity in the home.

That long intro was just to say that we are looking at properties that are in areas we would want to live in ourselves, but looking for properties that would also make good rentals.

We found a foreclosure listed at 39500 in a good area. Comps on that block are around $112-130. The 3 blocks to the east towards the river increase into the $300k range. Two blocks to the west in one of the better elementary schools in the area.

DH is willing to do as much of the rehab as he can, excluding roof, foundation, and electrical work.

Current rental prices point to the $800-900 range. We could for sure be safe with the 1% rule on that. I think we could keep our total investment closer to $60-70k.

My confusion comes with  the 50% rule and figuring out if it would be cash flow positive.

We would likely get a loan for the Purchase price, work on rehabbing slowly with cash until we sell our house, then pay off the mortgage and fund any remaining rehab with our equity from the sale of our home.

So, is it important to think of the possibility of this being cash flow positive in the future or should we mostly be considering what the property has to offer by allowing DH to retire in less than 8 years?  Does using it as our primary home (paid off) for several years change the way we should look at the future cash flow question when it is a rental? We are approaching it as a business venture, not emotionally as if it were our 'dream home'.

Just to qualify ourselves, we built our current home. I did all of the GC work myself. DH is an mechanical engineer and has done a huge number of handy projects.I still have my contacts from building our current home and I think we have a good grasp on cost and amount of work involved.

[waltworks]

It sounds like a slam dunk to me, unless you are way off on the repair costs. Plus it sounds like you can live there, fix up, and then make a decision down the road on sell/rent as well as saving a fortune on commuting. Your skills and life situation align almost perfectly with this opportunity, IMO.

Read up on foreclosure buying, though. You will *almost certainly* not be able to get a loan on a property like this (<$50k, in need of many repairs) so you will need to figure out how/if you want to finance it (pay cash, HELOC, sell current primary, etc). Got any more Vettes you can sell? :)

-W

[escolegrove]

My husband is active duty so all of our "homes" become rentals at some point. We gutted our first house in the same way you are describing. It was also a foreclosure and needed Tons of cosmetic work. Sounds like you have a great rental. We then self manage our houses when we move out.

[BooksAreNerdy]

Thanks for the replies. They just lowered the price again to $36k. We have an appt to look at the house this afternoon. We would be able to do a HELOC, no problem.

On paper, it all makes financial sense. Its a little intimidating to think of the huge life shift of moving. But, buying the property before we sell our current home makes the most sense as it would give us a head start on renovations before we needed to move in. I'm afraid our current house could take 6-12 months to sell as it is on 20 acres and will take the right buyer. It does make me ffeel good to think about having the school district issue sorted out.

Should we get an inspection asap before making an offer? Do foreclosures usually allow much negotiation in price?

[waltworks]

1: Talk to the listing agent and find out what the bank is planning. Sometimes they will list a place just to drum up interest (at a ridiculously low price), then auction it. Or they may just be selling it. Agent will know more.
2: Walk around the neighborhood and find people to talk to who may know about the house. People *love* to chat about this kind of thing, believe it or not. If there are retirees, they are information goldmines!
3: Some foreclosures (auctions, especially) will be sold "as is, where is", meaning that there are NO inspection, financing, etc, contingencies once the offer is accepted. The bank will want something like $3k in earnest money, probably, so you can back out if you desperately want to, but you'll lose that.
4: Make sure, sure, sure you are getting clear title and that you can get title insurance. This might mean hiring a title company to run a title search before you put in an offer (few hundred bucks).

-W

Thanks for the replies. They just lowered the price again to $36k. We have an appt to look at the house this afternoon. We would be able to do a HELOC, no problem.

On paper, it all makes financial sense. Its a little intimidating to think of the huge life shift of moving. But, buying the property before we sell our current home makes the most sense as it would give us a head start on renovations before we needed to move in. I'm afraid our current house could take 6-12 months to sell as it is on 20 acres and will take the right buyer. It does make me ffeel good to think about having the school district issue sorted out.

Should we get an inspection asap before making an offer? Do foreclosures usually allow much negotiation in price?

[BooksAreNerdy]

Great advice we will take moving forward.

Unfortunately, this story has a lame ending.

The listing was shown to be on Indiana st in Lawrence, KS. Turns out they misentered the info and it is actually on Lawrence st in the state of Indiana. So, a big bummer. But at least we have gotten the ball rolling and know more of what we are looking for in a house.

[waltworks]

Doh. But there's nothing like a lost opportunity (or one that never existed in the first place?) to clarify your goals.

-W

[escolegrove]

Sorry it didn't pan out. As walt said, now you have a plan. A good one by the way. Crazy thought, what could you get for renting out your current house since it is paid off. If you bought your next house as an personal, and had your pervious personal property pay for the mortgage of your new house while you work on it. Than you would get two houses building assets.

While we don't have a paid off house. We do the same thing to a point. Just a thought. Congrats on having a plan. That is the first step.

[BooksAreNerdy]

That is an interesting thought to rent out the current home. Though, I'm not too sure there is much of a market for renting a 20 acre hobby farm. We surely couldn't rent it for $3600/mo. Which would be 1% of value. Our mortgage is $1500, and I would assume we could get maybe $1800-2000 for rent if we found the right family.

It does feel good to have a plan. I'm trying to not be impatient. I think we want to list our home in spring and I'd like to at least have a project home to be working on by then.

[Mr Mark]

Great that a typo got you rolling on the options you have!

plus, sounds like you have the time to wait before you pounce! Keep researching the market, have your paperwork in order ready to fire.

and then, trust your numbers.

If you crunch the numbers, conservatively/conservative side of reality, and can get a solid 1.5% deal with no downside on valuation (you have some solid numbers on after reno value, on rental value, on taxes and insurance, etc), then pull that trigger!

Remember, if its such a good deal it may not last more than a few days or even hours... so find a good realtor who's willing to work with you (be nice, they hate tire kickers), tell them what you're looking for, and good luck!