First Timer Landlord - Thoughts and Critiques Welcome!

[h2ogal]

I'm buying my first income producing House this month, and hope to Close before Christmas, and I would love to hear your thoughts!   (Long post so you have the relevant details).

About Us: I "fired" a couple of years ago, but DH was still working, so I got bored and started my own LLC doing contract IT work.  DH also has a well-established S Corp with 7 employees.   Our children are grown. We own our current house (paid off), some undeveloped acreage/farmland, and some commercial real estate we rent to DH business. For the past 2 years, both of us have been spending more and more time with customers in a city about 2 hours from our residence.  We often stay in Hotels 2-3 days a week.   My investments are currently 70% US Stocks, and the rest in Bonds and Cash.   

About the Property:   
We found the city we are doing work in to be going through a 'renaissance', and decided to purchase a multi-family home there in the most popular trendy, walkable neighborhood in the city, very close to a $100 Million dollar redevelopment investment project (approved by City and starting construction Now), and right on the bus and metro lines.

We paid $330K, and financed 100% with a 30 yr fixed rate VA loan.   I got a 4.3% interest rate due to banking connections.   The total monthly cost will be about $2k, as the property taxes are very low.   

The house currently has two 3BR units, and has been fully and tastefully remodeled including all new roof, windows, furnaces, electric, piping, kitchens and bathrooms, etc.   We plan to rent one unit to a family member (Single Semi-Retired PhD) for $1000/month, and the 2nd unit will be my primary residence for a year, while we remodel the attic into livable space.   

We plan to remodel the attic into a Master Suite with kitchenette, move into it, and rent the second legal unit for $1250/month.   

Since the house is currently a legal 2 Unit, we plan to combine the finished attic (our living space) with the unit my family member is renting so we don't have a problem with zoning or building permits, while we will still maintain our separate private spaces, and each area will have a private exterior exit. 

This city apartment will be my primary residence for the next 3-5 years, but we are keeping our current (fully paid for) house as a vacation/2nd home, and we will be there Friday - Tuesday.   One of our sons will live in this current house full time also.

Our long term plan is still up in the air.   We may keep it and fully rent it.  We may decide to sell it once we fully retire (which for me will be 4-5 years out).

Do any of you experienced and smart landlords have any advice for us?   Tax advise, legal advise, ideas on unforeseen risks all welcome!

[joonifloofeefloo]

Before doing anything, read the relevant landlord/tenant laws *for your region*.

Even on this forum, people will give landlord/tenant advice based on no laws, or based on the laws in their own region. You need to know the ones in yours. Should be easily accessible online. In some regions, agencies develop a guide for laymen. Worth reading *both* versions through completely.

Ignoring the laws can set a landlord up for big loss.

[rothwem]

It honestly doesn’t seem like much of an investment to me. I get that it’s convenient, but you’re not making money off of it! I suspect that after you move out, it’ll be more of a headache than a money maker. 

[Jon Bon]

So how much money are you going to put into this remodel? It sounds a bit significant to finish off an attic (depending)

I will say another 30k for arguments sake.

So you are into the house for 360k.

Would the house fully rented generate $3,600 a month in rent? If yes, then this is a good investment. If its less than this, probably not the best investment.

If it produces $2,400 as I suspect that it would based on your comments, this is a terrible investment. I guess since you are closing soon it is a little late in the game. But just because rents cover your mortgage and insurance does NOT make it a good investment.

The point of a rental is to harvest cash from the property.

[waltworks]

Between the headaches of remodeling and the nonexistent cash flow on this property, plus the family+money potential for disaster, I personally wouldn't touch it with a 10 foot pole.

But it sounds like you're already committed, so best of luck.

-W

[Jon Bon]

Between the headaches of remodeling and the nonexistent cash flow on this property, plus the family+money potential for disaster, I personally wouldn't touch it with a 10 foot pole.

But it sounds like you're already committed, so best of luck.

-W

lol @waltworks I feel like you are always more direct, and probably more accurate than me in these posts.

[rothwem]

Between the headaches of remodeling and the nonexistent cash flow on this property, plus the family+money potential for disaster, I personally wouldn't touch it with a 10 foot pole.

But it sounds like you're already committed, so best of luck.

-W

lol @waltworks I feel like you are always more direct, and probably more accurate than me in these posts.

Walt is just mad that newbies are bidding up the prices of multifamilies to the point they don't make financial sense. 



Oh wait...I'm annoyed by that too.

[waltworks]

I guess I prefer to be direct, yeah. I came on here years ago asking if I should get an iPhone. Oh my god did I get reamed a new one. And I deserved it. It would have been completely idiotic for me (doesn't use phone as anything but a phone, is exposed to a lot of dirt/dust/outdoor sports/metal shop conditions).

4 years later, I've killed about $80 of cheap used smartphones that worked just fine for me, instead of killing $2k worth of iPhones.

OPs property is a financial loser, and they're going to rent it to a family member, and they're sure their city/area is super up and coming and hip... we get one or two of these a week, right? And then usually we never hear from the OP again, presumably because when they said "thoughts and critiques welcome" they really just mean "congratulations and high fives welcome"...

I mean, I honestly hope it works out. Since they're FI, $300k isn't going to kill them,  probably, so whatever. But when you're FI you should be doing things that make you happy, not remodeling a duplex in a city 2 hours away. Stick with the hotel, or just rent a place if you want a home base there.

-W

[h2ogal]

Hi All - So sorry not to check back sooner.   It has been a crazy $50hr work week, and lots of holiday parties and travel in addition to trying to close the deal on this house.

Thank you all for the honest comments and opinions!   

Yes, it will be very convenient for us to have a house in the city we are working in (and Fun TBH) and even though we wont make a LOT of money, in my opinion it is still better than paying hotel or rent for 3 years.   (Im spending about 12k per year now on travel).

I did look at several multi-family houses in a range of prices from $300 to $600K which is the average for this neighborhood.   I looked at over 12 houses in the past 6 several months, and put in bids on 3 places before this one, (low balling), and lost the bid wars when other buyers outbid me.   It's that kind of market in this neighborhood...good multifamily houses that are priced right sell within days of being on the market and often with multiple offers.

My plan is to live there for 3 years, have the mortgage partly paid by renters, and then when and if we are done working there we can either keep it as a rental (if it is working out cash flow wise) or sell it.    I'm taking a risk that the equity we build +the rent we collect will be greater than what we invest in the house.

The only cash I will have into it is the closing costs, ($15K) and the costs for renovating the attic ($30K).   

My monthly nut for Mortgage, Tax, Insurance will be around $1850 since the tax is very low.   The house was entirely gutted and remodeled before sale, so I dont think I will have much maintenance.     

Rentometer said that similar 3 BR units within 1/2 mile are averaging 1450 per month for rents.   (I am estimating rent of $1K and $1250 conservatively, I certainly also don't want to charge my family full market price for rent.)

I know I am a newbie, but it still seems like a good deal to me!   I'm excited to have a nice place in the city and also trying out being a landlord. 

I will post an update once I have a few months of real expenses and let everyone know how it is going.

[waltworks]

It's that kind of market in this neighborhood...good multifamily houses that are priced right sell within days of being on the market and often with multiple offers.

Oh, jeez.

That's when you *don't* buy a property.

Good luck.

-W

[h2ogal]

Yes, I toured through that many houses and looked at more online....but the specific neighborhood I want to buy in (the most desired one in the city) does not have a many houses for sale, and multi-family houses even less.   I looked at every single place that came on the market, monitoring realtor.com daily.    The house I ended up getting was not my favorite, but is in a great location and we can live it and rent it immediately without having to do any work.   

[mr.neel]

Here are the tools that I use:
Credit and Background checks - https://www.mysmartmove.com/

I recently started to use https://cozy.co/pricing/ for payments, but I think they do have other features.

As for the comments about the 1% rule etc, those are completely accurate wrt cash flow, but if you look at the location of where you are purchasing you can also make money off appreciation. You can actually lose money with the 1% rule if you buy in a area where property values go down over the 100 months in which your 1% pays back the cost of your purchase.

Things I look for are areas where: people go to retire, has a university, and yes is hip and attracting people with higher incomes. Location is key and I think it sounds like you picked a great spot.

[h2ogal]

Thanks!   I will check those out.   State university is 1/2 mile from house, so grad students with family, or a student share is possible, but for now it will just be me and my relative. 

[clarkfan1979]

I agree with others that the cash flow is not good. However, if the house is big enough that you can live at the house for free in a mother-in-law suite, while renting out the other two units that is much different.

You financed 100% of the deal, so you have zero of your own money. If you get $2250 of rent on a $2,000 mortgage, you are going to "break even" with repairs. However, you created a free living situation for yourself.

I guess the biggest question is how much the remodel is going to cost. Is the plumbing accessible? Are you going to do the work yourself? It could cost anywhere from 5K to 50K.

[h2ogal]

We are experienced remodeled, did several houses in the past.   I think 30k will cover the attic remodel.  I'm spending about 12k a year on hotels now, so I also have to consider that.

[h2ogal]

Update:   We are moving in tomorrow, so I thought I would share the final updated numbers.   

Cash Outlay:   8300
I thought the closing cost cash requirements would be higher, but since it was a VA loan they packaged it into the loan amount.

Mortgage, Tax, Ins: 1865 per month total

Income from Apt 1: $1000
My cost to live in Apt 2: $865, plus whatever expenses come up.

[lovegoodyu]

Very excited to see your progress photos!

[ilsy]

You can use MAGI, since you seem to be loosing on this property, if your total annual income is less than $100k (I'm not familiar with it very well, so do your own research. "If you or your spouse actively participated in a passive rental activity, you can deduct up to $25,000 of loss from the activity from your regular nonpassive income such as wages. The allowance is phased out if your modified adjusted gross income (MAGI) is between $100,000 and $150,000").

I know that a few people own RE properties with losses, just to offset their total large income and to pay less taxes on income. I don't know if this is still legal with the new tax laws, but it was at some point. So there is nothing wrong with owning a property that doesn't make money. It's just not what majority of investors are doing.

I'm also planning to purchase a property or two for 3-4 years for my daughter and son when they get into college (an out of state property), that is going to be rented to her/his roommates. By that time I should be FIREd and that's what I want to do. My primary reason for buying won't be money making, but I would like not to loose when I sell. And, while for many people an investment property should be making money, I consider those properties "long term flips" (they should just get my money back, hopefully plus some). I have enough experience renovating (the costs might be different in other states, but that's the fun part of figuring things out) and renting properties, especially renting to college students. It's going to be a learning curve and an interesting experience.

I agree with @mr.neel, appreciation makes money too, my house doubled it's price now, after I'd purchased it in 2012.

So, do your math, I think you are on the right track. Just because everyone is obsessed with the 1% rule, it doesn't mean what you do, doesn't work for you and your goals.