Author Topic: Is this a good way to get into RE investing?  (Read 1701 times)

NicoleO

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Is this a good way to get into RE investing?
« on: January 19, 2016, 10:55:29 AM »
We currently owe approximately $65k (10.5 years left on 15 year mortgage at 3.5%) on our primary residence and believe it is worth $150k on the low side to $200K on the high side.  The house sits on 18 acres with a tiny house/mother-in-law quarters and shop/storage building in addition to our house.  The tiny house has a separate driveway from what we use but it is shared with our shop/storage building driveway, so out of the way but not completely.  The shop is currently a 3 sided building/barn and the tiny house is completely gutted (needs everything including electric and plumping).

We are thinking about doing a cash out refinance of approximately $20K-$30k (keeping the loan amount under $100k) to get the slab poured and the fourth wall put on the shop and the rest to completely finish the tiny house.  The shop has to be included because we currently store (almost) all of our tools in the tiny house.  We would probably look for another 15 year loan so I am thinking this would not change our monthly payments too much but I doubt we will get the same (or lower) interest rate.  Husband grew up building houses with is father and is currently a realtor so we feel like we are in a good place to complete most of the work ourselves and manage rental properties.  We believe we can get approximately $300/month in rent for the tiny house, I have always heard that you want a rental to pay for itself in 2-3 year.  At $300/month, if we spend $10k finishing it than it will pay for itself in 3 years.

Is this a decent way to become a landlord?

EAL

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Re: Is this a good way to get into RE investing?
« Reply #1 on: January 19, 2016, 01:27:04 PM »
First, check with the zoning laws in your community to ensure you CAN rent this unit out if it is fixed up. I have heard of people converting basements, back houses, etc to later find out zoning doesn't allow the rental unit.
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NicoleO

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Re: Is this a good way to get into RE investing?
« Reply #2 on: January 19, 2016, 07:22:02 PM »
We are in the country, no zoning concerns.

MoonShadow

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Re: Is this a good way to get into RE investing?
« Reply #3 on: January 19, 2016, 07:28:56 PM »
This is one way to get started in rental investing, but it's not exactly going to give you experience that translates well to the greater RE markets.  However, I have seen many families in the countryside do similar things, so it's certainly not an unheard of method.  An additional advantage of doing things this way is, if you want the property to stay in the family long term, the tiny house in the back of the property could end up your empty nest house once the kids have grown up and one of them has taken over the big house & the management of the property.  The only thing else I would mention, be wary of taking out a loan right now; and make sure there is a market in your area to actually cover the $300 per month you would need to make your fiscal goal.  $300 won't sound like much for most of the urban dwellers on this forum, but there still might not be a market for it, so be certain.

SwordGuy

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Re: Is this a good way to get into RE investing?
« Reply #4 on: January 19, 2016, 07:52:09 PM »
the tiny house is completely gutted (needs everything including ... plumping).

Quite a few folks might agree with that...

That's quite an ironic typo. :)


In effect, you are purchasing a rental property for $20,000, which is what you think it would cost.   A great rent on a purchase cost is 2% of the purchase cost per month or $400.  The lowest you should consider is 1% or $200.   1.5% is respectable, assuming you can get it.   If it costs more or less than $20,000 you'll have to adjust the numbers.

NicoleO

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Re: Is this a good way to get into RE investing?
« Reply #5 on: January 20, 2016, 06:34:10 AM »
the tiny house is completely gutted (needs everything including ... plumping).

Quite a few folks might agree with that...

That's quite an ironic typo. :)


In effect, you are purchasing a rental property for $20,000, which is what you think it would cost.   A great rent on a purchase cost is 2% of the purchase cost per month or $400.  The lowest you should consider is 1% or $200.   1.5% is respectable, assuming you can get it.   If it costs more or less than $20,000 you'll have to adjust the numbers.

I didn't even notice the typo until you pointed it out, maybe it was not completely accidental.

Thank you for the numbers.  I do not think our market would support $400, but I have no doubt we could get $200 for it and am somewhat confident that $300 is within reason.

iamlindoro

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Re: Is this a good way to get into RE investing?
« Reply #6 on: January 20, 2016, 11:13:46 AM »
I would caution you to be very very careful at this low level of rent.  There's an article over at BiggerPockets about buying properties in the < 30K range that points out some of the issues with this kind of plan. 

https://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/

I don't necessarily agree with all of the article (the author is somewhat insufferable in the article and on their forums, and takes forever to get to the point), but there are a few good points that would apply to you: namely that certain types of repairs are the same cost whether it's a 30K house or a 200K house.  Assuming you do 100% of the property management and even the repairs yourself, there are bare minimum costs for replacing a water heater, a toilet, a furnace ($$$!), an appliance, etc. as those items age.  You are very vulnerable to these costs at this low of a rent, because having a single repair can wipe out 100% of your rents for many months, or even years.

For this reason, I try to stick to properties that have a minimum rent of ~$650+ per unit on a duplex, and $800+ on a Single Family Home.
« Last Edit: January 20, 2016, 11:25:51 AM by iamlindoro »
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NicoleO

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Re: Is this a good way to get into RE investing?
« Reply #7 on: January 20, 2016, 06:43:17 PM »
Those are very good points for us to consider.

Thank you for taking the time to post.