Author Topic: Biting off more than we can chew (purchasing first rental)  (Read 3858 times)

OneCoolCat

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Biting off more than we can chew (purchasing first rental)
« on: February 21, 2015, 07:39:16 PM »
My wife and I have been looking into purchasing a 3/2 in my hometown as a rental property.  I've read a bit on here and found the 1% rule particularly helpful.  I believe it means if you pay 100,000 for a home, you need to aim to get 1,000 in rent from it.  I've been following Zillow and Trulia and there are a few properties that I want to look at (one is a shortsale) which are estimated to be rentable at above the 1% rule.  I certainly wont base my decision on it, but I do use it as a preliminary reference.  So far, we have been pre-approved for a conventional loan through Quicken Loans at 4.4% up to 300k (we are looking in the 90-130k range).  We will put down 20% but we only have about 20k between the two of us at the moment so I wonder if we are trying to bite off more than we can chew?  I know there will be closing costs (probably around 4k from what Ive been told) and I will need an inspection and title insurance so we are pushing it.  So we are in a situation that if we pull the trigger on this we will need a property that is pretty much ready to be rented with little maintenance.  However, I have crunched the numbers and I know we would be able to pay the mortgage, insurance, and taxes on the property going forward even if we are unable to rent the property.  I expect the Mortgage, insurance, and taxes would come out to around $800 a month on a 100k loan, and even after maxing our retirement accounts we have enough left over to cover this without changing our lifestyles.  Only problem is that our safety net will rebound slower.  Do you think we are biting off more than we can chew at the moment?  Maybe we should risk letting interest rates go up and wait another 6 months so that we can build up a 8k or so safety net after closing?

cshaw

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #1 on: February 21, 2015, 10:27:07 PM »
Your scenario is strikingly similar to one I am in now, so I decided to share my current situation and line of thinking.  I am in the process of purchasing my second rental property: a 4 bedroom SFH where I live.  The purchase price is $109K.  Iím putting 20% down.  P&I is going to be about $425 and taxes/insurance will raise that to $600-625ish.  Your closing cost estimate seems pretty accurate.  My home inspection was just over $300 and title insurance should be included in that estimate of closing costs.  I was also originally going to go with QL since I refinanced my first rental with them just over a year ago and was impressed with how quick & efficient they were.  I decided to go with a local mortgage company: the rates and the closing costs were a tad lower.  Plus, I plan on purchasing a few more and like the idea of working with someone I can build a professional relationship with.
If you can cover the cost of the unit you are looking at, Iím guessing w/in a couple of months youíll be able to save that amount toward closing.  Iíve yet to do a ďshortsaleĒ so Iíd talk with your agent (if you are using one) to get an idea how long they typically take in your area.  Iíve discussed it with my agent and a lot depends on the lender and of course the particular situation, but I was led to believe the process would certainly not be quick.
One major consideration is going to be how much work and cost is it going to be to get the unit rent ready?  The last thing you want to do is get into a situation where you stretched to close and then walk into a couple of thousand dollarsí worth of work and repairs just to get it ready to rent.  Most, if not all of the distressed properties I looked at needed some work: carpetís cleaned or replaced, painting, etc. at a minimum.  You can certainly save a lot on labor by DIY, but material costs can escalate rapidly if you find yourself having to make repairs.

I personally donít put much faith in the rental estimates on Zillow: they donít seem very accurate for my area.  I frequently browse Craigslist for similar listings and try to keep up with what other landlords are asking.  I also had a Property Management company walkthrough the homes I looked at and give an estimate of what they thought they could get out of the homes.  All it cost me was a sales pitch.  My real-estate agent was very helpful in setting this up.
Iím pretty new to MM: I only discovered this site around the beginning of the year.  One think that has stuck was his notion of ďspringy debtĒ.  Iím no longer as concerned about having a ďsafety netĒ sitting around in a low interest rate savings account just in case.  I have a $25K limit on my Visa and a $25K HELOC that I can dip into if something comes up and I need more funds than I have sitting around.  I keep the balances at zero and pay them off monthly if they do get used.  Some of my down payment on this house will come from my HELOC and Iíll pay it off as quickly as possible.  Iím in a similar situation: I can cover the mortgage on the new house and the HELOC payment without missing a beat.  Hopefully I can get renters in their fairly quickly and then I can start saving for the next down payment.
So, do I think you are biting off more than you can chew?  Personally I donít.  Knowing that you can cover the cost of the unit without making any changes is a good position to be in.  You are so close to having enough funds to cover the down payment and closing cost that Iíd find I way to make it work; even if it means rat holing as much money as you can for another 30-60 days.  Iím guessing if you make an offer on the unit and they accept youíll find a way to save enough to comfortably close by the time it arrives.  Assuming the location is good, you know the rents you can expect to make, and you are not looking at a lot of upfront maintenance on the units Iíd go for it.

OneCoolCat

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #2 on: February 21, 2015, 10:46:37 PM »
Thanks!  Lots of good advise there.  I actually spotted something on Zillow tonight that has intrigued my wife and I so I'm making plans to go scouting this weekend.  Its a nice looking 3/2 1800 sq.ft in a decent part of town for $100k.  It looks like it will require no work done before its rent ready.  I do have a major concern though, its been listed for rent at $1,125 for the past three months which leaves me wondering why hasn't this home been rented out by now.  According to the 1% rule, I would be fine taking $1,000 in rent but there is only a $125 difference there.

Also, in the town I'm looking at, I see craigslist ads offering to rent 4/3 homes/apartments for $800 near the local university.  This isn't in the same area (about 15 minutes away) but that rent makes me feel discouraged about what I would get for the residential 3/2 SFH.  These ads are posted by apartment complexes so maybe its a bait and switch type ad, idk.  I also checked the neighborhood rental properties listed on homes.com and felt like this property at $1,100 is very competitive in the market, but I still cant explain why it hasn't been rented for the past three months.

cshaw

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #3 on: February 22, 2015, 12:22:18 AM »
I would certainly dig into why itís not rented out as well.  It could be as simple as poor advertising or the place is overpriced.  The good thing is, as you pointed out, you can drop the rent by $125 if it being overpriced is the case.  Do local comparisons though: I donít think Iíd be too concerned with what rents are closer to the University and 15 minutes away.  You will likely find entirely different demographics.  Look for what the draw to the local area is: schools, parks, business centers, proximity to shopping centers etc.  That is the base you will be marketing too. 
Also, I would talk to some of the local property management companies as a potential customer: see what you can learn regarding in-demand type properties in the area and current vacancy rates.  I had originally started looking at 3 bedroom homes but moved to 4-5 bedroom homes because the family sizes are larger than the national average here in Idaho and there is a very low supply of rentals that size compared to the demand in my city.
Finally, be patient.  As exciting as it is to buy a new place (especially your first), donít force it if the numbers are not there.  Finding a good buy this time took me about a month before I was ready to make an offer on a place.  I got to the point where I was sick of looking through online listings and walking through the ones that interested me.  Yet I defined up front what I wanted (other than adjusting from a 3 Bedroom to a 4+ Bedroom home) and what I was willing to pay and I was not willing to compromise on the details.  Make a plan and stick to the plan.  Good luck and happy hunting.

clarkfan1979

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #4 on: February 22, 2015, 03:51:56 AM »
Do you have a realtor? They should be able to help you with the basics. Once you decide on a loan company the loan company will can give you a good faith estimate to estimate all closing costs. With the good faith estimate, you will know how much money you will actually need. If you want to get a deal on a property it's got to be something that doesn't show well for some reason. This will require some cleaning and/or minor repair. If you can't afford any repairs then you are going to limit yourself on the properties that you can buy and you will be keeping with a lot of people to purchase. At the very least you need 24K to account for closing costs. If you had another 3K for minor repairs, it would be really helpful. 

OneCoolCat

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #5 on: February 22, 2015, 07:06:18 AM »
Right now we have 20k and can save 1.5k a month between the two of us.  I think we will have 24k within the next 90 days.    If repairs are needed, we have credit cards.

Quick question about credit cards.  My wife and I have always paid off our credit cards in full every month.  I recently set my credit card up to automatically withdraw from my checking account each month.  When this was done, it only withdrew like 20% of the credit card balance.  This worried me so I immediately paid off the rest of the balance.  If you make the minimum payments on a credit card do you avoid late payment fees and interest?  I should really know this but for the past decade I've never made a late payment.

OneCoolCat

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #6 on: February 22, 2015, 07:10:14 AM »
Oh yeah, I'm also a first time homebuyer, but my wife is not.  I can actually pull some money out of my IRA if needed to make the down payment/closing cost.  I really don't want to bother doing this though.

Megma

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #7 on: February 22, 2015, 09:33:44 AM »
Onecoolcat if you only make minimum payments on your credit card you won't have late fees, if you pay the minimum on time but you will begin paying interest fees. You should check the rates on you cards before doing this to plan which is best for carrying a balance, I know I have no idea what my rates are since I always pay them off!

I'm in a similar position too, there is a very well priced  foreclosure in my neighborhood but I'm not quite ready to buy yet...

waltworks

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #8 on: February 22, 2015, 09:38:25 AM »
RE is not a game to play if you are cash-poor. And if you have only $20k saved... you're cash poor. Forget it until you have your finances in better shape.

-W

KD

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #9 on: February 22, 2015, 10:50:44 AM »
My concern here is RISK.  Do you have disability insurance?  Life insurance?  Can your SO/wife pay to keep your current home & one vehicle & the rental if vacant if something were to happen to you?  Can you if you are relying on her income as well to meet these expenses?  What's the game plan if these two pieces of risk coverage aren't in place?

OneCoolCat

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #10 on: February 22, 2015, 04:56:56 PM »
My concern here is RISK.  Do you have disability insurance?  Life insurance?  Can your SO/wife pay to keep your current home & one vehicle & the rental if vacant if something were to happen to you?  Can you if you are relying on her income as well to meet these expenses?  What's the game plan if these two pieces of risk coverage aren't in place?

Our primary residence is paid for.  Both of our cars are paid for.  She would not be able to afford the home if something were to happen to me unless she changes her 401k allocation (we both currently max our 401ks and IRAs, hence our small amount of cash).  I do have life insurance but its for a small amount of money, employer provides it.  I should probably increase it since im still young, 28, and its probably affordable.

MrsCoolCat

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Re: Biting off more than we can chew (purchasing first rental)
« Reply #11 on: February 22, 2015, 06:10:29 PM »
Don't forget u also want a kid... Soon. Ugh there's never enough money in this life for normal ppl.