Total newbie toying with the idea of buying for (eventual) investment property

[mabinogi]

We are nowhere near deciding to actually do this, so if it's an incredibly stupid idea, be nice (but honest)!

DH and I live in a town where a pretty large percentage of homes are currently for sale, so it's possible to get a pretty nice house for a pretty nice price. On the other hand, there is a very limited rental market. We are currently renting, and paying $1300/month for a house that's too big for us, because there just wasn't much available when we moved here. Overall, there is very little mid-range rental housing available.

If we were planning on staying here long-term, I think it would almost certainly make sense for us to buy a house. We could get a nice house that would suit our needs for ~$125k. The catch: we don't want to stay here long-term. We'll be here at least another year or two, but our 5-year plan involves getting the heck out of here. Given the state of the real estate market, I'm not confident we could sell if we ended up moving within a few years. That said, it seems to me that it MIGHT make sense to keep a house here for an investment property, since there is so little rental housing available. The housing market is expected to pick up here eventually - the major employer here is a large government lab, so there's steady employment, but due to government funding cycles, the housing market here tends to lag behind the rest of the country.

So, since I'm a complete newbie here, some very basic questions:
1) how much (in percent of home value) should one expect to get in rent in order to make an investment property worthwhile?
2) how much of the monthly rent would be eaten up by the property management company (since we'd eventually be remote)?
3) is this overall a terrible idea, or does it have some promise?

Thanks in advance!

[Calimandc]

My wife and I went through the same debate a while ago.  I'd love to know what town you live in with real estate prices so low. 

If you've planning on leaving the area DONT buy!  Being a dislocated owner is not good for your sanity.  Either you have to hire a manager for it, or you have to do everything from afar.  Chances are things will break and renters will leave or need to be evicted.  You don't want to be constantly bothered with that while you're somewhere else. 

Ideally, you'd want to be able to rent it out for 1% of the purchase price of the home.  If you cannot do that, then you should not buy it.
Also, you want to be able to net approx. 50% more than the home costs you in mortgage, tax, insurance every month.  Like I said, things break, there are gaps in renters, other unforeseen costs.  You need to cover that with what you're making on the place so that you're not putting $ out of pocket.

Finally, and probably most importantly, if you're planning on moving away, you don't want to have your assets tied up in a location where you cannot liquefy them.  You'd probably do much better paying off debt if you have it, or investing the money.  Then you can put it toward your real eventual goal, which is FI, rather than some property somewhere you used to live.

Good luck with it all!

Jeremy

[ioseftavi]

So, since I'm a complete newbie here, some very basic questions:
1) how much (in percent of home value) should one expect to get in rent in order to make an investment property worthwhile?
2) how much of the monthly rent would be eaten up by the property management company (since we'd eventually be remote)?
3) is this overall a terrible idea, or does it have some promise?

Thanks in advance!

Thank YOU for making your questions so neat and organized.

1)  1% of price (purchase price + any immediate improvements) as monthly rent is a good starting point.  2% is better but is very difficult to find in many parts of the country.  1% is a nice starting point, but higher is better.  Past a certain point, higher rent-to-price ratios will mean you are looking in more "difficult" neighborhoods or towns: crime or economic depression in the area starts to be a factor.

2)  8-12%.  Depends on your management company.

3)  Has some promise.  Start reading books and go sign up for biggerpockets.com.

[mabinogi]

Thanks, folks. We could likely get almost 1% of home value in rent, but might not quite be able to reach it. I'm probably being swayed too much by the high rent that we're currently paying, and the difficulty we're having finding something a bit more reasonable to rent. On a monthly cost basis, buying would be cheaper than renting...while we're living here. But it's true that managing it as an investment property remotely doesn't sound like a whole lot of fun, and may not be lucrative enough to make it worth it. We've definitely got some research to do.

ioseftavi, any particular book recommendations? Thanks!

Calminadc, we are in Idaho Falls, Idaho.

[waltworks]

If you can't hit 1%, don't even consider it. That's the typical lower bound for even running specific numbers on a property. Even many 1% rule properties will still be money losers when you run the specific numbers.

There is a book list sticky at the top of the forum.

-W

[mabinogi]

If you can't hit 1%, don't even consider it. That's the typical lower bound for even running specific numbers on a property. Even many 1% rule properties will still be money losers when you run the specific numbers.

There is a book list sticky at the top of the forum.

-W

Thank you! I'll check out the book list. We might be able to hit 1%. Given the amount of time some of these houses have been on the market, it's quite possible we could get the selling price down to closer to $100k. In that case, I think we could hit 1% or just a bit higher. Lots of research and reading up to do. We're in our lease until August, so we've got time to mull this all over.

[zephyr911]

I went through an absolute nightmare as an absentee landlord after I moved 350 miles away for work. I didn't think I could afford management, and some moderate messes left by my first tenants pushed me into a series of bad deals trying to get it fixed by someone who could live there temporarily for free. My first try was a (literal) crackhead who melted down wire to sell the copper for drugs, ruining my back porch in the process, while committing all kinds of crimes and ruining my rep with the local government. Then there was a family with local roots, who fixed a few things and paid for a couple months, but then became unemployed and left - again leaving the place full of their shit. The next guy did a bit of work on it but never paid a dollar, moved out when I pressed the issue but wasted months of my time responding to emails as if he was still there. I lost track of all the dumb shit that place went through, and ultimately I filed a deed in lieu of foreclosure and walked away from ~$30K in losses.

Lessons learned, if you're going to be a landlord:

1) HAVE SAVINGS. Not being able to make major repairs will put an otherwise workable investment into a death spiral.
2) ALWAYS have local management. In your case, I'd identify them ahead of time.

If there's a #3, it's not one that I'm quite as adamant about, but don't go into rental investing sideways. If you're going to do it, do it systematically and purposely. And usually that works better with small multi-family properties (YMMV).

[ioseftavi]

If there's a #3, it's not one that I'm quite as adamant about, but don't go into rental investing sideways. If you're going to do it, do it systematically and purposely. And usually that works better with small multi-family properties (YMMV).

Sound advice.  I didn't mention it in my first reply, but please note that I am NOT a property owner - I'm just an interested guy who's been doing his homework.  My wife and I have been gearing up for our first rental property for about 6 months and will be looking to purchase an investment property - not in our local market - by the end of the year if all goes well.

I started a thread a called "Tell us about your first rental property", because I wanted to know what lessons people had learned, and I wanted to avoid the major pitfalls.  Here are my main takeaways from that thread and my own experiences:

1)  Don't become a landlord by accident (i.e. inheriting a property you wouldn't buy and hanging on to it, or moving away from your area and renting out your former primary residence despite it being a money-loser).  Approach the purchase deliberately.
2)  If you want to make life easier, don't involve family as business partners or as tenants.
3)  Run extremely realistic income / expense numbers for your property, and include lumpy (not ever month) or hidden expenses (upcoming repairs, cost of vacancies).  Use this as a key part of your decision making.  Lots of real estate horror stories involve people who ran no numbers, or penciled out numbers which were not at all realistic / complete.
4)  Don't count on supernormal appreciation to save your ass on a bad deal.  If you're forecasting that your rents or properties will go up far higher than general GDP growth, you are likely rolling the dice. 
5)  Tons of well-meaning friends and family who have never owned rental property will offer you advice on rental markets and techniques.  You can thank them and ignore 95% of what they say. 
6)  You can also ignore lots of the 'get rich quick in real estate with no money down' books.  Most of the real estate books out there are, frankly, utter shit.  A small proportion are not - a quick rule of thumb is that if it contains far, far less hype than the "get rich quick" books, and lots more legalese, how-tos, and formulae - it may be decent.
6)  Buy smart, manage well.  It is far easier to STAY out of trouble with real estate investing than it is to GET out of trouble.

Perhaps I'm breaking rule #5 since I don't own property yet!  But those are my findings so far.  Hope that helps!

[mabinogi]

That is a great list of tips, ioseftavi. Thanks so much! I'll go check out the thread you started, as well.