Author Topic: Unexpectedly becoming a landlord - advice?  (Read 2915 times)

FIRE 20/20

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Unexpectedly becoming a landlord - advice?
« on: August 22, 2015, 12:13:14 PM »
I have never been interested in real estate.  The few landlords I know may just be bad at it, but they seem to have lots of problems with tenants, HOAs, maintenance, etc.  Now my ignorance is coming back to bite me.

My mom is in a terrible place and is going to move soon.  She moved to a bad area to take care of her parents for the last few years of their lives, and it drained her financially, physically, and emotionally.  I don't feel like going into a lot of detail unless it's necessary, but my partner and I have decided that the only viable option is for us to purchase a house nearby and have her live there as a tenant.  She is unable to get a mortgage.  My goal is first and foremost to give her a nice (but not expensive!) place to live in a safe neighborhood.  After that I'd like to try to come as close as I can to breaking even with her rent covering our expenses.  However, I'd rather come up short a few hundred dollars per month rather than try to make any profit on the situation.  My mom has selflessly taken care of others in the family and got me through some really hard times, and now that I'm very comfortable financially I can think of nowhere I would get a better "return" on my money than helping her out when she's in need.  I think I've worked out the money aspect - there are reasonably priced homes and she can cover enough rent to make us come out roughly even.

Ok - enough with the introduction.  I wanted to set the stage with that because I'm not looking for advice on how to maximize my profit, but rather just looking for some basics on the mechanics of being a landlord.  I have read some basic information on being a landlord, but most of what I've read has been focused on the finances, finding tenants, background checks, finding very low-priced houses to maximize return, etc.  What I haven't found is what do I do about insurance?  I assume just talk to my current insurance provider.  Are there any things I need to pay attention to for the loan, since it will be a rental property?  What liability am I taking on? 

I don't even know what questions to ask because I don't even know what I don't know.  If there are any good beginner tutorials for someone in this situation, please let me know.

Thanks.

GizmoTX

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Re: Unexpectedly becoming a landlord - advice?
« Reply #1 on: August 22, 2015, 02:16:40 PM »
I believe rental house mortgage interest is usually priced higher than primary residences. Typically you insure just the property, while the tenant gets rental insurance for the liability & contents. You will also need to budget for all maintenance, repairs, yard work, & property taxes.

Why do you have to buy a property for her to live in? Renting removes all these uncertainties & frees up your capital. She likely could qualify for assistance at a senior community, which would also give her more of a social life.

Rezdent

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Re: Unexpectedly becoming a landlord - advice?
« Reply #2 on: August 22, 2015, 02:18:38 PM »
You've already done the math, but are you sure that renting won't be better than buying in this area?  How long will mom be able to live on her own?  Is your mom pretty isolated and getting up there in years?  If so, renting in a community that has lots of folks her age might be worth it even if it's more expensive.

If you do buy, then yes talk to your insurance agent.  We get a different lower rate when the "tenant" is a family member.  Still higher than our primary residence, though.

Overall, this wouldn't be a real landlord situation.  It's more like "moms house, but in my name".

cchrissyy

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Re: Unexpectedly becoming a landlord - advice?
« Reply #3 on: August 22, 2015, 02:59:37 PM »
I think for insurance and the purchase loan and really everything else, you will have higher prices calling it "a landlord situation" and should instead approach it as "second home" or "owner occupied" or like the other poster said "mom's house but in my name".  Maybe the loan is in your name and the title is in yours and hers, with her share of course going to you if she passes away? or title in just your name, in which case it looks to the bank like a normal owner-occupied purchase.

If you need to show the "rental income" to qualify for the mortgage, fine, write something up. I don't mean a lease inappropriate to your situation, but a single page "mom will live in our home and contribute $xxx for rent every month" or "and will contribute $xxx to household expenses" or "and will directly pay 10 mortgage payments per year". None of that transforms the property overall into "a rental", as lots of people get rental income for home they still live in. And honestly, you're not buying it to be a rental, this is a house for one person, your mom for goodness sakes, and the extra lending requirements and costs of "a rental property" really shouldn't apply.

MsPeacock

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Re: Unexpectedly becoming a landlord - advice?
« Reply #4 on: August 22, 2015, 03:39:23 PM »
Wondering if renting wouldn't be a better option. Removes the need for maintaining the property (repairs, lawn mowing, snow removal). I'm not sure how old your mom is, but unless you plan to own the house for a long time it may turn out much more expensive than renting. Since she presumably needs only one bedroom surely there is a nice rental community that would bee easier for her? Should her health turn bed and she needs to I've your money isn't tied up in a house.

FIRE 20/20

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Re: Unexpectedly becoming a landlord - advice?
« Reply #5 on: August 24, 2015, 07:45:31 PM »
Thanks for all the replies. I will definitely look into a senior community or another rental option. The main reason I have looked into purchasing a house is that she has a number of pets, including two large dogs. I also think she probably has ten or more years of independent living, especially with us nearby.  It's good to hear that I may be able to purchase this as a second home. I had assumed that since I would be collecting rent it would be characterized by tax law as a rental unit. I just want to make sure I do all the right things legally and for taxes. If anyone can point me to resources on the legal difference between a second home for a relative and a rental it would be greatly appreciated.

Thanks again.  Any other thoughts would be appreciated.



Dicey

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Re: Unexpectedly becoming a landlord - advice?
« Reply #6 on: August 24, 2015, 08:04:02 PM »
Oh, hell no it's not a rental property! You're buying a house for your mother and that's all the lender needs to know. Speak to your insurance agent about how to work that policy, but there's most likely no need for you to call it a rental if the tenant is your mom. Some combination of Landlord and Renter's Insurance might do the trick, but you may have to insure it differently to satisfy the lender at first. Find a competent CPA to help you structure the purchase to best take advantage of the tax code.

Your landlording book reminds me of when we rode our bikes down the CA Coast. We tore out the pages after we passed through and just kept the part that was ahead of us. Do the same thing with your mom, and ignore the parts that do not apply to your situation. And good for you for taking this on. If you are wanting to make sure she can age in place, consider a layout where she can have a roommate and or caregiver live there comfortably, if at all possible.

Whoops! I just saw cchrissyy's post. What she said.

SwordGuy

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Re: Unexpectedly becoming a landlord - advice?
« Reply #7 on: August 24, 2015, 08:30:13 PM »
Do you REALLY want to collect rent from your mom?

Is that a dynamic that will really work for you?

I can't find the link to the article any more, but one fellow wrote a very clear description of how that really messed up the dynamics between him and his mom.

Personally, if I could at all afford it, I wouldn't charge the rent.  If possible, let her keep up the house with some help from you. 



cchrissyy

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Re: Unexpectedly becoming a landlord - advice?
« Reply #8 on: August 24, 2015, 10:11:57 PM »
even if you do choose to handle this in a way where you truly are "collecting rent" in the eyes of tax law and need to report that on your tax return a little over a year from now, it does not follow that you need to "buy it as a rental" in the world of mortgage financing options. You are buying a second home for your family to occupy.
« Last Edit: August 24, 2015, 10:16:26 PM by cchrissyy »

adamcollin

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Re: Unexpectedly becoming a landlord - advice?
« Reply #9 on: August 25, 2015, 12:51:13 AM »
Personally, I don't think asking rent from your mom is a good idea. If you really plan to earn some profit, you can consider buying a duplex instead. You can rent one part to a family (for safety point of view) and your mom can stay in the other part.

Just a suggestion..

FIRE 20/20

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Re: Unexpectedly becoming a landlord - advice?
« Reply #10 on: August 31, 2015, 09:07:07 PM »
Thanks for the additional replies.

The "rent" will just be to cover expenses.  As I tried to say in the original post, I just want to come out of this roughly even - I'm not looking to profit and if we lose money each month that's ok.  Our current budget includes $500/mo. for me to help my mom in her current situation and my partner has the same budget for her family.  With a small annuity and SS she can more than cover the cost, it's just that she's moving from a very high COL area and has had her credit ruined from dealing with medical care for her parents who are now deceased and cannot qualify to purchase a house on her own.  Nevertheless, she wants to cover as much of the cost as possible.  I'm not too worried about the dynamics of "charging mom rent" but I will consider it and talk to her about it some more.  I'm confident that she would want to pay as much of her own way as she can.  It's a good comment that I need to think about and will have the conversation with her.

Regarding "it's not a rental property", I've been doing a lot more reading online about this and am confused.  From what I've read so far it seems that as far as the IRS is concerned, it'll be a rental if we charge market rates, but it will be a personal residence if we charge below market rates.  If that's the case then I'm fairly confident we'll categorize it as a personal residence.  I will need to check into local rent prices, but since the plan is just to have her cover the taxes, insurance, utilities, and maybe just a bit more to cover some of the mortgage, that should be below market rent.  Property taxes are low here, and utilities and insurance shouldn't be too significant. 

Here are two of the relevant links regarding IRS categorization of the property:
http://www.forbes.com/sites/anthonynitti/2013/01/18/tax-lesson-of-the-day-no-good-can-come-from-letting-your-in-laws-mooch-off-of-you/
http://www.irs.gov/taxtopics/tc415.html

As for the loan, I'm looking into the options and plan to talk to a mortgage agent soon.  If we categorize it as a personal residence that will give us lower rates, as a few people noted.