Nervous First Rental
So my wife and I are buying our first rental. We live in Oregon and the real estate prices are so high that we would need an extremely large downpayment in order to get our payments down to the point of making 2X our payment in rent. Thus we elected to buy a home in Omaha, NE. My aunt is a realtor there and directed us away from certain neighborhoods and was very happy to find us a small house in between the University and the Hospital. My uncle also does home inspections.
Some basics:
Me: 65k per year, 70k in brokerage, 25k in Roth
My wife: 35k per year, 10k in brokerage, 20k in Roth
We own two bare land properties, both worth about 100k each here in Oregon. One is paid off and one we still owe 20k on. We bought one with owner financing and the other we paid cash.
We have no debt other than the land payment, no car payment, student loans, etc...
The house: We have an offer accepted at 156,000 for a 2 Bedroom 1 Bath. Nice little house, renovated bathroom, one car garage, needs small things done like new paint on trim and basement, some carpentry work on back porch/steps, new gas range/oven. Comps in the area renting for about 1400. Monthly payment will be slightly below 750.
I have done quite a bit of research and felt good about the idea, but now I'm so nervous. Due to this we're moving into a house that runs for 1,000 a month in January, down from 1,600 right now. I'm also thinking about selling the property that we still owe on in order to have more of a cushion. We could also use that money next year for another down payment on another property if all goes well.
My fear definitely arose from watching my parents divorce right before the recession, go bankrupt, and one year later my father was driving a school bus and my mom was living in a friend's spare room. I have been quite careful with finances for my entire adult life. Our credit is very good.
Can someone either tell me everything will be okay? is there something I'm missing that I should consider? I have more questions that I'll post elsewhere, but for now I just need to hear from other people that were nervous when they started their real estate journey.
Thanks for any input.
Is your aunt a realtor and an investor, or just a realtor? I absolutely love everyone in my family and am certain they would all do right by me in this kind of a deal, but I would need someone other than my uncle to do the inspection. Particularly if this is a married aunt/uncle pair.
Are you hiring a property manager? What do they have to say about the deal and your rent comps
You say your nerves come from fear of loss, which is reasonable. Come up with ideas of how you could mitigate that potential loss. If "x" situation happened, what would you do?
Hey, Duncan! Congrats to you for having the courage to do what I have not yet been able to pull the trigger on, out of state investing. Given both the prices and the political climate on the west coast, it seems the way to go.
Nobody can tell you that everything is going to be OK, but seems like you are being wise. If worst case happens, it seems like you would be able to recover and start again. More likely is that you might get hit with up to $2k in unexpected costs now and then, keep some funds liquid. Get insurance, stay educated, agree on some arms length from the relatives, and decide whether you will be able to sleep at night or not. Heck, I stopped sleeping when we started buying our rentals and that was OK too. More time to read BiggerPockets.
It's all about your risk tolerance and whether you want to get rich super slow or want to move things along faster. I would not sell the bare land unless the reason you originally wanted it has changed.
Hi Taylor,
Thank you for your response. My aunt has owned rentals, but definitely not a real estate investor. For what it's worth this home was not one of her listings, I didn't want her bias to get in the way too much. We had already spotted this home the day before she suggested it based on our own criteria. It was nice that we could FaceTime her and get a virtual walk through and see the neighborhood, etc. I had been looking at other midwest cities that had homes in our price range, but without having an insider that I trusted it was hard to know if homes were really a good deal or just a cheap flip in a bad neighborhood. I probably should have started here and reached out to people in those areas. My aunt has clients with multiple rentals in the area, I will get their contact info and continue my research.
I was not planning on using a property manager. Perhaps I should reconsider, but with only one rental I can't see my time managing the property as that much of a burden. what are your thoughts?
I will talk with my wife and come up with plans for the "what ifs." That will probably go a long way in mitigating my fear.
Thank you for your time.
It sounds like you have virtually nothing to worry about. You just made the mortgage payment by downsizing your personal home from $1600 to $1000, which is quite an accomplishment since most people are willing to give up nothing in order to make investing work. You just created the mortgage payment in space by moving. Even if no one rented your house at all, you're no worse off than before financially speaking and now have an investment property to show for it instead of a bigger rent payment (I assume you were renting?).
Once the property is rented, assuming you do a good job screening applicants, you will do virtually nothing besides collect rent. I have an entire portfolio of houses and on most of them I spend less than an hour per month managing them. Biggest time suck is when a place goes vacant, which requires turnover efforts (cleaning, touch up paint, etc), advertising, screening and on-boarding new tenants. Beyond that, it's pretty low key. Make sure your major systems are up to par (HVAC, roof, appliances, water heater) and enjoy your newfound wealth.
I know it's scary. When I bought my first property, which I paid for in cash, I still have a bucket of nerves and "what-ifs". It all turned out to be nothing; I had the house rented before we even finished the rehab.
Michele thank you for your thoughts. We will definitely keep funds liquid for unexpected costs. Fortunately we don't need the extra income to fund our current lifestyle. I was thinking about opening another bank account to collect rent and use this account only for rental necessities and/or saving up for the next rental. Do you think it necessary to start an LLC for our first rental to keep everything more separated from our personal finances?
Thank you for the kind words JD. Yes we are currently renting. Unfortunately where we live we'd have to easily shell out 350k to find a home that we would be happy with and that wouldn't really feel like progress to me, just more burden. The furnace, AC, and hot water heater were updated in the last three years. Kitchen appliances will need updating. Hopefully we can find solid renters with the desirable location.
I know exactly which home you are talking about and underwrote it myself. (The listing agent offered it to me before listing). It's in a terrific location, you can long term rent it at 1400 or you can furnish it and make solid money off travel nurses on 3-6mo contracts.
I offered 140 before the seller put a little work into it. I typically live by the 1% rule in Omaha, but there's nothing on MLS in a desirable neighborhood that fits that these days.
Ah thank you Alex for showing me how to tag people. I was wondering how they might see my responses... I am happy for your stamp of approval and glad we jumped at the opportunity. Have you ventured into the world of mid term rentals in Omaha? If so, how was your experience? We were thinking about starting with a one year lease and then looking at furnishing it for that purpose. It also has a large basement with true windows which could double the livable space in the future. Glad to find someone in the area, thanks for commenting.
Just letting you guys know that I responded; didn't realize I could tag you.
Quote from @Duncan Van Horn:
Michele thank you for your thoughts. We will definitely keep funds liquid for unexpected costs. Fortunately we don't need the extra income to fund our current lifestyle. I was thinking about opening another bank account to collect rent and use this account only for rental necessities and/or saving up for the next rental. Do you think it necessary to start an LLC for our first rental to keep everything more separated from our personal finances?
Duncan,
We currently live in a highrise in downtown Seattle, so completely understand the model of renting something to live in and buying rentals elsewhere. Some cringe at that, but with the new higher standard deduction, it isn't as much of a tax disadvantage as it once was. And the flexibility is great.
We did not set up LLC's for the rentals, that is another risk tolerance decision. There are horror stories out there, but it is easier and cheaper to not. It's a good time to research it, at purchase is the time to do it if you want to.
@JD Martin "which is quite an accomplishment since most people are willing to give up nothing in order to make investing work" - Amen! Couldn't have stated that any better.
@Duncan Van Horn You're in a great position. Maybe bouncing around a bit with the strategy but it's not a bad thing. Being diversified is a big deal.
Always do worst case scenario that involve real numbers, not others circumstances imagined as your own.
So every decision you need to make you are headed currently in the right direction, viewing best slow and steady out come and worst out come. Once you are at peace with both ends, pull the trigger.
Lowering your monthly living expense is always helpful, that is one of our next strategies, especially when first stream of income goes up, it is powerful when you then turn around and trim more fat.
Keeping all your assets as long as possible in a healthy financial matter is a plus. Only sell when lets say your time and attention makes more money elsewhere or on other tasks.
Never let go of assets just to gather some cushion. Only sell assets as strategic moves such as tax benefits, example 1031 etc. ( I personally do not have experience with this yet, but others do) Do not even think about this strategy, it will only add to the unknow and paralyzing fear.
Find an agent that can show you that they have already a few investments of their own, then compliment your progress with your Aunt's point of views if you like.
Pull the trigger based on the knowledge you know now. Once you move forward, do not regret what you did not know. Because regardless you will be advancing your self do to action.
Good luck best wishes, and just like my digital coach Shia LaBeouf would say "Just do it, yesterday you said tomorrow"
What if I can't rent the unit? What if I made a mistake? What if the roof falls in? What if the basement crumbles? What if what if what if.
The answer was that you can always rent it. You have insurance. You have folks local who can help.
You have already far surpassed the millions who want to do it but never will. Fear is the realization of action and that is a great thing. On my first buy I upped all my "holding" items such as vacancy, maintenance, and capex at 5-7% each. This was a nice buffer to where almost anything would be covered or close from an emergency perspective.
You got this!
@Duncan Van Horn I don't like 2 beds because they're harder to resell. It might make a good rental while you have it but will be less desirable for buyers. I stay away from them personally and we'll only buy 3 bed places.
Why are you holding onto the land? Couldn't you use that cash to make passive income?
I would go ahead and buy it. The numbers look ok and you have family support in the area. My only regrets in real estate are not buying more or selling too early. Getting in the market is most important, taking action. Buying properties for me is like planting seeds, the appreciation in time will amaze you years later. Cash flow is nice, but the real money is in appreciation.
Have high standards and screen, screen , screen for a great tenant. Accept nothing less. Or those nightmares may come true.
Congratulations, sounds like a decent deal. Long distance property management is tough. Here are some words of wisdom. Good tenants = Good Life. Bad tenants = Life sucks. Find a property manager that you can trust (if that is possible), make sure you review the applicants.
As a real estate agent and investor, I am not a fan of investing in land. Land is very hard to sell. I would recommend selling both pieces of land.
In my opinion, Rents are going to keep on increasing even if we go into a recession. I first started buying rental homes in 2010, in the middle of one of the worst recessions recently. Rents have gone up every year since I purchased my rentals. Just remember, people need a place to live. The only risk with rental properties is if the government gets involved and starts controlling rents. This is highly likely in Oregon and not too likely in Nebraska. Don't worry, things will be fine. Sell the land and be ready to purchase more rental properties if prices go down!!
My friends thought I was crazy when I started buying rental properties. Rental properties have increased my net worth dramatically. Real estate is one way for ordinary people to dramatically increase their net worth. Just remember, real estate is not a get rich quick scheme. It takes time and it is a slow process, but it works!!
@Duncan Van Horn
I always laugh and remember what my friend told me when I closed on a rental property. "Yeah!!!! you bought a house!!!!! Oh s**t, you bought a house!!!"
It has been like that on every purchase, which is now part of the enjoyment. I've done this 8 times now and it is always the same. Good Luck, you can do this!
@Duncan Van Horn My wife and I were both pretty nervous but as the forums keep saying, and it's true, you'll find that first rental and see that it's really not that big of a deal. Second one's even easier. You just have to get over that initial jump and then I'm sure you'll be set.
@Duncan Van Horn, I strongly recommend that you engage a professional property manager, find the absolute premier manager in the area.
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@Duncan Van Horn some "random", hopefully helpful, thoughts:
1) Either hire a PMC or join a real estate investor group where you can access mentors to help you DIY manage.
2) Why don't you look into a line of credit against the land, for funds to access in case of emergency?
3) YES, keep your peronsal and rental finances separate! Otherwise you increase your chances of one of the newly hired 76,000 IRS agents audting you. You can do an LLC for your rental business or just a Doing Businss As (DBA), so you can open a business account. Deposit rents there and keep a healthy cushion for expenses.
