Odd scenario; Would you consider me as a tenant?

19 Replies

Hi guys, I find myself in a unique predicament and need advice. Here’s the situation:

My wife and I currently have two homes, one is our primary, one a rental. Both homes were originally on one parcel which we’ve been able to divide into two separate parcels. We are listing the rental for sale July 1st as it sits on acreage and makes for a poor rental property. We also happen to be selling our primary home in August as we have a third child on the way and need more space (among other reasons).

We intend to rent for a year ourselves and see how the economy looks in another 10 months before deciding to purchase again. After the sale of our rental we will own our primary home free and clear, so the proceeds of our primary home will end up as investment capital as well as earmarked for our future home. My wife has a full time job that pays roughly $50k but I’m the stay at home dad who’s homeschooling our kids. We just dissolved a small business as well, so this is a fresh start for us. We have no debt, essentially perfect credit, and no other blemishes on our records.

In other words, we’ll need to lock in a rental before we close on our primary home but we’re relatively income poor, especially when most LL’s want 3x monthly rent for income, while at the same time we’re relatively asset rich with very low overhead.

The idea is to deleverage while the economy has had a long run, start investing in rentals out of state over the next year or two, and find a more suitable primary home while not selling and buying at the same time here in CO. 

What would it take for a LL to consider us for a 12 month lease if we’re talking around the $2000-$2300 a month range? I would be willing to put 6 month’s worth of lease amount in escrow and pay the typical first, last, and deposit. Is that a common thing to do or would most LL’s turn us down just because it’s an unusual situation?

We’ve always done things different which has paid off for us over the years, but that makes for some odd situations too. Last thing I want to do is put my family in a bind, but fortunately the baby isn’t due till December.

What would you do in my shoes? What would you require if I looked at your property and wanted to sign a lease? 

@David Smit

I think you're setting yourself up for failure, and I'm saying this because your predicament, in it's base form, is far from unique. There are three kids involved and you feel you need lots of space. I get it. But you also have a yearly income with take-home pay of "roughly $50,000" and you're looking at signing a 12-month lease on a property that's going to run you somewhere between $26,000 and $29,900 with a security deposit, none of which you will ever see again except for maybe most of the security deposit. You are nowhere near "income-statement wealthy" enough to rent a large house with lots of room and not have it significantly affect your current and future ability to successfully convert your income into more wealth.

Get a cheaper place to rent. Make the sacrifices now. Do you really need a very nice place to live, or could you possibly find a 2-bedroom apartment for much less that you could rent? It's only for a year, and the kids are small. Or do you really need to impress your friends and/or parents with your expenditures?

Your plan is to start investing in rentals out of state. There is going to be a learning process associated with that goal. Things are likely going to go wrong that you will have little control over. Give yourself a chance to make the mistakes and go through the failures you will have to in order to be successful at it. Give yourself a wider operating margin and a safety net. I don't know how much you're putting by with the sale of these two properties, but it will probably go faster than you think.

Whatever you decide to do, good luck to you, David.

2000$ + a month is not going to work if your only bringing in 50k . Crazy high rent ..and Why would you even want to strap yourself like that ? No one is going to probably rent to you if your not bringing in 3x the income of the rent . Giving all that money away is only going to make investing in real estate next to impossible by having such a slanted debt to income ratio . You need to rethink your goals and priorities . It’s admirable to homeschool the kids and stay at home with them but If you are only going to have one employed adult they need to increase the household income dramatically especially for where you live .

Not an unusual situation at all. I cant tell you how many times this comes up. I would guess at least once per rental. If you make $ 54000 you can afford a $1500 a month rental. We sometimes go with income 2.5 times rent but no lower and that is with excellent landlord references. Consider renting in a safe place with a crummy school district I imagine it will be cheaper, you are homeschooling your kids anyway.

Since you wouldn't clear the pre-application portion of our process, I probably wouldn't rent to you since your lack of income would preclude you from moving further in the process. I suppose if I had met you and you were willing to put 10 months into irrevocable escrow, paid out to me each month (plus I would collect first/last/deposit), I might consider it, kind of along the way we will sometimes allow college student parents to pre-pay for their kids that they've co-signed for in a unit, if we had a unit that was proving difficult to move. But it would be unusual, because we are never hurting for qualified tenants. I think your application would not look favorable to most landlords that have decent places - ideally, we want tenants to stay a decent length of time. You're advertising up front that you're only willing to commit to a year - actually less, based on only putting 6 months into escrow. From that vantage point, you don't look like an ideal tenant to me. 

Thanks all for the feedback so far; exactly the info I needed. 

There's other options for us such as staying where we're at for another year after selling the rental; we'd be mortgage free, AND I'd be able to test the waters in an out of state rental market as I'd still be able to buy the first unit/home cash (we'll clear about $150k on the sale of our rental after paying off the note and other fees).  This would allow us to transition into some more income/cash flow more gradually and eventually we could still sell the home we're in in favor of something more suitable. 

Or there's the possibility of selling our primary home while buying a more traditional home for less (without the acreage) and eventually keeping it as a rental down the road if we find a home we really like once the market frees up a bit. It's extremely unlikely we'd be able to buy a home we happen to see ourselves in long-term while selling the home we're in at the same time. 

I agree that renting for a year is a great way to waste a lot of money when we don't have to, but selling a home and buying at the same time in CO is a tricky thing to get done in this market (it's essentially a gridlocked market). If we rented for a year I could buy our next home cash and save money on the purchase while not being rushed into buying something. 

In a way, we're trapped in our current home even if we own it free and clear, which is an odd circumstance.

I would accept that arrangement in my cheaper rentals but if I was renting a house in the 2-2.3k range, probably not unless you paid the full amount up front. But for that money you'd be better off buying.

To me you should buy now regardless. You have the money to put down a good down payment so the market would have to really crash in the next year for you to be underwater. But, with that income you will run into the same qualifying issues with the banks as you would with other landlords. Honestly, you might need to lower your standards right now due to your reported income. I do like the idea of a nicer home in a bad school district since schools don't apply but finding something you like and feel safe in might be harder in an area with bad schools. 

Focus on what you can afford, not what you want. Families of five used to live in houses no bigger than today's apartments. Sell off your junk, learn to get along with each other, and live frugal for a year so you can save up and buy again.

Originally posted by @Nathan G. :

Focus on what you can afford, not what you want. Families of five used to live in houses no bigger than today's apartments. Sell off your junk, learn to get along with each other, and live frugal for a year so you can save up and buy again.

Amen.  We lived in a doublewide for 5 years, saving and building. Now I can live wherever I want.

Live a little like no one will. A lot like no one can. 

@David Smit sorry I don't understand, what is the reason you want to sell your home and live in a rental? You talk about the economy. Are trying to get out of the property in expectation of economic troubles? You also mention being trapped and needing to sell before buying, but with good credit and low debt, you should be able to use a bridge loan to buy a new home. In my opinion, prices will be up a year from now, so in addition to spending $24,000 renting, you will lose out on a years worth of property appreciation when you sell.

As far as renting to you, I would not. My 3X rule would exclude you. If you told me yes, but we are only renting for a year, that would make me even less interested. I am not looking for short term tenants with low salaries.

Another thing to keep in mind is the tax implications of selling your rental property. You would be better off with a 1031 exchange it into another property, rather than paying capital gains.

You seem to believe you are cash heavy, but I think you are overestimating how far that cash will go and with only $50K income for a family, you have low income coming in. 

I think most people are reading into the scenario a bit too much... we're not looking for luxury and lots of sq footage, American entitlement, etc, but a bit more practicality would be significant. 

@Nathan G. and @Steve Vaughan , there's also no need to save for a home as we'd own our home free and clear before selling it; I know there was a lot of info in the original post, perhaps too much. We'd have some money to invest after selling the rental home and we'd be free and clear on our primary as well, just to clarify. 

As to the income, many people on here can attest that it's actually not hard to live on $50k when you have no mortgage, no car payments, no other debt, you have health coverage, low taxes, etc, and fortunately that number goes to $60k next year without considering any other cash flow (purchase of rentals, may pick up part time work myself for extra savings, etc.). There's also plenty of flexibility for extra hours/income if it were needed, but the idea is not to run ragged in favor of the almighty dollar so long we're constantly improving our balance sheet. 

But I'm tending to agree, that by the time we rent a year, I'll have spent as much as half a rental home in some Midwest markets... so we're opting to keep the house we're in for another year and reevaluate as we go. There's a sad history tied to the home we live in, hence the desire for a fresh start, but I won't get into those details here. The idea is to get a bit more home on less land, so a lateral move rather than moving up.  The only reason we'd like to be renting is to go back into the market as a cash buyer rather than subject to the sale of the current home and so we're not rushed into a purchase. Even if we waited a few years, that's not an ideal way to buy a home in my opinion; it's optimal to be able to buy cash without the requirement of selling your existing home and relying on the buyer's financing coming through. 

@Joe Splitrock I'm actually pending a call with my accountant regards the rental home and how that's looked at from a tax perspective. It gets complicated with this property being that it wasn't purchased as a second home. I can't remember all the laws there, hence the call I'm waiting on. And yes, I'm not too worried with missing out on some appreciation with rates climbing; again, renting would mean I could go to the table cash, which should make up for some, maybe all, of the costs of renting for a year. Though that point is moot since we've decided to keep our primary for now based on the feedback here. 

Thanks all

@David Smit I am curious why you need to sell your home before you buy another? You can get bridge loans to cover the gap. That is just a temporary loan, so it will get paid off when you sell your other property. That would take some pressure off when house hunting. May want to chat with your bank about it.

As far as the rental home, your accountant would have assigned it a value when you put it in service as a rental. So even though it wasn't purchased as a rental, it was given a "starting price". Your taxes will be based on gain from that point after depreciation is added back in. So you don't just pay taxes on the gain, but also depreciation recapture. That is why I mentioned 1031 exchange. But if you only rented it a year or two, there probably isn't much to tax.

@Joe Splitrock I'll have to look at those bridge loans again; I remember looking at them last time we sold a home and the feasibility was rather lacking in the US relative to places where they're more common like Europe (in speaking a family member across the pond). It's possible something has changed or even that I wasn't looking in the right places. Thanks for that pointer sir. 

You are indeed correct on the assigned value of the home initially. Beyond that I don't recall the details for this particular home. Again, they were both purchased as "one" primary residence as they were on one and the same parcel which seems to impact the suitability of the 1031 exchange, but again, that's what my accountant is for. It's been a while since I had this talk with him... this time I'll take better notes!

@Steve Vaughan stop making sense!

@David Smit , I'm not seeing details here but one thing that sticks out.  You may be selling the wrong house.  If you were to sell your primary you might be able to get the profit tax free.  By selling the rental you're paying tax.  And if your rental is on acreage - whether foothills or plains in CO that is really what your children need rather than another 100 sq ft of room to get lost in.

I raised 4 boys in 500 sq foot of sailboat.  When the world is your backyard you don't need interior space.  For kids especially.  And we loved being able to always be in each others lives.  It's messy but so positive.  The worst experience I ever had was spending a month with a friend in Alpharetta GA in 12,000 sq ft with driving range pool media room  etc etc etc.  We had to use a call system to even find our kids.  What a waste!!!

I wonder if you could take the tax free sale of your primary and apply that to your rental.  Then add a tiny home or two to your acreage and rent short term.  Larkspur has tons of great activities people come from long distances.  the rest of the yea what teenager wouldn't want their own home (but still close enough to check bed times and homework).

@Dave Foster All good points. I have the tax aspect covered, though indeed valid points in most typical scenarios! 

I fully agree with you on the land; we're not wanting to go into the suburbs but rather exchange 15 acres of ag land for 2-5 acres of wooded land. (35 acres with the rental home included) All this acreage adds up to a lot of work in fence repairs, keeping ag status current with cattle, cleaning up trees that have been dying in this long drought, picking up trash that blows from the road, weed control, etc. The acreage and long drive tend to require a tractor which is more time, money, etc. We want to simplify life, not to mention the acreage is worth a good bit but demands little for rent... it's appreciated nicely for us, but in the end of the day I'd like to put that capital to work in the form of more traditional rental homes. We actually farmed garlic for a few years which proved exceedingly difficult compared to Centennial just a half hour away; we get about half the precipitation of the Denver metro area and what does fall tends to evaporate with the winds very quickly. 

People don't realize what all comes with this kind of set up... between the two homes I've caught over 150 mice in the last 12 months and there's 6 cats on the property and plenty of bait stations around too. Then the ground squirrels (got em), voles, had a problem skunk, bears getting into the trash, etc. All the little quirks add up fast! I'd rather spend more of this time with my family or at least building up cash flow and retirement assets. The rental alone buys about 8-10 homes in good B class neighborhoods in parts of the Midwest... there's certainly better opportunities out there. 

So, are you in the market?! Lol. Some people love it and have their horses... I get it, to each their own. 

@David Song Thanks David. I see that the general consensus leans toward an assumption that one must make 3x the rent regardless however, which is exactly what I had suspected. Seems most LL’s would take a cookie cutter tenant over me even if most or all the annual rent was forked over up front. Psychology is often half the equation if not more! 

Long story short no I wouldn’t. Need 3x rent most times and I don’t like to do less than that