This isn't a bad country song, but now that I have your attention I really do have a question. :) I previously posted a question in the Deal Analysis forum asking for opinions about whether or not my current home will cashflow well. My wife and I have found a new primary home, and we will be moving into it next month. My mother in law currently lives with us, but she will not be moving with us to our new home. I love her to death, but trust me, this is a good thing! She is still in good health, and she earns enough pay to pay about $400.00 per month in rent. We are thinking if she is going to have to start paying someone rent, it might as well be us, right? Well, that is of course if she has roommates who can pay us enough rent combined in order to help us cashflow properly.
The house is a 4 sided brick ranch home that was built in 1969. We just spend nearly $50K in rehab which included a new breaker box, remodeled both bathrooms, retiled kitchen floor, retiled screened in porch floor, replaced cast iron plumbing with PEX and put in a french drain. unfortunately, we will be making payments on this personal loan for the next 7 years unless we pay it off early. The home is on a full basement, but it is mostly unfinished. No bedrooms, just 2 small offices (no closets or bathroom). The living space upstairs is about 1700 sq. ft. with 3 bedrooms and 2 bathrooms with a 2 car garage.
The home could list for around $200K, and we owe $140K on the house. The interest rate is 4.25% so our monthly mortgage payment with tax and insurance is around $1,300.00 with 22 years remaining.
The homeowners on both sides of our home have decided to rent their homes out, and the rents seem to be in the range of $1,400.00 to $1,550.00 per month in our area (Mableton, Georgia).
In the next 30 to 60 days, we will decide to do one of three things:
1.) payoff the mortgage and get the equity and mother-in-law will just go pay for a room for around $300.00/mo to another landlord.
2.) Mother in law will stay as a $400.00 per month tenant, but we will need 2 other tenants who can pay at least $500 to $550 per room to help us cashflow.
3.) Mother in law moves out to pay $300.00/mo to another landlord and another tenant will pay the full rent (hopefully around $1500.00/mo)
We are new to investing, so if we go with option 1 we will not be landlords right away as we will have to invest somewhere else at another time.
Option 2 feels more like a multi-tenanted or house hack situation where we will have to collect from 3 different tenants. If we go with this option, should we do a full service lease to include utilities (at least WIFI?) Of course we would not have separate meters to track how each tenant utilizes utilities so that could be challenging, but at least mother in law would be here to keep an eye on things and she will of course pay and be sure the home doesn't get trashed.
Option 3 may be easier to manage just one tenant and they could pay utilities, but we won't know what kind of tenants we may have.
In any case, I feel better about having a property management company help since my wife and I will be an hour a way and I don't want the calls at 3AM if something goes wrong in the house.
We cannot refinance this house to lower our monthly payment since we are purchasing a new home, and this home will not be our primary. I have been told that since we already own this home, and the interest rate is not too bad for a rental property it might be a good way to easily work our first SFH deal and provide a place for mother in law to live.
What do you think? It seems that home values are holding right now, but of course I am concerned about not selling for a good price right now while I can. Long term (5 years or more) renting seems like the best option though.
Thanks for your feedback!
Chris, while you're right that with another tenant you won't really know for sure what you're getting until they're in, I would argue that the same is true in option 2, with your MIL staying and renting alongside 2 new strangers. I think that option 2 is much harder to manage; you will be chasing 3 separate payments per month instead of 1, and also there is high potential for friction among the roommates. Plus, it sounds like your house is the most expensive option for your MIL once she starts paying rent.
I would recommend you go with option 3!
That is a very valid argument to consider option 3. If we could afford to finish the basement, we could easily have a downstairs tenant in a 3BR/1Bath apartment as well but we can only cashflow the top floor for now or sell to get the cash equity. Thanks for your feedback.
MIL should live somewhere else. If you feel that the house is a good deal as a rental, (to me, it doesn't sound like it), rent it to one party. Otherwise, sell it. Sounds to me as if MIL would qualify for some assistance, if all she can afford is $400/mo in rent. It would be one thing if MIL were well off, and were paying rent to you as a means of transferring wealth to the next generation. But your MIL is impoverished, and turning your property into a rooming house to support her is a BAD idea. You'd be better off getting her onto the shortest waiting list you can find near you for subsidized senior housing, and meanwhile, get her into as inexpensive a single unit nearby as you can - and subsidize her rent yourselves, because she's your wife's mother.
You have no idea how "entertaining" your life could become should you proceed with having your MIL as your renter. No tenant wants to acquire a rental AND a mother...that's why they're renting and living on their own.
Please keep peace and harmony by reminding MIL that she is a vibrant, independent, good woman who has earned the right to a fuller life of her own - while being close enough to the family for great visits and holiday celebrations.
Bottom line: Hard to overcome stupid...please let MIL retain that sole title.
@Chris Noles , you should simultaneously post this in Dear Annie column as well :) Good title btw!
Kidding aside, there are so many different ways this could go wrong that I can't even begin to enumerate them. Why do you want to mix up your personal issues with investing?
1. Can your MIL not find another place? Sounds like the answer is NO.
2. Can you not find a tenant who is equally qualified as your MIL? Sounds like the answer is NO.
Everyone has offered very helpful feedback here, and so far it does sound like option 3 is the most popular opinion. To answer your question, my wife is Venezuelan (Yes, I am lucky!) and her mother immigrated here as a permanent resident. (the legal way). MIL is 64 years old, she barely speaks English, she does not drive and she has never lived alone. She has lived with us for the past 2 years, and we do think that it will do her some good to live by herself and work to pay rent, utilities, etc. She is a very quiet lady, and she never causes any trouble. Maybe it is because I don't speak great Spanish, ha!
Anyway, we just thought there could be a win-win situation if we became her landlord and she could stay in the same house she has been living in where she can walk to McDonald's to work, and we know she would take good care of the house, etc. Since this is probably not a good idea for many known and unknown reasons, we will nix the idea and she will likely rent a room from a friend for just $350.00 per month and we will either rent this house to another tenant or just sell it. Even if we were to only net $150/mo the tenant would be paying down our mortgage, but hopefully they will not be destroying all the upgrades in the process. ha!
Hopefully by explaining my situation the idea doesn't sound as crazy as it normally would. Either way I win - *I* won't be living with her anymore in 3 weeks!
Chris, do NOT get fooled by the "if it cash flows, it's a great property" mantra. Look at it this way. You have a single family house that has tied up in it maybe 60K equity and 140K loan at 4.25% (which is 1.25 higher than the best you can get now). Plus it is most definitely in saleable condition now. If you were to keep it, and were able to rent it for $1400/mo, by your calculations, it would barely produce a profit of $1200/year, and the tenants would surely be hard on it, and it would need to be reconditioned before sale. If you were to sell it, you might wind up taking out of it 40K, which could be a 20% downpayment on a 200K property that hopefully would be a much better investment, with better cash flow. Plus it could be a bargain property in less than perfect cosmetic condition, that could be a rental just as it is (and who cares then whether the tenant is hard on the paint or the floors) for a few years, then you could recondition it, and sell it for a significant profit, and roll it into the next property. I just think that it could not be that difficult where you live to find a better return on investment than $1200/yr on 200K.
Sell it. Using your home as a rental is rarely a good idea. When you bought it, you were looking for a house to please you, not to make money. Now you should get your equity out of it and invest in something that makes a profit.
#2 is a terrible idea. If you need to supplement mil's income by paying some of her rent, do so directly. You won't be tying up a $200k asset that way.
@Karen F. That is an interesting perspective when you look at it from that perspective - I would only be getting + or - $1400.00 per month for a $200,000 asset. I do want to mention two things though: 1.) I won't likely get a much lower rate since this will be a rental and not my primary residence. I can't even refi at a lower rate right now. 2.) I could finish the entire basement for around $45K and rent each level of the house out as a separate apartment unit, but of course that means spending that extra money while we are still paying for rehab.
@Sylvia B. MIL is moving out for sure so option 2 is off the table. You are right - there may be other ways to make a bigger profit if we sell this place and get the equity, but it may also be more difficult to qualify for purchasing new properties and inventory may be very low plus I could finish the basement here. Thanks for sharing. I will think hard about option 1 and option 3 after we move out of here at the end of this month.
The only good option could be if you finish the basement and have a legal second unit. That is even better if the basement already has some above grade features like egress windows. (otherwise that adds to your cost). That essentially gives you 1.5 - 2 times rent predicted now. Renting by the room will likely require furnishing common areas and other costs. For the MIL might try getting her on a list for senior housing in case the rooming doesn't work out.
@Colleen F. MIL has already decided to move out no matter what. The basement has 2 above ground/egress windows. There is enough space for 3 bedrooms and 1 or 2 baths with a small kitchenette/common area. The $40k estimated finish would just require framing, drywall/build out for rooms and bathroom, flooring, sump pump and bathroom amenities. The electrical is ready. Yes, 1.5 to 2 times the rent or we think the whole basement would rent for $1100.00 or more plus utilities.
@Chris Noles does zoning allow for a legal two family? Don't forget about splitting electric and adding a meter. I would want to split electric for sure in your area.
@Colleen F. Zoning is ok, and yes, I could add another meter. However, with all the costs we have for moving we may have to decide to only rent the top floor for a year or two before we can pay to finish the basement.
Good luck to you, that is probably a better plan then room renting. You want to get someone who isn't a long term renter in the upper unit unless you want to share you will take over the basement at some point.