Looking to buy but stuck in a lease
Investor · Milwaukee, WI · Member since 2021 · 15 posts · 8 votes
Hi! Looking for advice -
We are in a lease through the end of May 2022 but really want to get started on our REÍ journey. We plan to purchase a duplex and owner occupy for a year in hopes of buying a SFH afterward and renting out both sides of the duplex + acquiring additional cash flowing properties.
I have an agent, have been analyzing deals and really want to get the ball rolling. However, I realize if we close it will be around winter and we may have vacancy throughout winter.
would it be best to wait and ride out our lease or at least get closer to the end of May to avoid too much overlap or should we try to get out of our lease and buy now before rates are back up to 4-5% (which I’m realizing makes it tough to cash flow)
also, how do you handle this situation as a landlord? What do you write in your leases (in WI) regarding someone breaking the lease?
Thanks!!!!!
Hi @Leah Bates! Units tend to rent for less when you're looking to start in the winter (no one wants to move when they could be inside sipping hot cocoa instead!) A way to circumvent that is to look for a property where 1/both units are already rented. The danger of doing this though is that you don't know how the tenant was screened which presents extra risk. I like to ask for rent rolls and to see for how long the tenants have been in the property for. It also helps to pay attention to each unit and talk with each tenant during the home inspection. From a landlord's perspective, there's most likely a clause stating something along the lines of "you must notify PM 60 days in advance if you plan to break the lease" so I would start that discussion with your landlord now.
Here's how I would think about it:
How much roughly do you think it's going to cost you to end your lease early? This includes potentially renting a place out in Winter or worst case having a vacant property for 2 months. How soon are you going to recoup that cost by the potential lower interest rate you're going to get?
Personally I think if you're planning to hold this thing for 10+ years and you guys are not financially strapped to where this decision greatly affects you, lock in a great rate today and you won't even think about it 3 years from now. Hope this helped a bit!
Hi @Leah Bates! Units tend to rent for less when you're looking to start in the winter (no one wants to move when they could be inside sipping hot cocoa instead!) A way to circumvent that is to look for a property where 1/both units are already rented. The danger of doing this though is that you don't know how the tenant was screened which presents extra risk. I like to ask for rent rolls and to see for how long the tenants have been in the property for. It also helps to pay attention to each unit and talk with each tenant during the home inspection. From a landlord's perspective, there's most likely a clause stating something along the lines of "you must notify PM 60 days in advance if you plan to break the lease" so I would start that discussion with your landlord now.
Here's how I would think about it:
How much roughly do you think it's going to cost you to end your lease early? This includes potentially renting a place out in Winter or worst case having a vacant property for 2 months. How soon are you going to recoup that cost by the potential lower interest rate you're going to get?
Personally I think if you're planning to hold this thing for 10+ years and you guys are not financially strapped to where this decision greatly affects you, lock in a great rate today and you won't even think about it 3 years from now. Hope this helped a bit!
Hi @Leah Bates, I think knowing what the numbers roughly will be, would help the decision as well. How much more is your mortgage on the duplex going to be vs. your current rent? Moving into a duplex without a tenant might be a negative hit to your cash flow, but I'd guess that it would likely be net positive change for you overall (in terms of total net worth) once you consider the equity you're building instead of paying someone else rent (plus all the tax benefits and everything else that goes along with home ownership).
If you absolutely couldn't financially handle not having a tenant for a few months, then maybe wait, but I'd be surprised if that were the case. I was just listening to one of the recent BP podcast episodes where David just answers questions and he was talking about how it's worth lowering the rent a bit to get someone in sooner than having a vacancy for even a month. Lower the rent $100-200 from where you would ideally want it, then just raise it up next year when they go to re-sign.
Also, I just want to acknowledge that I know it's a huge pain to break a lease and have to pay your landlord an extra one or two month's rent. I did it in 2019 and hated giving up that much money, but it was definitely worth it. I'm not sure if it is, but don't let that hold you back if you can afford it.
Hope this helps!
Hi @David Mo great points! I have to look at our lease again to see what it says before I would ask. That's a good point about figuring out the cost of what we would miss out on with the new percentage. I noticed some rates creeping up above 3% so it's making me a bit nervous to wait but we'll have to look at the pro/cons and our budget. Thank you!
Thanks @Alexander Cattran ! I just listened to that episode today too! Great point. "Heads in beds" they say! Thank you for the nudge of encouragement!
@Leah Bates if you don't have a specific target property yet, I don't think the end of your lease and potentially closing on a property are actually going to be too far apart. Finding, offering and closing aren't instantaneous, and say for example your lease ends up overlapping by a month or two with your new property. So what? Maybe your landlord lets you out early if they can find a new tenant, and maybe they don't and you have to pay something. That could (again, potentially, based on the deal you find) just be a cost you consider - the cost of doing business.
Also, I don't think you should try to buy sooner because of what interest rates might do - that's outside of your control, and no one knows what is going to happen. Buy (or don't) based on the specific deal you find. Run your numbers conservatively, don't rush just to buy something, and don't think about your situation as being "stuck." You'll be in a much stronger position if you are patient and buy right.
Hi @Leah Bates!
In regards to buying before winter in light of having a winter vacancy, I honestly wouldn't consider that as a reason NOT to buy instead in the calculations just budget for the off-chance it stays vacant until the middle of March. I don't think it's likely you would be sitting on a vacancy for that long honestly, especially in the 'landlord's market' that it is still is. You could always use the strategy of doing a really competitive rental rate to ensure it gets rented (but one that makes sense), a 6-month lease, then raise the rent at the end of that original lease when you will likely be in Spring/Summer market.
Have you talked to your current landlord yet? Are they amicable to letting you leave early? If they aren't, this may be a moot point anyway because you could end up paying a substantial sum due to your lease obligations.
Hi @Nicholas L.
Thank you for your points! All really great reminders. I am being optimistic that closing would be quick but finding the right property and actually closing might actually take some time so that's a great reminder.
Also great point about not worrying about interest rates for now. When I'm doing the calculations, I can always run a bit more conservatively as well to ensure that there would be no surprises. Thanks so much for your insight and tips!
Hi @Corina Eufinger !
Great points! I love that idea about a short term, competitive lease. I have not talked with her yet. It's on my to do list. I think I'm a bit intimidated because that conversation makes it all so real! :) but I am ready and looking forward to seeing what she has to say. I did read over my lease and it says we'd be responsible for the remainder of the lease amount so I'm wondering if she'd be willing to budge on that. We could weather a month or two but 6 months+ wouldn't really make sense.
Thank you!!