I have one successful rental and now am under contract to purchase a second one. I am scared and think everyday about pulling out of this one! Because the numbers aren't as good as my 1st one. Here's the deal:
It's a 4 bed/2 bath 1800 sqft home in an mid-to-low neighborhood in Lakewood, WA House is almost 100 years old. However, 2 of the bedrooms are in the basement. There is a cottage in the back that I would live in and rent out the big house. Cottage is permitted. The rent from the big house would just cover PITI. Clearly by normal standards this wouldn't be a good deal, but the fact that my living expenses are covered for, this makes this an attractive offer. I want this house so I can pile up lots of cash for more investments (since I'm not paying rent or mortgage).
The big house is too old and will need expensive repairs.
The 2 basement bedrooms -will this be a turn off for prospective families? I am afraid this affects rentability and trying to sell it in the future
The basement bedrooms- I am scared of the risk of it flooding, radon, sewage backup, etc. I hate living spaces in basements.
Those are all very valid concerns and, considering how worried you are about it, I personally would pass on it and look for something with better numbers. Just my $.02.
What I see here is a "Shiny Object of Distraction". You are rationalizing the number of rental problems being overshadowed by your tenant paying for your house. This only works if you have a tenant. The idea that you can have a tenant pay for both the rental and your own home is great, but not at the expense(s) of the potential problems of the rental.
Rationalization is the most expensive word in the Real Estate Investor's vocabulary.
@Samantha Quinneisch You are already under contract... have you done your home inspection? Also, you should check the elevation to determine if you are in a flood zone.
Also, for the basement bedrooms, I would assume that you would need a proper window and egress in order for this to be legit. I think due to that, this would not scare potential families. An above ground bedroom may be more attractive, and you may not be able to charge as high rent.
Home inspection hasn't happened yet. Per the contract I can still back out.
Congrats on looking at your 2nd property! Living on-site has its negatives, but with a goal of living rent-free, I commend you! The amount of wealth you will be able to build with proper budgeting and goals will amaze you. Basement living spaces in wetter areas like Lakewood can be a risk. Are the basement bedroom windows proper egress? If not, seek a discount. When I get on the bubble like this, I usually seek to be rewarded a bit more for my risk. I'd hate to go back to the seller you're already under contract with, but your level of fear could be offset by something I would think. I would have it inspected for sure if you haven't already. Inspected for things you said like pests, radon, mold and what have you. Make sure there is an outstanding gutter system and everything grades away from the house. No flower beds against the foundation. Use recycled rubber tire mulch, not the real stuff for example. If this is keeping you up at night, talk to the seller or their agent. Maybe them providing some type of home warranty would help? I had a basement that would flood, so we dug down a foot around the house 10 ft out where most was coming from, installed some 6mm plastic and back-filled with a nice grade away from the house and haven't had a problem since. 2 guys digging for 6 hours. Wenatchee doesn't rain like Lakewood, obviously, but good gutters will help. Good luck and keep us posted!
Hi. Just because this isn't as good as your first deal would not in itself be a reason to not move forward. However, all of the other points you make seem to be very reasonable concerns. Here are the additional aspects to consider that I would suggest to help clarify whether your concerns are sufficient to look for a way to pull out of the deal.
House too old & will need expensive repairs -- ALL houses have the potential to require expensive repairs. Do you have information on the normal big ticket items such as roof, HVAC, electric and plumbing? I live in a house that is 100 years old but it has a slate roof that will last another 100 years and new furnace and AC unit. Is the electric knob and tube? That can certainly be more expensive to work on and can be more difficult/expensive to insure.
2 basement bedrooms - you are correct that this will limit your future buyers. How much of a limit probably depends on how much of a "basement" vibe you get. How much light is coming in? Is there anything you can do to increase that (without compromising safety)? Even though it limits future buyers you only need one! So this doesn't have to be a deal-breaker. But you need to make sure your idea of what you would sell it for in the future does discount vs other comps due to this. Also, how common is that style in your area? Perhaps buyers will see this in other houses too. For example, I personally can't stand tri-levels but there are a ton of those in my area and people seem to keep buying them.
Risk of flooding, sewage - that makes me think there is a drain in the middle of the floor like you do have in a lot of non-living space basements. How is existing drainage handled for the house? Where is the hot water heater and where does that drain go? You can measure for radon if you want. But before you add that expense I would do a quick google check to see if that is frequently a problem in your area.
Where are you in the purchase process? Do you have an inspection clause? That would be your best opportunity to get more info on the items that might need to be repaired or replaced in the near future and to potentially opt out. I plan on spending at least $5,000 on average every five years for each property. This is generally enough to cover one big item. If you can't manage at least that in the next couple of years then this deal is probably too tight for you.
Good luck with this!
@Samantha Quinneisch If you are already under contract, I would get a home inspection done immediately. I would never purchase a property without it... even f the property was being bought "as-is". This will let you know exactly what you are in for, as long as the inspector is thorough. It is well worth the $300-500... and you may even be able to use the findings to negotiate a better purchase price if the findings are that significant.
I completely agree with @Steve Vaughan about the egress too. If it is not up to legal code, you should seek a discount. You should be able to look up the fire codes online.
I've got the home inspection scheduled in a few days. Just would rather pull out now before I pay the money for inspection if this is an obvious bad deal. I will go through with the inspection.
Basement has proper window size/height off ground and staircase that meets egress code requirements.
I'm just really terrified of the "what-ifs" that seem to be greater when you have basement living spaces. Home had prior back-up issue (and the damage is evident in the basement bathroom baseboards) but they added a sump pump. Current tenant says they haven't had a problem since.
Oh- with back up issues, I would get a rooter guy with a camera as part of the inspection process. Probably another $250. I would ask the seller to provide that and be there to watch it and ask him questions. When in doubt, get as much quality information as possible!
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