Inland Empire, CA · Member since 2012 · 63 posts · 12 votes
I am so confuse and in need of some expert advice...
We owned a house and current on our mortgage. We can rent our house out for $2K per month. Our mortgage is $1500.
Plan A: We move and rent a place for $1500; Rent our house for $2K, cash flow $500.
Or...
Plan B: We buy a rental property in a less desirable area with a mortgage of $80K ($20K down); and rent that one out with rent ranging from $700-$900, before expenses and reserves.
sounds like your current home is in a place you love and also needs some work. I would personally stay in the house and fix it up yourselves. Learn all you can about repairs around the home. Once you home is in great condition with all the projects done that should help bring it out from under water. If not look at refinancing to a lower rate if possible, maybe a cash-in to make it work. If you have a great home in a neighborhood you love why leave? Get your experience understanding how a house works. Then work on saving money again to purchase a duplex or something along those line with 20-25% down in the next year or two. You have no reason to rush.
It seems that you want the kids to stay in your school district so to move would just be to say you are a landlord while also being a tenant, I don't see a real benefit.
It would really depend on your end goal and what you're willing to do in order to reach it. I see in your profile that you aren't sure about goals yet. Sometimes its just a mater of jumping out there and trying something that isn't too costly and then learning from that.
So a few questions to consider:
1. Do you mind renting, or you do you want to be settled. If you don't mind renting what is your time frame in life that you want to be settled?
2. What if you sold your current house and bought a duplex or other multifamily and then rented part of that? It could be both profitable as well as benefit from your homestead exception.
3. What major repairs are coming up in the next 2-3 years on your current residence? Think major expenses. If you have a lot that will be rolling around this house may bring in $500 profit a month initially and then eat it all up on regular repairs.
I hope that helps a little. I guess the other thing is to really consider those "less desirable" neighborhoods. I'm not saying war zones though. What is going to be the difference between you enjoying rentals is your profit and level of hassle. Good luck!
Thank you Elizabeth for your response. you have given me lots to think about....
1. We'd rather settled down but thought the extra $500 a month is a good cash flow. But we didn't consider major expenses as you stated.
2. Our house is currently under water, we are not sure if we can qualify for alleged property after we sold it.
3. I'm not too sure about any major repairs, but so far the recurring expenses are plumbing and maybe replace a/c or heating. Though hubby mentioned replacing electrical wiring to be safe.
Ps - is there a way to find out if a property is in a war zone?
I'm a novice and I'm not familiar with your location so take my comments as such, I'm leaning towards plan A with the caveat of what @ElizabethS. mentioned about your current house repair needs.
My first thought is that it sounds like your current house is maybe worth more/more desirable/bigger/etc. than the house that you would buy as a rental. So in the long run, i think the higher valued asset would be better to have around because it would appreciate higher than the property in a less desirable area. You didn't provide any numbers (what you owe/what you could sell for) on your current house so this opinion is dependent on how underwater you are.
If it were me, I'd rent out the current house and find somewhere to rent for only $1000! Don't touch the 500 the house flows and keep that in an emergency account for that house. Save the 500 from the cheaper rent religiously and you'll have a solid down payment for a better 2nd property in a good neighborhood/etc in a reasonable time.
This approach also gives you time to set some goals for where you want to take your real estate investing as @ElizabethS. mentioned as well as giving you immediate experience in being a landlord. You might hate it and decide that isn't the direction to take your investing.
@Ali Boone , Would you mind giving me some feedback as to why you chose Plan A? Are the reasons the same as stated by Elizabeth and Michael?
@Michael , thank you for your point of view. I'm actually gearing towards Plan A as well because of the reasons you mentioned. The two drawbacks (so far) are: 1) the hassle of moving, and 2) the location of the rental we're moving into. We have two small children and the reason we move to the city we're in today is because of the great school system. If we look for anything under $1,000, it'll have to be in a less desirable city.
But, I'll keep looking in case something comes up...
sounds like your current home is in a place you love and also needs some work. I would personally stay in the house and fix it up yourselves. Learn all you can about repairs around the home. Once you home is in great condition with all the projects done that should help bring it out from under water. If not look at refinancing to a lower rate if possible, maybe a cash-in to make it work. If you have a great home in a neighborhood you love why leave? Get your experience understanding how a house works. Then work on saving money again to purchase a duplex or something along those line with 20-25% down in the next year or two. You have no reason to rush.
It seems that you want the kids to stay in your school district so to move would just be to say you are a landlord while also being a tenant, I don't see a real benefit.
I agree with Kyle after seeing your responses. It sounds like your family is feeling the pressure of being under water on your house and trying to come up with a solution and using it as a rental was one of your options. If that is the case I would stay were you are (especially because of schools) and get a second job (maybe close to real estate so you can learn) so you can pay down your mortgage or have extra cash for updates.
When finances are tight, that is not the time to think of becoming a landlord. There is a chance it will solve your problem but there is a chance that it will make it worse.
@Kyle Hipp , you guys are right, we do feel like we have to rush to take advantage of the real estate market when it is still affordable. It's a newbie mentality, I know....just can't shake it off. What you suggested makes a lot of sense too. We will most likely stay put for now. Thank you.
Yeah similar to others thoughts. Mostly because it's already "working". It's not a new property, you know everything about it (condition, neighbors, location, etc) and it will cash-flow positive. You increase your risk by buying something totally different and lower quality.
It sounds like you're in a bit of a rough spot, but there is a lot to like about your current situation. If you have a home you and your family love, that is in a good school district for your kids, and is a house that you can afford to keep, I'd count you as blessed.
With that said, if you do opt to pursue the landlording path, here are some thoughts that I'd like to share
First - if your mortgage is $1500 and you rent it for $2000, I don't expect for you to make a dime of cash flow. This is due to things like vacancy, maintenance, ad fees, etc. and if you haven't considered them, taxes, insurance, etc.
And second - I'm on the conservative side, but my personal view is that you should have very large cash reserves if you want to be a landlord. The number will vary based on a lot of things, but my personal view is that you should have ~20k in cash/liquid reserves for your first property (and certifiably not less than 10K). The chances of you needing 20K are small, but if you don't have capital behind you - you run the very real risk of getting into big financial trouble that can quickly snowball into a foreclosure or worse. I don't say this to scare or discourage you - only to highlight that real estate investing carries very real and large risks.
@Jeremiah b, another great point. We are very greatful for what we have now. Just looking for ways to get into investing in real estate. not at all discourage by your comment. Always open to learn everything about being a landlord. Thank you