The purpose of owning a rental.

golddustApril 24, 2014

I read through the other rental thread with interest. Late to the thread, it's timely. I was kind of shocked by the discovery of stoves with one working burners and 20 year old rugs that needed replaced. Was this house managed by a company?

We had a meeting with our Financial Planner yesterday. We had two rental scenarios in hand that we needed help deciding which one to go for. Both in neighboring cities, hit especially hard by the economy, but showing strong signs of rebounding and impressive population growth. I even looked at the Development Plans and interviewed police.

The first option is a $145,000. home in the historical section of the city who is losing its business base but close enough to places to still be a viable place to live. Cute as could be, built in 1935 but not located in the best neighborhood. Three bedroom, across from a mostly decent school whose population included 80% lunch subsity. The numbers worked on that house. Easy profit right out the gate but little resale gain potential down the road but $600. A month profit for a small down payment was tempting. The house was solid as it qualified for an HOA loan last time it sold.

The second house we brought to the table is a four bedroom house about 6 miles away from the first, in its sister city. Located in the best area of town, the house is in a development of custom Ranch Houses built in the late 1960's. Every house is immaculate and the development is framed with giant 12,000 (+/-) Sq Ft Mansions. The home is 1902 sq foot, 4/2/2, immaculate, and in the most desireable school district around. (Better rated than our local schools) Listed at $279,000. I could see me living there with minor kitchen updates. We will be able to rent it out at only a small profit (after paying for a gardener, etc). This house has every amenity including sprinklers on timers, new HVAC and a new 50 year roof.

We were very confused about which house we should go after so we solicited advice from our local investment Guru. Initially, he thought the. $140,000. was a no brainer until he looked at our situation. We need a tax haven and long term investment rather than income. After looking at market trends and development plans for the area, we are making a bid on the more expensive house. That means we are investing in the belief that the economy in that area will bounce back so our profits will be in equity. Basically a higher earning savings account than our bank is offering.

In our particular town, $279,000 would buy us a home that wouldn't likely even qualify for a loan. An hour away, it will buy a first tier house flanked by mansions in a city ranked #3 for most affordable places in California to raise a family and whose population is on the rise.

Before we felt comfortable pulling the trigger on a rental, we had to define the purpose of purchasing one in the first place.

Why do you own rentals and what would be your goal of owning one?

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We turned our former home in Calif. into a rental when we moved to Texas for a few reasons.

#1: I was apprehensive about the move to Texas and wanted a path back. Calif. is such a rapidly escalating real estate market, I knew we'd never get back in if we exited.

#2: If we'd sold, we'd have put the profits into the stock market. I felt that the long-term real estate market was more of a sure thing than the long-term stock market. Of course, I didn't foresee the housing problem the country has just gone through, but fortunately, it didn't affect us negatively at all.

#3: We've had the property as a rental for the last 18 years. We didn't make a profit until a few years ago (when the mortgage was paid off). But in the meantime, the tenants paid our mortgage all those years. So now, we still have the property and the profit is paying college bills.

In your situation, I'd go for option #2.

    Bookmark   April 24, 2014 at 1:22PM
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I was the one that posted about the 20 year old carpet and the stove with one eyelet. Yes, it was being managed by a real estate agency with a rental department. As I said , we had the same renters in there for years - probably 8-10 years. The management group would send them questionaires each year about repair needs and would send us photos from the outside. We did have repairs made outside as needed and there were small things inside like faucets leaking and probably big issues that were taken care of.

It did amaze us when they left that the stove was in such bad repair. We certainly would have rather replaced it than have a possible fire issue. The carpet we knew must have been in need of being replaced but we also knew that once these people were out, we would do major work on the house.

For some time, we were renting the two houses we had at a loss. We are talking the late 80's on. San Antonio had suffered a major cutback in military and the area had been very much overbuilt in the late 70's - early 80's. When we bought the house new, we were on the the last street at the top of the hill, when we left 6 years later, we were in the middle of the subdivision and they had built an elementary school just for the subdivision that was opening with nearly 900 kids.

We sold both of the houses we owned there and took seconds as was common at the time. Both buyers were military officers and it was not in their best interest to default on their bills, etc. We felt safe taking the seconds. Unfortunately, one went through a divorce and the wife 'gave" us back the house with only a month or so loss of rent. The other had an unexpected change of job site to overseas. He tried to rent the house out himself but couldn't manage it so he offered it back to us without any loss of money to us. Both situations could have been alot worse. We of course had also been reassigned and were now in another state with a home that we had bought there. Two in Texas, one in Mississippi. We were only there 3 years when we left the AF and moved again. We couldn't sell the home in MS, so we ended up renting it for a few years. We finally sold it for about what we paid for it. The two houses in TX finally started renting for a little profit but most of it was taken up by the management company. We certainly weren't going to pour more money in them with the financial situation the country was in at the time. We ended up selling the 2nd house in Tx and kept the one, which we still have. We will rent it another year or so then hubs will go out and do the necessary work on it to sell it. We won't be making much on it, but at least the last few years have been at a profit since we own it outright. We also need to take any money from it and transfer it to property here so we don;t have a tax issue.

So, it wasn't that we weren't willing to fix what was asked of us but that we didn't know about these things and we did have to weigh money spent vs money coming in with 3 properties out of state, plus by the way, the home we bought here in FL when we got out of the AF!

    Bookmark   April 24, 2014 at 2:19PM
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This is a very timely post for me! My finance guy has mentioned needing a fairly large tax write off also.I've thought of going with a business franchise my son would manage, renting a retail property for my now rental space in an antique mall(they pay taxes/no help to me), renting a house, buying a vacation home, or taking over son's mortgage since it has a larger than average interest rate. I also have CAT stock that I need to exercise options on every year for the next five years. What this means is, if the stock was purchesed stb$38 per share, and it's now at $100 per share I pay tax on the difference. To NOT excercise the options would be insane even though there is a price to pay. They can 't just sit in the trust and 'gather dust'.

I'm pretty much set for the future, but hate giving the IRS such a chunk of what DH worked so hard for over 44 years and never got to enjoy. Working hard, and planning for the future thru onvestments seems to be a catch 22. DH and I never talked about any of these things, so I was completely left in the dark when he passed away after a 7 month fight with cancer.

If anyone has any advice, I'm willing to listen.

    Bookmark   April 24, 2014 at 2:24PM
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Ugh. Patty. Good luck. We have been on the hunt for months. The economy is quickly rebounding and it isn't easy finding the right property. In our case, we have a little bit of money to invest but must be very careful.

We pulled out of one property because of its location. We had to travel over a Mountainous Summit frequented by large trucks on short timers. We had just placed an offer when, on our way home, a big truck almost squished us. Scared us to death and we realized we didn't want to travel that road for business. We were one of three the sellers countered and we took the opportunity to back out. Good Bye Reno and Donner Summit.

We exhausted our search in Sacramento area before landing in Yuba City. It's a growing city, hit hard by the recession but housing is trending up. Costco is building a new store within three miles of the home we have in escrow. (We are voting with Costco! Lol) Great schools rated the assigned schools 8 out of 10 and there are no huge housing developments planned. Our target renters will be Military Officers (Beale Air Force Base) or medical personnel, as there are 33 hospitals within 30 miles of the house.

We decided to jump on a sprawling ranch house being offered by the original owner/builder (circa 1969). It has a great address but I suppose it's still a risk. I figure we won't die if it doesn't work out but finding the right property has been a full time job. We've been in a race against the rapidly rebounding California economy. If it breaks even, we will be thrilled. Money in the bank is earning nothing and I don't want to pay more taxes than we are already paying.

I can relate to wanting to maintain a path back. My sister moved from CA and could not return if she wanted to.

    Bookmark   April 29, 2014 at 9:30AM
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We've had 2 rental properties for several years and no real problems with either. Both were bought for tax shelter purposes plus long-term investments although the payoff on one will not be much and we knew that. One is a small house in a lower-middle income neighborhood. We have had 2 renters in almost 25 years. Current renters are an elderly couple (retired) and we have recently reno'd the kitchen and bath for the second time. They have kept it up well and their daughter now lives down the street. The other house is in a highly desirable neighborhood but is one of the smaller homes in that neighborhood. Excellent location and schools and is in great shape when we purchased about 10 years ago. When my DD got a divorce about 5 years ago, she moved in. It isn't but a few blocks from her former house. Lots of houses in this area get total makeovers or are scraped and rebuilt. One day we may want to downsize and move to this area so might sell and get a good return on this house or add on and remodel it and move to it ourselves.

We also got a great deal on the lake condo we own but don't rent out currently. It will definitely give us a nice ROI, as lake property almost always does really well on this particular lake.

    Bookmark   April 29, 2014 at 11:18AM
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