Possibly buying an older home to rent, advice..

Alexina PropertiesFebruary 11, 2010

Hi all,

I'm new to this forum so wanted to introduce myself. I'm Lisa and live in Fort Worth.

I grew up with my parents having rental properties and dealing with tenants, etc. I worked for a company for a year dealing with rental properties, but that was 25 years ago...

So I have some rental knowledge, but it is old and full of cobwebs.

Now, here is the scenario...

Dh and I paid off our mortgage a few years ago. We live in an older area of ranch homes. Our house is worth about $245k or so

The house down the street (7 houses down on next block) the owner died, and kids sold it, the new owner lost it to bank, and now it is on market. The house was on market for 7 days and was REO to highest bidder. It was listed at $46,000 which is ridiculously low (house two doors down sold for $225,000 last year). We bid $57,000 on it 3/2 on 1/2 acre and yesterday notified we won. Closing is set for 11 days from now.

I bid $57k because I watched this house from my front porch and saw at least 20 people go through it, inspectors, etc... I also knew the neighbors and new house across street the new owners dropped 100,000 in remodeling to making it nice. Old neighborhood but people are putting $$$ in as lots are nice and location is great.

I am signing paperwork today. I am going to get a home inspection. What else do I need to do besides home inspection?

I'm not sure if I over bid, have no idea. I love the fact that it is down the street and I know the neighbors and can keep an eye on renters. Love the fact that I could have a house for my kids when they are older, so to me house is worth price.

What are my most important priorities at moment? Home inspection and ??????



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Sounds like you bought yourself a money pit. Do you have 100k on hand to make repairs?

I assume you you have a termite inspection lined up too. Do you have contractors lined up to start repairs? The longer the house sits vacant, the worse it will get. Is it on a well? If so, you'll need a separate inspection for that. Have you checked out the major systems and their age? Roof, HVAC, electical, plumbing, and structural problems?

As a general rule, I think it is a mistake for your entrance into the rental business to be a 100k makeover, but who knows. You are taking on a lot of risk and there may or may not be much upside for you. The carrying costs on 157k would be about $850/month - not including property taxes, insurance etc. Can you rent the house for more than $1000?

    Bookmark   February 11, 2010 at 10:33AM
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Alexina Properties

Bill, I appreciate that. I can see why you think that. I have done the money pit thing in my 20's and never again.

Soo....No it actually isn't a money pit..LOL

I am paying cash for it. I do have adequate assets to do the repairs. I have excellent contractors and feel comfortable with them being able to do it. I have not had the inspection done, I can back out within 3 days of inspection if something serious shows up. I am pretty sure with the contractors that for about $10,000 to $15,000 it can be a very darling little rental....

Bones are good, it has not been trashed out. Same lady owned for 55 years then it was owned for 9 months before went into foreclosure.

Rentals within 8 blocks rent for about $1000 so even if I rent for $850 or so I'm okay. I would still make better interest on my money versus the savings accoutnt.

I am not doing a 100% makeover. I actually could rent it out with less than $3,000 put in it, but I would rather make it nice and attract a better quality renter.

I am going to get the inspector out ... and an engineer and I can walk away...

So besides inspections, is there anything right now I should worry about?

    Bookmark   February 11, 2010 at 10:44AM
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"Same owner for 55 years" is actually not a positive for most homes. The house would tend to be in better shape if it gets sold every 5-10 years. That is usually when most major problems get found/fixed.

The skeptic in me says there is a reason that a house would be marketed at 46k when comparable homes are selling at 200k+. I would be shocked if 15k brings it up to community standards. I would definitely have the contractors (and yourself) go on the inspection so they can ballpark the actual costs.

    Bookmark   February 11, 2010 at 11:42AM
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Alexina Properties

I realize I should have explained more about hte $100,000 the neighbors across street put in. They inherited house, and then added on double the square footage, new garage, major landscaping etc...

The neighborhood is in flux I suppose, housing prices are all over the place. There are homes from $80,000 to $700,000 all mingled together. Typically though, the homes are in the $125,000 and up range.

I hope to not invest over $12,000 in repairs and that is max.

Just trying to clear up my confusing explanations.

    Bookmark   February 11, 2010 at 11:44AM
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Hi Lisa!

I don't have any experience w/rentals, am actually starting to consider acquiring rental property myself. But I read your post b/c I'm interested in owning a rental property eventually.

Unfortunately, I'm not clear what you're asking about. Let me paraphrase what I understand: you already bought the property and plan to put some money into it, are having it inspected, and know a good contractor. I think that's a great start--if I were to buy a rental I do not know a good contractor. My DS is handy, but we'd have to get help w/some things and I'd have to start calling/interviewing. So you're in a good position as far as who can help you fix the place up.

I expect there will be some problems w/the home, though, so maybe you need to look at your budget and figure out how much you can spend to get it up to code and make it attractive to tenants. I've been reading a book about being a landlord, and it's very important to have your rental be up to code. If the house is 55 years old, there's a good chance you'll have to bring it up to code.

Here's where I get lost. Are you worried about what might be wrong w/the house and need an expensive repair, or are you worried about how much you should spend on the remodel before you find a renter?

    Bookmark   February 11, 2010 at 1:07PM
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Oops, I see you already explained you have a max budget of $12K for repairs.

Cosmetic improvements like paint (interior and exterior), flooring (and do you have to pay for labor?), cleaning will probably be necessary. You might have window issues, roof issues, plumbing issues, electrical (code) issues. the kitchen/baths may be really outdated, you might need to buy some appliances for the kitchen. You'll probably need to put in new smoke detectors, and possibly overhaul the yard somewhat so it will be a low-maintenance/attractive landscape.

Personally I do not think that $12K is enough, but I live in CA where everything seems to be expensive. Keep us posted, I will be very interested in what happens.

    Bookmark   February 11, 2010 at 1:14PM
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Alexina Properties

Hi there,
Well, I have not actually bought the house. I won the bid with the bank, and I'm signing all the paperwork today with my earnest money certified check. I have 7 days to do an inspection and can back out during that time. Closing is in 11 days if I go forward.

I am trying to make sure besides being diligent about inspections what else should I worry about during this time. Bill made a good point to me in taking my contractors with me to get bids.

So basically I know I need inspections and real life bids, so besides those things, what else might I worry about?

And Bill, just to clarify further, I see why you were confused by my post. The house fixed up would easily sell for about $90,000 to $100,000 range it will never be a house to compete with the more expensive homes in the area. The neighborhood is just a mixed bag of homes, the older homes are often torn down and $500,000 and up homes being put on the larger lot. So you have tiny houses and big houses in the neighborhood. I'm not trying to make a silk shoe out of a sows ear, with this house. I do need to keep my eyes open and keep reality in check. Your frankness is very appreciated, as it is the level talk I need. Thanks.

    Bookmark   February 11, 2010 at 1:21PM
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Your home inspection clause covers any inspection you want to do. I would include radon and mold as well as the general house inspection and any specific systems (well, septic, etc.).

I would also get an appraisal on the home.

    Bookmark   February 11, 2010 at 5:07PM
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Ah, I gotcha now. $57K for a house that could get to $90k with work passes the "reasonableness" test. The cheapest house in a decent neighborhood is a good choice for a rental.

Becoming a landlord is exactly like starting your own business. You should have a business plan outlining your short and long term goals and how you will get there. Get all your expenses down on paper (and double check it after the first month's checks clear.) Also, make sure you have money included for house maintenance. Get your expected revenue down on paper and make sure to account for the eventual vacancies. Make sure you have an emergency fund in place to cover the things you missed in the above steps. Then total it all up and see what you have.

    Bookmark   February 12, 2010 at 9:06AM
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If there is something hideously wrong uncovered during inspection, you can walk away, but it sounds like you are in a potentially profitable situation.
Remember that in addition to the 57K, you will likely have some other costs to close, then say with your updates you get 70K into the property. You also have to figure in your annual expenses of property taxes, maintenance and costs to rent. Allow for for 1 or 2 months a year that the property is vacant (especially the first year) and then figure what you will clear on that 70K investment. If you can rent for 1K per month, you should be bringing in considerably more than you would from most stable investments these days.
All that being said...being a landlord was not my cup of a tea, and real estate is far less liquid than a mutual fund - so be prepared to sit through the downs in the market and remember rentals age much quicker than homes occupied by owners. Good luck!

    Bookmark   February 12, 2010 at 1:51PM
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Having operated up to a dozen rental homes at a time, my experience is that the building itself is the lesser part of the story. Your tenants can make or break you. You should figure out the best you can who your tenants will be and where are they coming from. How big is that pool of tenants? Do you actually know what the local vacancy rate is? Overall, Dallas-Fort Worth vacancies were 11.7% in the fourth quarter 2009.

BTW, did you back out or complete the purchase?

    Bookmark   February 19, 2010 at 9:09AM
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Alexina Properties

just updating:

We had a large amount of snow here, not typical here, so we were without electricity for several days. The bank did not sign off until Wed and the bank needed 48 hours notice to dewinterize for inspection. Apparently though there were some reasons gas could not be turned on, so the bank/owner sent out a plumber and they will be running a new line to the gas water heater so gas can be turned on.

So today the inspector came through, as well as an electrician and plumber that I asked to go through.

Inspector spent about 5 hours going over everything. He said the house was very sound, and nothing major to be noted with exception of house needing a new roof (which I was well aware of). I had already planned for that as well as water heater and a/c as they looked very dated.

I also had a structural report as well as a termite inspection and both were fine. The electrician had an issue with the height of the wire coming into the house, so he wants to address that but he could not find anything else of concern. The plumber noted of course the age of the water heater (it was from 1981!) as well as some improper plumbing connections near washer/dryer and refrigerator/ice maker.

The home inspector will return to finish inspection of the gas related appliances when the gas is turned on.

So all in all, the house is in very good shape, but really neglected as far as any updating of features in 30 years.

I had a guy stop buy while I was there who offered to buy the house from me and I told him I had not purchased it yet, he apparently bid on it also, and he was willing to buy me out for what I offered. I declined.

As it stands now, there were no huge scarry surprises, such as mold or broken pipes, structural damage, or etc.

I am still planning on going ahead with the purchase. I wish I had offered less in a way, but with 9 other bids besides mine I was not sure. It is a fair price and the house is solid and actually quite cute (or will be when I'm done).

worthy: Oh I agree completely about the tenants making or breaking you. I sold my last rental property several years ago when the last tenants ripped the house to shreds and the eviction proceedings took forever. I will be very careful on the renters. I have watched the homes that go for rent in my neighborhood, most start at $1000 a month and up and I have never seen a sign last more than 10 days before the place is rented. All the landlords I know in the area require year minimum leases. So hopefully finding a good/dependable renter will not take over a month or two maximum.

Still nervous about plunging into unknown waters, but I'm moving ahead. Thanks all.

    Bookmark   February 19, 2010 at 7:11PM
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Worthy made the real point. My uncle was also a residential landlord his whole life. His advice to me was not to worry about the property. First, find a good renter and get the house for him. Being a landlord is like any other business. You can't just expect to put an ad in a paper then put the renter who answers it in the house and expect good results. A good analogy is someone who starts a small 'boutique' type store. They 'do the work' plowing through trade magazines and web sites and go to trade shows to buy their merchandise. The store flourishes because buyers know they can find unique gifts unavailable anywhere else (because of the owner's hard work). Someone with more money than sense sees the booming business and buys it. They think because they bought something successful that they now have a free ride and hook up with several jobbers to stock the store while they sit back and work the register. 6 months later they're bankrupt as people stop buying, disgusted with the stale merchandise. The renter is the real asset. If you 'do the work', you can find lots of good ones out there. Just don't expect the 'work' to be placing an ad...

I suspect your 12K figure for freshing up the house to be unrealistic, even if you do the work yourself...which your talk of contractors indicates that's not feasible. I usually budget 20K (doing most myself) to be able to present an excellent property to my hand-picked tenant. I have no problem leaving the house empty 6 months if necessary to get a tenant I feel good about...I NEVER post a 'for rent' sign. Not the way to get good tenants..again, YOU have to 'do the work'. If having a rental sitting empty is going to seriously affect you financially or emotionally, you probably should't be a landlord. That's the serious truth. When you have a good tenant, keep in touch with them, stop by and visit now and then, bring some beer/wine if they like it. Buy them a fruit basket at Christmas. If they fall onto temporary hard times, cut them a break. If you picked a good tenant, you know it's only a temporary setback for them and they'll be back on track. Letting them be a little short one month won't kill you since they'll bounce back. If their life really goes south, don't hold their feet to the fire on their lease. Let them out and give them back their deposit. If you 'did the work' selecting them, the house won't be trashed and minimal work will get it ready for the next tenant. Remember all the advantages you're getting as a landlord (IRS depreciation, deduction for property tax, loan interest deduction, the appeciation of the property value)... all made possible by your good renter. Like worthy said, he's the most valuable part of the deal.

    Bookmark   February 23, 2010 at 3:47AM
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Alexina Properties

This is such good solid information, and I am very appreciative. I know that the way garymunson talked about renters is the way my parents handled them, very careful, yet kept the same renters for 5 or 10 years or more. The one eviction was sadly a relative that I let move into a rental. They paid nothing for almost 3 years and there were always promises,etc they always lost a job because the boss was mean etc. I finally had to evict to get them out which was simply horrible to have to evict a relative, but the neighbors were complaining because of how bad they were.

I am realizing the $12k is unrealistic, but I just "guestimated" in my head. I actually am quite capable of doing alot of remodeling, I have done 4 or 5 remodel jobs over the years, and can do everything from framing to basic plumbing, tiling, painting, refinishing, etc. Electrical I always pay for an electrician :)
So I can and will do alot myself. I will indeed hire alot done. If I come in around $20,000 the house will still be worth more than what I have in it.

So the most important feature is obviously the quality of the renter themselves. I did not plan to put out a sign at all, just mentioned when I saw realtors place "for lease" signs for other houses in neighborhood that the went up and down quickly. I did not mean that they were just little "for rent" in the windows by the owners, almost all have used Real Estate companies.

My Real Estate agent manages 22 rental properties and she said she would have no problem renting for $1000 and could get me a good renter. I am not close to that point of needing to rent, but it is nice to know.

I absolutely would rather have the house sit empty for months than have a bad renter.

So now I am wondering if perhaps I should fix up the house nicer than what I was first considering and hope for a better quality of renter.

Oh, the bank called yesterday and instead of closing tomorrow they need another month for a title issue. Hmmm... so I can only wait on them.

Thank you so much for all the kind, firm, and very real world advice you have all so kindly shared. I have read and reread these postings and it is obvious I have alot to learn. Thanks for sharing your knowledge with me.

    Bookmark   February 23, 2010 at 11:02AM
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"So now I am wondering if perhaps I should fix up the house nicer than what I was first considering and hope for a better quality of renter."

Lisa, I don't mean to hijack your thread but I am in a very similar situation myself.(awaiting closing on a REO next door that I plan to rent out). I am still alittle confused about the $5000.00 allowed start up deductions. Maybe you have the answers: I know that paint and basic repairs fall under this section BUT If I want to replace some carpet, replace stove and some light fixtures these do not seem to fall under the "start up" deductions. I have heard that you must advertise the home is available in order for these things to be deemed "operating expenses". But how do you advertise that the home is available for rent, thus allowing you to take improvement depretiation, if it is not truely move-in ready? I'm confused. I can also afford to have the home vacant but I would like to get the best tax break available also. How do you plan to work through this? Thanks for any info.

    Bookmark   February 24, 2010 at 7:39PM
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