My husband and I have been looking at buying and managing rental real estate. It is something we’d like to do to move out of a standard middle class life and move up. We’ve gone through other options and have decided this is for us. That being said, we find ourselves not sure what to do. We were recently found a fantastic property - but it looks like we’re not ready financially to purchase it
I recently became self-employed, and am not showing any real income right now, but my husband has sufficient income to pay all of our bills with some leftover. We also both have side projects that bring in additional income every month-but that income is in cash and flucuates.
Our total joint debt is only about $14,000 - one is a car note and the other is a roof loan. I personally have about $21,000 in unsecured business debt, which is in my name only.
We have excellent credit, but we do not have a substantial down payment, and have just been told that our personal cash flow isn’t sufficient, which leads to our dilemma - do we use our extra money every month to pay down debt or to save for a down payment? My concern is that once we pay off our debt, we will still have to save a down payment, which puts us about seven years from making any financial progress. That’s pushing things a little far down the road, since my husband is 41 now.
Since you have debt in your name only and some shared debt, investigate placing your shared debt into your name only and getting your husband to take out a loan in his name only. Since his income has a paper trail, that’s the only way I can see this working for you.
I’d like to say I don’t think this is a good venture, period, with real estate still de-bubbling (you could end up upside-down and foreclosing like so many others are in both the private and commercial sectors), unless you had significant capital already to invest (in which case you wouldn’t have a dilemma to post about). It’s your choice to make in the end, but you have 21k of unsecured personal debt… and holy fuck, that is a LOT of debt. Why do you think this is in ANY WAY a good idea?? What happens if (god forbid, planning for the worst here) you or your husband passed away? What happens if one of you loses a job? What happens if you get divorced?
I don’t think you’re in a position to undertake this venture. Pay down the debt. Save up your leftovers between paychecks and side jobs to create a just-in-case-hell-falls-in-on-our-heads cushion. It sounds like you’re living paycheck to paycheck with a bit left over. SAVE IT!
There used to be some program plan where if you agree to rent to section 8 for 15 years or something like that the program would back/cosign loans for you. It was seen as a nifty free money scheme because you could basically buy a house on a 15 year loan, be pretty much guarenteed a stream of renters, Most of the money came from the program anyway and even if the renters fell behind there was usually enough money to at least keep up the payments.
After 15 years, you now own a house free and clear that you paid little if anything for, you have rockin credit, and if you continue with the program you now have a nice little income rolling in. Manage to stack up enough for down payments on additional houses while you are still working on first house, lather, rinse, repeat. 25 years down the line you have half a dozen houses 3-4 paid off, and plenty of cash rolling in from rent.
Section 8 is welfare rental, isn’t it? I wouldn’t touch that deal with a 100 foot pole. My parents were in the rental business for a couple of decades, frequently renting to lower-income people/welfare people, and they almost universally trashed the rental and skipped out on the rent.
Sateryn, I don’t think the rental business is a way to get rich. For my parents, it was a way to barely stay ahead of the game, with my dad able to do ALL the repairs himself, with tenants right in their house or across the alley so they could keep an eye on them. What kind of rental are you planning to buy? Will the rents coming in do more than cover the mortgage on it? Are you and your husband able to do everything yourselves, or will you have to hire people?
I’m not saying this to be mean, but you and your husband don’t sound as well-informed as you say you are - you didn’t look into getting pre-approved before you started looking at properties?
ETA: I see that this looks more critical than helpful - I think paying your debts down and doing more research would be useful. After you have some years of provable income, you might be able to qualify for a mortgage (have you paid off your current house?).
Pay off debt first, then save for the down payment. Chances are pretty good that any interest you are paying on the debt is at a higher rate than you’d get if you saved. And in the end a bank is going to look at your debt ratio in addition to the size of your down payment.
Well, we didn’t anticipate moving this quickly at all - but the property is a 6 unit mixed commercial/apartment building that had gone into foreclosure and is now bank owned. It is a half a block away from our house, is in the historic section, and our town is on its way up. It is also priced $84,500 under the assessed value and with full rental will generate almost $1000 in cash flow, after debt service, taxes, projected maintenance, monthly legal expenses, pest control, etc. It is a super deal and one that is not common in our area.
We aren’t looking at being landlords as the main occupation; the hope is to purchase income generating assets, and real estate is the one that we are most well suited for. It will be a pain in the ass, but once we generate more income as rents rise, we hire a management company - or if we find out property management isn’t so bad, we start a property management company.
Our debt is not bills for eating out and new bedsheets - we live very simply. It is a roof loan for our primary residence, a car note for my husband, a business loan for me and a small credit card used for business related purposes. We were doing quite well before I quit my job - my lack of income is why we can’t quite get a loan.
It’s just so tricky - the bulk of the debt is a $15000 business loan, with a regular payment for 60 months. It makes sense to me to make the regular payment (which we can afford) and bank the rest to use toward another asset purchase. It’s based on the idea of leverage, and is something that is well accepted - why use my money, when I can use the bank’s money and save/invest my money?
Living “very simply” doesn’t help you in the case, because it means there’s nothing you can cut back to improve your cash position.
You have $150K in unsecured debt that needs to be paid within five years. You’re considering taking on a boatload more debt that will return “almost $1,000” per month, meaning less than $60K over the same five years.
Put me down as another “pay down your debt first” vote.
I think you should pay down your debt THEN save for a down payment. Yes, it’s 7 years down the road. A mortgage is what, 20-30 years? If you can’t manage to paydown then save over 7 years can you really handle a 20 year mortgage?
You have one shakey income, one steady income, two people to support (you didn’t mention kids), and you want to acquire MORE debt?
Look, we’re in a financial mess right now, the whole country if not the whole world. What happens if your husband loses his job? What if your business goes under? Seriously, pay down that debt FIRST. So what if it takes you 7 years - you’ll be in a stronger position at the end of it.
And, I have to say - being a landlord isn’t all fun and games. I work for a landlord. Most of what I do for him is fixing stuff broken by tenants, or cleaning up messes left by tenants. Can you and your husband both work AND maintain rental property? Do you have the skills to do so? If not, have you the means to hire someone who does have the skills?
It’s not an impossible thing to do, but it’s no way to get rich quick. It can be a lot of work.
If you’ve been told your cash flow isn’t sufficient the correct response is not to deny that, but to re-examine your situation and take steps to improve whatever deficiencies are present. Yes, it’s possible the lender is being a jerk, but this is not something to enter lightly or until you’re fully prepared.
Are you SURE the foreclosure is kosher? Given the foreclosure mess that’s unfolding please proceed cautiously. You don’t want to acquire a property only to find out the bank messed up the foreclosure and now ownership is clouded. That could result in years of winding through courts.
Maybe this looks like a great deal… but when this deal passes there will be another coming along. No deal is good if you’re not ready fiscally to take on the challenge.
Geez - until “rents rise” and you get more income you WILL be the “maintenance staff”. That will be over and above your regular jobs. Are you prepared to deal with plumbing problem calls at 2 am? That’s just for starters. Can you handle regular jobs AND that job, too?
And it’s a very good reason for turning you down! You have only one income and $21,000 in debt between the two of you. Take care of that debt OR get a solid income (preferably by growing your new business) OR, better yet, do both.
There’s nothing “tricky” here - you decided to give up a job and start a new business acquiring debt for that. Now you want to acquire income real estate - but maybe you should have kept your old job and bought the real estate if that’s what you wanted to do instead of starting a business.
A bank looked at your plans and decided that if you took out a loan for that real estate now you’d be a bad risk. That doesn’t mean you’re a bad person, it means the lender felt it was more debt than you could handle given your situation.
You are, of course, free to find other lenders or some way to make this work - but consider the possibility that the bank that turned you down was making the correct determination. People overextending themselves is part of why the economy is such a mess right now. Learn from their mistakes.
Also once you’re over 40 it’s that much harder to find a job. So if your husband loses his job it WILL be hard. I found that out. I used to hear that and never believed it, but looking for a job after 40 is a totally different experience, that you just don’t believe till it happens to you.
That said, you could also consider getting a part time job if possible. Add 16 hours working at Starbucks or Kmart or something and save this money.
In your late 30s and early 40s is a tough time to start anything, as your health is also gonna start to get worse. Teeth get old, gums start receding, women go into menopause and have issues.
You’d be better of learning to LIKE the standard middle class life you said you got.
Do you have any down payment or are you borrowing the entire purchase cost? You say the property will provide $1,000 a month after expenses and servicing debt. Does servicing debt include only the interest on the debt or is it paying down principle? Do you own your own home?
If you are doing this you should think about it like a business, and calculate if the returns are worth the risk. For example, if you have a deposit of $100k and the property returns $12k per year after all other costs, you will make a return of 12% on your money. That is probably worth some risk. If you are putting in $200,000 the return will only be 6%, in which case paying down your current debt will probably make more sense.
Don’t forget to take account of everything that can happen. Your time in managing everything, potential capital gains or losses, potential large capital expenses (eg replacing the roof), periods of time without tenants etc. You should do a budget, both for the investment and yourselves and work out how you will cope with different scenarios, eg if a couple of apartments are empty for 6 months can you still afford the loan? If the roof collapses how will you pay to get it fixed.
Assuming you aren’t making a huge down payment this sounds like a good investment. It will be cash flow positive, allowing you to pay down debt and being a block of 6 will help ensure you still receive income when an apartment is empty or the tenants don’t pay, etc. It’s risky but there are no rewards without risk.
I’m surprised you are having trouble getting a loan for an investment that will be cash flow positive. Shop around and see if another lending will help you. Do you own your own home? Can you use it as extra collateral? Can you take a part time job to earn a steady income until the loan is granted?
Paying off your debt and then saving is the safe option but I say be bold and take a (calculated) risk! Otherwise you’ll be average for ever.
I appreciate everyone’s helpful advice, but it seems to be the same advice, and is based on the idea of living safely. That’s great, but it often makes impossible a bold move that can help my children for several generations to come.
We’re not being stupid about this - as I said, the main problem is that this property popped up now, instead of in a year or so. Yes, I’ve talked to the bank’s lawyer and read the court docket - the foreclosure is clean and done. We’ve run every number from here to Sunday, and we’re proceeding very cautiously. My husband has experience with rental property - in Gary, of all places - and he’s quite familiar with bleeding radiators at 2am.
We can stay where we are, and pretty much run in place for the rest of our lives, or we can try to make the change we want in our life.
Does anyone have any opinion about paying off the debt vs. using income to save right away? Not all debt is bad, and it is a terrific tool for building assets. My husband could lose his job now, and we’d be bad off - but, if we own this real estate for a year, and then he loses his job, we would have an asset that we could liquidate for at least $60,000 at a quick sale. So, we’d be better off, right?
I’m not in the safe/mediocre school of wealth building. I’m into education and hard work, and with those two things, most risks cease to be “risky” and become either smart or stupid decisions.
The $950 month in cash flow is after all projected expenses and a 20-year mortgage on the property at 6% (standard terms for non-owner occupied real estate loans).
I’m a little surprised as well, but the banks and others I have talked to have said that banks are being very conservative, if not outright not even writing these types of loans, due to the horrible costs they’ve had to endure with all of the foreclosures they’ve taken on. My numbers are even over-estimated, just to be safe, but banks are very tightfisted right now.
We own our home, had planned to take the down payment from there, and knew our area had tanked, but we were still surprised at how much equity had gone away. We own a 3 bed, 3 bath historic Victorian in an excellent area, but are back at the 80/20 we started at 10 years ago.
Our down payment is going to be as low as possible, and that’s where we are stuck - one bank wants at least 30% down (which we don’t have, and as you said, cuts our dollar investment value) or is not happy with our personal income to debt ratio.
It’s just very frustrating - but, ironically, my old job just opened up. They’ve already asked me to come back temporarily, and to train the new hire. But as it’s a small law firm I’ve been with for 12 years, I’m going to approach them about a combination of tele-commuting and office work, which would take care of the problem. While I love the work, I hate the job, and it feels too much like surrender.
But, I figure if he used me for 12 years, I can use him for a couple more to get this rolling.
When I was a financial reporter, I regularly interviewed people who had made a million or more in real estate. Virtually all of them had started out as real estate salespeople, then gone into investing–when they knew a lot about it.
One person, who I knew somewhat better than the others, started out with a duplex, living in one half, renting out the other, then progressed to a place with more units, then got into commercial properties. She and her husband started out without risking their cash, as owner-managers, but they did have to live in less than desirable conditions and learn how to fix stuff. According to her, it took them years to work up to multi-unit, but once they did it was worth it.
An old friend of mine bought a duplex in the early '90s. The rent she collected (when the other half was rented) paid for the mortgage. She threw in extra money whenever she had it–she’s a freelance commercial artist–and she paid off the duplex in about 8 years. It’s not a lot of income, but on the other hand, she’s not paying rent, she still has other work, and maintenance costs are not high. (She will paint & spackle the interior, but for everything else, like plumbing issues or painting the outside, she hires people.)
The idea of leverage in business is controlled by covenants between the business and the bank. Keeping within those covenants for a small business can be very challenging in good times (they can be hard for large companies - mine almost went under when we almost failed passing our covenant). Covenants are based on financial ratios.
i.e. you can have all the positive cash flow in the world, but if your current ratio and debt ratio aren’t sufficient, you can’t get a loan. If you cannot keep them sufficient, you can’t get a loan.
All this is moot, because you don’t have the downpayment for this sweet deal anyway - and aren’t likely to come up with it fast enough. If this is a sweet deal, it won’t be on the market when you manage to save a downpayment.
But, before I’d consider this property, I’d make sure to look at the books of the previous owners if you possibly can. A property that generates $1000 a month in free cash flow that is in foreclosure? It wasn’t generating that for the previous owners or they were really stupid. Chances are, in this market, they just paid too much for the building, but it would sure be nice to know that you aren’t underestimating the maintenance expenses, overestimating the occupancy, unaware that they spent $15,000 in legal fees in a single year on evictions - or some other expense you are overlooking.
Hey, I used to fly homemade experimental airplanes - I understand about living outside of “safe” and not being average. I also did a LOT of research, pre-flighted obsessively, and had a bajillion contingency plans for when crap hit the fan. And sooner or later, the fan gets hit by something. And sometimes, no matter how pleasant the day and no matter how much I looked forward to the flight, I’d turn away and stay on the ground because circumstances just weren’t as perfect as they first appeared. Did I miss some “sweet deals”? Oh, sure, I’m positive I did - but I also missed some spectacular (and literal) crashes.
Bold moves comes with real risks. It now sounds like you’ve done your research, which is good and reduces the risks. However, it also seems that you came here for a sort of affirmation you aren’t getting. Again, maybe there’s a reason you aren’t getting it, and it may not be that other folks are afraid to step outside “safe”. It may be that what you’re contemplating really is riskier than what the vast majority of people think is prudent. That doesn’t make it inherently wrong, but you may wish to re-review this opportunity.
I understand that. It IS potentially a fantastic opportunity. But no matter how fantastic you don’t have to take it if you’re not ready at this time. There will be other opportunities in the future if you pass on this one. Yes, you might regret passing it up. You might regret taking it. As no one can see the future that’s about as certain an answer as you’ll get, I think.
Yes. If you succeed you can succeed big. However, if you fail you may be running in place somewhere less desirable than where you are now. Have you considered what you would do in the event of failure?
As I said, I work for a landlord (in Gary, of all places - so we have something in common). He has had trees fall on buildings. He has had buildings burn down. Two years ago three of his buildings were flooded with sewage contaminated water. Yes, everything was insured, but an insurance pay-out doesn’t generate income the way an intact building does. You can do everything right and still encounter disaster. How carefully have you considered the worst case scenarios and can you handle the worst happening?
Yes. I gave it in my first reply. I think you should pay down debt first then save. You don’t have to pay down ALL the debt - maybe pay on it for a year or two to reduce it, then save for a down payment. It doesn’t have to be entirely either/or. However, MY inclination would be to reduce some of that debt. A better debt to income ratio AND a solid history of on-time payments will only hep you when you go to make another loan.
Not all debt is good, and too much leads to bankruptcy.
Look, in the end this is YOUR decision. You may well be more comfortable taking this on than most would. The problem is that “most” might include most banks as well. I did suggest that if you were determined you should try other lenders besides the one that turned you down. Risk tolerance varies among lenders just as it does among individuals.
How quick is your “quick sale”? How will you pay your bills in the meantime? What impact would it have on your credit rating?
Nothing sells as quickly as it once did. A lot of people are being forced to sell for a loss right now. There is zero guarantee that if you had to sell it within a year or two of purchase that you could recoup your costs.
My personal opinion is that you should spend a few years spending down your current debt AND socking some money away for a future downpayment (split that however you wish, but do pay down that debt via more than minimum payments). In a couple years you’ll be a stronger position all around to take on another loan. There WILL be other opportunities. I realize the current one is tempting but emotion has no place in this sort of business real estate. Given the current climate it is wise to play it a little bit safe right now. Spend a little more time getting ready to make the jump and when you do there will be a little less risk. Taking risk is one thing, you have to take some risks in life but taking needless risk is foolish.
Slightly over two years ago in my area we had massive flooding AND a tornado go through - some highly educated people who worked their asses off lost every material possession they owned. Who do you think is bouncing back fastest from that? The people with high debt loads or those with lower debt loads and some savings?
Again, I think you’re looking for some sort of affirmation of your decision, and you’re just not getting it. I also think you’re tending to look at this as success assured. There is no guarantee. Unless you have considered what you would do in the event that through [insert unforeseen calamity here] you lost everything and how you’d bounce back you haven’t done ALL your homework yet. Maybe you HAVE done that - I don’t know. I’d like to think you have.
The reason the property went into foreclosure is because the prior owner had financed it almost completely at $300K (in 2003) and then taxes tripled (part of a complete property restructuring here in Indiana). Those taxes are figured into our calculations, and should go down once we buy the property, as they are based on current market value.
I’m going to sound really cranky here but… You guys appear to be getting surprised a lot. This tells me that you might be looking at things and seeing happy dancing dollar signs rather than doing a ton of research.
Quitting jobs, starting new businesses, going into debt, grabbing irresistible opportunities that can’t fail–it might work out, but it honestly sounds like a hundred people I’ve heard throughout my life who made one bad financial decision after another until they end up destitute.
Pay off your debt. Debt is expensive and it looks bad to banks. You seem to be glibly talking about how you should use the bank’s money, but it’s the bank that’s making a profit off of you.
If you’re living simply and still don’t have any money, that’s a danger sign.
Make SURE of that. I just bought an “investment” property. And while the taxes did go down based on the new valuation, because everyone’s property is being revalued and the state of foreclosures in our city, they didn’t go down much. About $50 a year.
By the way, I have one tenant. To date he’s been there two months. He’s been a pain in the butt, bounced his first rent check, and didn’t bother to pay his second. He’s my brother in law - and this is the “not for profit” landlord situation.
Seems like if you want to make this work, you are going to have to change your personal cash flow first in order to create a situation where someone will loan you capital - regardless of what else you do. There are two ways to do that - increase your income or decrease your outgo. Decreasing your outgo can be done by paying down that debt. Since you already said the debt isn’t for gold plated bathroom fixtures, but simple stuff like fixing the roof, getting a car, and starting your business - I can see that a bank wouldn’t be eager to fund your next venture when your first isn’t paid for and you currently require the use of debt to literally keep the roof intact over your heads.
I’ll be the dissenting voice, here. Reading through this, I’m guessing every single real estate purchase my husband and I have made over the last 10 years would have foretold our financial ruin, yet we’ve made a few hundred thousand in real estate over that period.
My advice is to ask the bank that owns the property for the loan; that’s how we got our first house. They might want to get rid of it badly enough to take a risk on you. Also, be sure to offer a lot less than you think they’ll take, especially in this market. Take the lowest offer you could conceive of them accepting, and take at least 20% off it for the initial offer. Do you have a real estate agent involved at this point? If not, talk to an experienced one, they might be able to help with this, and will know some banks that are more open to this type of loan. Good luck, it sounds like a good investment to me.
