I plan to get into the real estate game in a few years, for the first time. By then, I’ll have quite a good amount of money to play with. I don’t need a lot of space- I’m a single man, but at the same time, I don’t like the idea of being under the thumb of a landlord, nor living in a single-family home all by myself. I’m seriously considering purchasing a duplex, living in one unit, and having my tenant essentially pay my mortgage for me. Does anyone have any experience with this? What are some things I should know before going in?
My father-in-law is doing exactly this. I’d say the most important thing is to use a property management company. You don’t want the tenant banging on your door at 2am to tell you there’s a water leak. You may not even want to tell the tenant that you’re the owner, although in my FIL’s case the tenant is well aware of that. Nevertheless, she knows that for anything related to her unit, she calls the management company, not my FIL directly.
Since the OP is asking for personal experiences, let’s move this to IMHO.
Colibri
General Questions Moderator
Check with your local government and do whatever they say. The amount of time and money you’ll save is worth it.
If you decide to manage the property yourself, go down to City Hall and see if the prospective tenants have any evictions against them. If so, do not rent to them. Don’t believe any sob stories.
Get everything in writing. Have the tenants sign a lease, and include in detail who is living in the apartment, what the rules are, and “any illegal action is grounds for immediate eviction.”
My friend works as the maintenance man for his parents who own rental properties. He said that his maintenance work load dropped enormously when his folks adopted a specific policy: they now never rent to guys who drive jacked-up or otherwise “monster” style trucks. In their experience, those guys are the type who just keep constantly damaging their own living space. The most expensive thing they break is directly due to the truck. They park them on the lawn and break the septic tank.
I’ve been a tenant and I’ve worked for landlords, although I am not myself a landlord.
My recommendation is to keep business as business - use written leases and clearly write out the rules. It is worth a couple hundred dollars to speak with a lawyer to make sure your leases will hold up should you ever wind up in court, to know your rights, and to know tenant rights. You will also need to keep good records of rent, security deposits, etc. so it might be worth consulting a CPA to set up a record keeping system you can maintain yourself that will keep track of all this, and in form that will make doing your taxes much less a headache. Also, it might also be worth having a professional tax preparer rather than doing the taxes yourself. As soon as you start renting out part of your building you are a small business, treat it like a small business.
Vet your renters, as already suggested.
If your plan is for your tenant to pay your mortgage, think again. If the rent is so high that it can pay for both halves of a duplex, then your renter will easily find someplace cheaper to live. I would expect your tenant to cover maybe 60 to 70 percent of your mortgage, tops.
There are pros and cons to management companies. The pro is that the management company handles everything, so you don’t have to deal with the fuss. The con is that paying a management company costs money. Subtract that from the rent that you get and now your tenant is paying even less of your mortgage.
How handy are you? Stuff breaks. Tenants expect things to be fixed quickly. If you are handy, you can fix it yourself and your only cost is materials (and your own time). If you are not handy, you need to pay someone to fix things, and there goes more of your mortgage.
If your tenant is aware that you own the building, they will probably come directly to you for problems, even if you have a management company.
A rental property is a business. You need to devote time and effort to it. You need to keep good records of everything. If you aren’t willing to run it like a business, you are heading for disaster.
Location means a lot. I own a rental property in a small town where people generally take care of things. I would not buy a property in a larger city. City people don’t take care of things and will trash your building. You can have your tenants sign whatever lease you want, but if they have no money and live paycheck to paycheck, if they do $5,000 worth of damage to your apartment, you aren’t ever getting that money back from them.
You need a proper lease written up by a lawyer. Don’t just get the first free lease document you find off of google.
If you want good tenants, you have to respond quickly and effectively to their issues. Respond poorly, and your good tenant will move out and a bad one might move in. I have good long-term tenants in my building, and I work hard to keep them. Saving $500 by cheaping out on maintenance will backfire on you if the tenant moves out and the apartment spends a couple of months vacant. That lost rent ends up costing you a lot more than that lousy $500 you saved.
Read up on all of the legal issues. No one is going to tell you what to do or how to do it. Violate a law or local ordinance though and you will immediately be fined. Ignorance of the law, as they say, is no excuse.
ETA:
FWIW, I own a small apartment building. I do not live in it. The building is about 10 minutes from where I live, and I try to do as much of the maintenance and repairs on it that I can. I purchased the building outright, so no mortgage. I do not use a management company. Somewhere around 1/4th of the rent goes to expenses, taxes, etc. The rest is profit for me. YMMV, etc.
My experience is a little different than what you are envisioning, but still relevant, I think. My wife and I own five rental properties, three single family houses and two multi-unit buildings, with a total of nine tenants. We live within a mile of all of these buildings; one of them is across an alley from my back yard.
My wife handles finding, screening and dealing with the tenants. I do most repairs myself. When we first got into this seven years ago, I was very concerned about the frequency of handy-man calls I would have to deal with. I feared that I would be getting calls at all hours to fix things, and that leaving town for vacation would be a nightmare or impossible. It hasn’t been like that. The only emergencies we have dealt with in all of that time involved something I don’t do myself, furnace repair. Since we already had a good relationship with a heating and cooling company for our own home, we were able to get quick service for our tenants in those instances.
I suggest that you do exactly what you envision, buy a duplex. Try to find one that is in good shape, use a home inspector as part of the purchase process, and begin researching home repair professionals like HVAC, plumbing, electrical, et cetera, as soon as you buy the house. If you are handy at all, you can take care of much of what goes wrong yourself.
Whether the tenant in your duplex will pay enough rent to pay your mortgage depends a lot on the market you are in. In the small city in southern Ohio where I live, housing prices dropped significantly during the mortgage crisis, but rents didn’t. We have borrowed 80% of the purchase price for each property, and all had positive cash flow right away, meaning that the tenants were paying the mortgage, taxes and insurance with some to spare. I think I could have lived in the smallest apartment in one of the multi-unit buildings we own and still been cash-flow positive, but I wouldn’t count on living in your duplex for free. Cheap, but probably not free.
Good luck, and feel free to ask me any questions you can think of.
As I stated above, check with your local government to see what is required of a landlord. You might have to get a Certificate of Rental Occupancy. DO IT!
The rent is due on the first. After 5 days, add a 5% late fee. 10 days, 10% late fee. 15 days, start eviction proceedings, and make sure your lease states “tenant is responsible for all legal fees and court costs related to eviction.”
That depends on how much the mortgage is. The OP says he’s he’ll have some substantial amount of money by then, he might only have half the value of the duplex mortgaged and the rent might cover just mortgage part. Taxes and insurance will vary but they don’t go down as the mortgage is paid off, so depending on that situation the OP may still need more income even if the rent is covering the outstanding mortgage or some large part of it.
I know a few people who have done this, it can work out well for a long time, but eventually everyone gets a bad tenant. Not the end of the world, but something you’ll probably have to deal with eventually. Still, as I’ve been improving and expanding my house over the past couple of years and it’s all been done around the idea it could become a duplex some day. I won’t have mortgage left by then so the rent will be a nice income.
Good point.
I would also add that you need to consider some worst-case scenarios. You might have enough money for a larger down payment, but you also might want to keep some of that money in the bank in case the furnace goes ka-blooey or you are hit with some other large expense. Don’t keep your finances too tight. You need to be able to handle an emergency.
Make sure you get an inspection done by someone of your choosing when you purchase the place. When I had my building inspected, the inspector went so far as to note the exact date of manufacture for the furnaces, water heaters, etc. so that I had a rough idea of how much longer they would probably last.
Also, make sure all utilities are split between each duplex unit. Any shared resources (water, heat, etc) can be abused by one of your tenants and there is no way to separate out who used what. You may know approximately how much they used, but you can’t bill them if you can’t prove it with an actual measured value.
I am not a landlord but I have been a tenant all my life. One piece of advice I’d give is try avoid any multi-unit building that was converted from a single family residence. In my experience they have a tendency to be money pits in constant need of repair.
Do you live in Dayton by any chance? I Among the places I’m considering are 2 Ohio cities, Cleveland and Cincinnati. Both have very cheap multi family units for sale, especially Cleveland. Do you know anything about those rental markets and the ROI I might expect?
I’m afraid I’m not very ‘handy’ as I’ve never done any home maintenance. What would you recommend I do to acquire that knowledge and skill set?
What is the ‘vetting’ process like?
Roughly how much of your revenue goes to maintenance? Do you save a lot by doing repairs yourself? If so, home maintenance is something I need to start educating myself on
If I have a good tenant who’s always been paying rent on time, but they happen to fall on some hard times, should I still be this strict?
Noted. Why do you think that is? I plan on moving to the Midwest, not NYC. Does that apply to other places to?
I’ve lived all my life in small cities and towns in northern New England and a lot of the rental properties here are old residences(I’d say pre-1920) converted into apartments. A lot of the towns are former mill towns that lost between 30 to 40 percent of their population since the mills close down so they were a lot of empty residences that people converted to apartments. I really don’t have any clue as to the quality of rental places in other regions on the country; perhaps another poster could help.
That depends both on how well you know/trust the renter, and just what exactly your locals laws state you can do and what happens if you choose to not follow them. You may be limited in what penalties you can legally impose… and you may also run into problems if you just ignore collecting rent for a few months and something changes; it might not be so easy to collect if you establish such a pattern.
Some people genuinely do fall and hard times, but pretty much everyone who can’t pay the rent will claim to be one of them and it can be hard to tell truth from a good and practiced gimmick. I know one person who’s been using a tried formula of paying properly for a few months and being very personable, then having some tragedy happen which prevents him paying the rent for a couple months (but he’s built up trust so it slides), then a few more months go by with no rent, and by the time the landlord catches on, goes through the eviction process, a year or more has gone by and he’s only paid maybe 25% of the rent owed over that time. Move out, go find another place in a different town, and start over. He’s probably done this for close to 20 years. Credit ratings and financial judgments mean nothing; he lives welfare cheque to welfare cheque and always will.
Side topic, but if you live next door to them would it not be easy to become friends or otherwise personally involved with them so you might have trouble kicking them out or raising rent?
I recommend not investing most of your money in a single property. I personally wouldn’t even invest 5% of my investment portfolio into a single piece of real estate. It takes a lot of guts to risk significant sums of money on a property that strangers are going to be using as their living space. Most people completely underestimate the amount of money they will have to spend on repairs and overestimate the time they can keep the property rented. If you can get a good renter and get lucky on non-scheduled maintenance, you can make a lot of money. Or you can get a “professional tenant” described by mmmiiikkkeee who will live there a very long time paying very little of the rent they’re supposed to.
Residential real estate is just a huge risk in my opinion. I see a lot of people that own rentals in my job preparing tax returns, as they’re highly self-selected to go to CPAs for their taxes, but I see relatively few people actually making money on a year-to-year basis. Most of the profit comes from the increase in value of the property, but if you have bad timing you might miss out on that. Sure, taking a loss each year is good for your taxes - if you’re allowed to take it. It depends on a lot of factors. You then end up with one year with an outsized gain that puts you in a higher tax bracket that year, so you probably want to hold it for a long time until you don’t have any other sources of income. In the mean time you’ll probably be slightly cash flow positive, losing money tax-wise because of depreciation (which is why you’ll have a large gain even if the property doesn’t go up much in value, and the reduction in tax basis for allowable depreciation is not optional - if you don’t take a depreciation deduction, you just lose that basis), but might experience huge swings in how much cash is available to take out of the business.
If you want to take on huge risks without having any idea what kind of return you’re going to get, I’m not going to stop you. If you have the money to blow on it and still have plenty for retirement, it’s not a bad idea. But it’s extremely risky and potentially nerve-wracking.