My husband and I are thinking about buying a second house in our neighborhood. We live in Tucson, very central, and near the University of Arizona. Houses have declined very steeply in value in the last few years, and I have hope (but not definite) that they should start to rise soon.
So we are think of buying a house for around $100,000, maybe a two bedroom place, that we can rent out to students, or use when family comes to visit, or maybe have the kids live in when they are old enough to attend the university.
What should I be sure to think about that I haven’t yet? Any cautionary tales?
Do you guys have a large pile of cash sitting somewhere that you wont be using down on the house? I ask because with rentals, things happen: stuff breaks, tenants move out for months on end, you have to pay your way through the eviction process, etc.
If you can cover all those expenses without it being a detriment to your finances, I don’t see a huge problem. But especially renting to college kids, your house is going to get messed up much faster than normal.
It is a lot of hard work to get good tenants in, get bad tenants out, and fix everything up again after bad tenants. Don’t go into it thinking you’ll just put an ad in the paper, have it rented instantly, and keep the same tenants for years - it’s a job. Do you want to do this job?
What’s your neighborhood like? Are there students renting in that area already? If not, how would your neighbors feel about it you renting to students?
If you rent to students, expect too the likelihood that it may be empty during the summer - which isn’t necessarily when people are going to be visiting you - but leased out during the winter, when they might.
(aside: If you do rent it out though, you might try to aim for UofA faculty/staff. There’s some classifieds that the university has for faculty/staff in a regular newsletter type thing - I don’t remember then name, but I know I got an email regularly when I worked at there. )
You’ll be responsible for maintenance. (If you’re renting to college students, there may be quite a bit of this.) Are you handy enough to do stuff yourself, or can you afford to hire the people who’d do it for you?
Also, IANAL, but I believe I’ve read of cases in which people have done assorted illegal things in other people’s houses, and the property owners wound up losing their property. (I’m thinking of drug possession.) Contact a lawyer who knows about property law first if you decide to proceed with this.
I think you should examine the financial end further. Your initial outlay is 100k. What will it rent for each month? You can write maintenance & other expenses off in your tax return, but, they likely will still lower your profit margin. I’m no real estate lawyer, nor accountant, but, investigating the financial end seems wise. Your money might be better invested elsewhere. By the way, I’d love to invest in a rental property & actually had one at one time. Tenant screening is absolutely key. Call former landlords, employers, etc. There are some unbelievably nasty folks out there!
Praline brings up another point - I don’t know how it works where you are, but here, only your first property is not subject to various taxes and stuff - buying a second property is treated differently than your primary residence.
DON’T do it. A multiple dwelling (at least 4 units) is a much better investment.
The reason? Your tenant might skip out-and you are responsible. As for college students as tenants…another bad idea-many are irresponsible, and wil happily damage your property (think “keg parties”-and passed out students on the front lawn).
Plus, the maintainnence on a single family dwelling is almost the same as a multiple dwelling.
My SIL did this-she has always regretted it (her college student tenants did over $3000 damage to her house-and sued HER!).
We have a lot of contacts with grad students and medical students, so that’s who I’d hope to rent it out to. But it is good to know that we need to do some serious number crunching before taking any further steps.
Financial risk is less – probably only one of the units is empty or past-due at any one time, so at least you have income from the other unit.
Tenant risk may be less. my mother had a duplex unit, and when there was a vacancy, she asked the people in the other unit if they knew of anyone looking for a place – who they wouldn’t mind having living next to them. It worked well – that tenant found some good tenants for the other side. And also warned us about others – even more valuable.
You can run the numbers. A simple way would be to grab the IRS rental/royality income form (go to irs.gov and search for schedule E.)
Go through, filling it out with as much real info as you can come up with, for example call and get a property insurance quote on that exact property.
looking at these numbers you’ll see:
Property insurance is as high* if not higher* for rental property as homeowner’s insurance is…only NONE of the tenants’ possessions are covered.
as others say above, property taxes may also be higher…in my state ~3x on a $100k house.
Get numbers for city/county tax by calling the tax accessor’s office. [some realestate searches, like trulia and zillow, list the property tax, but check out those numbers.]
also type in Your Home address and see what the z(illow) estimated price is for you. then run your to-be-acquired property.
After cobbling together the Sch E numbers run an economics program…OR rule-of-thumb it: your income after expenses should be 10% or greater.
For example, here in Louisiana (where taxes are very low and I manage/do routine upkeep myself) I wouldn’t look at a 100k investment unless it’d give me $1000/mo in rent.
Basically that’s a 10% return on my money, with 1 mo rent going to pay property taxes and insurance and another months rent going toward upkeep/repairs. This is considering the property is in pretty much perfect condition…so set aside $$ to put it so. [new refrigerator/roof/central ac unit/window and sheetrock damage isn’t included in the rule-of-thumb upkeep $ estimate.]
some stuff I did that you might want to do:
*get a lease form from several rental companies around you [the bank had a property management company dealing with the tenants in the building I bought so they handed me the lease agreement. later, out of curiosity, I scoped out several properties and got their lease forms. these were apartments, with professional management, so it was business-as-usual for the management.]
*lease the property for ~10% (or to 15% if you want no turn-over) below market value. long-term tenants are a must in property that’s likely to be damaged.
As you’re likely leasing to prof’s or university people (the non-party, non-fight or flight population this may not be important.)
along with the above, make your place The Best Rental for the money in the hood.
Counter-top needs replacing? do it one better than the competing rentals. solid trumps tile trumps formica. Window treatments? room darkening blinds over blinds over nothing. Room darkening draperies might be a god-send for your population.
CLEAN. sparkling clean. take pics of every room before tenant moves in! it doesn’t hurt if the tenant see this/signs the pics. after all, neither of you are out to eff the other, right?
except for usual wear-and-tear the property needs to be left as it was leased. If you lease a ‘somewhat dirty’ property it’ll come back worse, much worse. Lease it spotlessly clean.
Don’t Leave Town. don’t think you can manage your rental from even 50 miles away. it’ll wear on you. AND if you’re needing professional management: look at a minimum of 15%/yr ABOVE your other costs…
The 15% means the management company IS ONLY MANAGING the in-place tenants. It’ll be a lot more if they are organizing maintenance…showing/renting the place. “Management” to them means “collecting the rent checks” “sending late notices” and calling YOU when such doesn’t work.
My last thought:
I can’t tell you how hard tenants are on garbage disposals and dishwashers.
expect maintenance plumbing/ac/dw/disposal/yard maintance to be 2-3 times the cost
at your house, just down the block. don’t ask me why.
That’s great advice, Breccia. In addition to leasing it spotlessly clean, you should also probably do an inspection on move-in day with the tenants, and note every single thing that isn’t perfect with the house, and both parties sign it. That way you can avoid arguments on move-out day over whether that ding in the wall was there when they moved in or not. A bunch of explicit digital pictures wouldn’t be a bad idea, either.
You might be noticing a theme here, Palo Verde - renters can be just fine, and be a good source of income and cause you no trouble at all, but you really, truly, must cover your ass with them at all times. Nine out of ten will be no problem, and the tenth one will have you in court and deciding to sell your property rather than ever have a tenant again.
