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Working Moms
Virgo17
member
Another real estate question: Rental Properties
Virgo17
member
in Working Moms
So DH and I would like to build a new home and move about 15 minutes from our current location. The problem is that our house is not worth what we owe on it. We have been tossing around the idea of renting it out. We live in a community with a lot of military families and probably would not have a hard time renting it for close to what our mortgage payment is each month.
My questions are:
How does financing work in a situation like this? Does our income have to be enough to "qualify" to carry two home mortgages?
How big of a PIA is renting a home out? I'm hoping since we are local it wouldn't be that big of a deal.
Could this become a good financial move down the road? For example, could we hold on to the house until the market recovers and then sell for a profit? Could we refinance at some point so that the rental payment is more than the mortgage?
I don't want to make a hasty financial decision and regret it down the road. We are fortunate in that our current house meets our needs as far as location and space. However, we have our third child on the way and I'm afraid we will feel the crunch soon. We also have some preferences (i.e. one level instead of two) that we didn't think about prior to having children. However, it isn't something that makes our current house unable to function for us.
This discussion has been closed.
Re: Another real estate question: Rental Properties
My husband just did all of this the end of last year so I will answer your questions based on my experience. We own a 2 bedroom condo that we lived in since purchasing it in 2006 (height of market here). Although we put 20% down and paid prin. & int every month our condo was worth $60,000 less than we paid and nothing was selling. We wanted to take advantage of good buying market and low interest rates now so we met with a mortgage broker who gave us a range we had to stay in for mortgage and taxes and amount we must get for rent on the condo.
We had to put down almost $100,000 on our house, wipe out all debt besides mortgage (included paying off 2 cars), have great credit and have a signed 1 year lease on the condo just to get a mortgage. So yes - you have to make and have enough money to carry both and full each month and then some. Renting for us sucked - I still lay out $160 per month to cover the condo association because the rent we could get is not enough. Our financial advisory did recommend keeping the condo and waiting it out for a better selling market, we will never recoup what we paid but someone else is paying our mortgage on it and we should be able to refinance it next year so we will make a little each month. We are so happy in our new house and my husband has been able to expand his business so it was really worth all the hassle for us. Best of luck!
I don't know a ton about this, but we are about to do it ourselves, so I'll answer what I can. We are moving out of the tiny house I bought as a single person, into a new house that's being built right now.
Yes, we had to have enough income to cover both of our mortgages. This was not much of a problem, because I had bought it on my own, so with the addition of DH's income, and the raises I've gotten in the last 6 years, we can afford them.
We are going to rent to a friend, but if we didn't have her lined up, we'd be using a property management company. The one we talked to charges 8% of the monthly rental, plus a larger amount the first month a new renter is in there. But they deal with finding a renter, arranging for payment, doing credit checks, etc. If there's a repair that's needed, they'll deal with getting a repairman there if you want them to, but we would pay for any repairs. My DH will probably do some work on the house if it's necessary, and hopefully that's not too much of a hassle since we will live nearby. We're working on some preventative maintenance-type projects right now.
We certainly hope it's a good financial move! Our neighborhood is always on these "hip places to live" type lists and we're doubling down on it, so I hope the real estate prices keep rising. The rental market is definitely healthier than the selling market right now. We are charging a little bit more than our mortgage, and I'm starting to suspect we are undercharging - we actually have 2 potential renters, and that's just from word-of-mouth.
We learned a lot from talking to our realtor. He's the one that was able to tell us how much rent we could get vs. how much we could sell for.
You have to qualify for both. Also keep in mind that if you want to refinance your current house down the road (when it is a rental property and not a residence) it will be more of a PITA -- not all banks do "investment mortgages" and the rates are generally higher.
For us renting has not been hard. We have great renters. I've also heard horror stories. It's definitely a risk you are taking (which is why banks make you qualify for both mortgages!). Also keep in mind the hassle involved in re-renting, and the time the house may sit empty in between renters -- perhaps less of an issue for you if you are in a military town with high turnover, but who knows.
It could be a great financial move. If someone is paying down your mortgage while the housing market recovers, that's a double win for you. But it could also be a huge financial burden. It ties up a lot of available credit plus any cash you have in the house, you bear the risk of major repairs for that home in addition to the one you're living in (what if 2 roofs need to be replaced the same month? will you be able to swing that financially?), and you're not guaranteed to get *any* of the money unless you are able to sell when you need to, and there's a risk that you won't be.
It's really a matter of your overall financial picture, and your risk appetite.
Here's what I know from my experience:
1. Financing. We had to have enough income to qualify to carry both loans, and really excellent credit.
2. Renting it. Our house has rented really quickly both of the times we were looking for tenants. We advertised on Craigs list and received calls within minutes of posting an ad. Our first tenant was okay. She was a single Mom and she always seemed to be struggling to pay rent on time. She rarely asked us for anything, though. Our current renters are awesome. They pay rent through direct deposit, so they have never been late. They never ask us for anything. They always keep up with yard work. They can stay forever as far as I'm concerned.
3. Financial aspect down the road. I think that having the house as a rental could pay off in a couple of ways. You hold on to it until you're able to make money on a sale or you hold onto it until you're able to make money on rent. We know people who are retired and still own their very first house. It's a rental and provides them with extra retirement income. We kind of hope to hang onto our house for the same reasons.
We moved a few months ago and are renting our 1st home. Yes, we had to have income to support both mortgages to get a 2nd loan. We are using a property management company so we didn't have to do anything. We pay them a monthly fee to find a renter, collect rent, take care of anything that breaks, take care of the taxes, etc. We want to sell the house as soon as possible and don't intend to keep it as rental property.
Some advice before you do this:
1. Don't use a lease you get off the internet. Shell out the money to have a lawyer do one specific to your property and your location. While you're at it, get familiar with the SCRA (Servicemembers Civil Relief Act) lease provisions since you said there are a lot of military in your area.
2. Ask a tax professional about the tax implications of owning a rental property. They can explain how you claim depreciation and expenses and how renting the property will affect your tax liability when you sell it.
3. Talk to your insurance company about how to insure the property and your liability as landlords. You may need to get additional insurance - which is an additional expense of renting.
4. Have enough money saved to cover the mortgage for a few months in case there's a gap between tenants or you have to go through a long eviction process.
You already got good advice, but two other things.
1. from my experience if you are underwater on your house you will struggle with breaking even in renting, not always, but most people lose a month or two of rent every year or two while trying to find new tenants and if you are only able to barely cover your mortgage with the rent you won't break even.
2. If you rent the place yourself try and walk prospective tenants out to their cars. Generally speaking, the state of their car will reflect how they will likely treat your home.
DH and I rent out our condo that we purchased about 5 years ago. We thought we got it for a 'steal' because the builder had knocked about 30k off of asking price, we were told they needed to sell quick so the next phase of development could be started. Within a year the builder went bankrupt and about 5 unoccupied units went bank owned and sold for about 60k less than we paid- and we put about 13k into finishing our basement by then.
We had kids and the floorplan just did not work for us (first floor master at front of the house, other bedrooms on second floor and steps were in the back of the house). We had enough money set aside that we knew we needed to move but were so under water in our condo that selling was not an option.
We listed an ad and had a lot of people look through it and it rented out pretty quickly. Our mortgage company required a 2 year minimum lease and this family we rent to wanted more than that. So far things have not been too bad. They don't bother us and pay on time. We had some carpet replaced a few months ago by a family friend and he commented on how clean the place was.
Just make sure you have enough time to move out and get things set up. We had to push back our closing date on the new house 3 times. We originally were going to have 2 weeks to get out and get it painted, cleaned, etc. We ended up being 'homeless' for 11 days because of this and it was a PITA.
We were required to pay off a vehicle so that our debt to income ratios were a little better but we were able to swing it financially. They also required that we closed out all our credit cards which we have not carried balances on for over 3 years. We bought a bank-owned home, we were very fortunate. We found the house the day it went on the market. Put our offer in the next day and it was accepted. We were able to finance the house with 5% down, 3% of closing costs covered by the bank. No PMI and a very low interest rate- like 2% lower than our first mortgage.
Our plan is to rent to these people until they say they don't want to rent anymore. They have teenage kids so hopefully the fact that they have teenage kids will keep them there until they are done with school. There is a bunch of vacant land in our subdivision that has been bought and more condos are being built by another builder. Hopefully once these start selling our home value will increase again and we will be in a position to sell without taking a huge loss.
Unfortunately my advice is not as "nice" as everyone else's. I am a bankruptcy attorney and see people after everything has gone to crap. So here is my advice.
1. Financing: depends on your income, it is quite possible you can get a mortgage even though you already have a property.
2. Renting out a property is a huge PIA. People never budget for maintenance, water leaks, repairs, etc. Unless you are getting a FEW hundred dollars a month above your mortgage payment it is a terrible idea. In my experience (obviously not always true) normal people make bad landlords. They don't budget properly for things, etc. Again, not always true.
3. IMO it is not a good financial move. Many people are underwater and want to do the "right" thing but the real estate market is not going to recover (for many people) to the point where you will one day be able to sell and make a profit OR break even. However I would need to know what the FMV of the property is and what you owe on the mortgage. I have clients who owe $300K on a house worth $100K. Unless you hold on to the property for 20+ years you will NEVER sell and make a profit or hardly break even. You have to face the fact that the investment was a bad one, the economy collapsed, etc.
4. You should do a "short sale" get rid of your other property and NOT buy a new one until you get rid of the old one. If you end up defaulting on your old property they can place a lien on the NEW property. Also if you have a new property it will be difficult to show a hardship to be able to qualify for a deed in lieu of foreclosure or short sale later.
I personally never advise people to buy a 2nd house when they have a crappy old house they can't sell.
Good luck, a lot of people are in your boat and sometimes there is not a simple answer.
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