A real estate question.

Having lunch today with a real estate agent friend of mine we started batting around some numbers.  My house is fine, not spectacular or grand, but fine.  The problems with it are smallish rooms and two tiny one car garages and neither of those issues can be easily fixed.

She suggested this:  my house has roughly 75K in equity and my all in monthly payment is $700.  Take a $50K LOC out and use it to put 20% down on another house.  Rent my current house (she has a guy wanting a place like mine to be a small group home for folks with head injuries and the rental income will be $1650 per month).  Mortgage is 700, LOC is 300 netting me a positive cash flow of 650 per month.  Mortgage on a new house of 200K is a payment of $1200 a month.  Subtract the cash flow from the other place and my out of pocket ends up being $550 a month.  

So I'm saving $150 a month and have two homes building equity.  Aside from the usual (double repairs/tenant headaches) reasons for not becoming a landlord, am I missing something?

Can you swing it all on the months the tenant stiffs you? Or if it goes vacant? 

Thats the one that i always come back to,  and that my brother the realtor hammers home with his clients. 

We did the same thing 19 years ago.  It has worked out well for us.

You're also forgetting your friend's commission for getting you into a new house

Less sarcastically, I think stuff like that can work out if you're ok with the risk of having no tenant for a time, having a tenant who trashes the place that you get to pay to fix it back up, and having that much debt.  There's a guy I work with who's done basically the same thing to buy 3 houses in the last 9 years.  Downside is that he's still close to $1 million in debt, since houses here are 400k-500k. 

Do you have the time/energy/skills to maintain a rental property?  They may call at all hours with problems large and small, and expect you to fix them right now.

Brokeback (Matt) said:

There's a guy I work with who's done basically the same thing to buy 3 houses in the last 9 years.  Downside is that he's still close to $1 million in debt, since houses here are 400k-500k. 

Live by the sword, die by the sword.  No berking thanks.

I think the big question is, if you don't have a tennant for a few months, can you swing both payments or is that going to be a big issue for you?

The other questions, does your house meet the 1% rule and is the rent you mentioned above market rent or rent only for this specific use of the house?

Dusterbd13-michael (Forum Supporter) said:

Can you swing it all on the months the tenant stiffs you? Or if it goes vacant? 

this is the big one Big Dave hits on.  If your place is empty can you cover 3-5 months of no rent?   

Sounds like too many assumptions (needed for it play out correctly) and what-ifs for me.

That's kind of what I did when I bought my current house. I did it more because of the housing market crash in 08 and wanting to wait out the slump. We kept that house as a rental for 6 years. 

The main thing I discovered through that process was I didn't want to be a landlord. People are whiny little ass holes most of the time and I wasn't making enough money off the rent to put up with the bullE36 M3. 

Although......a guy moved from India that I met and he had this grimey business -Addison Electro Polishing.  I got to know him well and he drove around in an old beater Delta 88.  Just no sign of success and the business was nasty.   

Until one day we started talking and he told me of the 10 apartment buildings he owned and the giant house his family was in......???????   

Turns out he loved renters - back in the day he told me he loved to rent to Americans.  They move in and stay 5-10 years.  He didn't like those new to the USA as they save and scrimp and only stay 1 year.  Mind blown. 

My alarm bell was the phrase "head injuries".

Unfortunately folks with head injuries sometimes go on rampages.  Result = sheetrock damage, holes in doors, etc.

If they want to rent the house, offer to sell it to them and be free of hassle.

Anybody who states, implies, or allows you to believe that your cashflow is 'rent minus mortgage' is not acting in your best interest. Your cashflow determination MUST include reasonable assumptions for all short term maintenance costs, long term maintenance costs, and the vacancy rate.  Viewing these as out of pocket expenses, along side those of your primary residence, is a recipe for failure.

If your rental property appreciation is not greater than inflation, you're not going to be building equity as fast as you might think.

If this is not an expansion of 'head injury small group home' guys existing and successful business model, with other landlords happy about both his ability to pay and the treatment of their properties by his clientele, I fail to see the allure to him as a tenant vs the general public.

In 2001 I moved 175 miles on short notice. I let my then roommate continue to rent the place after I moved. After the first year he got a roommate or two. I checked in with him occasionally but he always told me the place was fine etc. Finally after 3 years I started thinking it was time to unload it and his sister in law asked if she could buy it. It needed an FHA inspection so I drove over to meet the inspector. I was shocked at how many things were in disrepair. The inspector gave me a full page of things that needed to be fixed. I rushed to the hardware store, spent well over $1k and then spent the next 8 hours replacing toilet gaskets, dishwasher, garbage disposal, light ballasts, patching holes in the walls, etc. The inspector was kind enough to stop back by at 5PM that afternoon. He was shocked that I had actually managed to fix all but one item and I was halfway done with that last one. Anyway, the point is that this was someone I KNEW and TRUSTED and the place still was in bad shape. 

My uncle owned 6-7 houses at one point and there was always at least one renter behind on rent. He finally had one guy who was a auto painter paint classic cars in trade for rent. 

Another point, a friend has 5-6 houses that he rents in Phoenix. A renter just left him $50k worth of damage and skipped town.

The deal sounds interesting but the numbers have to work for a bank.  They will look at your income and run some ratios on what you can afford for all your mortgages.

The monthly cash flow you predict won't be added to your income 100%.  They will look at annual income from the property, subtract about 30% for misc expenses. Divide that number by 12 and add it to your monthly income to then figure out your money available for  PITI.  So, 36%ish of all that for all mortgages.

Your mortgage numbers total $2200. You are going to need about $6200 a month total income to qualify.  The bank will consider the rental income of about $1155 using your numbers so you need to show just over $5k coming in from somewhere else.

Driven5 made most of my points for me, so I'll just chime in with some mostly rhetorical questions that you should ask yourself.

 Is the current place in really good shape, or will it need some expensive repairs soon? A $10k roof replacement can wipe out years of rental profits. (Keeping in mind that rent minus mortgage does not equal profit)

If the new house needs work at the same time your rental is vacant or needs work, how long could you handle that from a financial perspective? 

Instead of a HELOC, why not take advantage of the low interest rates on mortgages and do a cash-out refi? Interest rate would be lower which would drop your monthly payment. 

What numbers are you using for insurance? Is your current coverage adequate to cover you and a rental?

Would you setup a structure like an LLC to reduce the chances of a rental issue damaging other aspects of your life?

Is it worth the extra work and risk vs just selling it and putting your equity all on a new place?

Do you know what "the 50% rule" for rentals is all about?

Someone is renting a house to make a group home?

I know real group homes exist, but in many many places these types of setups have been used to scam local and state governments because the "renter" gets paid to have the group home, but they never actually house themselves or people. They just have to show addresses and expenses or whatever.

I'd make sure a renter wanting to do that was super legit.

BoxheadTim (Forum Supporter) said:

I think the big question is, if you don't have a tennant for a few months, can you swing both payments or is that going to be a big issue for you?

The other questions, does your house meet the 1% rule and is the rent you mentioned above market rent or rent only for this specific use of the house?

I can't say for every place but once a location has been set up for handicapped habilitation they tend to be extremely stable.  There is a real shortage of suitable homes.
Motorcyclists with brain and body functioning injuries, social problems like Autism and Aspergers etc.,   Other handicaps. Conditions that require 24/7 monitoring by trained and licensed staff. 
 

Living independent lives out of hospital settings is massively cheaper and more rewarding for them and society.  
Some occupants are supported by insurance settlements some are funded by taxes, occasionally a family will meet the costs involved.  

However funded as soon as a vacancy occurs there is a rush to fill it. 

In reply to CAinCA :

Our top salesman owned 1/3 of the building as he was 1/3 prior owner of the company. They kept building ownership and the staff made him nuts.  
 

Guys flushing the toilet with their boot and trashing the drywall.  We had guys bumping into the outside wall with the forklift and moving/cracking the inside wall.   Even people having wet shoes dirtying up the carpet.   He sold the building and is a happy camper today.  

Robbie (Forum Supporter) said:

Someone is renting a house to make a group home?

I know real group homes exist, but in many many places these types of setups have been used to scam local and state governments because the "renter" gets paid to have the group home, but they never actually house themselves or people. They just have to show addresses and expenses or whatever.

I'd make sure a renter wanting to do that was super legit.

Yes there may be a few scams*. But state and local documentation is typically very strict along with regular inspections by several government agencies. 
I've got family members in the industry. From home managers to company principles. 
 

Just the conversations at family get together tells me the complex requirements. You're working with federal and state and city plus in some cases neighborhood agents not to mention health inspectors, safety inspectors, and legal qualifications.  Insurance companies., and family members. 
Minnesota had a bed bug infestation and they began semi weekly bed inspections.  Now with Covid 19 things are even tighter since many of the occupants are at risk people.  
* I just found out that last year every 3 seconds someone had an identity theft. So yes there are plenty of criminals around. 

Purple Frog (Forum Supporter) said:

My alarm bell was the phrase "head injuries".

Unfortunately folks with head injuries sometimes go on rampages.  Result = sheetrock damage, holes in doors, etc.

If they want to rent the house, offer to sell it to them and be free of hassle.

There is a difference between a renter and a group home.  The company that set up the group home becomes responsible for damage due to "occupancy issues." In other words trouble makers are sent back  to the hospital or ward they came from because the company running the group home can't afford trouble like that.  It tends to be a low profit industry. 
  

KyAllroad (Jeremy) (Forum Supporter) said:

Having lunch today with a real estate agent friend of mine we started batting around some numbers.  My house is fine, not spectacular or grand, but fine.  The problems with it are smallish rooms and two tiny one car garages and neither of those issues can be easily fixed.

She suggested this:  my house has roughly 75K in equity and my all in monthly payment is $700.  Take a $50K LOC out and use it to put 20% down on another house.  Rent my current house (she has a guy wanting a place like mine to be a small group home for folks with head injuries and the rental income will be $1650 per month).  Mortgage is 700, LOC is 300 netting me a positive cash flow of 650 per month.  Mortgage on a new house of 200K is a payment of $1200 a month.  Subtract the cash flow from the other place and my out of pocket ends up being $550 a month.  

So I'm saving $150 a month and have two homes building equity.  Aside from the usual (double repairs/tenant headaches) reasons for not becoming a landlord, am I missing something?

Choose carefully the company you work with.  Make sure they assume responsibility for occupancy issues  ( damage done by out of control tenants )   Make sure they are fully accredited. Properly staffed. Inspections and qualifications are current. 

If you don't want maintenance  issues there are company's that will maintain your home for a fixed fee. So water heater replacement becomes their worry etc. 

As I've said,  vacancy won't be an issue with a good company. 
 

Properly set up, you'll want to repeat the process as soon as you can. Special needs homes can be good business 

Dusterbd13-michael (Forum Supporter) said:

Can you swing it all on the months the tenant stiffs you? Or if it goes vacant? 

Thats the one that i always come back to,  and that my brother the realtor hammers home with his clients. 

Special needs homes never have a shortage of occupants. As long as people survive accidents with diminished capacity there is a need for places for them to live. 
 

Not just accident victims.But those with military disabilities, handicaps from birth. Victims of terror, assault, violence industrial accidents, etc. 

Some will be insurance settlements or state funded, some will even be supported by family members or union members. 

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In reply to elbapewit :

Tiny houses now come on canoes? I know I shouldn't be surprised but I admit I am.