Any landlords? I feel like it's about time for this annual thread.

My wife and I are looking to buy a house to live in. We were originally planning on moving into another apartment that my landlord owns, but then she decided to sell the building instead. So my wife and I, tired of renting, decided to start looking for a house. Then we got the idea to buy that apartment we originally wanted to rent.

So we're newbies. We've never owned a place, let alone been landlords. Heck, if it wasn't a college place our landlords lived either next door or in the same building. What questions should we be asking, other than the inspection? Is there a go to list of things to ask or look for? How do you value an apartment building (2 units)?

The things I know:

• the monthly payment for us including tax and insurance would be about $2500.
  Rent for the other unit is $1400. Rented through May and our landlord says that the longest it stays vacant is one month. Knowing the area I believe her.
• It could be rented for more money, but she likes to keep it low to keep renters there a long time and get a good quality pool of applicants.
• Roof is 2 years old.
• Has a 2 car garage and 4 other parking spots. Tenants do not have access to the garage.
• Both units are 2 bed 1 bath.
• We would be living here for 3 to 6 years. After that we'd either sell and roll equity into a single family home that we'd live in, or keep the gravy train rolling from a 15-30 minute drive away (in the single family home).
• Desirable school district.
• My wife would have easy advertising at the hospital she works at for tenants; this is probably the most popular town for employees of said hospital which is a large teaching hospital.
• The current owner, my current landlord, keeps up with everything as necessary. Best landlord I've ever had.

Seriously though, that doesn't sound bad. Although my first question is why sell now? People don't generally sell income property unless it's not making them money, or has reached a point where the responsibility is greater than they are capable of.

Buy your house first - you've never owned a house?

Then buy rental property later. You have time for that as life goes on.

Buy it! 2 bed one bath with income unit adjacent is perfect first home.

Wish I had been that smart.

petegossett wrote: Seriously though, that doesn't sound *bad*. Although my first question is why sell now? People don't generally sell income property unless it's not making them money, or has reached a point where the responsibility is greater than they are capable of.

I haven't asked her yet, but I'm assuming it is because she is getting older, has some mobility issues, and spends 3-6 months a year in Florida.

Buy it. Be selective when getting tenants and stay on top of them. Renters (can be) the worst humans on earth and make your life hell......or they can be wonderful people who you want to hang with and share a beer with.

If you wouldn't offer them a co-drive in your autocross toy, trusting them with half of your biggest investment should be off the table as well.

Mrs VCH and I were just discussing last night, if there's one thing I regret in life, it's not buying my first house sooner. That said, hindsight is very much 20/20, and not everyone's situation is the same.

The property sounds OK on paper. 2500/month (assuming 20% down) means the house is going for, what, around 350,000? I don't know your market to tell you if that's high or not.

One thing that may get tricky is your taxes. We have a rental house, but it's a 1 family and we don't live there. If you're living at your rental house things may get...interesting. How it gets handled in terms of expenses and income for tax purposes. I would highly recommend seeking advice from a certified accountant type person here.

Do you have savings to cover the rent if a tenant goes south and leaves you with $2000 worth of repairs and 3 unrented months dealing with evictions and whatnot? It happens.

Setting rent amount is tricky. Where we are, rents are generally very high in comparison to real estate values. What this tells me is that people who don't own homes and are renting are people who cannot buy homes for...reasons. This makes it tricky to get good applicants. We priced our home's rent somewhat below market and were pretty hard-core about weeding people out. The tenants we have in there now love the place, have told me point blank that the rent I'm charging is probably too low, BUT have been there 2-1/2 years now with exactly zero 2AM calls about crap. I have heard that other houses have much higher turnover. Could I get another 100 or 200 a month? Sure. Would it be worth it to deal with getting new tenants every 1-2 years? Nope.

Does the fact that it's an income property limit financing options?

volvoclearinghouse wrote: Mrs VCH and I were just discussing last night, if there's one thing I regret in life, it's not buying my first house sooner. That said, hindsight is very much 20/20, and not everyone's situation is the same. The property sounds OK on paper. 2500/month (assuming 20% down) means the house is going for, what, around 350,000? I don't know your market to tell you if that's high or not.

The loan would be close to that. I need to do some more research on if the place is worth that. From an income perspective, if both were rented out for what she's renting them now, it is profitable at that price--but not WAY profitable--that assumes looking at a 5 year exit strategy and $2,000 a year in maintenance for the building (both units). But she owns the place outright. It is also kind of an interesting area--a suburb of Chicago that isn't quite a suburb, with good schools (phenomenal when compared to Chicago schools). It is on the blue collar side of a mostly very white collar suburb, but not on the gang-banger side of town. I tend to think that the area it is in is going to appreciate soon just because people want the schools and the city life (which is about what this is) but can't afford it in the white collar part of town.

One thing that may get tricky is your taxes. We have a rental house, but it's a 1 family and we don't live there. If you're living at your rental house things may get...interesting. How it gets handled in terms of expenses and income for tax purposes. I would highly recommend seeking advice from a certified accountant type person here.

We'll have to look into this (first I'll ask my landlord first--she lives in the building that we do, it is a 3 unit and she lived in the one we're thinking about buying twice). She had mentioned that since it is a 2 unit (meaning under a 4 unit) and we'd live there that our taxes would be very friendly--but I think she was talking about the property taxes.

Do you have savings to cover the rent if a tenant goes south and leaves you with $2000 worth of repairs and 3 unrented months dealing with evictions and whatnot? It happens.

Interesting question, and one that I'm still pouring over. I think the answer is yes. If we get a worst case scenario of one of us losing our jobs and the place is unrented (assume indefinitely) we'd be living on Mac and Cheese. If that happened and we NEEDED to do a $2,000 repair? Well, I could make it work, but I wouldn't be happy. But that is the worst case scenario. If the place is rented and one of us loses a job, we're ok. If the place is NOT rented and we're both still employed, we're ok.

Setting rent amount is tricky. Where we are, rents are generally very high in comparison to real estate values. What this tells me is that people who don't own homes and are renting are people who cannot buy homes for...reasons. This makes it tricky to get good applicants. We priced our home's rent somewhat below market and were pretty hard-core about weeding people out. The tenants we have in there now love the place, have told me point blank that the rent I'm charging is probably too low, BUT have been there 2-1/2 years now with exactly zero 2AM calls about crap. I have heard that other houses have much higher turnover. Could I get another 100 or 200 a month? Sure. Would it be worth it to deal with getting new tenants every 1-2 years? Nope.

This is what we're trying to figure out as well. Rather than figure it out, I'm just using the price that it is going for now. In a perfect world if we did this, we'd rent only to students at the hospital my wife works at for 100 to 300 more than it is going for now--but I know as well as anyone that just because someone is a Doctor doesn't mean they're a good tenant.

STM317 wrote: Does the fact that it's an income property limit financing options?

My understanding (and I could be wrong) is that it does NOT because it is under 4 units, and I'd be living there.

My main concern with your plan is the limited time horizon - 3-6 years is below/very close the 'conventional' threshold for the breakeven point for renting vs buying on a single family home (apartments are usually 7+ years). I think it would only make sense to buy the property if you're looking at a long-term investment horizon of at least a decade.

Also, keep in mind that in a lot of places rents have been going up for quite a while now, so the question is - are those $1400 current top of the market rent, or are they top of the market five years ago rent? You need to make sure you have some breathing room if the rents in the area fall (which they will at some point).

I think at the end of the day it boils down to what you want out of owning this property. Do you want the income stream (in which case it should be cashflow positive right away IMHO, at least if you'd rent out both units) or are you speculating on capital appreciation? If the latter, you might be better off with a single family home.

Re the financing, if the current owner doesn't need the whole pile of money right away, it might be worth asking her if she's willing to carry the note if you give her a substantial downpayment. That would give her a nice chunk of change and a better return on her money than, say, keeping it in non-junk bonds or a savings account, plus it's pretty low risk for her as she'd get the property back if you suddenly can't pay. Also might be less of a headache for you than trying to get financing for a duplex.

My previous boss has 30+ rental units, and I am planning to buy one of his buildings as soon as I find out what is going on with my job status.

Here's what I know from listening to him and others:

Number 1 thing is use a rental company. The one I will be using costs 10% until you have multiple properties with them. This is worth every penny though because they deal with all the phone calls, and finding tenants, and everything. Your tenants wouldn't even have to know that you, the person living next door, are the owner.

Taxes: Get a good accountant, let them do the hard numbers work, and it's less stress on you.

Rent: The rental company probably has a good feel for what you can get for rent. Slight side note, my old boss always allows pets in his apartments for en extra charge each month and a higher security deposit. Not many landlord allow pets, so his apartments don't sit empty for long.

Financing: You are correct, since it is less than 4 units and you will be living there you can get very good financing. Minimum down payment 3.5% vs 20%+ if it was a straight rental property.

I'd say go for it if it is as nice as it sounds. When you move out you can keep it and rent both properties, and if you use the rental company it will be very low maintenance for you being 30 minutes away.

Personally, the one I am planning to by from my old boss is a 3 unit, with a 1 bedroom apartment for me, as well as a 2 bedroom and a 3 bedroom apartment to rent out. The 2 car garage will be just for me, no tenants in there. He is currently fixing it up now, new plumbing, new electric, and various other things, so it should be fairly maintenance free when I get it. The market near me is a lot cheaper too, so it looks like I'm going to get this one for somewhere around 160k, with the 2 bedroom rented out for ~$700/month and the 3 bedroom rented out for ~$850/month depending. I am planning to have it setup so that I pay for all of the mortgage like I would my own mortgage, and then any rent will go into a savings account until it is built up to enough of an emergency fund. That way if tenants leave I will not be dependent on the rent income, and will have a stash of $$ for any repairs needed.

BoxheadTim wrote: My main concern with your plan is the limited time horizon - 3-6 years is below/very close the 'conventional' threshold for the breakeven point for renting vs buying on a single family home (apartments are usually 7+ years). I think it would only make sense to buy the property if you're looking at a long-term investment horizon of at least a decade. Also, keep in mind that in a lot of places rents have been going up for quite a while now, so the question is - are those $1400 current top of the market rent, or are they top of the market five years ago rent? You need to make sure you have some breathing room if the rents in the area fall (which they will at some point). I think at the end of the day it boils down to what you want out of owning this property. Do you want the income stream (in which case it should be cashflow positive right away IMHO, at least if you'd rent out both units) or are you speculating on capital appreciation? If the latter, you might be better off with a single family home. Re the financing, if the current owner doesn't need the whole pile of money right away, it might be worth asking her if she's willing to carry the note if you give her a substantial downpayment. That would give her a nice chunk of change and a better return on her money than, say, keeping it in non-junk bonds or a savings account, plus it's pretty low risk for her as she'd get the property back if you suddenly can't pay. Also might be less of a headache for you than trying to get financing for a duplex.

Financing won't be an issue. Not sure I understand how that benefits us offering to do a deal like that with the landlord.

I've just crunched some more numbers. I think it will really depend on if we like it and could see ourselves living there, and what price it comes in at. She gave me a ballpark that is too high. She'd have to come down quite a bit for us to make the move, I'm just not seeing how we can be making money on it if we rented it instead of lived there.

I'd consider it simply based on two things:

1. You can live there and pay ALL the rent if needed
2. You feel it is the "blue collar" side of a "white collar" neighborhood - that's the real estate sweet spot of low cost and high value, like you noted.

My worst case scenario is all based on "economy tanks".

If the economy tanks and your tenants lose their job, and your wife loses her job, what then? What other renters can you attract?

In our case, we're more comfortable spending a slight premium on our potential house because its one of the best neighborhoods for renting to college students and professors. Similar homes rent for between $1450-$1550 and they only last a few days on the rental market. Which, with a %10 rental company fee, leaves a few hundred dollars in our pockets every month, and a few grand to cover expenses at the end of the year.

We could also rent to locals who want to live in a desirable neighborhood without high prices, and Forest and National Parks staff, and we know quite a few people who always know someone looking for a house to rent.

I don't like the fact that your place costs $2500 a month but the rental unit is already kinda high at $1400. If the economy tanks, you may need to drop your rent, or be forced to pay the $2500 yourself, which would be much more difficult than on a $200,000 house with $900 mortgage payment.

I'd be curious to see where you live because I see something like this as a better deal: http://www.trulia.com/property/3235805828-209-S-Towanda-Ave-Normal-IL-61761

PHeller wrote: I'd be curious to see where you live because I see something like this as a better deal: http://www.trulia.com/property/3235805828-209-S-Towanda-Ave-Normal-IL-61761

I live in Chicago, no longer in central Illinois.

Ah ok. Disregard.

My first 2 houses were three-families. Lived in 1 unit, rented the other 2.

Lots of war stories, but no regrets.

SVreX wrote: My first 2 houses were three-families. Lived in 1 unit, rented the other 2. Lots of war stories, but no regrets.

That's always good to hear from someone else. :) I just stopped by the house tonight with my mom to show her around and check out how the progress is coming. It's still getting there, but it'll be pretty nice when it's done. The layout for the first floor unit is a little strange, but it is HUGE.

Many European folks bought three flats in Chicago; lived in one and rented the other two. I didn't know you were in Chicago (said Normal) - go for it.