Teach me owning rental property....

I'm considering buying a house just outside of downtown Tulsa. Small 2 bed 1 bath, in a slightly downtrodden neighborhood......but not so bad I'd have a problem living there myself. I suspect this neighborhood will be reclaimed in a few years based on the explosive push to move back to the downtown area.

If I decide to buy it (going to look inside this week), it doesn't need much to be "rentable" and it's cheap. As in the asking price on the house is cheaper than my 2015 BRZ was. So the mortgage would literally be less than what I spend going out 3-4 times a month.

I also have already talked to a good friend who needs a place in a few months since her lease is up.

I know there are plenty of potential pitfalls, but educate me. And as mentioned, if necessary, I could live there myself, and even with the person I would likely rent it to.

Long term plan would be to pay this place off quickly, then buy another to turn into a rental, etc. Running some quick numbers, based on what I would likely rent it to her for + what I would pay on it, I could have it paid off in just a few years.

It will be a business and needs to be treated as such. If you do not know your potential tenants, there are online places that perform background checks for civil and credit. Make the applicant pay the fee for the background check.

You are responsible for all maintenance, so you need to develop a plan to manage that.

You can use Schedule E on your taxes so look at that form to know what you can deduct and what receipts you need to keep.

There have been some very good threads on this board FWIW.

Operating expenses will always be more than you expect. For example -- heavy rains in this area once washed out the retaining wall behind our house, and the cost of having it replaced offset years of rental income profit.

Take a close look at the results of your home inspection (you'll get one, right?) and estimate the time until you'll need to replace big ticket items like the HVAC system, roof, exterior paint, etc., and then budget how much those things will cost you over time. The only way to really win at this game is to buy a property well under market value so that you can reduce your monthly overhead and fatten your profit margin while accounting for these future expenses.

It is not for the fainthearted. I know people who make pretty good money at it and people who say it was the worst experience in their life. The ones I know who make money are a step above a slumlord and ruthless. YMMV.

After your first year (getting in, rented and set up) aim for expected costs to be around 60-70% income. This covers you for vacancy, finders fees, upgrades and repairs. We bought our place to rent to our eldest daughter and her boyfriend so we went in expecting to lose money. They stayed less than a year. We then spent a E36 M3 load on maintenance, repair and upgrades. We could have advertised on Craigslist but decided to go through a realtor to get it rented. Although we had to pay a finder’s fee it saved a lot of hassle on screening people, getting references etc. and was worth it to us.

Also look for hidden fees. Where we rent there is a bi-annual city inspection of all rental properties to make sure they are in good condition, safe and up to code. Where we are it's $50, just a little to the South in another neighborhood it's $250. Things like that add up fast.

Also think carefully of the neighborhood. We looked at several and chose an up and coming area. We could have got more for less close by, bet we don't know how those neighborhoods are going to developed. We are safe in the bet that even if there's another downturn the neighborhood will ride it, it's a hot market. other places not so much.

We don't use a management company as we're only 20 mins away. We have friends who although more than capable of building a house from scratch themselves have 5 properties 2 hours away. For that reason it's worth the management fee so as not to have to shoot half way across the state at the drop of a hat.

Also most rental contracts say that things light bulb replacement, dripping faucet, minor issues are the renters responsibility be prepared for calls to fix all those simple things, especially if they are young and even more so if a single mother. We have other friends with several properties who rent to section 8 people. This is good in that you get guaranteed rent from the government, but bad in that you will be called for the most insignificant thing, many of these people can't even use a plunger on a blocked toilet.

One more thing. GET GOOD INSURANCE and possibly more important make sure the renters have their own INSURANCE, get a copy of the contract. We've been lucky, others haven’t with places being trashed. IF they cancel the contract after you have a copy you at least have something to go after them with in court if you need too for fraud and breach of contract. Don't be afraid to start eviction if people are late paying. Some friends do it straight away, others have tried to play long, be fair and work with tenants, guess what? They are still trying to play catch up with the renters 18 months later.

Don't be scared. We are not looking at this as immediate income. We are looking at this as guaranteed income in 15 years when it's paid off. It's part of our retirement, not our current living finances.

One measure that I read said to expect 50% of gross market rate rents to be eaten up by costs. That means property taxes, management fees, maintenance, etc. So if you rent it for $800/mo, expect only $400/mo to cover debt service. I've run the numbers on a few properties and found that 50% is inevitable if not low.

It sounds like you will be good with the purchase price you're talking about, as long as there's no major deferred maintenance and you can rent it out for the $800/mo range. Check on Craigslist for what comparable properties rent for; I was surprised by how high rents are nowadays.

If you can't get enough cash flow from the property it can make more sense to invest the money. I ran the numbers and couldn't come up with more than a 5% annual effective return on a good quality residential rental property which was low enough that I was happier putting the money in the stock market. A property like you're discussing will often yield more than 5% at a correspondingly higher risk.