I was at a friend’s house yesterday, enjoying all the perks of homeownership vicariously: a driveway, garage, yard, neighborhood, walls to paint whatever color you please. It felt so luxurious.
Someday I’m sure we’ll jump on the homeownership bandwagon. And when that day comes, I will love each of those homeownership luxuries like nobody else. But right this moment, it doesn’t make sense for us to buy a home just yet. However, we’d still like to do something with the money we’ve been saving over the past few years.
We’re looking into options. We’ve already maxed out our Roth IRAs for the year, and now we’re looking at other ways to make our money work for us. One of our goals is to find ways to make money passively. As we said in Monday’s post, we probably won’t be early retirees. Realistically, we just don’t think retirement for us will happen until at least our 50s. But that doesn’t mean we’re just going to sit around and do the bare minimum until we get there. Earning passive revenue could help us live easier lives until we get to retirement.
One option we’re considering is buying a home for the sheer purpose of renting. But here’s the thing. We haven’t done any research yet. We’re weighing the obvious pros and cons, and then we plan to dig a little deeper.
So we wanted to ask you guys what you thought. Should we buy a rental before we buy our own home? Is owning a rental something others have considered, looked into, feel completely opposed to?
Hmm, interesting question. I think the biggest factors to consider are whether or not rents are stable/increasing in your area, what the rental market is like generally (who would your renters be? is there a large student population you could tap into? how easy will it be to market your property?) and of course if you can get a deal on place. I don’t think not owning your own home precludes you from owning a rental property by any means. We own our home and our plan is to turn it into a rental in a few years. So, maybe you could go the opposite route–buy something to rent out now and then live in it later?
Those are great considerations. As we’ve looked into it a bit more, we’ve realized there are so many important factors!
A couple of thoughts…
1) Roth IRAs are maxed out; great. What about 401ks? Have you maxed those out — even beyond any employer match? Does your employer offer a Roth 401k? That is where I would start. If applicable I would then look to max out my HSA.
2) Circumstances will differ for everyone, but in general I would say don’t buy a rental before you buy your own home. As an investment property the bank will likely require more than the typical 20% down, and rates won’t be as good. Even if you aren’t ready to buy for yourself yet, I wonder if a bank required 30-35% down for a rental how long that might delay the eventual dream? Something to consider.
3) An alternative scenario that we’ve explored is purchasing a home as your primary residence, living there for one year (as required by most banks giving you a mortgage), and then finding another home to purchase and move into while keeping the first and renting it out. Now you’ll have a rental with a lower mortgage rate (as low as if it were a primary residence), and you won’t have to put up as much of a down payment as you would’ve if you bought it as a rental from the get go (in theory this could be as low as 5% down for each… living on the wild side). Yes, you’ll have to move, but we’ve found a neighborhood we like that we could move within and not mess with finding new schools and friends. We haven’t quite pulled the trigger on this plan, but we’ve been close a few times–just waiting for the right house. An added bonus is now that we’ve owned our own home for a year, I have a much better sense of what’s important to look for in our next house (rental or not) and also how to better navigate the lending process.
I like your idea, TT. As we’ve looked into it more, I think that’s a more likely route for us. We were thinking of something more vacationey that we could airbnb, but the location we were looking has some stipulations that are making it seem like it’s gonna be a no-go.
I’d have such a hard time emotionally buying a home for the first time and not living in it! Just something to consider, whatever you decide to do.
I know! Whether I wanted to or not, I’m sure I’d get emotionally attached.
There is absolutely nothing wrong with buying a rental before you buy your own home. But with that being said, Don’t get too attached to the rental, they have a tendancy to get kind of destroyed and if you look at it with a “awwww, it’s our first house perspect” you’re bound to be disappointed. Buying a rental would be a super smart way to get some “passive” (and I use that term loosely) income!
Yes, it would be very hard to stay emotionally detached, but that’s the way to go with rentals!
Rentals are A LOT of work even if you do have good renters. My parents have owned rentals all my life. They get a lot of calls on a daily basis, there’s always fixing something when someone moves out-at least cleaning and most likely painting. These days I think the difference between the payment and the rent is minimal. In my opinion it just wouldn’t be worth the income.
Thanks for your insight, Halsy! I think about how often I contact our landlord — poor guy, ha! We were looking more at a vacation-type rental, which would hopefully help the income made be worth it. That said, after looking into it further, I don’t know that we’ll be moving forward with it!
Unless you’re really ambitious I would hire a property manager to help you find/manage the property and tenants. Property managers often only get paid when you get paid (aside from some potential upfront costs), and their typical fee is only 10% or the rent. That’s very cheap considering that you now are getting paid to do nothing but pay your bills on time (and, assuming they’re a good property manager, you’ll get paid on time too!).
As for your home-buying strategy, as first-time homebuyers you may be able to save money on the purchase. Also, there’s the idea of “house hacking” where you buy a multi-tenant home and live in one of the flats while renting out the rest. This means you can be a home-owner with a $0 mortgage and much higher Return On Investment each month. And if you hire a property manager, none of the other tenants ever have to know that you’re the owner! 😉
Our landlord recently hired a property manager for us (probably because I was contacting him all the time, ha!), and I have been kind of unimpressed with the company! For how much they get paid, they sure don’t do very much! I’d have to really look into make sure we hired a standup company.
I REALLY like your idea about a multi-tenant home. We have family who does that, and it’s a pretty sweet setup for them financially. That said, I’d have to be sure I was willing to give up some of my privacy!
We considered buying a duplex, living on one side, and renting the other. My husband convinced me not to do it, but I am still like the idea of duplexes. Especially since we live in a university town, you can almost always find a renter, even if you’re picky. In the end, we bought a house that has a separate guest house on the property that we rent out. It was probably the best rental option we could have hoped for.
Nice! I think that sounds like the idea option! You only had to pay for one house, but you’re able to get rent without giving up your own privacy!
My boyfriend and I definitely talk about about owning a two family when we first purchase a home. His parents did that, and were able to save a lot of money by renting out the other side so that they were able to buy a house that they loved a few years later. We always say that we would review the crap out of potential tenants before approving one though. Ultimately, I think it would be important for us to have a family like ours on the other side, or at least people who were interested in being long-term renters.
Great idea. The more we’ve thought about, the more we’d like to do something like that, too. Imagine not having to pay rent or a mortgage because someone else is paying YOU most of it. Sounds like a dream. And I agree — I’d do some major background checking, too!
I like the idea of owning a rental property, but I’m not so sure about the work involved compared to the profit. It’s still something I want to investigate, but first I want my own house! 😉
You’re tellin’ me, sister! I’d really like to be a homeowner before long!
Get Rich Slowly posted about this today (your posts were literally back-to-back in my Feedly)! http://www.getrichslowly.org/blog/2014/09/24/buying-rental-property-sometimes-getting-rich-means-taking-it-slowly/
This happened to me, too in Feedly!!!!
Over at GRS, they don’t seem to be pushing investing in a rental property….
Ha! That’s crazy! Thanks for sharing!
I don’t ever want to own a house and rent it out for the exact reason why I love renting: I’m responsible for fixing everything. When the air conditioner breaks, it’s me the renters will be calling. When they decide to wreck everything and disappear, it’s me that has to get everything fixed back up again. I looooove being a renter so much because I have less responsibility when things break (as long as I didn’t break them), but I would never want to switch places and become a landlord. Side note: I just re-read that and it made me sound like the type of person who wrecks rentals and then disappears, which is entirely untrue. Oops.
I know… If I had myself as a renter, I’d hate myself. I call or email our landlord about any little thing that goes wrong. There’s a lot to consider before we make any big decisions on the matter!
Why don’t you buy a duplex? Live on one side and rent out the other?
That’s a good idea… it’d be nice to be able to make one purchase that we could live on and still get rental income from it!
I think rentals are a great investment when you can jump on a great deal. That would mean you’ve got the resources to comfortably handle everything. Ideally, an all cash transaction would be best, unless you’re okay with leverage.
I call myself an accidental landlord. Our first house was a 2bd/1ba home that we grew out of, but with the housing crash in full swing, it appraised for half what we bought it for. The decision was easy at that point. While I wouldn’t want to repeat that scenario, I have enjoyed having a rental for the past few years and am planning on more. I want to save to purchase in cash, unless we start seeing foreclosures pop up again.
Thanks for the insight, Danny. I know a few accidental landlords, and they all seem to enjoy having a rental. We’ve still got a lot to think about before we make the decision, but it’s nice to know that others have done it and fared well!
Most of what I would have said has already been stated. So I’ll just add that one of the best resources I have found about real estate investing is biggerpockets.com. Great and free way to learn about it before jumping in. As some people have said, the first step to having a successful rental property is buying the right property. Whether you manage it yourself as a landlord or hire a property manager is up to you. My recommendation if you are considering being a landlord is to buy a property that is within a hour of where you live, preferably closer. I managed my brothers house for a while and it was about an hour’s drive, which made it more difficult and costly to get out there to show the place and do repairs. Or if you buy a multi-family (between 2-4 units) and live in one unit, that is a great way to have others pay your mortgage. If I were to go back to when I was just getting out of college, I would pursue that route.
Thanks for sharing that site, and thanks for the tips. We have a lot of research we still want and need to do! And you’re totally right…. it’s all about choosing the right property to invest in!
Interesting idea. We have a rental property kind of by default – we have a condo we’d like to sell, but until the market improves, we’re renting it out (we also own a house that we live in – check out our website for more details). I don’t know that we’d choose to be landlords if we had the option. It’s not a huge money maker for us and it’s true that it can be a lot of work. However, we bought it at the height of the bubble, so the market now is quite friendlier to buyers/investors. I think researching the market in your area and checking out comps in your neighborhood would give you a better idea of if this would specifically work for you.
Thanks for your thoughts, Laura. It’s always nice to hear from someone who has firsthand experience!
One thing to consider is how long you plan to stay in the area. I’m not opposed to owning rental units, and it’s something we’re considering. But we already own a home and we intend to stay in this area.
I would not want to buy a rental property, then move to a different state and have to hire someone to take care of problems & oversee it. So if you’re not ready to buy a home to live in because you think you might move in the next couple of years, I wouldn’t buy a rental home. I think you need to plan to be in the same place for 3-5 years. Just my opinion…
Emotionally, I’m also of the opinion that it would be nice to have your first home purchase be the one you’re going to live in.
True. And very good point. After thinking it over these last few weeks, I think I’d really like to own our own place first, too. If we’re not ready to buy, we’re not ready to buy. No reason to pull the trigger on buying a rental just because we feel the itch.
Hmm. As much fun as it sounds, I think if I were in your shoes I wouldn’t do it.
I’m assuming that you guys would pay cash for the house (and have a dedicated emergency fund for the rental as well), as that’s what you’ve talked about doing for your first home purchase, in previous posts. Without knowing what price range you’re looking at, or the exact rental market, it’s harder to make an educated assessment, but let’s say for fun that you guys bought a $100,000 house and rented it out for $1500/month (again, just a guess). At $1500/month, it would take you about 5 years to make back your $100,000 before you even started making a ‘profit’. Then when you consider that you’d still be writing a rental check every month, you’d only be ‘making’ a few hundred bucks at most. Sure, that’s more money than you wouldn’t have had otherwise, but you’d have to part with thousands and thousands of dollars for years to get there. I think parting with a very large sum of money for more than a couple of years is quite a long time, especially when you don’t already own a home. Yes, you would still have an asset that’s accruing value, but to me it’s not the same as liquid cash.
And if you wouldn’t be putting 100% down, then I wouldn’t even consider it. Too much risk. If the tenant trashed the place and disappeared, you could spend months trying to track them down to no avail, and that doesn’t even consider the cost of getting the place rent-able again. You’d be on the hook for the mortgage and your own rent until you could get a new tenant.. Of course, that’s a worse-case scenario, but even if you had a small mortgage (putting 80% down), you’d be eating into any ‘profit’ and delaying how long it would take to break even and start making money, even with ideal tenants. But, I don’t think you guys would go the mortgage route anyway.
In summation, if you’ve got enough dough to buy a house, buy one for yourselves first. If you want to move in a few years, then rent it out and become landlords that way. Way less stress on you guys and way, way less risk. =)
Thanks for the tips, Miranda! What we were looking into was buying a vacation home to airbnb from week to week throughout the year. It was kind of complicated, so I didn’t go into the details in the post. The more we’ve looked into it, though, the more I think we’ll wait and not pull the trigger on a purchase like that. I’d really like to just get settled enough that we can buy or build our own place!
A lot of our friends seem to be pursuing this strategy- they buy a “starter” home, live in it for a few years, then move to a bigger home and rent out the first house. This can be a good idea IF 1) you own the rental outright or can easily cover both mortgages and 2) if you pretty much luck out with your renters. Do not do this if you are relying on the rent to make the mortgage! I am watching my sister, parents, and friends do this landlord thing and it is just astonishing to see how much work it is. For instance, I spent a decade renting and never thought paying rent was optional.
And you can’t just kick people out, even if they are not paying rent or keeping chickens in the living room. I was surprised about that. I always assumed that if i violated the terms of my lease, my stuff would be out on the street. It is all very complicated. Study up on your local laws before you take anything on.
Very interesting… you’re totally right that it’s a lot of work and surprisingly hard to find good tenants. The idea of being a landlord really doesn’t appeal to me! The more we’ve looked into it, the more I think we’ll hold off on purchasing a place until we’re ready to buy our own!
Buying to rent is an amazing idea. It is definitely something that I hope to do in the future. Many of my friends and relatives swear by investing in duplexes or triplexes. Live in one side and rent the other.
Yep. The more we think about, I think if we do decide to do a rental, it will be something like that!
I dunno… I’ve never seriously considered owning a rental property because pretty much everyone I’ve known who has done it says it’s a major PITA (pain in the arse.) You have tenants to deal with, you have to collect rent, deal with repairs, occasionally evict people – in other words, it’s a real job – yuck! So, I think I’d second the property manager idea if you do decide to go that route, because trying to do it all on your own – especially when you don’t have any experience maintaining a home – might not exactly be a “passive” experience!
Totally true. I doubt it would be a passive income. I know some people who have had a great experience with renting and others who haven’t. The more we look into it, the more I think we’ll hold off for the time being!
Own to rent? I dunno guys. There’s a lot to consider. Such things as:
(1) Would you have to deal with rent control laws, limiting how much you could charge for rent and/or increase it as time passes?
(2) Would you have the time/money to maintain that property for your renters?
(3) Would you be able to charge enough rent to cover your mortgage and other costs (eg., maintenance, taxes, insurance, utilities, etc.) and still be able to earn sufficient income to make it all worth while?
(4) Would you be able to keep going financially in the event that you couldn’t always find a tenant?
(5) What if Johnny was out of work for some reason? Could you still be able to carry on?
(5) Would you be able to successfully and expeditiously evict a so-called “renter from hell” if you had to?
And I’m sure that there’s other pluses and minuses to consider.
If you really wanted to pursue this strategy then I would at least first try to contact others who have successfully rented out to tenants so as to get their input. You can’t get enough info from what your blog readers here will tell you. You have to speak to those with first hand experience in your specific area.
Our married son has a young family and is gradually paying off his mortgage. To help him do that some time back he renovated his basement into self-contained living quarters (with it’s own kitchen appliances, washroom, and separate entrance) and rented it out to a single tenant (whom he first carefully pre-screened). This arrangement has worked out well since my son is able to monitor things to ensure that his tenant acts properly, doesn’t trash the place, and faithfully pays his rent on time.
So this idea can work out just so long as you thoroughly check things out first.
Great questions to consider, Rob. The more we’ve looked into it, the more we’re thinking of waiting to buy until we’re ready for a place of our own. The idea of owning a home and renting out a portion of it, such as a basement or guest house, seems to be the only option we’re really considering at this point. Very cool that your son has been able to do it successfully!
What if you bought a duplex and then lived in half of it?
That’s a good idea, one we’d definitely consider!
Interesting question. Obviously there are pros and cons with owning the home you live in: on the plus side, the stability is great (your landlord can’t kick you out) but you also have to deal with your own maintenance and taxes. If property prices rise then you’ll make a killing, but if they fall you’ll be stuck in negative equity. And what happens if you get a great job offer out of town? Then you may be forced to sell and you may end up being out of pocket. There are a lot of things to consider when buying property, and buying for investment purposes is completely different to buying a home.