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Need advice for possible rental property
Old 03-15-2008, 09:35 PM   #1
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Need advice for possible rental property

Hi everyone - have put an offer on a property that I intend to rent out, probably until I retire from the military (8 years). The money that eventually comes out of this house will be the money that I put towards my own home after I retire, and I may possibly live there at the end of my career (this would not be a permanent location).

Offering $140k for the property, asking price is $142,500. This is a condo unit, very nice, in a 10 year old gated community. I will be able to keep it rented (I'm pretty certain) 95% of the time, as it's close to base, and this area will stay in demand over the next few years. Only way that it could not is if there is a huge drawdown, and I don't see that happening for a while.

Wells Fargo is offering 6.625% for the mortgage (it's this high because it's considered an investment property. I was originally quoted at 7% but was told my credit score brought it down some), a 30 year loan. Principal and interest should be $672, HOA Dues $134, Taxes $50, and I figure about 10% paid to a property manager would be about $86. I would need to rent it for $950 to break even, and I should be able to get that, possibly a little more. I will put down $35k, leaving a $105k mortgage.

Here's the question. If I deploy again, I could throw all of my pay towards this mortgage, and with another bonus that I should be offered this year, could come very close to paying it off in about a year and a half. Is there any really good reason not to do this? To me a rental property is higher risk than mutual funds, there is a lot that could go wrong. After paying it off, it would be straight profit, and that would cover anything that could go wrong, plus build towards retirement.

I would not get a mortgage tax deduction (Not sure if you do for a rental anyway), but would still be able to deduct HOA and property manager's dues. I would also be able to claim depreciation over the years, which I think is pretty significant. Any good reason not to? Is there something else I need to consider?

Also - I have rented my own property out before and sold later, but think this time I will keep all expenses separate. Would you recommend opening a completely separate checking account for all expenses?

Thanks for the input.
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Old 03-15-2008, 10:11 PM   #2
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"Offering $140k for the property, asking price is $142,500"
In all the figures you have not included repairs, at list price + PM overhead. They will get expensive very very fast.

Search absent landlord on bbs2 . mrlandlord.com. I don't think this is a good deal for you.
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Old 03-15-2008, 10:19 PM   #3
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What is PM overhead?
With the condition that the place is in and the age of the appliances, I would not expect any major repairs, but am prepared if, for example a hot water heater goes out, at least for the next 2-3 years. If I could pay the entire thing off in a year and a half, I would have all of the money needed for repairs. I'm not looking to make a killing here, but I do want to pull back out the money I invested (Initially about $40k) plus appreciation at minimum. I figure either way (pay it off in under two years, or under the normal mortgage payment plan) that at least a good chunk of principal would be paid down over that 8 years.
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Old 03-15-2008, 11:13 PM   #4
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I would recommend keeping you bonus money in other investments and then tap it if you need it to handle issues with the rental. 6.625% is a pretty good rate for 30 years and you can hopefully do better in other investments that also have the advantage of being more liquid. I have 5 rental units and the one thing not in your equation is the true turnover costs. I've had a couple occassions where a renter who was very good went very bad and caused $3k to $6k in damage, and then the place went without renters for 3 months because of time to do repairs and it was winter when people don't move. Its good to have some liquid assets to tap if something like this happens to you. Be sure to validate how much rent you think you can get. My cash flow is currently about zero for the 5 units because the rental market dropped off a cliff right after I purchased them. But, the rental market is now coming back after all the people who should have been renting are now walking aways from their homes. Also, be sure you can handle being a landlord. I think it actually builds character, but many people have trouble making the tough calls when tenants don't act responsibly.
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Old 03-15-2008, 11:23 PM   #5
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A couple additional things...You may want to form a LLC and then quit claim the deed to your LLC so you have a liability shelter in case a tenant tried to sue you for something. Why do you say you won't get a mortgage deduction? You should get one for the interest. If you make over a certain amount annually then I believe you can't take the depreciation and losses on the investment toward your earned income because the investment property is considered "passive income." Check with your tax professional on this for the specifics. I am in the situation where I can't take the passive losses against my earned income right now. But these losses are allowed to accumulate for your life time so after you retire, and your rental becomes a significant portion of your income, you can then apply the losses against your rental income, which gives you an income boost in retirement.
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Old 03-15-2008, 11:29 PM   #6
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Quote:
Originally Posted by Slarty View Post
A couple additional things...You may want to form a LLC and then quit claim the deed to your LLC so you have a liability shelter in case a tenant tried to sue you for something.
If you want to hold the property in an LLC, you either need to acquire the property in the LLC name or get your lender's permission to transfer the property (some lenders are reluctant to do so, and in any event will probably charge a fee). If you have the loan and title in your name and you deed the property to an LLC -- even one wholly owned by you -- you will probably be in default on your note.
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Old 03-16-2008, 08:38 PM   #7
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Thanks for the answers. They accepted the offer. I expect that the price I pay will be level with the appraisal. (I'm not looking to be a slumlord, just for a safe investment outside of the stock market/mutual funds). I just need to keep it rented now. I think I will take the recommendation and keep the bonus money to the side just in case, and pay down the principal as fast as possible. I don't mind making a payment once in a while when it's vacant - it would be like making the payment towards my own home. What I do not want to do is pay for major, unnecessary repairs.
I'll check into the facts as well about the LLC. The last thing I want is for someone to slip and bust their butt on ice at the front door and lose everything.....
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Old 03-16-2008, 08:44 PM   #8
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Also what I meant about the mortgage deduction - was - "If I paid it off in a couple of years, THEN there would not be a mortgage deduction" - I don't see any reason to not go ahead and pay it off if I can, despite what I would get back thru deductions??

The only detriment that I can see by paying it off is - not only would I not get the mortgage deduction after it was paid off, but most of the rent would be profit, and - I'd have to check tax brackets, but that might push me up. I guess I could take the equivalent of the profit and fund my TSP, helping bring the bracket back down.
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Old 03-18-2008, 11:42 AM   #9
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One thing that someone mentioned to me who has done this for 20 years.
All of his tenants have told him that he is not a slumlord, because he took care of the place BEFORE they moved in.
He replaced any outdated plumbing (or cleaned out lines if it was new), and took care of any outdated wiring, and of course patched any holes in the walls.
He said that these 3 things had left him with only receiving 2 calls (in 20 years) anytime after 4pm to "come fix this" or "come fix that".
We're in the process of doing it right with an investment property ourselves.

Planning on paying it down while you're deployed is an excellent decision!
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Old 03-18-2008, 07:06 PM   #10
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Yes, I agree with you - I'm buying the kind of place that would attract someone like me as a tenant. I did rent out a place in Hawai'i after living in it for 3 years. Rented it out for two and it was immaculate for the first renter. I had a great tenant and no maintenance required over the two years it was rented out. I have no desire to be a slumlord.
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