Financing rental property and using property management services

[GreenER]

There must be threads touching on this but I've not been able to get the search engine to work for me. I am looking for input on how best to finance a rental property. We are thinking of buying an inexpensive property in a town we'd like to move to when we FIRE in 2.5 years. We should be able to put down 20 to 35% on the house we are looking at and should be able to rent it for $100 to $150 more than the cost of a 15 year mortgage at the current low rates. We should also be able to swing the payments if it were to be empty at times. I've looked up rental rates and availabilities and it seems there is also a dearth of rentals available on the lower end of the market. Plan would be to buy now while rates are low and rent it out until we downsize. We have stellar credit but I understand banks don't like to loan on rentals. Would love to hear what experiences others have had with this. Would also like any information on the cost of property management relative to cost of rental and any recommendations on who to use for property management.

[Fishingmn]

Begin here - Real Estate Investing: The Ultimate Beginner's Guide from BiggerPockets

You may want to read a bunch of their information and post questions like this over there.

You really shouldn't think in terms of $100-150 more than the mortgage. You should plug all your costs into a property investment spreadsheet and look at projected rates of return.

I would just check around with lenders. Many should do a 25% down loan, especially if you have other assets to back up the loan. Many investors would do a 30 year loan to get a lower payment to make cash flow better.

Property management is usually in the 8-12% range.

[smokey21]

If you are buying the property through an LLC, interest rates will be a couple of percentage points higher than for personal homes.

If no LLC is involved, try a personal loan as if the house was a second home.

Personally, I like the idea of the 30 year mortgage to start for cash flow. Can refinance to a shorter term when it becomes your primary home if you want.

Long distance landlording can be a hassle. Find a good manager.

[Meadbh]

Check your PMs.

[GreenER]

Thanks Fishingmn, smokey21and Meadbh for all of your input,


I have concluded that we are likely better off going with a 30 year contract if we do get a mortgage. I neglected to mention earlier that the target purchase is a foreclosed home that has been vacated and is currently in the hands of the bank. I am uncertain if we have much chance of getting the house if we low ball them or if they will just be happy to dump it. Are banks unwilling to fuss with anyone needing to finance when buying a foreclosure? Is it sometimes possible to just get the loan with the bank that is holding the foreclosure? We could likely just finance 75% of the purchase price with a HELOC. What are the pro and cons of HELOC over a home loan on our current property? I am starting to read up on the site provided by Fishingmn but so may questions and so little time! Hoping to benefit from the experiences of others on this forum.

[Senator]

The answer to all of these questions, is 'it depends...'. What kind of bank foreclosure is this? REO? Short sale? What lien position is the bank in? Is the bank actually trying to market the property?

The best deals are before the bank actually takes possession of the property.

I have purchased foreclosure properties as REOs, short sales, at Sheriff's auctions, redeemed as a junior lien holder negotiated with the original owner, purchased mortgage assignments, have had owners sign deeds over for $0, etc. I have even initiated foreclosures as President of an HOA. There are a lot of flavors of what people consider a foreclosure.

Are banks unwilling to fuss with anyone needing to finance when buying a foreclosure? Yes, they do that all the time.

What are the pros and cons of HELOC over a home loan on our current property? A HELOC is a lower cost, easier way to finance. The only disadvantage is you put your own home on the line. It's fast, and easy.

[SVHoper]

I have repeatedly used primary home HELOC to buy as it gives the advantage of looking like a cash buyer (short or no contingencies). I believe, I couldn't have purchased at the same price with a loan. However, I then refinance to their own fixed rate mortgage (requires a seasoning period).

My BofA HELOC is variable but can be converted to a fixed.

[clifp]

+1 on the HELOC if you can. There are a lots of things that can go wrong with foreclosures and short sales. I'd say only about 10% of my offers on bank own property resulted in an actual purchase. A cash only purchase is much stronger than one that requires financing in most markets.

[GreenER]

Quote:

Originally Posted by Senator The answer to all of these questions, is 'it depends...'. What kind of bank foreclosure is this? REO? Short sale? What lien position is the bank in? Is the bank actually trying to marketÑ the property? The best deals are before the bank actually takes possession of the property. I have purchased foreclosure properties as REOs, short sales, at Sheriff's auctions, redeemed as a junior lien holder negotiated with the original owner, purchased mortgage assignments, have had owners sign deeds over for $0, etc. I have even initiated foreclosures as President of an HOA. There are a lot of flavors of what people consider a foreclosure. Are banks unwilling to fuss with anyone needing to finance when buying a foreclosure? Yes, they do that all the time. What are the pros and cons of HELOC over a home loan on our current property? A HELOC is a lower cost, easier way to finance. The only disadvantage is you put your own home on the line. It's fast, and easy.

It is not a short sale. It is currently listed by an agent so I would think that means the bank is trying to sell it but I am a babe in the woods on this one. We haven't yet examined the title so I am uncertain of lien status. That is a good point. DH looked on the county record and the bank holds the title. The house is appraised at $30,000 more than the listed price. Photos of house look pretty clean, but we would have a relative who lives nearby and who has managed a rental of his own locally and is also a handyman, go out to check it out for us before we proceed. DH may also fly out to view it but we don't know how much time we have and it seems a good deal for the neighborhood.

[unno2002]

Find yourself a "buyers agent", don't deal directly with the listing agent. The listing agent, and other non buyers agents have an obligation to the SELLER, not you. Find yourself a quality property management firm that knows the applicable law, can do financial checks, ect.. Get them involved with your purchase. They "know" good rentals areas, deals, etc., and they have the contacts with inspectors, mechanics, etc., to get stuff done at a lot less cost then for example you finding a plumber on your own…

[SumDay]

Quote:

and it seems there is also a dearth of rentals available on the lower end of the market

As someone who inherited several "lower end" properties, I cannot stress how critical it is for you to screen, screen, and screen some more, your prospective tenants.

In my experience, people who are interested in living in "lower end" properties may not be stellar tenants. Check court records, past landlords, and their credit score. Someone with a really high credit score can probably afford to rent a "higher end" property. So there's the catch, you've got to find someone who can only afford a low end property but has a good credit score.

You say you want to live in this property eventually. Believe me, you cannot imagine what a family can do to a property, particularly after you threaten to kick them out for not paying. They can threaten you, sue you, and generally make your life miserable all while stealing copper pipe, poking holes in the walls, spray painting the exterior and leaving the place full of trash that you get to clean out.

All I can really say is to proceed with caution. Real estate is not for the faint of heart, and if you don't have experience as a landlord, well, you may be in for a shock. And you say it isn't in the town you live in now? Wow, that's really brave. Of course lots of people do this, but this scenario really makes me nervous.

I'm just speaking from experience, and of course YMMV. Best of luck to you.

[GreenER]

Quote:

Originally Posted by SumDay As someone who inherited several "lower end" properties, I cannot stress how critical it is for you to screen, screen, and screen some more, your prospective tenants. In my experience, people who are interested in living in "lower end" properties may not be stellar tenants. Check court records, past landlords, and their credit score. Someone with a really high credit score can probably afford to rent a "higher end" property. So there's the catch, you've got to find someone who can only afford a low end property but has a good credit score. You say you want to live in this property eventually. Believe me, you cannot imagine what a family can do to a property, particularly after you threaten to kick them out for not paying. They can threaten you, sue you, and generally make your life miserable all while stealing copper pipe, poking holes in the walls, spray painting the exterior and leaving the place full of trash that you get to clean out. All I can really say is to proceed with caution. Real estate is not for the faint of heart, and if you don't have experience as a landlord, well, you may be in for a shock. And you say it isn't in the town you live in now? Wow, that's really brave. Of course lots of people do this, but this scenario really makes me nervous. I'm just speaking from experience, and of course YMMV. Best of luck to you.

Turns out I am probably not that brave (foolish?) either as it makes me nervous too. I am worried that we will miss out on buying while prices and interests are low if we wait until we FIRE in 2+ years and so part of me is wanting to lock something in now. We will likely ended up sticking with plan A which was to spend a year seeing the country which will allow us to check out various locations and opportunities in the process. At that point we would have the cash in hand to avoid having to finance and so could be more agile as well. It has been a good learning experience though in doing the research I have done on this thus far. I plan at least to go further down this rabbit hole as a learning experience if nothing else!

[Cat-tirement]

Quote:

Originally Posted by GreenER We are thinking of buying an inexpensive property in a town we'd like to move to when we FIRE in 2.5 years. We should be able to put down 20 to 35% on the house we are looking at and should be able to rent it for $100 to $150 more than the cost of a 15 year mortgage at the current low rates. ... Would also like any information on the cost of property management relative to cost of rental and any recommendations on who to use for property management.

Quote:

Originally Posted by GreenER I am worried that we will miss out on buying while prices and interests are low if we wait until we FIRE in 2+ years and so part of me is wanting to lock something in now.

A couple of years ago we did something similar, though I wouldn't call the property inexpensive. We had decided on where we wanted to retire, and wanted to get into the formerly hot property market while prices and interest rates were significantly down. We found a house we liked in a good neighborhood and bought it with the intention to rent it out until we were ready to move. Since we were going to immediately be renting it out, we couldn't get a typical loan that requires owner occupancy. Talking with a local bank, we got an investment property loan with a bit of customizing. They required 25% rather than the typical 20% down. We ended up with a 30 year variable rate loan, fixed for the first 10 years at 3%. We figure that we will move in before the 10 years is up, and pay off the loan with proceeds from selling our current house.

One other thing we considered was that if by chance we change our mind about the house, at least it will have appreciated along with the rest of the local market, so we could sell it and buy something else in the area.

Being on the opposite side of the country, we hired a small property management company who charges 8% of rents. Since it is in an area with a now good property appreciation rate and 1% rental vacancy, it's not a problem getting rents to cover all expenses plus the property manager.

Tenants can always be a risk, but we've been lucky. We first rented back to the sellers for half a year while they built a bigger house. Then we rented to a good friend of theirs. Our current tenant was found by the property manager and has also turned out great. (One of the reasons we chose our property manager is that we give final approval of prospective tenants.)