My first home - investment property?

Question

Hi all, newbie here. I have read many threads and sincerely value the experience and wisdom of many of you.

I am a 24 year old young professional, I make 30k/year. I have 30k sitting in the bank and am interested to buy my first property, however I have about 10 months on my lease at my current rental address. My rent is very cheap so I dont mind staying where I am but I am itching to invest my money in property since I am attracted to making additional income on the side and I love doing DIY projects.

There is a house asking price 67K$ in one of the marginal, but up and coming parts of town for sale. There is a very strong rental market in my city due to the local university. The property is tax assessed at 74K, down from 94K the previous year and is currently listed with a real estate agency for rent for 650$/month. I assume this means that it is at least in rentable condition. Assuming I put 20% or more down my monthly mortgage payment would be less than 300$/month which is very affordable for me, and I would still have money left over as a buffer and for possible repair/improvements that are necessary.

My main questions are:

1) Is it foolish to buy an investment property before buying a house for a primary residence? Will I be losing out on major tax incentives?

2) Should I get a buyers agent or do you think I can negotiate the deal myself? I know the seller is motivated and I hope to get a better than asking deal, I'm just worried I dont the language of deal making or I might inadvertently do something wrong to screw up the deal since I am a newbie.

3) On the MLS sheet it says "Lead based paint exhibit available" what does this mean? It also says "RENTAL RESTRICTION: YES" what does this mean?

4) I am viewing the house tomorrow with the sellers agent, what red flags should I look for regarding the condition of the property, what should I say/not say to increase my haggling leverage?

5) How necessary is landlords insurance? I hope to rent to university grad students but since it is a college/party town is the cost of landloards insurance worth the safety net it provides? I was  thinking that I could just reduce the asking rent and be really selective about the tenants.

Tom Dillinger · Answer

^ I am not sure of my plans for the long term. For now I am just thinking about needing a place for myself to live and potentially rent out in the future, although if I find good deals I would go with whatever makes sense.

I have seen the property I talked about and while some things are nice, it is big, clean, location is good, has a working hvac system, it has some of what I would consider major problems.

It was originally a shotgun box house built about 100 years ago, like many houses in this town. The norm here is for people to put add on additions to the house. In this house they kind of turned the house into a frankenstein with oddly shaped additions, in some rooms the floors are slanted at a high angle (im not sure if they were built that way or the foundation is bad), the kitchen floor slants down and bows in the middle. They put new carpet 
and linoleum on all the floors, covering up potentially nice hard wood floors and/or hiding whatever problems are under there. They made the ceilings too low in some of the rooms, they might be able to be raised though. The walls are paneling and not dry wall which to me indicates shoddy construction. There are 1.5 bathrooms and they are both shoddily constructed additions and would need to be redone if I was going to live in the house. The concrete patio in the backyard is slanted towards the house and water is pooling along the house, growing algae in it. The next door neighbor right next to the house has a barbed wire fence and keeps construction trucks infront of his property 24/7 which is shady.

The question is, is the cheap price tag worth all these serious problems.

Michael Czepil · Answer

Tom,

I too live in a college town and will invest in the market here in the near future.  And I agree with the other members, insurance would be a critical part of putting your deal together.  Are you looking to purchase multiple properties there in Athens in the future?

Steve Babiak · Answer

TOO LATE for you to get a buyer's agent for this one, since you are going in to see it with the listing agent.  If you want to then bring a buyer's agent into this one, it will cost YOU whatever fee that buyer's agent expects to be paid.

I assume that this is to comply with Federal law with respect to lead based paint disclosures for pre-1978 construction.  The RENTAL RESTRICTION could be a number of things - HOA approval required, the town might have some requirements, could be an over-55 community - you should ask the listing agent what that is supposed to mean.

You are new, and students are irresponsible, and as a result are responsible for LOTS of damage.  But your lender will insist you carry insurance anyway, so don't even try to skirt this.

Steve Babiak · Answer

Although that is usually a safe assumption, I can tell you that in the last year I looked at one that was listed both for rent and for sale.  It was a real dump, needed LOTS of work, and could not pass the inspection needed for Certificate of Occupancy in that town so that  a tenant could occupy it.

James H. · Answer

Tom Dillinger,

Based on your income, you will not get any tax benefit from owning your own home. I say this because you will not qualify for a home loan for which the interest you pay will exceed the personal standard income tax deduction fo about 4500 just for being a living breathing soul. Unless, of course, you have cumulative itemized deductions that already put you at or above the standard deduction. You have to have a HUGE mortgage and/or have LOTS of other deductions to benefit from the mortgage intrest writeoff deduction.

Dave M. · Answer

You're welcome Tom. Let us know how the showing goes today.

Occupancy requirements vary so check with your lender.

Lynn McGeein · Answer

Tom,   The lead paint disclosure is standard on homes 1978 and before.  The "Rental Restriction:  Yes" is potentially a HUGE issue so don't ignore it.  Also, a buyer broker would probably be invaluable in your case as they will help you through the process if you have a good one, not someone who is just looking for a commission but wants to help you invest.  Do not get locked in or sign an exclusive agreement with someone as most will pressure you to do that but usually will agree to only the property they've showed you.  Also, if you have a mortgage on the property, landlord insurance will be required, and even a free and clear property can burn down, so it is a necessity unless the building is worthless or you don't mind losing that much money.

Buying an investment property first would only be a choice, in my opinion, if I didn't qualify for any special First Time Homebuyer programs in my state, and with your income, you should research it before deciding not to buy owner-occupant first, maybe move in, rent out rooms and then convert it to a full rental a few years from now.  You could get something now for 0 down with some of these programs, then take your savings and buy an investment property 6-8 months later after you have taken advantage of the first-time home buyer programs, which won't be available if you buy investor first.

Tom Dillinger · Answer

Thanks for the excellent advice Dave. I do not believe it is currently rented, the house was on the market for a while, it didn't sell and I assume what happened recently is that a real estate management company was hired and did some renovations and just recently starting advertising for renters.

Is there a set definition of owner occupied, such as a length of time you must live in the house before renting? I think you are right though and I should intend to live there first to get the OO benefit and to fix the place up and appreciate its value.

Dave M. · Answer

Congrats on having $30k available at your age and income level - and the right mindset to make your money work for you!

Have you asked your landlord about modifying your lease? I would never advocate breaking the lease, but there may be a work around if you find a place to purchase. Won't hurt to ask. Also, since its cheap you may want to stay put for now.

If you can buy a place with owner occupied finance, you will save on rate and down payment. So that is always a good option, especially since you are handy. You could buy a place and fix it up for future tenants, or buy a multi-unit, or even a mutli-bedroom place and self-manage...just need to consider if you are willing to be hands-on with college kids.

Questions about your specific property/from your post:

Is it CURRENTLY rented for $650? If so, how long is the lease and rental history?

1 - Depends, as I mentioned OO financing has benefits but there are tons of threads debating this topic...try a quick search.

2 - Buyers agent won't cost you anything but may not be necessary for you if you feel comfortable negotiating. Don't sign anything before having your attorney/advisors review. If you have questions post on BP for feedback.

3 - Not sure about lead paint disclosure in GA but this seems fairly common everywhere, BUT "RENTAL RESTRICTION: YES" means there is a restriction on your ability to rent the place. May be minor, or may mean you can't rent at all - need to find out before proceeding.

4 - Look for condition - don't look at cosmetic stuff. Look for roof leaks, broken fixtures, anything that would cause you to personally not live there. Does the place smell ok? Would you pay $700 per month to live here (knowing what else is available to your tenant base).

5 - Landlord insurance will protect you if the place gets burned down. No amount of screening will protect you from this, don't cut corners on insurance.

...also, reducing your asking rent will only reduce the quality of your tenant pool, I suggest pricing high to get people looking for higher end properties (that's why I mentioned $700 above instead of $650 btw - if you have a high quality product people will pay a premium)...