Should I buy this rental?

Question

Hi guys,

So I have lived in a house, in an expensive neighborhood for 10 years,  my  child grew up there so I am very attached to that house and so is my son. It is 550K now, rented but its too big 5 bdr 3 baths so its always a big family that wants it and usually they trash it. I was thinking, if I want to sell it, the only way to persuade myself to sell it would be if I bought a smaller house in that area. A smaller house, 4 bdr 2 baths cost around 500-550K as well... I found one for 450K... It will rent for 2-2.5K...  The mortgage payment will be 3.5K. If I buy it I will be losing 1K per month... So my plan was to wait till the market goes up and the house where my kid grew up becomes 800K then I will sell it and at least I will have that 4bdrs little house there in the same neighborhood... At the same time, by the time the market increases in price I will be paying 1K per month towards the mortgage to cover what the rent wont cover, so its 12K per year of loss (if I get a good tenants and nothing breaks), then who knows even if the market does go up... I am not sure... At the same time, if I dont buy an alternative, then I will never be able to depart with my expensive house that is a bad rental... One smart person, who is a super smart investor said: "Its just a box"... I get it, but I am an idiot and feel like crying when I think about selling the house where my kid grew up, even though its a bad rental...What would you guys do? Would you buy a smaller house that will bring a negative cash flow so you could eventually depart with the bad rental?

Nathan Gesner · Answer

Let me summarize to see if I understand the situation correctly.

You bought a 5bed/3bath in a nice neighborhood. You owe $250,000 at 3% interest so it cash flows very well as a rental. Tenants keep trashing it and it's hard to deal with. You think it may be easier to sell it and use that money to buy a smaller house, enabling you to live in the neighborhood you love so much. However, mortgage rates are high so buying a 4bed/2bath will lose money.

1. I don't think the house is the problem. It is very, very rare that a family trashes one of my large houses. I think you need a better system for screening applicants and then holding them accountable when things get off track.

2. I never recommend selling a house unless you are selling it to invest the money in something that provides a greater return, or you are experiencing financial difficulty and can't get out of it through other means (e.g. a part-time job).

Have you considered living in the 5bed house and renting out a couple of the spare rooms? That enables you to live in the community you love, gives you extra income to pay off the house faster, and you won't have tenants trashing the place.

Mary Jay · Answer

Thank you so much guys, for all your help!!!!

Sam Yin · Answer

It would also give you the option to live in part of it, separated from the tenant.  It cost less than you think to do this. If you are short on funds, consider a HELOC on it so that you avoid changing your current rate.

Sam Yin · Answer

Based on your post, you have internal struggles that no one on this forum can help with.

HOWEVER, based on your post, consider spending a little money to break up the house into either a 4/2 + 1/1 OR  BETTER YET, a 3/2 + 2/1. Then you have a duplex to rent out. Make way more money. AND when you are ready to move in, take down the wall and make it into your original house, OR BETTER YET, when you are ready to sell, sell it and it will likely command more money than your 5/3.

This will allow you to keep the house until to can settle your feeling and make a decision on what you want to do. You ay find that your children does not really care what you do with it.

Bill B. · Answer

Are you using a PM? This sounds like a failure on their part. I have a 3,200sf 5bedroom him that’s been a rental for 15+ years. It’s never been trashed. The worst that’s ever happened is getting stuck with an excessive water bill. I didn’t have to pay it but the water company makes me keep the water bill in my name now.

How much is the rent on the 5 bedroom? You say the 4 bedroom costs as much as the 5 bedroom, does it rent for just as much? If the 5 bedroom rents for more I would never buy a smaller home that costs the same but rents for less.

You talk about waiting until the $500k home goes up to 800K, that’s a 60% increase. That could easily be 10+ years from now. That’s way too far in the future to try to plan for today. Buying a second worse rental won’t make up for a first bad rental.

If you truly plan to move back there someday could you furnish it and rent it mid-term fully furnished? If you don’t plan to move back you either get a better PM or you sell or better yet exchange it for a better property. You don’t buy another one. (Throwing good money after bad and all that.)

Good luck.

Mary Jay · Answer

One more thing, the house where my kid grew up, I owe on it 250K at 3% interest... Now interest rates are 6-7, so if I will be buying a smaller house it will  be more expensive

Mary Jay · Answer

Another thing I struggle with is that at one point the big house where my son grew up was 800K, and now its only 550k, so that's another issue I am having in addition to an emotional attachment to that house. So if I wait till the market goes up then I will be loosing 12K per year on the smaller house that I am trying to buy to replace the big one

Should I buy this rental?

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