Buying house from my current landlord?

Question

Hey, everybody. I'm an inspiring investor from Louisville, Ky and I'd like to get some feedback on making my first deal. For the last couple of years I've been renting a 3 bedroom house with 2 others and it's time to break the cycle. Although it's been a while since the owner has mentioned it, he said that he may be willing to sell in the future. If this is a possibility, it would certainly be the most convenient way to start out, especially since I have a lot of stuff. My current roommates have been great for as long as I've known them and I know they are financially stable. Hard to find better tenants in my opinion.

Living there for the time that I have, I know that it doesn't need any major repairs and he's even updated several areas as well. House hacking would free up what I currently spend on rent and what doesn't go to repairs, would go toward another investment opportunity. As much as I'd love to get it for 70-80% of the market value, he may not be willing to let it go for that...although he may.

That being said, what would you all do in my position? How close to market value would be worth it since I'm mainly interested in cash flow? I know you should make your money going in, but assuming I can't, would it be worth my time? I know without numbers it's rather difficult to say, but I'm just looking for ideas. I'm trying to do a bit of homework before I sit down with them. I'd hate to look back at this deal at a later date and realize I only did it for convenience reasons. It seems a great option now and although I could be making more elsewhere, I'd still be living rent free in a house that I'm already settled into.

I appreciate everyone's time and I'm glad to be part of this group. Hopefully, I join the status of investor in the near future. Cheers.

Kelly Bankes · Answer

I'm in the Camp Taylor/Prestonia area.

Glen Nash · Answer

Hey KC - I did this long ago with a house I was renting and one way I found to lower the price was to remove the 6% agent fees off the top since no agents would be used in the transaction. Saved me $6300 right up front. A good deal for both of you - You save 6% and he gets market value with no hassle of finding a buyer.

K.C. Marsh · Answer

Much appreciated, guys. I agree that I need to run the numbers for sure but I thought I'd get some quick pointers first. I would like to speak with a few lenders to get an idea on where I'm at, but my credit is good and I'll have a decent down payment. I could even borrow some from a family member and put down 20%. Other than not having to pay PMI, I'm not sure how beneficial this would be though.

Yeah, I highly doubt I could get 20-30% taken off, but it's nice to think about. I'm sure there are many investors that wouldn't even consider it if they couldn't get this discount. I think I'd be happy with 10%. I recall him saying that he still has a mortgage himself, although I'm not sure how much is owed on it. He's hard to read and sometimes seems like he'd love to part with it...other times not.

Kelly Bankes, what area of Louisville are you in? I'm sure your year into investing has been invaluable as I hope mine is. I just hope I don't pay too much either.

K.C. Marsh · Answer

I really appreciate all of the responses. It's been a busy couple of days due to Thanksgiving but I finally have a bit of time to relax. I hope everyone enjoyed their holiday.

Thanks, Jerry, I'll have to look into that. All I've gotten is Zillows estimate, although I'm not sure how accurate that is.

@Jd Martin, I completely agree that he would have to have some incentive to sell to me below market or get rid of it when he is getting cash flow, but I really do think it's too much hassle for him. He's told us that his last tenants were a nightmare and we're the ones making it easy on him. If we were to leave, he may not want to find new tenants. I do know that his network is rather small since he's asked me several times if I knew a plumber/electrician/handyman, etc, so he would solely rely on an agent to sell it. I just don't think his heart is in it. There is only one way to find out, though.

@Maggie Tasseron, I'd probably refrain from telling him my REI plans, but I would tell him that I plan to buy a house next year. I'd let him know that I do love the place and may be willing to purchase it, if the price is right. If not, I will be looking elsewhere. I've spoke with both of my roommates about it and they are fine with it, as long as rent doesn't go up now, lol. I've known one for many years and it's mutually beneficial for him to stay.

@Jim Wilcox, I've been thinking a lot about that lately. The house is located in Hillview, KY for those of you familiar with the area. Although it wouldn't have been my first choice of areas to invest in, I've read about several people on BP liking the area. It's pretty far away from the heart of Louisville, but that isn't necessarily a bad thing. It isn't an area I see a lot of housing for rent, but there's not many vacant ones either.

@Neal Bratton, I could easily come up with 10% down myself by the end of next year, so I know I could at least get an FHA loan. I would just have to borrow extra if I were to pay 20% down, which would prevent me from paying the mortgage insurance. This, I could borrow from a family member in cash. I'll certainly keep you informed on how's it's going. I may wait until after Christmas to talk with them.

Thanks again, everybody. Cheers.

Neal Bratton · Answer

@K.C. Marsh I think you should definitely pursue your current property. Talk to a lender, talk to the owner, and of course...Run the numbers several times. Paying way below market is great, but getting your feet wet with something you are comfortable doing is also worth something. You don't have to hit a homerun first time up. Singles are fine and still get you on base.

Also, I'm sure the lender will take you in depth, but most banks won't let you borrow the down payment. If you were using your parents money they would probably have to sign the loan also.

Looking to forward to hearing some more details on this as you examine this opportunity further.

James Wilcox · Answer

@K.C. Marsh welcome to BP and REI. Seems you know now what you need to do and others have given some great advice. House hacking is a great way to start into REI. However, it does not mean the current place you are renting is a great Investment property. Run your numbers! You need to be prepared for when you no longer live at the property or your roommates move out. Think long term. Just take action because whether you get the property or not it will be a great REI learning experience.

Maggie Tasseron · Answer

My first piece of advice would be that you be completely honest with your landlord about what your goal is. If he doesn't want to sell the property to you now, are you going to start looking for a different property to buy? Don't expect that just because you have been a good tenant for a number of years, he will sell you the property at a discount; why would he, if he can get more from a stranger? You might first ask him what he wants for the property but before you do, I would suggest you try to get an idea of the market value by checking out comparable properties in your area. Talk with him about getting an appraisal as that would happen in any case if you do decide to make him an offer. Once you have a price established, you will know better what you want to do. Hopefully you and your landlord can come to a mutually beneficial agreement, whether or not you buy from him. You also need to consider whether your relationship with your roommates will change should you become their landlord. Best of luck to you!

JD Martin · Answer

If you can't make a house you already live in cash flow, with two roommates, you wouldn't want to do this deal. With rates at current levels, and assuming your LL has the house priced at market and doesn't own it outright, he should have cash flow from you and your roommates. Let's say the rent is $1200 and the LL has $1000 monthly expenses including mortgage. You and each roommate pay $400 in rent. Now you become the owner and let's say the expenses stay at $1000. You still cash flow $200 because now you pay only $200 while roommates still pay $400.

These very rough numbers won't work if conditions aren't right. If the guy owns the house outright and is renting to you cheaper than what the market would allow; if the guy owes so much on the house that you have to eat his shortfall; if your roommates move out and you can't replace them; ETC.

Personally, I think you are best off finding your own deal rather than assuming you are/can get a deal because you live there. Unless the LL is at retirement age or is sick of LL, what would be the point of him selling you a house that has healthy cash flow? I have my tenants ask me occasionally if I would be willing to sell them the house, to which I usually reply "We'll see", because it's unlikely they can afford to buy the house for what I would need to sell it - which would be, at a minimum, my original investment, equity appreciation, plus the difference I would need to purchase something equivalent in today's market. For example, just because I bought the house at 35k and it's worth 45k today doesn't mean I'm going to sell it at 45k, unless I can replace it with something equal or better at that price. If I need 60k to get back in to the market, then I need 60k out of the unit, a price the tenant is usually unwilling to pay.

K.C. Marsh · Answer

That certainly is a good incentive for us both. Was it a fairly simple transaction without an agent? I'm assuming your attorney would be doing a majority of the work, right?

Also, would it make sense to get an appraisal done before negotiating a price, since I won't have an agent to approximate it for me? All I have to go off of now is online resources. I know it's required to get one before the lender approves the mortgage, but wouldn't it be good to have one earlier?

Kelly Bankes · Answer

Greetings from a fellow house-hacker.  I have house hacked for a year and in retrospect, I paid too much for the property.  However, I have had a year's worth of experience that I wouldn't have had.  I am satisfied with my property, but might have waited for a better deal if I had it to do again.

Buying house from my current landlord?

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