Buying over budget a safe risk when rent is already guaranteed?

Question

Hi all, I'm looking at purchasing my first property and am looking for advice/thoughts. I would be purchasing a condo in the Dallas area and it would be a rental. The condo would be a bit out of my price range but would have guaranteed tenants for at least the first couple of years.

My biggest hang up is that I'm currently, and would continue, living in an apartment. Assuming worst case, I could end up with a mortgage and apartment payments which would consume about 50% of my monthly income. I could technically make both payments if need be but it would be a big stretch.

Would this type of risk normally be considered a 'safe risk' when rental income is guaranteed or is this something to stay away from? Btw this is my first post so let me know if there is any more info I should include. Thanks!

JD Martin · Answer

The only thing guaranteed is the big sleep at the end of the road. Everything else is just probabilities.

Tyler Hodgson · Answer

Morgan - don't let the % of your income scare you. You are going to be counting on that rental income. If my units went vacant right now my 3 mortgage payments would equal about 80% of my W-2 income. There is definitely some risk there. (and the next property I buy will put me over 100%) I mitigate this risk by purchasing properties that are in very desirable rental areas and in good condition. I vet my tenants to make sure that when I do get a lease in place I can "count" on that rental income. Unfortunately, even that is not guaranteed. And don't even get me started on the unexpected repairs and maintenance. You must be prepared for all this. You need to make sure you have enough money in savings to cover all of those payments for about 6 months before you dive in. If my units went vacant I have enough savings to make those payments for 6 months. I am confident I can fill those units with new tenants in less than a month...so I have a pretty good buffer there.

Read through some more forums and blog posts and look at some other BPers deal analysis on rental properties. Make sure your analyze all the numbers and have a strong deal with strong cash flow. And again, have some savings in your emergency fund, just in case that friend decides he doesn't want to live in your condo anymore.

I hope this helps!

Chris Clothier · Answer

Can you expand a bit on the 'guaranteed rent'?  How is the rent guaranteed?  I have an idea, but I don't want to make assumptions.  I can give you some more advice, but I'd like to hear your answer on this first.

best, chris

Chris Clothier · Answer

Well, that took a turn I wasn't expecting, but just as bad.  I think the only way you can go into this investment is if you can honestly afford both payments every month.  There are no guarantees and the one you listed above is very risky.  Probably very unlikely that you will have your property occupied and paying if you are banking on people you know who are moving to the area.

Beyond that, if the properties are in the right area and if rentals are even allowed then this might be a good investment, but as you can see, there is a lot of reaching and justifying here.

I would pass on something beyond your reach and keep looking.  Opportunity is out there.

Morgan Winslow · Answer

This question may be suited for a separate post...but I'm still a bit curious as to when the risk might be worth it in a similar situation.

Ignoring all previous conversation, it's hard for me to think of a situation where worst case scenario I wouldn't be on the hook for close to ~50% of my income (Rent + mortgage w/o tenant). Is this the norm for investors starting out? I realize there is always risk but I'm trying to understand what an appropriate balance might be. The following are the options what I currently see

1) Purchase quality property for rental and worst case I will be paying Rent + mortgage (~50% of income)

2) Purchase a much cheaper property...but not feel comfortable with its quality (~35% of income in worst case)

3) Wait a couple more years to get mortgage much lower. Or accumulate larger nest egg for worst case. I'm still young so this is definitely an option...But I'd enjoy starting sooner rather than later

Morgan Winslow · Answer

Thank you all for the responses. I was having a lot of these thoughts in the back of my mind but it helps to see them from others.

Thomas S. · Answer

Condos to begin are a poor choice for investment in rentals, Condo fees usually kill the cash flow, increases are very common as well as special assessments which often are in the thousands.

Also as a landlord you must be aware that a lease is not a binding agreement, tenants will walk away at the drop of a hat. Additional renting to a friend in the end will either cost you money or a friendship. It is the number 1 do not do it rule for investors.

You are making a number of mistakes which you will defiantly learn if you go forward.

Dennis Carvalho · Answer

You're making a lot of assumptions.. What if the condo board decides to not allow rentals or they increase your HOA fees. What if you tenant gets sick can't pay the rent and can't move out either. Never rent to friends things can go south real quick. You need an established cushion of cash as a landlord because as they say shit happens.

JD Martin · Answer

OK. Holy crap that is nothing like a guarantee. That's just pillow talk. If I had a dollar for every tenant who filled out an application and said they "definitely" wanted the place, I'd have a hell of a lot of dollars. People have good intentions but get cold feet. Some are outright liars. Some just don't have the gonads to tell you they want something that you're not selling. My prediction is that you buy this place and neither one of these people end up renting from you.

Do not do business with friends.

Bill Gulley · Answer

Only rent guarantee that would mean anything would be in a lease to the government and that can change as well, don't put weight on the guarantee part but you may have a great tenant.

You have to take risks in business, if you can't sleep, your risk tolerance is too low.

You need decent cash flow in the beginning to build up savings for such times, they will happen but the question is, for how long?

I agree with Chris, more info is needed. :)

Buying over budget a safe risk when rent is already guaranteed?

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