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Updated over 6 years ago on . Most recent reply
Under contract for our first property!
My husband and I are going to be landlords! We've chatted about this over the years, but over the last year we resolved to either make a purchase or give up the dream.
We made an offer on our first property yesterday and today it was accepted. We are both a bit stunned because we felt like we made a very low offer and did not expect it to go through. So, now while pleased that we got it, we are wondering what comes next.
We own our home, so we understand the process of financing this. We are putting 20% down and getting a conventional mortgage. But, we don't have a lease written up, we don't know how to go about screening potential tenants and what standards we need to consider. How do you run a credit and background check?
Do we need to put this in a LLC, and how would we do that?
How should we collect rent?
How do we organize the finances for this property? we will keep an emergency fund available for things that come up, but is expect we should separate this from our personal accounts.
Oh my, I don't want to be in over our heads. We need an education and we need it quick!
Most Popular Reply
Angela:
Congrats on going farther than 95% of the general public in your financial education.
First comment, don't panic. Just keep moving foward and learning as much as you can. If you do, you will be fine.
If your offer was just accepted, you are still probably 45 days or so away from having to answer all the screening questions. There are lots of resources on BP. I can share with you some others if you message me.
Regarding LLC vs. no LLC, you are probably going to have to close in your personal name, given you have a conventional mortgage. Because you only have 20% equit in the property, you will not be a target for any kind of lawsuit so do not freak out. Most important thing at this time is get good insurance. I like at least $500K liability. From there you can evaluate going the LLC route or getting a larger umbrella insurance policy. I've don both, but ended up doing the latter more often.
Regardless of whether you choose LLC or to keep it in your personal name, keep a separate bank account and track financials separately for the property. That will allow you to correctly do your taxes. With one property you can probably track via spreadsheet but better to use an accounting package. If you don't have one already, get a CPA for help with taxes. They will probably save you more in taxes than they cost you in fees.
Good luck on our new journey!
Angela:
Congrats on going farther than 95% of the general public in your financial education.
First comment, don't panic. Just keep moving foward and learning as much as you can. If you do, you will be fine.
If your offer was just accepted, you are still probably 45 days or so away from having to answer all the screening questions. There are lots of resources on BP. I can share with you some others if you message me.
Regarding LLC vs. no LLC, you are probably going to have to close in your personal name, given you have a conventional mortgage. Because you only have 20% equit in the property, you will not be a target for any kind of lawsuit so do not freak out. Most important thing at this time is get good insurance. I like at least $500K liability. From there you can evaluate going the LLC route or getting a larger umbrella insurance policy. I've don both, but ended up doing the latter more often.
Regardless of whether you choose LLC or to keep it in your personal name, keep a separate bank account and track financials separately for the property. That will allow you to correctly do your taxes. With one property you can probably track via spreadsheet but better to use an accounting package. If you don't have one already, get a CPA for help with taxes. They will probably save you more in taxes than they cost you in fees.
Good luck on our new journey!
How exciting! I felt the first few years were like a rollercoaster. Some times we were sitting back amazed that we brought in some income without putting in any hours that month. Other times we were cursing and wondering what the hell we got ourselves into. Like anybody we made a lot of mistakes, but when a problem comes up you address it, learn from it and be better prepared for the future.
Having a place like BiggerPockets to ask advice would have been really handy when we were starting out. Best of luck to you!
Read some books to help you learn the ropes and then figure it out as you go.
Try these:
https://www.amazon.com/Landlording-Auto-Pilot-No-B...
https://www.amazon.com/Book-Managing-Rental-Proper...
Good Luck!
@Angela Smith: Congrats to you. I just purchased my first rental recently as well and I freaked out as soon as my offer was accepted. Even the lender was laughing when she noticed how nervous I was. But, one step at a time. Make sure you sit down with your real estate attorney and CPA because they are a vital part of your business. My attorney has helped me a lot with decision making. In my case, I inherited tenants and didn't know how to proceed. But you will do great, just continue to read and ask questions.
Closing today! The house is in great shape with a new roof in 2017, new furnace and air last winter. It needs some lipstick in the way of interior painting and exterior landscape clean up. The budget for these issues is 2-3K for supplies and we will do the work mostly ourselves. We might hire the landscape clean up for fear of poison ivy. The goal is to have these things addressed by the end of the month so we are ready to screen tenants for September move in.
The payment including principal, interest, insurance, and taxes is at $380ish a month. It will easily rent for $750 a month. We will ask for a deposit equal to one month's rent. We will screen our tenants to avoid anyone with a criminal history, we will verify employment and will ask for previous landlord contact info.
100% of the rent after expenses will go directly into an account to build up an emergency fund and save for our next purchase.
The payment on this house is so low that we can afford to pay it with the income from our salaried jobs. So, it feels safe in the event that we have a delay in renting it or a tenant that needs to be evicted.
Now, I need to find a good screening tool, a rental application and lease agreement.
We decided to not go the LLC route at this time, as this is our only property and our insurance agent wrote us an umbrella policy.
Question: When you sign on a new tenant, do you collect first and last month's rent as well as a deposit? I'm concerned about asking for too much up front as it is back to school time and moms and dads don't necessarily have that much available this month.
nervous indeed. But I am in this with my husband, we have been cautious with this purchase. We can afford it even if it goes empty which would be the worst case scenario. I guess the tenants could trash the place, but I feel like we can absorb that too should it happen.
Still, it is an unexplored territory for us.
Years ago, we had a couple purchase the house across from the street from our residence to be their first rental property. They over leveraged themselves at the buy, then they went in and put in higher end finishings than what the neighborhood could support. They had to rent it at a lower monthly amount than they anticipated and the renters were very hard on it. The renters had 2 large german shepherds, one of which ripped the guttering and some siding off the back of the house. Their teenage son put holes in the walls, painted graffiti all over the place and, let's just say used his bedroom closet as an outhouse. Local law enforcement was very familiar with this family. It was horrible! The landlords did not visit the property, did not screen the tenants. After the year's lease was up, the owners, of course, did not renew, they patched it up and sold it at a loss. I never heard if this couple ever returned to landlording.
Anyway, I learned quite a bit by their failure at implementing their plan.
Our property is in a blue-collar neighborhood, about 50/50 in regards to owners and renters. It's in the city, but the area is low crime. about 6 blocks north is a very rough area, but it is separated from us by a rail yard that is about 4 blocks north. This forms a natural barrier on the north, going south its a long way to the rough area. West has industry and east has one of the hottest neighborhoods in the city.
Tell me about your property.
@angela : Wow, I am glad you learned what not to do. Sometimes agents and investors can be unrealistically optimistic which is dangerous. I believe that is where research comes in. I decided not to hire a property manager but simply fulfill all the administrative and management roles myself while working full time. It is quite the learning experience. One tenant is section-8 which I am starting to see why some landlords prefer not to rent to them, my issue is dealing with the housing authority personal, not the tenant. So many rules and regulations. It takes away from my autonomy. For instance, before I raise the rent, I they have to approve it even though it is not coming from their voucher, the tenant is paying the difference. Right now the rent is below market rent so I can afford to rise it up. Let's see what the housing authority have to say. My goodness!