Buying house to rent out for retirement

[Jordan Patten]

My wife and I have been looking into buying a new construction home with the idea of renting it out...paying down the mortgage with the rent and using the rental income or sell the home in 25-30 years as part of our retirement income.

We narrowed down to a growing area in Florida where we can buy a new construction and make about 1 percent a month on the rent. After paying mortgage/insurance/taxes have around $200-300 extra a month. We plan on building the extra money up for expenses in the future for the rental property and paying the mortgage off a few years faster.

It looks like a HELOC on our current home (paid off) would be our best option for down payment. We do have the cash for 20 percent down on a rental property though if we go that way.

I want to be a good landlord. I had bad and good experiences with landlords when I was younger before I was able to buy my own house.

I'm a little concerned about income taxes every year and finding good tenants. Any advice on that or in general with someone just getting started?

Also, is it good practice to hire a management company and STILL be slightly involved with the tenant as a landlord with fixing minor things, being available sometimes with issues, helping choose repair company as issues arise or is it better to just let management company deal with everything and make all decisions?

Thanks in advance!

[Nathan Gesner]

Jordan, I think you're calculating your cash flow incorrectly. Cash flow is the money you have left AFTER paying all expenses, which includes setting aside funds for future maintenance, capex (roof, carpet, furnace, driveway, and other big expenses), vacancies, property management, etc. A good rule of thumb is to set aside 50% for those expenses, then pay your principal and interest from the remaining 50%. What's left is your cash flow.

In my experience, most primary homes or new construction are not going to produce a good return. You'd be better off finding something used, off-market, and in need of some updating. You can buy it below market, put money into the renovations, and then have a home with instant equity and stronger cash flow. Just a thought.

Most property managers don't like owners to stay involved. The owner tends to know way less than they think they do and it creates more work for the property manager. If the doorknob needs to be replaced or the home needs some touch-up paint, you may be able to handle it. But if the toilet needs to be snaked, you won't. As a property manager, I don't want to spend my time trying to reach you to have a discussion about what you may or may not be able to do at any given moment. I want to get the property fixed properly and quickly and move on. This is even more important when you're not living in the area full-time. It's worth talking to the PM to see what they will allow and whether your plan fits into their processes.

[Stephen J Davis]

I have seldom seen new construction that cash flowed. Check those numbers again to be sure. Don't buy anything that is negative cash flow. I like to run my single-family myself. It is very easy if you know what you are doing. Make sure you take a course on real estate investing and property management. This stuff is not intuitive at all. Also, I would not use a HELOC. I would refinance my home and buy a bunch of single-family rentals with the money not just one. Good luck!

[Corby Goade]

Personally, I like to use a HELOC to pay for the entire purchase and do a cash out refi after six months. Typically give you some good leverage on the acquisition, but rates are so low right now that it could bite you down the road.

If you hire a PM, don't supervise their day to day work for you. For one, it defeats the entire purpose- if you are going to be interacting with the tenant and making minor maintenance decisions, then you are wasting money on the PM. 

Secondly- the PM should be providing you with anonymity and passivity. You being involved completely eliminates both of those benefits. 

If you want to be involved and learn the process, I'd suggest you buy a rental closer to where you live and self manage- you can be as hands on as you want and learn along the way, but don't do that through a PM. We have some clients that want to do those things and we have had to respectfully part ways. It's too labor intensive to work with an owner who wants to be intimately involved- your intentions seem to be fine, but PM is really a volume business, there's not much money in one off contracts. If you have one where you are netting $100 a month but have to be in regular contact with the owner as well as mitigate the inevitable problems that arise when then interact with the tenant directly, the juice is just not worth the squeeze. 

Good luck!

[Sarah Brown]

Let the management company manage.  That is what you are paying them for; to handle the small things and the day to day.  Read through their contract with you.  It should spell out the things that they will handle, and the things they will seek your involvement in.  It doesn't make sense to spin your wheels doing what you pay some else to do. 

HELOC is a great option for downpayment. It's a very flexible loan that allows you to take out what you need, and not everything all at once. You can refi later on down the road if you don't want the variable interest rate.

Make sure when doing your calculations, your cash flow makes sense.  I, personally, would not feel comfortable with only $200/mo after my mortgage payment.  It doesn't leave a lot left over for any surprises that may come up, or any increase in property taxes that happen from one year to the next. 

[Theresa Harris]

Why do you want a new home?  There is often a premium associated with buying new construction.  I'd suggest looking at an existing home.  While your plan is to hold it for 25-30 years, you can always sell it after 10 and buy another one.

As for property managers, they should contact you for larger repairs (the $ amount varies depending on the contract) otherwise they just go ahead and do the repairs themselves.  If you want to manage it yourself, then get a good team together so you have someone there to do the repairs as they arise.