Dug Myself Into a Hole

[Account Closed]

Houston, TX. I decided to jump in and buy a house and now I feel like I have backed myself into a corner. I bought a single family house with a detached apartment for $250,000. I'm living in the apartment and renting the house. I am struggling to find tenants because they are uncomfortable with the landlord living on site. The mortgage with taxes and insurance are $2550 a month. I can get $2000 a month for rent. I would estimate my rent by myself would be $1000 a month. I've only owned the property for 6 months and the mortgage is killing me. I don't know if its worth it to keep or if I should sell and move on l. Would love to hear some opinions from the community!

[Jordan Moorhead]

@Account Closed something else has to be going on? I've done what you want to do multiple times, in fact I'm doing it right now. Are they telling you they don't want to live there because you do? Just tell them you're the manager and you live on site to provide great service.

[James Barry]

@Kyle Fadness

Kyle, you can handle this.

The beauty of starting small is your mistakes are also small. Sure, this deal won’t cash flow well but no ones RE dreams are achieved in their first deal.

In my opinion 2K rent is very high. Someone can rent a luxury apartment for that much. Get a stable tenant and keep them there. No turnover, keep them happy and in the unit until you can sell and do your next deal.

[Hunter Vigneault]

Sort of feels like piling on to an answer here, but the pricing is likely too high. Without running comps (I don't live there anymore but am still a Houston Realtor - I'd be happy to check for you if you'd like), I assume the $2k number could be reasonable for someone that wants to rent a single family home. However, because you are also living onsite you need to view it in context with apartment price points which are probably substantially lower.

I'm not sure who financed the property for you, but I don't think there is any harm in asking what would be required to change the term of the loan and recast it for 30 years. Assuming they can do it, you'd likely need to pay some fees, but if you can wrap them into the loan and it keeps your head above water it would probably be worth it. Just make sure you understand how they would manage that process and how it might appear on credit reports, etc.

[Account Closed]

I agree with much of what everyone else has said. 

It would be hard for you to hide that you are the landlord. Most states require the name of the landlord or their company name to be put onto the lease. If you have a company name you might get away with it.  You are correct, many renters do not like living next to the owner. With this said, I also agree that the rent seems high, although there is no way to really say without doing a market analysis for the area based on the current rent market.  Ultimately, you might be ahead moving elsewhere and renting out both of the units. I agree that you should look into that mortgage amount as well, it seems off to me. Wishing you good luck!

[Austin Whitmore]

@Kyle Fadness

If the fact that you live in the adjacent apartment is a point of contention, I wouldn't offer up that information. I wouldn't lie about it, but I would treat it as a don't ask don't tell. Even after they move in...I would just tell them you are the "caretaker" or "property manager". That is probably way less intimidating than "owner".

On a side note, you must either have really high taxes or a 15 year mortgage based on your numbers. If that is the case you may consider a refinance to 30 years. That would give you way more of a cash flow buffer.

[Michael Robbins]

I think you should hire a reputable property manager to lease the property.  I would still have the property manager disclose that you are the owner is also a neighbor.   You might also ask your future property manager to analyze the furnished rental market and short term lease demand as well (6-12 month lease terms). 

[JJ P.]

I don't mind the sin of omission or downplaying that you live adjacent, at least during the initial phone call, but not beyond that.  I would not call myself a "caretaker" if I were the owner to someone that I'm entering into a business relationship with.  That would start the relationship out with a lie.  The contracts are going to be in your name, so the lie would be exposed almost immediately, and surely very shortly after they move in.  

Also, as enumerated many times, it's not the mere fact that you live next door that would be a deal killer for many tenants, it's what happens after that.  Do you respect their privacy?  Have reasonable, neighborly expectations that are not excessive due to proximity?   Is it comfortable or uncomfortable for them to have you so close by?  

[Greg M.]

Originally posted by @Account Closed:

TX property taxes are insane so my escrow is $847 a month. 

That works out to a 4% property tax rate.  According to the county website, max is a little over 2%. 

Are you sure this number won't lower shortly? When I was forced to escrow tax, not only did I have to pay 1/12 of the annual bill every month, but they also required a buffer of something like an additional 30%. 

Is it possible that this also includes a supplemental bill for this year only? Ex. prior owner was paying taxes based on $100K valuation. You buy at $255K and the government wants the property tax difference between $100K and $255K on top of your normal payment. 

[Abbas H.]

Congrats on purchasing your first property Kyle! I'm a real estate agent/investor in Houston/Austin and would be happy to pull comps for you to give you an idea of what you could rent it for. 

A few thoughts that come to mind, can you get a 30 yr instead of 15 year mortgage? Is it possible for you to get to 20% down? Just DM me and I can talk through options you have. 

Your last resort should be to sell as you will lose 5-10% on closing costs alone. Not to mention the supply/demand have both taken a hit due to COVID. You have options, we just need to find which one fits the best.

[Tom Kaser]

@Bill Brandt

Yes Bill, thanks for pointing this out. The PITI mortgage payment seems way high. Look into refinancing.

[Moises R Cosme]

1. How much would the house sell for?  2. Have you considered renting both units?  In general, it looks like you have a good situation; you can get $2K for the house and it looks like you think you can get $1k for the apartment.  Cash flowing $500 per month is a strong start for your first rental.  If the house is worth $330,000, you will have 25% equity.  I recommend hanging in, identify the problems and work toward fixing them..  Identifying the problems on your first deal and starting to trouble shoot them will help you down the road.  

[Ryan Landis]

@Account Closed as others have mentioned, living onsite should not be the issue. Given the situation, it might just be worth lowering the price so it fills ASAP. Then when you get a better grip of what to do/build up your reserves, you can explore trying to get a different rent, etc.

Vacancy hurts real bad - the rent amount can usually solve that.

[Paul Kennedy]

@Kyle Fadness if they feel u comfortable with a land lord living on the property then I wouldn’t suggest them to be good tenants in the first place.

[Account Closed]

This is probably not the case with this property, but I just wanted to throw out there that you can also scare away good tenants if your price is too low.  They wonder what's wrong with the property, they assume something is bad.  Oddly, sometimes when you raise the price, you can get better interest from better tenants.

It always just depends on the market.  You just really need to have a finger on that pulse and really know your market.  But, a little experimenting doesn't hurt.

I actually learned about the idea of raising prices from a marketer who worked for GoodWill, of all places.  He told me that when items aren't selling, instead of lowering prices, they raise them.  It gave buyers the idea that something is worth more than they thought, and therefore, it must be desirable.

I found this to be the case when we lowered prices during the 2008 crash years.  I learned that you can actually lower your price too much.  

It's a lot of trial and error and a lot of learning your tenant base.  That takes time.  Nobody knows this stuff overnight.

[Destiny Protzo]

@Kyle Fadness

How much are you asking in rent. Also what is the square footage, bedroom, and bath count?

[Michael H.]

@Kyle Fadness

Welp, nothing left to do but house hack! Start renting by the room for 500 to 600 a month. Thats why I do with a huge 5 bed house I have

[Sharon Foster]

Property taxes in Houston are often over 2.55%. Since the state doesn't have income taxes so property taxes are extraordinarily high. I'm guessing you don't have much down and PMI to get to that payment. I walked from an investment in Houston for that reason. I think it's great advice not to identify yourself. Also make sure you are using Zillow to market that way you hit all the major rental sites. A PM would be worth it, but it's expensive in your situation. If you can get out and make a profit, do it and consider it a success! Whatever you do once you move on from this don't give up. If you decide to walk, I know an excellent realtor that's out there who can help. A realtor can give you rental comps. Your rental rate might just be too high.

[Craig Kamman]

Pricing will overcome any objection.  But before you drop your pricing to far, try to find out the real objection.  It might be something you can inexpensively correct.  

If the rents you can receive are still too low to support the property; you will either need to sell it or figure out a way to increase rents by improvements or additional revenue streams or ride it out. 

Good luck.  It will make you wiser and stronger once you get through this one.  

[Aigo Pyles]

I don't think that they are not renting it because of having a landlord on site. It could be the price of the rent, the location of the property, the house itself are the factors that could affect why you are having a hard time getting a tenant. 

[Kyler Cook]

@Kyle Fadness

Talking for myself here. I’d LOVE having the property manager close by. I don’t do anything illegal and would love the ease of access when it comes to maintenance and things. Maybe the tenants your finding would really like to do shady stuff haha

[Stanley Ezeadi]

So if you're strategy is not working. Take a step back and see what others are doing in the area. I live in Houston, TX so if you provide a zip code I may be able to steer you in the right direction. I agree that maybe a family would not be comfortable with living with someone in the garage. Why don't you try renting by the room instead. I do this with my House Hack and I profit by doing it.

I would move into the house and rent the rooms out instead. And then also rent out the garage apartment. Shoot me a message if you'd like and we can get more specific based on your area.

[Sean McKee]

There have been a lot good information put by other people regarding your current situation and getting tenants.

I would recommend reading Brian Chavis’ book – “Buy It, Rent It, Profit!”. He has concept called SEOTA(Strategic Evaluation of Target Area ). It’s basically an easy way to organize information to determine demographics and what types of rentals to purchase. This might help you out in the future so you have an easier time attracting tenants and maximizing income. 

Good Luck!

[Account Closed]

@Kyle Fadness

I just wanted to give an update for everyone that helped out/anyone who stumbles across this thread in the future.

I took some of y'alls advice and went with a realtor to help get it rented out. Also, just as most people suggested, I lowered the rent to $1850 and got the place rented out within a few short weeks! I did disclose that I was the owner while showing (didn't really want to start of a hopefully years long relationship with a fib).

Anyways, the new tenets have been great and have no problems with the owner on property, they even help out a lot when I'm out out of town

Covid had me pretty stressed out back when I originally made this post, but now things finally seem to be falling in place! I'm thankful for everyone help on this, I didn't expect to get so many replies

No regrets jumping into REI and gonna ready to start the next deal soon!