Would you risk it?

Question

Would you risk:
Living in SC while having 2 rental properties in MN (one of which was previously your residence)?

Vacancy being my main fear: PITI on 1st = $375, PITI on 2nd = $825

1st Rental cash flows nicely and seems to have a permanent renter (HRA assistance, 1+ year of tenancy with very few issues)
2nd Rental would cash flow when rented at a market rate.

Both would be property managed by a competent manager I am using presently.

My primary fear is a vacancy on the second as I could not cover the mortgage for numerous months based on our family's modest income.

I want to go for this as I am a risk taker, yet I don't want to be stupid...

Brian Mathews · Answer

If you can't afford for them to sit vacant or get torn up and they will.  I'd  sell both of them and move on with your life.  Take whatever money you make and pay off current mortage or other bills.

Account Closed · Answer

Brian Knox,

If it's keeping you up at night, it's not worth the risk.  Been there, done that, will never repeat it.

Jon Holdman · Answer

You should not fear vacancy.  You MUST plan for it.  Its a reality and you will have to deal with it, and many other costs beyond the taxes, insurance, mortage and the PM.  When using a PM, a rule of thumb is that the rent needs to be double the p&I payment to be break even.

That said, "numerous months" of vacancy should not be the case.  If there is demand and there are tenants and its priced correctly (hint - your mortgage payment is irrelevant) then you'll have a tenant.

Bill Gulley · Answer

Thanks Michael Wagner thanks for helping!
Brian Knox, these are installment sales that might fit your needs. Take each and use the search feature, and you'll find tons of info. Try to look at recent threads, within a year as there have been regualtory changes in these areas.

Basically you sell on a contract agreement or convey title allowing a buyer to assume the financing, but in all of them you are still responsible for the underlying mortgage, get a good buyer and that probably won't be an issue, but be aware of the mortgage having a due on sale clause, so you also need an exit strategy. Good luck :)

Michael Wagner · Answer

Brian Knox, In order for you to be sure that Bill Gulley sees your question, use the @________ format in the future...this will alert whoever you are talking to that they have been mentioned.  @bill Gulley taught me this some time back:)

Brian Knox · Answer

Really good stuff, guys. This was my first post on BiggerPockets and you showed me just how helpful it can be. Thanks to you all!

Bill, I am too new/dense to understand a little bit of your post:
Can you say more on: "Might consider selling, if you can on an installment/wrap/sub 2 getting some cushion up front and again, lower payments." ?

Ralph R. · Answer

Its Always best to remember the first rule of Investing, Gambling, and buying stocks. That rule is:  NEVER risk what you can"t afford to loose.  Your headache here isn't the out of state location, but rather the affordability of the rental.  If it goes vacant it doesn't matter if its in another state or right next door, your in trouble.   Look for other ways to finance, a partner, etc.
 
Another tip... I make it a steadfast policy, ALL yes, every one of my bills is paid 3 months ahead.  Personal bills as well as  mortgage payments on rentals. The only bills I pay every month and don't pay ahead is any type of rent.  (storage unit, office space etc.) and Credit cards.  These are paid off each and every month.   That gives you a very good cushion when something does happen.  If your out of work, or the rental goes vacant, you have 3 months to figure it out.  It also eliminates the need to have short term disability insurance.  We have LONG term disability in case of a major injury/ illness.  It takes time to establish this cushion, but its not as painful as you might think.  We started by simply over paying the lights, water, phone a bit each month.  It wasn't long and we were 3 months ahead on all bills.  Now we have to watch or we will have a huge credit some place.

Mortgages, car payments, snow machines and the like are a bit different.  These loans usually give you a 30 day grace period before the first payment is due. sometimes even more.  I make the first payment the first day the loan is closed and you know where to send the money.  I don't borrow any money unless I am sure I can make that first payment a double payment.  That way I have made 2 payments, but I am 3 months ahead.

One more thing then I'll get off my soap box.....I was a meat cutter for many years.  A wise old timer taught me early on the first rule to making a butcher shop pay.  He said this.....All markets will make money if you plug the holes.  What he was saying is cut your losses (in this case mark down meat or over cutting for the amount of business).  I try to apply this to my personal finances as well.

Ralph Ramey

Bill Gulley · Answer

Ask the property manager if they can do a master lease and rent them out, you'll get less, but that could build in peace of mind having the PM on the hook for lower rents.

Might consider selling, if you can on an installment/wrap/sub 2 getting some cushion up front and again, lower payments.

If you want the benefits of market rates you'll need to accept the risks of a landlord. Hope it works out for you.  :)

Would you risk it?

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