Am I stupid for doing this?

Question

Hi everyone and thanks in advance for reading my very first post. I’m excited to become more active on here and learn from you all. So here it goes...

I’ve been renting a 3 br 1 bath house in Concord, NH for $1350/mo with my boyfriend for the past 3 years. It’s well maintained and has a large yard backing up to woods/trails which we enjoy for our dog and hiking. It feels very much like our home for us and I f we could buy it we would but the landlord is never selling (long story).

I have finally saved enough to invest in my first property. I found a very modest 3BR/1bath single family modest property within steps to downtown with small manageable yard. I’ve been scouring the sites for a home under $200k and it very rarely exists without needing a ton of work (not something I’m ready for yet). So needless to say I was pumped finding this one at $185 and I somehow miraculously got my offer accepted at $10k over asking (on par for our market) beating out multiple offers (thanks to my badass realtor).

Now my mortgage plus taxes and insurance will equate to $1333. I have posted it on Craigslist just for sh*ts and giggles and have a few inquiries at $1900. Keep in mind I’m draining my entire savings for this home (again, I may just be an inexperienced idiot so please advise) so the extra cash flow would be nice not only to build back the savings in case of unexpected future expenses but also to reinvest in a future home I would actually live in.

Ok so what are your thoughts? Am I crazy for still renting while simultaneously renting out my first house? Do I just suck it up and move (it’s in my child’s same school district luckily) but sacrifice all the space and LAND my current home offers plus forfeiting the income generated from the rent? Any thoughts appreciated in advance!

Rob B. · Answer

Others are spot on. Make sure the lender knows whether it is owner-occupied vs investment prop, as that will make a difference. Additionally, with regard to making sure your screening process is ironed out since it sounds like you're considering living in it (owner-occupied) with roommates, you may want to take into account lifestyle through your screening process. That is important because you want someone who is going to be on the same page as you (as far as taking on a roommate, should you decide to go that route). It is standard to have anyone who is 18 years of age or older to both complete the full screening process and to have them on the lease. Set a baseline set of standards that you look for and go from there. Either way, this is a great start and just wanted to say congratulations!

Jessica Stevenson · Answer

Congrats @Kayla Boyer ! I'm glad I finally see people mentioning letting your lender know it is an investment property vs owner occupied - it will be part of your application if this is going to be used as a primary residence. Obviously I don't know the specifics of your situation in terms of down payment etc, but you don't want to inadvertently commit mortgage fraud so it's best to be up front with your lender regarding your intent with the property.

Todd Rasmussen · Answer

@Kayla BoyerI don't see any reason to move. If you can rent it out at 1900, I'd stay put and put the difference back into your savings account. If you ever are paying within a couple hundred dollars of what you can charge, then it would probably be time to start trying to time your leases to move into the home you own. It sounds like your landlord is missing out on a bunch of potential rent. From what you are describing you are paying at least $600 under market value at your current place!

Matthew Dennehy · Answer

Kayla, congrats on the new house! Concord is a great area.That being said, it’s extremely difficult to turn a profit on single family houses in NH. The people that typically rent out singles families typically either lived in the property, inherited the property, or otherwise acquired it without originally intending to rent it. Renting a single family is a way to hang onto the property for a while until they eventually sell. Typically the numbers work out to just about break even, and that’s if you self manage.I don’t want to discourage you in any way from investing, but your agent is trying to sell you snake oil if he/she says it will make a good “investment”. The best way to make this work from an investment perspective is to move-in and “house hack” by renting out a room. You’ll substantially reduce your payment liability that way, and be able to enjoy the extra savings while building equity. Then when you have some decent savings again, buy a 2-3 family. There are a lot of them in Concord. Finally, if you do decide to rent it out, make the tenants pay the water. Most landlords over that in Concord because of how the city meters are installed. However, with a single family, you can easily have them cover that expense, paid directly to the city.

Kayla Boyer · Answer

@Rob B. thanks so much! I'm very excited to finally start my career in real estate investing. I will keep your advice in mind should I go down the route of finding a live in roommate.

Daniel Haberkost · Answer

@Kayla BoyerHi Kayla, the main item I wanted to comment on is the rent vs mortgage. You mentioned a couple times that staying in your rental while renting out the new house would lead to extra income. Okay, but what about the other expenses ? It’s a single family home so the tenant will pay the utilities and mow the lawn so you have that covered. But what about capital expenditures, repairs & maintenance, vacancy, and property management (plus there are always other miscellaneous expenses)? Capital expenditures and repairs & maintenance will likely be between 5%-10% depending on the age/condition of the house which I know nothing about. So let’s assume they fall in the middle at 7% ($133 a month each). Then we have vacancy, if the house is unoccupied for one month of the year that’s already 8% of your yearly income. But let’s say management is great and it’s only 5% ($95 a month). Then finally we have property management which will be 10% monthly along with numerous fees ($190 not including fees). So now we have a $1,333 mortgage PLUS the aforementioned expense coming out to $1884. In expenses a month. If you rent it for $1,900 you are breaking even and this doesn’t include potential fees that the local HOA may charge, the additional (and inevitable) property management fees, the cost of utilities while the house is vacant, and so on. Those numbers do not leave you a proper margin ESPECIALLY if you would be exhausting all your savings when purchasing the house. One major expense could put you under. So when looking at properties in the future, make sure you include ALL of the expenses. Would it be possible for you to move to the house and rent out and extra room? Then you would be reducing your housing expense at least!-Dan

Daniel Haberkost · Answer

@Kayla BoyerIf you’re going to self-manage I can’t stress enough to take the time to get your systems/processes in order. Its only 1 house and 1 tenant but there is a reason that one of the most reliable sources for experienced investors to buy discounted properties is from small-time investors who manage their own rentals. Make sure you have a solid lease. Always run a background check, verify their income, and call their previous landlords. Do a move-in report that documents the condition of the house before the tenant moved in with pictures and descriptions, make sure they sign it too! If you’re in a hot market, I would not let them move in without first & last month’s rent along with 1 additional month’s rent as security deposit. If you do your due diligence correctly and get a solid tenant this could work well but since it’s only one unit if you cut corners and end up with a problematic tenant it could be a financial nightmare so be very careful who you rent to!Since the house is that old make sure you have an experienced inspector! I know you mentioned it has been renovated but I wouldn’t take my chances. Get a referral from someone you trust. Again, you mentioned this is draining your savings to buy so you want to minimize the chances of a large expense coming out of the blue in the first year or two of ownership. And to answer your question, I don’t necessarily think it’s a mistake to stay in your current living situation while renting this house out. If it were me, I would move to the house you are buying and rent out all the bedrooms. But I’m single and don’t have any kids! Everyone has a different set of priorities and I know you said you have a family. So maybe it makes sense for you to stay where you are. That’s ultimately up to you!-Dan

Kayla Boyer · Answer

Thank you Todd for your advice! Yes, we are very fortunate our landlord has priced the home under market value and even her financial advisor tells her she’s losing money on it. She says she just wants good quality tenants who will stay a long time so that’s us! My friends who are all renting apartments at higher prices are very jealous haha

Richard Lovering · Answer

@Kayla Boyer congrats on getting ready to make the leap! It's fun, nerve wracking, exciting, etc etc! Lots of great advice so far. What I really like about your situation is that if things don't go well with the purchased rental property you always have the ability to move in yourself and stop paying rent to someone else. Seems like a fairly solid plan B with minimal risk on the downside! best of luck and hope it works out! Rick

Jeff Barnard · Answer

@Kayla Boyer on the surface I think this is a fine idea. As others have said, run the numbers with all of the expenses considered. If the results meet your minimum criteria, then go for it. Try using the BiggerPockets Rental Property calculator. As a BP member, you can use this for free (up to a certain limit). Going through this exercise will ensure you've factored in all potential expenses. Just because the house is renovated and in solid condition, still put in 10-15% total for Repairs/Maintenance + CapEx. Leaving this out of a calculation is sure to come back to bite you in the form of unexpected expenses. Lastly, when you do select a tenant and set up your lease, make sure you are compliant with NH state laws. For example, in NH there are limitations on what you can collect up front in terms of Security Deposit, First/Last Month, etc. Best of luck!