All Forum Posts by: Jason Pedersen

I am new to real estate as an investor, though my wife and I are on our second home now (fortunately made a few bucks on our first purchase thanks to LA appreciation) and I have always been interested in investing in general. We are still at the strategizing phase and trying to figure out how to tackle our local market (I’m not opposed to out-of-state, but my wife doesn’t like the idea of it… but that’s besides the point!). One of our options includes turning our current house into a rental, which brings me to the point of this post…

Our house is on a large lot for the area we live in (1/3 acre). It’s one of the biggest in the neighborhood, and is the main reason we bought the house. It’s 5 bedrooms, and I’m envisioning a larger family that isn’t in a position to buy such a big property would be very happy renting for a while. We have a decent amount of grass, LOTS of trees, a gazebo, kids’ “clubhouse”, etc. (no pool!). I understand this doesn’t fit in the typical box for rental properties, so what things do I need to consider when I look ahead and plan for (potentially) making this a rental?

We currently have a gardener that comes weekly for $150/month that mows&blows + a little shrub trimming here and there. For those of you that have rentals that require some landscaping maintenance, are you paying that bill or asking the tenant to pay it in the lease? Do you go by maybe twice a year to take care of all the items the gardener isn’t taking care of, or do you look for a landscaping service that’s going to handle everything (from pulling weeds to adjusting sprinklers).

How about water bill? I haven’t done a full analysis yet, but I’d bet half of our water bill is from landscaping. How do you incentivize the tenant to water enough to maintain the health of the landscaping?

I plan to get some of our trees trimmed this winter, so I will get a good idea of how much of our rental income would need to be budgeted for that ongoing expense. Depending on what this costs me, I think it could single handedly change the viability of this property as a rental going forward!

And finally as a more general landlord-ing question, are property owners responsible for any injury a tenant (or their guests) sustain on the property? I realize this is an insurance issue, but would like to understand liability as well. If a kid trips and breaks his or her arm, am I going to be blamed for a half inch raised lip in the cement? What about a pine cone falling on someone’s head?

I know there’s a lot there. Just looking for some feedback to make sure we are considering everything. We’ve only lived here one year, so any move we make is probably a year out so we preserve the option of selling within the five year window without capital gains. Thanks!

I think when your primary residence is involved there is more to consider beyond the financial metrics. If you are pretty young, don't have a family, tied down to a location for a career, etc., then it might be easier to ignore the intangibles. Do you like where you live? Do you want to move? Those should be important considerations here. If your LTV is 20%, I'm guessing you've lived there a while...

If you see another primary you'd rather live in, and you can comfortably afford the mortgage when you take the equity out of your current home plus grab a rental property, that sounds like a win-win.

Personally, if I owed only 20% left on my primary, I would hate to give up that equity when I can almost see the end of the mortgage. Assuming I wanted to stay in the home, I think I'd be more interested in getting a big HELOC locked and loaded to help you acquire rentals, then paying down that HELOC balance with your rental income. The numbers (loan terms, interest rates, etc.) will really make or break the strategy, though.

She should probably figure these things out first, before picking an investment option:

1. What are her debts (if any)?

2. What are her fixed living costs? (rent, taxes, health insurance, etc.)

3. Any current income coming in, and how long is it expected to last? (social security, pension, etc.)

Once she has those answered, look to fill the gaps. Probably will want to start by paying off all debt, but not necessarily. Another thing to consider is her age. A 50 year old and an 80 year old are two different situations.

+1 on the Health Savings Account (HSA). Does your employer currently offer a high deductible health plan with an HSA? You may want to consider it. Your premiums will be lower now, you will get the tax benefit (triple tax benefit, actually) for funding it ($3,550 for individual/$7,100 for family contribution limits for 2020), and many employers will help contribute to it. Over 15 years, you will very likely have a large amount saved up. While you will still need your own health insurance plan once you leave the employer, you may be able to save a lot of money on premiums by getting a plan with a higher deductible/out of pocket maximum without the typical risk because you have all this money saved in your HSA.

If you have regular medical expenses now (chronic conditions or young children, for example), an HSA might not be for you, but it is definitely worth looking into. I "took a chance" on it a couple years ago and thanks to being young and healthy I now have more money in my HSA than my out of pocket maximum for the year, which helps me sleep great at night!

Note: my wife and my two young children are on her work's more typical PPO insurance. Wasn't willing to take the risk to put the whole family on it now, but as my HSA and children grow, I might consider moving the family over. If I do that, you better believe I'm going to use all $7,100 of that tax deduction!

So you did a refinance, pulled some money out, but it wasn't enough to cover your renovation costs? Where are you carrying the cost of the renovations now? Credit cards? How much do you still have to payoff? Just trying to understand the situation fully.

I think the most obvious answer is to take the cashflow from your Airbnb to pay down the debt. If you have a lower interest rate on the HELOC vs your renovation debt, perhaps you use the HELOC to pay that debt down and then pay down the HELOC with the cashflow. Personal loans, I believe, generally have a higher interest rate than collateral backed loans like a HELOC...

Congratulations and what a great, informative post! Love all the lessons learned. Might just bookmark this for when I am in your shoes and becoming a landlord for the first time.

What's next for you? Actively looking for your next rental or going to sit on this one a while and see how it pans out?

Be sure to consider that if you sell the index fund (or any stock) within a year you will be paying ordinary income tax on the gains. Depending on your timeline, that can be a pretty big disincentive to putting it in the market when you also consider the increased risk. (Note: Hold it for more than a year and you are only looking at capital gains, which is 0% if you make less than $40k and 15% if you make less than ~$440k.)

That's exactly how a credit card works. Unless you have a card with an annual fee (there are plenty that offer $0 annual fees), you only pay interest on charges you don't payoff each month.

As others have pointed out to the original poster, you don't stuff cash into a HELOC. The HELOC represents the equity you already have in the property and it allows you to use that equity (at a cost of your interest rate).

Investing in index funds, in general, is a great way to put your money to work without much knowledge of the stock market. You've heard it before, "historically the stock market goes up X% per year yada yada." On average, you'll come out way ahead.

If you don't have any exposure to the stock market right now (i.e. no 401k, IRA, personal brokerage account, etc.), I think it makes sense to put some of your money into the market using a personal brokerage account (I use TD Ameritrade and Robinhood, but they are pretty much all the same, especially if you're looking at index funds). $SPY (S&P 500) and $QQQ (NASDAQ) are two popular index funds you may consider, but there are probably thousands more.

Of course there are risks and you need to consider that. Remember that you don't have to (and shouldn't) put ALL your savings in the market at one time. One strategy might be to put just 10% into an index fund upfront, and then going forward you put 50% of additional savings in.

Personally, I think the stock market is overvalued at the moment and I'm selling more than I'm buying, but that's because I put an additional chunk of my savings into the market in March through April. With that said, I'm not willing to take everything out and miss future opportunities.

Good luck! 

This is a very good point. How does to lender know what your costs are? You may have told them already upfront, but imagine if you hadn't. They ask you what your rehab costs were, and you add all your material+contracted work+(YOUR TIME)*(A REASONABLE HOURLY RATE), and tell the. I'd be sure you can back up your calculation somehow (don't just make something up). You probably didn't spend $100k of your time on the deal (hopefully!), but may be a way to recoup some of your capital if the lender is going with this LTC method.