Hello. Looking at purchasing my first secondary property. Would plan to keep my current primary residence and turn it into a rental. Not sure if its a good idea. Could you experts take a look and give your thoughts?
MY QUESTIONS / CONCERNS:
-ULTIMATE QUESTION: should I go for it? Please answer with a yes, no, or depends, and then explain.
-would it be best to wait off until say next year when I am able to put down more money?
-I am thinking in the shorter term - how should I be factoring in marriage in 2-3 yrs, having lots of kids in next 20-30 years, and wanting a stay-at-home wife / stay-at-home kids?
-would it be wiser, from that perspective, to aggressively rent my current place (filling bunk beds), pay down my mortgage faster OR finish the basement with an extra bedroom to increase value / make it more marketable for more roommates?
THE DATA
GENERAL SITUATION
-Money I have to play with for down payment or other invesments/future saving is 40k. That does NOT include my emergency fund
-make about $5500 / mo with main hustle after tax
-currently investing about 20% of that in ROTH (so take home is about $4000-$4400)
-current discretionary + need expenses not including $1,100 mortgage = about $3000 / mo
-I am well known in the town and have lots of good connections, especially with college students through the local Catholic Churches. If I work hard, it is not hard for me to find at least 1-3 renters at any one time
-I am located in Lincoln, NE
-in my late 20s
-only debt is current mortgage around $100k and some minimal student loans, all at about 4%
MY GOALS:
-to get into real estate
-to get married in next 2-3 years, God-willing
-long term: to being open to as many kids as possible. I want a large family.
-to contribute 15%-20% to ROTH INVESTMENTS
-have a stay-at-home wife and homeschool most of the kids
-supporting a stay at home wife and kids have made me thought about a career change away from tech to say, optometry. This would of course require me to go to school, and be in more debt
-get a small acreage (<2 acres) eventually
CURRENT HOUSE
-bought a little over a year ago at 4%. I will keep this current mortgage; the terms only require that I be in it for one year.
-bought at 167k. Likely is worth about 175k-200k in current market
-2 bed, 1 bath
-mortgage + escrow = $1100 / mo
-have one dedicated tenant/roommate who has been with me for a year and will stay with me. He pays $400-425 / mo
-I have had secondary tenants for an average of about 4 months. Whenever they move in, rent for present tenant and secondary tenant is $400
-in a decent part of town
-could finish basement for 20-30k, get an extra bedroom in there, making it easier to rent to secondary tenants more consistently rather than using the bunk bed they use now
NEW DEAL I FOUND
-bought for 160k in 2020
-being sold off market (FSBO)
-good area of town (I would say even better than where I am at)
-seller is thinking somewhere in the 185k range. Haven't made an offer yet
-I could, if I could it for say 180k, 15 yr mortgage would be about $1,500 / mo, 30 yr $1,200 / mo at 7.5%
-the only way I could do this is by putting 40k down
-my current roommate would move with me. I would raise his rent to $500
-has a garage
-biggest disadvantage for perceived value for me is the smaller kitchen
THEORETICAL RENTERS INFO
-two friends of mine who are getting married are very interested in renting my current property if I get a new property. We talked through the theoretical possibility and verbally agreed to the following policies
-the groom is cool with moving in as early as January 2024 to secure his spot 6 months before their wedding in May.
-groom would pay reduced rate of $625 until his bride moves in, then they would pay $1,200 / mo
-so in theory, after they both move in, I will cashflow $100 / mo on that property alone (mortgage is $1100). That is before factoring improvements / necessary repairs and the fact I would cover utilities.
-I know this couple to be solid, upstanding folks who keep their word and take good care of their living quarters and are prudent financially. I have a good idea of their financial situation too. So I would definitely have them for a year.
-they would be under lease from whenever groom moves in until 1 year after their wedding
PROPOSED STRATEGY:
-get new house, move in with current roommate. He pays $500 / mo
-groom moves into my old house, pays me $625 / mo
-once his bride moves in come May, they pay $1,200
-at that point, my budget until next June will look like $4200 TAKE HOME PAY - $3000 LIFE EXPENSES - $1100 MORTGAGE 1 - $1500 MORTGAGE 2 - $300 MORTGAGE 2 UTILITIES + $150 MORTGAGE 2 REPAIRS, ETC + $625 RENT FROM GROOM + $500 RENT FROM ROOMATE IN MORTGAGE 1 = $-725
-HOWEVER, I would plan to, for the first two quarters of next year, half my ROTH contributions down to 10%. This would up me about $800 / mo.
$-725 + 800 = UP $25 FOR THE FIRST 6 MONTHS
ONCE JUNE HITS, and couple starts paying me $1200 / mo
$25 + $600 = UP $625 / MO ONCE JUNE OF 2024 HITS
-after that, I would start contributing to my ROTH about 15%-20% again
ADVANTAGES I SEE
-new 3 bedder residence is easier to get another roommate in (you don't have to use a bunk bed). If this happens, I am only paying $200-$500 on the new property, with the rent income on old property going towards said old property's mortgage. I am building equity for cheap.
-if I break the zoning laws where I live (which is no more than 3 unrelated ppl living together at a time), new property could easily house up to four or five of us including bunks, which would cash flow $300-$800 / mo. Everyone really breaks the zoning laws in this area - the police don't really care - they are mostly antiquated. I have to search my own conscience there though
-if something goes wrong and no one is renting from me, I can theoretically stop contributing partially or fully to ROTH every month and just about afford both properties myself. I of course definitely want to be contributing to some paper investments for diversification
Overall, after factoring in my base income sans expenses sans ROTH contributions plus rent income, owning both properties would have the potential to get me up $1,500 additional cash / mo best case scenerio (all units always full), or lose -$1700 / mo worst case
Currently, with my current property,
after factoring in my base income sans expenses sans ROTH contributions plus rent income, I am cash flowing up to $1200 / mo best case case (bunk in other room full), losing $0 / mo worst case
AGAIN, MY QUESTIONS / CONCERNS:
-would it be best to wait off until say next year when I am able to put down more money?
-I am thinking in the shorter term - how should I be factoring in marriage in 2-3 yrs, having lots of kids in next 20-30 years, and wanting a stay-at-home wife / stay-at-home kids?
-would it be wiser, from that perspective, to aggressively rent my current place (filling bunk beds), pay down my mortgage faster OR finish the basement with an extra bedroom to increase value / make it more marketable for more roommates?
Ultimately, I think it is worth going for it, because I am not even dating someone yet, I am confident I can get renters, I plan to hold the properties or trade up within next 5 - 10 years, and when I get married, I would have flexibility and diversification in that we would have two homes to choose from, and could rent out the other one.
