Financial advice on buying a rental house...

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1/15/2018 5:34 PM

I have the opportunity to purchase a rental property from a family member for $15k. It is an older home in a small farm town 1300 sq ft 2bed, 1bath, detached garaget etc. It is currently vacant but has a good record of $400/month as-is. Solid house but very outdated on inside.

My primary mortgage debt is $41k with a market value of $88k and it is on a 15yr fixed rate with a monthly cost of $302. The bank recommends that I refinance my primary for the $15K + real estate fees and use this as a refi cash-out to buy the rental property outright. This will increase that same 15 year mortgage to $419 per month.

I feel I can easily get the rent on it up to $425 per month very easily with some quick labor and TLC. I can float the extra mortgage cash monthly no problem if needed though so that's not a big concern.

This is our first opportunity at an investment property. Our goal is that the rental income pays the mortgage expenses. Is this a good scenario? For some reason it still seems odd that even though the mortgage would be paid in full, we aren't putting any additional income back into savings.

We are ok with increasing the LTV on our home because we think the $15k is minimal and we should still retain a good amount of equity in it.

The other option is to take my primary mortgage all the way up to 80% LTV which would buy the rental plus $12k to remodel and update the home. With that money I could hit windows/siding, kitchen, bath, flooring, and drywall. Leave the other small projects to do later in time as money allows. Comps of similar remodeled homes are renting at $500-600 month. If I did this, I think I would change the refinance term back to 20-25 years to try to get the monthly mortgage expense down to $350-415 month.

Also, the house does not have any appliances. For this scenario would a renter expect to have appliances included?

How should we go about this first one? We feel like this is an in expensive way to invest and diversify how we plan retirement (2055)

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1/15/2018 5:53 PM
Edited Date/Time: 1/15/2018 5:56 PM

You will probably get a lot of different opinions on owning a rental property..I think majority will tell you it sucks because it does.

We have one small condo that we rent...have gotten every excuse in the book why rent will be late or why they can’t pay the rent ( such as my cat died and because of the cremation costs we don’t have rent or I spent all my money on Christmas gifts and can’t pay rent ). Seriously, I can fix anything that breaks, but I fucking hate the “people” part of renting. We have a past tenant still paying on the water bill they left unpaid. Every month I have to email them and they send us a $10..$20 check..it’s been going on for nearly 2 years!

My good friend has a bunch of rentals and the stories he tells will make you hate people more than ever..laughing He is slowly divesting all his rentals because he can’t take the bullshit anymore.

You can have the best tenants for two years, then all sudden they are going through a divorce and next thing you know rent isn’t being paid..can’t trust anyone.

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1/15/2018 5:58 PM
Edited Date/Time: 1/15/2018 6:00 PM

The house should cash flow, you will probably need to supply appliances because people that generally rent 400 dollar homes don't have appliances.

If the inside is dated but complete, you should be fine, but if its a shit hole house......you are GOING to get shit hole tennants.

These kind of houses can make a lot of money......BUT it won't be money for nothing unless you get lucky. Dealing with the folks that will rent it will make you money, but it will also stress you out and age you prematurely. You need to treat them like children or they will walk all over you.

Also it is better to stay away from two bedroom houses because anyone that can live in 2 bedroom house can also live in a 3 bedroom. You can't say that for a 2 bdrm.

Hope this helps......In my opinion, buy all the real estate you can at the right price and you can retire a very rich man......just saying.

I've been a full time real estate investor for over 30 years. FYI

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1/15/2018 6:09 PM
Edited Date/Time: 1/15/2018 6:13 PM

Renters expect to have appliances included. I currently rent and the appliances were included. I pay my own utilities on top of rent. Some landlords include everything in the rent and some ask tenants to pay the utilities on top of rent.

Personally I would go with scenario one. The 2nd house would be paid in full which adds value to your net worth. The rent you will be collecting will cover your own mortgage (technically living mortgage free). Although the rent you are collecting from the rental unit is not adding any additional savings to your retirement fund the current income you and the gf/wife bring in from your jobs can be put towards your retirement. You could also put it towards your house and pay off your mortgage faster.

Having the 2nd house paid in full would allow you to take some equity out and purchase a 2nd rental property. As long as the 2nd unit pays for itself (mortgage, taxes, insurance, etc.) you're good to go.

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"Sorry Goose, but it's time to buzz the tower."

1/15/2018 6:18 PM

Those numbers seem closer to the year 1978 than the year 2018.......

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1/15/2018 6:33 PM

APLMAN99 wrote:

Those numbers seem closer to the year 1978 than the year 2018.......

Welcome to smalltown USA.

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1/15/2018 6:45 PM

Would it be wise to put the mortgage at 30 years and just rent it like it is for $400? This would then give me a positive cash flor of $140 month. I could then invest that money into other growth opportunities

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1/15/2018 6:46 PM

Sounds like to me, that money is a little tight, take the 80% ltv , buy rental house and put in some tlc and rent out for what your new mortgage will be at 20-25 years, and pocket 15,000 for a rainy day. Your mortgage payment is covered by rental and use the money that you now don’t pay, for fixing things up. Yes on appliances, I put washers and dryers in also, helps rent them. I keep my three rentals close by, my two family is on the way home from work and my other one is next door. Who cuts the grass, snow removal,pays for water, sewer? What skill level are you? A/c, heating,plumbing, roofer. Just be ready to put in some hard work and you can make it.

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1/15/2018 7:21 PM

mxtech1 wrote:

Would it be wise to put the mortgage at 30 years and just rent it like it is for $400? This would then give me a positive cash flor of $140 month. I could then invest that money into other growth opportunities

I would say no on that. The longer you pay a mortgage the more interest you pay and that money is better in your pockets than the banks.

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"Sorry Goose, but it's time to buzz the tower."

1/15/2018 9:22 PM

APLMAN99 wrote:

Those numbers seem closer to the year 1978 than the year 2018.......

mxtech1 wrote:

Welcome to smalltown USA.

I am in a pretty small town.......

$15K wouldn't buy a tiny buildable lot anywhere near here.

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1/16/2018 6:58 AM

APLMAN99 wrote:

Those numbers seem closer to the year 1978 than the year 2018.......

mxtech1 wrote:

Welcome to smalltown USA.

APLMAN99 wrote:

I am in a pretty small town.......

$15K wouldn't buy a tiny buildable lot anywhere near here.

Ain’t small enough. Can buy a few acres for 15k in Ohio/wv

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GP740
Since 1987

1/16/2018 8:17 AM

2smokertillend wrote:

Sounds like to me, that money is a little tight, take the 80% ltv , buy rental house and put in some tlc and rent out for what your new mortgage will be at 20-25 years, and pocket 15,000 for a rainy day. Your mortgage payment is covered by rental and use the money that you now don’t pay, for fixing things up. Yes on appliances, I put washers and dryers in also, helps rent them. I keep my three rentals close by, my two family is on the way home from work and my other one is next door. Who cuts the grass, snow removal,pays for water, sewer? What skill level are you? A/c, heating,plumbing, roofer. Just be ready to put in some hard work and you can make it.

Why do you recommend taking the refinance up to 80% LTV but then not really doing anything with the money? Shouldn't I use at least some of that to make some high return improvements to the rental to try and increase monthly rent as much as possible? Why shouldn't some of that money go into a short term investment fund?

My skill level is high, I would say. I have been a homeowner for 8 years and make all repairs/projects/improvements myself. The only time I have had to call a contractor is when we remodeled our kitchen and a gas line needed relocated.

I know I am capable of doing the work myself, but I also realize there are going to be occasions when I just don't have the time to run to do a repair. I have accepted the fact that I will, on occasion, have to bite the bullet and call-in a contractor for a repair. Yes, I know some repairs can be expensive, even for "simple" things, but my time is also worth money too and I feel this is just one aspect of the risk associated to this investment for us. I have quite a few friends who work construction & get layed off during winter. There is a good chance that I can reach out to them to
"hire" them to be my on-call repairmen. Realistically, I think they would be happy to make $40-$50/hr doing repair work and I would be thrilled to save $40-50/hr if I can utilize them at an hourly rate vs. a contractors hourly rate.

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1/16/2018 9:28 AM

All I know is that if my mortgage were double what yours is, I'd still only be paying half of what I do for rent now. sick

For $117 extra per month, I'd jump all over that, even if it was to sit on the new property and not even rent it. As for not adding to your savings, don't forget that your real estate appreciation is likely to be better than what you can get by putting it into a savings account.

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Braaapin' aint easy.

1/16/2018 9:44 AM
Edited Date/Time: 1/16/2018 9:44 AM

mxtech1 wrote:

Would it be wise to put the mortgage at 30 years and just rent it like it is for $400? This would then give me a positive cash flor of $140 month. I could then invest that money into other growth opportunities

No.

If your new mortgage for 15 years is $410 (and you can afford that) and you are getting $400 a month from rent, I'd pay $810 a month towards my mortgage. You'll pay it off in less than half the time without giving the bank more money.

Plus, on months it isn't rented, you can just pay the $410.

Don't forget about your extra property taxes and insurance.

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The message posted above is most likely my opinion and shouldn't be taken as fact....

1/16/2018 10:11 AM

Careful...the term "shithole" is a trigger word these days.

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The message posted above is most likely my opinion and shouldn't be taken as fact....

1/16/2018 10:35 AM
Edited Date/Time: 1/16/2018 10:37 AM

mxtech1 wrote:

Would it be wise to put the mortgage at 30 years and just rent it like it is for $400? This would then give me a positive cash flor of $140 month. I could then invest that money into other growth opportunities

huck wrote:

No.

If your new mortgage for 15 years is $410 (and you can afford that) and you are getting $400 a month from rent, I'd pay $810 a month towards my mortgage. You'll pay it off in less than half the time without giving the bank more money.

Plus, on months it isn't rented, you can just pay the $410.

Don't forget about your extra property taxes and insurance.

Thank you for the explanation.

Our immediate plan is to build a 3-6 month rainy day fund to cover the additional expense of owning the second home.

After that, we will take the rental income and instead of doubling up on the mortgage payment, we will put that towards some of our other debts that have much higher interest rates than the mortgage. For example, we both have student loans that are about 4-5% higher interest rates than the mortgage. We also have 2 high interest CC's (not a huge balance on them, very manageable) but I want to get those transferred to a 0% CC and then start paying those down aggressively.

We are thinking once the two CC's and student loan debts are paid down and we have a solid 3-6 month rainy day fund established, we would then double up on the mortgage payment + all of the other monthly savings from what we pay off.

I have considered property taxes and insurance in my analysis.

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1/16/2018 10:40 AM


I've owned rentals and always made money on appreciation. I never made a bunch of money on cash flow but that wasn't my goal. I had to subsidize rent by $100 per month on a rental in AZ because I couldn't rent it for the full mortgage payment. One month or two I had to make the full payment myself because it sat empty until the new tenant moved in. I made a fat profit when I sold that house because the market appreciated so much.
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I have the right to remain awesome.

1/16/2018 10:42 AM

You make some good points.

First - I want to say that we do not expect to get rich off of this and we know it will be a hassle and extra work. Although it may lead to more properties down the road, our immediate goal is to just "free-up" our monthly mortgage payment which will give us the ability to aggressively go after some other debts that would be very easy to pay off in short time spans with the extra $400/month.

We have had the exact same discussions that you just mentioned. As-is, the house is for sure livable but it is going to attract that lower end renter that we may not have pleasant dealings with. This is where we get really curious that if we take our mortgage all the way up to 80% LTV, we could do enough work to the house (inside & outside) to get the rent $500+/month with the thought that this will price some of those "less than desirables" out of the equation.

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1/16/2018 10:51 AM

Certain improvements are not tax deductible.Typically repairs and maintenance is deductible but improvements/remodels are not.

And also document everything. Your mileage is all deductible in the "management" of the property. So if you need to drive to the store to get a washer and bolt to make a repair, track the mileage because it's deductible. And I would plan on weekly site visits. The mileage is deductible.

Keep good records because that will add to your white meat a bit at the end of the year.

And something to keep in mind, if your white meat is $140 a month (true free cash flow), every month it's not rented lowers that over the course of a year. If you have to pay a plumber lets say 2 hours of work, that's an entire month of white meat. If you have to replace the roof, or buy a new water heater or who knows what else, you can lose 6-12 months of that white meat.

And you said you bought the house for 15k. Is that it's actual value or is that the family deal you got? Meaning is the home in fact worth more then 15k currently?

If you are generating $140 in white meat a month, and lets say you plan on spending 10k to remodel it, that means it will be 6 years before you are at break even on just the remodel.

Personally, because of the low free cash flow it generates, and the age of the home, this is something I would stay away from. Long term you will be lucky to come out break even after putting in a lot of time and dealing with a lot of headaches.

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1/16/2018 11:00 AM

TXDirt wrote:

Certain improvements are not tax deductible.Typically repairs and maintenance is deductible but improvements/remodels are not.

And also document everything. Your mileage is all deductible in the "management" of the property. So if you need to drive to the store to get a washer and bolt to make a repair, track the mileage because it's deductible. And I would plan on weekly site visits. The mileage is deductible.

Keep good records because that will add to your white meat a bit at the end of the year.

And something to keep in mind, if your white meat is $140 a month (true free cash flow), every month it's not rented lowers that over the course of a year. If you have to pay a plumber lets say 2 hours of work, that's an entire month of white meat. If you have to replace the roof, or buy a new water heater or who knows what else, you can lose 6-12 months of that white meat.

And you said you bought the house for 15k. Is that it's actual value or is that the family deal you got? Meaning is the home in fact worth more then 15k currently?

If you are generating $140 in white meat a month, and lets say you plan on spending 10k to remodel it, that means it will be 6 years before you are at break even on just the remodel.

Personally, because of the low free cash flow it generates, and the age of the home, this is something I would stay away from. Long term you will be lucky to come out break even after putting in a lot of time and dealing with a lot of headaches.

See that's where i get really confused. What if it doesn't generate any "white meat" profit and it only pays the increased mortgage cost? I'll shell out about $400 a month for mortgage and then at the end of the month the renter will pay us back that $400. So month to month we aren't seeing or feeling any extra cash flow but we have gained a second property that we own outright.

The house is being offered at a family price of $15K. It will have instant equity, but I do not think it would ever go for more than $22-$25K without some major updating.

The roof on the house and garage was replaced last year. Furnace and central A/C done 3-4 years ago.

Mechanically & structurally it is very sound. But everything cosmetic is wood paneling, vinyl, 80's, outdated, etc

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1/16/2018 11:32 AM

Trying to look at your math, it would seem that you actually are getting white meat each month though.

Current mortgage is $300. Taking out $15k increases this to 420. So that's a difference of $120.

Your new rental income would be $400.

Subtract the $120 difference and your white meat is actually $380 a month. I would call is $300 to account for other unknown costs.

So your white meat is in fact about $300 a month after paying both mortgages and related costs for managing the property.

So what can you do with that?

You can pay your mortgage down faster by paying $700 a month vs the new $420 a month.

You could also just save the $300. Lets say you put $300 into a bank account every month for the next 20 years.

($300x12) = $3,600 a year. Times 20 years = $72,000

Lets assume your original $15k on the house is still good and lets say you can sell house for 20k 20 years from now.

$72,000 + $20,000 = $92,000

This is very rough math here because you have to factor in interest and payback on the repackaged loan. And the management costs of the rental over 20 years is unknown.

But for our purposes that's close enough.

So after looking at the numbers I think it actually is a decent investment.

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1/16/2018 11:55 AM

TXDirt wrote:

Trying to look at your math, it would seem that you actually are getting white meat each month though.

Current mortgage is $300. Taking out $15k increases this to 420. So that's a difference of $120.

Your new rental income would be $400.

Subtract the $120 difference and your white meat is actually $380 a month. I would call is $300 to account for other unknown costs.

So your white meat is in fact about $300 a month after paying both mortgages and related costs for managing the property.

So what can you do with that?

You can pay your mortgage down faster by paying $700 a month vs the new $420 a month.

You could also just save the $300. Lets say you put $300 into a bank account every month for the next 20 years.

($300x12) = $3,600 a year. Times 20 years = $72,000

Lets assume your original $15k on the house is still good and lets say you can sell house for 20k 20 years from now.

$72,000 + $20,000 = $92,000

This is very rough math here because you have to factor in interest and payback on the repackaged loan. And the management costs of the rental over 20 years is unknown.

But for our purposes that's close enough.

So after looking at the numbers I think it actually is a decent investment.

That's exactly how I have my math laid out at home and yes it is close enough to paint the picture.

I have ran that scenario for nearly all of the different combinations and they all seem to make money. I honestly think our biggest risk is taking the mortgage out to 80% LTV, investing all of it into the house, only to have some renter come in and destroy the place.

Thinking 3 to 5 years down the road - we know we will be ready to move from our primary house to get into something a little bit bigger with some land. We have good data to show we should be able to rent our primary for $600/month. So if we did that, the rental property would bring $400 plus the $600 rental from the primary so $1,000 rental income against a $400/month mortgage. That would nearly fund the mortgage of our next house given the price range we are looking at.

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1/16/2018 12:02 PM

motosmith wrote:
I've owned rentals and always made money on appreciation. I never made a bunch of money on cash flow but that wasn't my goal. I had to subsidize rent by $100 per month on a rental in AZ because I couldn't rent it for the full mortgage payment. One month or two I had to make the full payment myself because it sat empty until the new tenant moved in. I made a fat profit when I sold that house because the market appreciated so much.

What is your approach on putting money into them?

Do you have the approach of don't invest anything unless you have to? Or do you like them to be updated to a certain "standard"?

In our case, everything is cosmetic. I would like to put vinyl siding on it and do some low cost landscaping to get a burst of curb appeal. Secondly, the kitchen and bathroom both need modernizing and I would be willing to tackle one or the other before our first renter.

When talking kitchen, bath, siding, etc. I see those as very important updates because it raises the house value and provides legitimate reasons to raise monthly rent by significant amounts.

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1/16/2018 12:05 PM

I'm curious to know what size house are we talking here? Hell in bum fuck nowhere around here lots are still going for 50k+ and that's in a field with not much around. Small subdivision about 10 minutes away 3/4 acre lots are 80k. 15 minutes away 2 acre lots 250k+ New subdivision opening up about 5 minutes away, 1 acre lots will be starting at 100k or 125k.

Honestly sucks. Trying to get ahead but it's difficult. 2 bed 1 bath apartment I'm currently renting is $1100 a month plus utilities, low grade finishes, nothing fancy.

How much are new houses going for in those areas? Condo about the same size as I'm currently renting with a little bit better finishes are selling for 265k (1050sq.ft.)

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"Sorry Goose, but it's time to buzz the tower."

1/16/2018 12:19 PM

-MAVERICK- wrote:

I'm curious to know what size house are we talking here? Hell in bum fuck nowhere around here lots are still going for 50k+ and that's in a field with not much around. Small subdivision about 10 minutes away 3/4 acre lots are 80k. 15 minutes away 2 acre lots 250k+ New subdivision opening up about 5 minutes away, 1 acre lots will be starting at 100k or 125k.

Honestly sucks. Trying to get ahead but it's difficult. 2 bed 1 bath apartment I'm currently renting is $1100 a month plus utilities, low grade finishes, nothing fancy.

How much are new houses going for in those areas? Condo about the same size as I'm currently renting with a little bit better finishes are selling for 265k (1050sq.ft.)

This particular house is about 1300 sq feet - 2 bed, 1 bath, dining room, living, room, front and back enclosed porches, and a detached garage that is 1.5 stalls wide. I believe it is about 100 years old so the age has a lot to do with the price staying low.

Our primary is 900 sq feet 2 bed, 1 bath. kitchen, living space, 2.5 car detached garage. We have basically remodeled everything on it over the last 8 years. It appraised 1 year ago for $88k. It was worth $65k in 2010 when I bought it.

The rental house is in a tiny little town (about 2500 people) with no major industry or good paying jobs. The nearest big-city is about 30K people and has some work to be found at modest wages.

It is common for our area to see rental homes go for $300 to $700 per month. So I think we are right at the midpoint of where we need to be given the median household income for the area.

I just checked and there are 5 homes currently listed in my immediate area for sale for > $20K and they are in much, much worse shape than my potential prospect.

There is very little residential new construction going on in our area. Pretty much everything that gets built is $200K+ and I am fairly certain they are only built due to an order.

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1/16/2018 12:27 PM

motosmith wrote:
I've owned rentals and always made money on appreciation. I never made a bunch of money on cash flow but that wasn't my goal. I had to subsidize rent by $100 per month on a rental in AZ because I couldn't rent it for the full mortgage payment. One month or two I had to make the full payment myself because it sat empty until the new tenant moved in. I made a fat profit when I sold that house because the market appreciated so much.

mxtech1 wrote:

What is your approach on putting money into them?

Do you have the approach of don't invest anything unless you have to? Or do you like them to be updated to a certain "standard"?

In our case, everything is cosmetic. I would like to put vinyl siding on it and do some low cost landscaping to get a burst of curb appeal. Secondly, the kitchen and bathroom both need modernizing and I would be willing to tackle one or the other before our first renter.

When talking kitchen, bath, siding, etc. I see those as very important updates because it raises the house value and provides legitimate reasons to raise monthly rent by significant amounts.

Good, honest people want to live in a nice house. Its much easier to attract good tenants if you have a nice house. I've always kept everything well maintained and in good condition. Just like a dirt bike, I try to keep everything in the best condition possible. Not necessarily new but clean, nice and in good working order.

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I have the right to remain awesome.

1/16/2018 12:53 PM

mxtech1 wrote:

Why do you recommend taking the refinance up to 80% LTV but then not really doing anything with the money? Shouldn't I use at least some of that to make some high return improvements to the rental to try and increase monthly rent as much as possible? Why shouldn't some of that money go into a short term investment fund?

My skill level is high, I would say. I have been a homeowner for 8 years and make all repairs/projects/improvements myself. The only time I have had to call a contractor is when we remodeled our kitchen and a gas line needed relocated.

I know I am capable of doing the work myself, but I also realize there are going to be occasions when I just don't have the time to run to do a repair. I have accepted the fact that I will, on occasion, have to bite the bullet and call-in a contractor for a repair. Yes, I know some repairs can be expensive, even for "simple" things, but my time is also worth money too and I feel this is just one aspect of the risk associated to this investment for us. I have quite a few friends who work construction & get layed off during winter. There is a good chance that I can reach out to them to
"hire" them to be my on-call repairmen. Realistically, I think they would be happy to make $40-$50/hr doing repair work and I would be thrilled to save $40-50/hr if I can utilize them at an hourly rate vs. a contractors hourly rate.

I say have money for a rainy day, I along with a lot of people, have a hard time saving money, I make my bills but can’t save what I should. And bam my 2family needed a water main from the street into the building, back hoes with three plumbers adds up quick. Glad I had a rainy day stashed. I took a year to rehab my house, paid in full every month. Bought for 20,000 put $15,000 in ,refi , took out a 62,000 loan for $500 a month, rent it for $700 a month. Had a rainy day fund. Invest it , but make sure you can access it if needed. I’m not the smartest by a long shot. Lol. Only thing I have going for me is, unless it needs a twenty foot deep hole, I do all my work. I do all the work and run my bosses high rises, plumbing, electrical hvac, sewers bath and kitchen remodels, drywall, plastering, roof repairs, boilers...

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1/16/2018 1:12 PM
Edited Date/Time: 1/16/2018 1:12 PM

You hit the nail on the head about renters destroying the place.

I rented out a property once and the tenants (let's just call them squatters, to be more accurate - since they only paid rent two of the 5 months they were there,) ruined the place. The teenage daughter wrote phone numbers and graffiti on the wall in sharpie, their busted-ass refrigerator leaked all over the hardwood floors and they never bothered to mop it up, they must have had mud wrestling competitions on the carpet, and I think they scratched the countertops on purpose. We had to paint and clean for days before we could even sell the place as a fixer-upper. I was pretty bummed.

I don't mean to dissuade you, but keep in mind there WILL be repair costs.

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Braaapin' aint easy.

1/16/2018 4:23 PM

We have a rental condo. Oh the horror stories in the early years!
Finally got a good tenant. We have rented to them anywhere from 10-15% below market value. There were times the economy was so bad we didn't get rent for 6 months. That really hurt but they were great folks and we couldn't ask them to leave. They have now been there for 25 plus years. I used to dress up as Santa and bring their kids presents Christmas morning. Now even the grandkids are adults.
Anyway, one day we will exchange this for beachfront in the Caribbean! Hopefully soon!
TM

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1/16/2018 5:53 PM

Falcon wrote:

All I know is that if my mortgage were double what yours is, I'd still only be paying half of what I do for rent now. sick

For $117 extra per month, I'd jump all over that, even if it was to sit on the new property and not even rent it. As for not adding to your savings, don't forget that your real estate appreciation is likely to be better than what you can get by putting it into a savings account.

waaaaaaaaaaaayyyyyyyyyyy better

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