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Need opinions

October 24th, 2009 at 07:47 pm

A new opportunity has come up that has caught my interest. I have been tossing the idea around in my head for the past day or so and need to kind of vent about it to see how I really feel.

A foreclosure has come on the market in my town. It is not advertised for sale yet- my realtor friend told me about it because I have a friend who is interested in investing in the area. The friend is interested in this property too- but I don't think it will work out for him.

I kind of want think it is a very good deal and am not sure if I shouldn't invest in it.

This is a 2 unit property- very similar to my own- but a little smaller. Shotgun style with a double balcony-one unit upstairs and another unit downstairs. Foreclosure asking price is $115,000. It is bringing in $1600 a month in rent.

Pros:The property is similar to my current property and asking price is $85k below what I paid less than a year ago.
The house is in good condition. Same condition as my current house. The property is in a better location than my current home. The property is currently rented with existing leases. The property is about a 10 min walk from my current house.

Although the unit is in good condition- It might need 5-10k for hidden fixes/non emergency stuff I would want to take care of. Wont know that till an inspection.

BB is not very handy and fixing stuff is not his forte. I will need to hire out for any fixing problems.

Having 2 more rental units increases our chances of getting sued. We have 2 rental properties now and knock on wood we are all good- but adding 2 more might mean I will need to start an LLC and there would be legal/financial/stress costs around that.

Having 2 more rental units kind of throws the "stay diversified" rule into chaos. I don't know how to measure what my diversification will equate too- I will have 5x as much real estate value as stocks/bonds...

I will be getting into further debt. I mean, it will be a mortgage- so that's good I know. But I will be taking on $95k of additional debt (assuming I put $20k down- around 18%). It seems kind of insane to be walking around $200k in debt (including my house mortgage) when I earn just over $30k a year.

I was not prepared or expecting to go in this direction. We bought our home less than 1 year ago. We have just barely started to get back on our feet recovering from the purchase of our home. We talk of buying another property- buying rentals as our way to financial freedom- but talk about it off in the future. I wouldn't even consider this if it wasn't such an insanely cheap deal.

Financially we are strapped-BB is "in the market" for a job- but not employed- don't know if he will even have a job in 2010. If he does get a job- it will be starting around $30k which would push us into such a good financial position we could afford this property easily. Right now my income covers our expenses but not much left for savings. The money for the down payment would come from my inheritance that has been earmarked for retirement.Currently the inheritance has $200k in stocks and bonds it could come from- but I worry that it wouldn't be the right thing to do.

I worry because we have already made so many big purchases in the past year. First we had the wedding about this time last year-then we bought our house and put in about $25k to "make it ours"(including a new 10k roof). I worry that if we buy this...we are just getting in the habit of buying big ticket items and maybe getting high off the excitement or something. I worry that we will spend ourselves broke if we are not doing a financially smart thing- but telling ourselves we are because we like spending money.

I worry because there are all those real estate investors declaring bankruptcy because they over-leveraged. Why would I be any different? If I lost the renters I would have to pay for the mortgage out of savings. Right now MY emergency savings would only cover a month or two- then I would have to go to those stocks and bonds. But that's because my savings is only cushy enough for our current situation- I could beef it up by scrimping more pretty easily in a few months to cover the possibility of needing to cover a 2nd mortgage.

What would this do for us in terms of our goals? We wanted to convert our current 2 unit property into a single family home within 5 years- eliminating the rent we earn off it. We also want to do some home renos in the $50k range when we convert the property. We wanted to have the 50k saved up to pay in cash. We wanted to be in a position to pay the mortgage ourselves (right now the renters upstairs are paying it.)

BB has 130,000 miles on his truck. We have not started saving for a new car for him yet. I guess a car is an insignificant expense when you are talking "$15k car or $115k rental property"...but a car is also a necessity and a rental property is not.

We also wanted to have a child within 5 years.

So will buying this property put us in line to accomplish those goals- or make us unable to achieve those goals?

I don't know- I don't think it is a good idea with BB unemployed. I keep thinking we shouldn't do this "now". If we could just wait till BB had a job and was working a few months...but then who knows what the real estate market will look like and if we will be kicking ourselves regarding missing this deal. No. I think we should wait, save up the 20% ourselves and then look around for a good deal. We might not get the best deal from waiting- but we will be using our own money to spend.

10 Responses to “Need opinions”

  1. mjrube94 Says:

    Wow, sounds like a lot to consider. Good luck whichever way you go. Personally, I'd probably wait, given the facts you mentioned (uncertainty about BBs job, potential need for new car, etc). But I know that's easier said then done.

    What's the rest of the market like? Are there many properties for sale at deep discount, or is this the only one? If there are many, maybe you could hold off for a bit and jump in as you see the market starting to turn (by that time BB may have a job).

  2. baselle Says:

    Your cons are more compelling than your pros, but I'd like to add just one more. Con: You would be a landlord. Do you have the temperment for this activity? You will have to vet renters, be able to truly assess the cash flow of property (not just follow the shuck and jive of a realtor who will tell you anything to make a sale), maintain and pay for 2 houses. I just don't think that strategically its the time for you either.

    I apologize for being a pessimist, but before this whole fiscal mess is over (years), I truly believe that either that 115K house and others like it will end up in the 70K range; or it will take 1-2K to fill your fridge. I just don't see buying a second house right now helping you out in either scenario.

  3. whitestripe Says:

    you've listed all the pros and cons i would have thought of too, but i just wanted to point out a con that might actually be a pro - if you're planning on having children in the next few years and this property will be rental income, assuming all goes well with tenants, this will enable you to have fixed income which is always handy, and more so when one of you are at home with a baby - even if there's only a small amount left after the mortgage and bills for the property, it's still putting you guys in a good position.

  4. fern Says:

    It sounds very risky, given everything that you've mentioned, specifically, 1. you're living on 1 income now, and a modest one at that, 2. hubby drives an older car that will need replacement soon, 3. very little in emergency savings, and 4. most especially, putting a huge chunk of inheritance money earmarked for retirement on the line.

    What is the rental/real estate market like in your area? If unemployment is running high like it is here, i'd be afraid of losing renters when they lose their jobs. Hidden or unknown defects in the property can easily exceed $5 or $10K. I bought my house in "very good" condition, and I easily exceeded $10K just in routine upgrades like a new roof, furnace, etc.

    I would just plan for the baby and put the thought of another rental unit, with unknown hidden defects, out of your mind. Don't take on more than you can handle.

  5. monkeymama Says:

    I know your situation is unique, because you do have other assets to fall back on. BUT, if I were you I would slow it down.

    There will be better deals and I think you would be better off waiting and seeing how your own future plays out.

    As I have seen over and over, it's not a *deal if you can't afford it! I see so many people with NO ASSETS getting sucked in by low housing prices. It's amazing. These are the people who will foreclose in the near future. (Our mortgage broker tried to talk us into buying a property, with 0 down - UGH! But he bought property with 0 down and is advising all his clients too. Very false assumption that you will have no expenses, and constant rental income).

    Finally, could you even get a bank loan? I guess you do have more income now, but just remember how hard it was to get your current mortgage. Realistically I wonder how feasible your plan even is.

  6. LuxLiving Says:

    I'd vote no, for all the reasons you give.

    What if BB doesn't get a job?

    What if you are laid off?

    What if you get pregnant?

    What if you get pregnant w/twins or triplets?

    What if there is a problem w/your pregnancy or baby (God Forbid) and have to be off work?

    What if there are major hidden problems w/the house?

    What if you can't keep tenants?

    What if more than one or two of the above happen at the same time?

    Ummm? No. I wouldn't do it.

    And I say that as being someone who would love to be a landlord and have rental income.

    If you're high on real estate I'd be scooping up a REIT while the market prices are low. No landlord headaches in the middle of the night.

    And, no way, no how would I put those retirement assets on such shaky ground.

  7. Ima saver Says:

    I too, was young once and wanted to make money on rentals. I bought three and all three were a nightmare. I sold them all at a loss after the tenants trashed them. I really think you should wait for a while. I don't think real estate will rise in value for several more years. Plus you will need a full time handyman and that gets expensive.

  8. frugaltexan75 Says:

    I don't think it sounds like a very good way to go right now - especially considering all your cons, plus possible future plans (kids, etc.)

  9. mooshocker Says:

    Thought.....invest in a great home improvement course for BB. Allow him to learn to do small to mid-range repairs and upgrades. Investing in real estate now is very attractive. Rates are low. Sellers are desparate.

    One other consideration. Tapping into your inheritance to invest in real property is just about a wash. Just consider it. God bless.

  10. Broken Arrow Says:

    I don't think this is a good idea for you.

    In general, people should only get into the business of being a landlord IF you:

    1. Have the ability to handle tenants.
    2. Know your way around downtown to handle legal matters.
    3. Is handy or have someone you can count on who is.
    4. Love being a landlord, even if it's at the risk that you might not make good money.

    Does any of this sound like you?

    If not, don't feel bad. There are plenty of other ways to make money. This just probably isn't the path for you.

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