Advice for those looking to buy a 'now' home that you'll rent 'later'
The other day a friend called me to discuss her thoughts about buying a home for their young family, that will ideally phase into a rental in a few years as they might need more space. They are renting currently, and while she’s in a different state and I can’t be their Realtor, of course I can give plenty of advice, based on my personal and professional experiences with investing and renovating.
My approach to her was two-fold: first I wanted to discuss the practical benefits and concerns, and second - because she is a dear friend and I want to be sure she knows what she’s getting into - I gave her my take on what it’s really like to be a landlord, and how best to manage it.
When done right, being a property owner can be a great way to fund retirement or other ‘big’ plans if you have the time to pay off the properties before you need the money. My friend, like myself, is self-employed, so it makes even more sense because there will be no pension or matched 401 to count on. At her stage of life, there’s no need for a big house or big cars or big anything, so it’s the perfect time to find a small, simple place that can be easily maintained if it becomes a rental after they move out, and that’s a good way to start. No need to go straight to a 10-unit courtyard building if you don’t want to! Our most successful investment property was a little house in our neighborhood, that just needed a good scrubbing and some basic repairs, and new appliances bought from scratch-and-dent sales. It was at the entry level price for the area, and was home for a few years to a young couple that was thrilled to be out of a condo and an easy walk to town, it was honestly a dream. When they moved out, another family eyed it for a teardown, and we took a nice profit and moved on. It worked because the location was right, the size was right, the price was right, and we were able to restrain ourselves against over-renovating. Full disclosure, we should have stuck with this business model FOR SURE. That’s a post for another day, and also covered a bit in one of my previous entries. Based on this experience, I advised my friend to look for something that fits the entry level price point in the neighborhood they want to live in, and also doesn’t need a complete renovation. Keep it simple, keep it small, and keep it in demand.
After a brief conversation, she sent me the list of properties they were considering, and they ranged from those that needed FULL head to toe renovation, to updates and landscaping, to a little bit of paint and carpet removal (but wholly devoid of curb appeal). I advised them to stay away from large properties, 1 acre+, for several reasons: 1. They require more landscape budget every month, especially in her climate. 2. It’s hard to drive by and check on things when the house is hidden in the woods. Appeal to tenants that fully intend to keep the house and grounds in good condition and without anything to hide. 3. Every market is different, but a higher percentage of people in most places want easy access to the area amenities and maybe even public transport, especially if they are renting to try out a new locale. Multi-acre properties tend to be out of town and out of the way. Next I cautioned that homes in her price range that need a full renovation might not recover the cost of investment for quite some time. If the house is $240,000 and requires $100,000 in renovations, it might not necessarily fetch the rent or resale price of a $340,000 property right away. IF you want to stay longer, like 5-10 years, this concern is less important. I enjoyed owning places where the rent was a few hundred MORE per month than the mortgage+taxes+insurance, so value is important. The properties left on her list were the ones that needed carpet removed and some removal of 90’s decor, but no walls removed or other large projects. These weren't the prettiest houses, but if long-term ownership of a rental is the main goal, appearances are less important. Renters want homes in good, clean, condition and the right location - a funky 80’s design isn’t that big of a deal. Narrowing down the homes in the ‘minor repairs’ category even further is a personal caution of mine - avoid the 90’s homes. Homes of this age and at lower price points tended to be built quickly and cheaply, with materials not meant to last. A 25 year old home may feel ‘newer’ than one from the 60’s, but that cheap siding, cheap roofing, vinyl windows, and ALL the mechanicals and appliances if they haven’t been recently replaced, are on their last crappy legs. I noticed that age didn’t shift the price much in her list, so choosing one that is less than 10 or more than 40 years old is probably a better buy.
Now that I felt the practical advice of goal setting, minding the value of renovations, and what to look for when narrowing the list (inspection checklists for rentals is a whole other topic!) had been covered, I would be overlooking a lot if I didn’t share some honest, personal advice about being a landlord.
If you’re only going to own one or two homes, it is probably impractical to share the rent take-home with a management company. That means you’re going to be dealing with every bump in the road on your own, and you need to be sure you’re ok with this. If you have 80 hour per week jobs, lots of little kids and not much help, or are easily upset by people calling you in the middle of the night to blame you for the toilet backing up because their toddler shoved a whole package of wipes into the drain (which of course is lied about until the plumber shows everyone the wad of said wipes), seriously consider if landlord life is for you. Our best experience as a landlord was for sure that young couple I mentioned earlier, and we found that as the rent went up, the headaches also went up and the care of the space went down. Maybe we were just unlucky, but we found that high-priced tenants tended to treat us and the home as an employee, not our own property. I think it also helps to be in the neighborhood, to be easy to reach for the little things, and to set firm boundaries with behaviors like painting, hanging fancy shelving, installing ANYTHING themselves, etc (the answer to all of those questions is NO). This all points back to ‘the smaller the better’ - less money, less problems for sure. Townhomes are a good option for people that have concerns about having too many concerns as well - your old neighbors and friends can keep an eye on the place, and the association covers whatever repairs and responsibilities that it did when you lived there, even if you rent it out.
Even though landlord life is not for me anymore, it really can be a great way to build wealth and give yourself financial options as time passes and those mortgages get paid down. Picking the right home to start with is critical, and every market has a sweet spot that will satisfy both the starter-home need and the future-rental possibility. Finding an agent that has year-over-year knowledge of the neighborhoods you are looking at is critical to getting the information you need to make the right decision - partner with them in your search and be honest about what you think you can tolerate down the road when it comes time to switch from resident to landlord. Reading back over this, I wish I had hung on to a few of those little success stories we had for a few more years - they would be almost paid off by now! Hindsight, as they say…..