I learned that buying a new house is not worth it. Unless you have some awesome negotiating ability, it’s not worth the price. I’ve always been taught that houses appreciate over the years. This is true in the long run, but in the short run, they’re just like cars, as soon as you turn the key, the value goes down. First thing I’ve learned is always buy used. Sure you’re going to have to fix some things on the used house and update it, but it’s no where near the price difference of a used house and a new house.
Let’s say you find a house built in 1976 worth $75,000, a similar house new might cost $180,000. That’s more than double the price! You could easily buy the used house, fix it up for under $10k and up its value to $120,000 or more. If you want to do that fast, that’s called flipping, if you want to live in it or rent it out and let it appreciate even more over time, that would be even better. For starters, your monthly mortgage would be much lower because the house was cheaper and your tenants would be paying it for you. You don’t have to make all the renovations at once, you can do it over time or take out a loan, which would still be cheaper than a $180,000 mortgage. Plus, your net worth and cash flow goes positive instead of negative.
Location, Location, Location.
The second thing I learned was location REALLY is as important as they say it is. Don’t be roped into a good deal like I was: no money down, 2 year buy-down, points added, tenants ready to move in. It doesn’t matter how good a deal the house is, if it’s in a location that would be difficult to get renters, it’s a bad deal. Even though my house came with renters already moving in, after they had to be evicted, I was stuck at square one, so think of the deal as though you have no renters and have to find them, cause that will eventually be the case.
Before buying a property to rent out.
Calculate the mortgage and your monthly payments, a.
Call the utility company and see how much utilities will cost on avg. How much is the HOA every month? Then add $200 a month for repairs, maintenance, and whatever other expenses might come up, that’s b.
Research how much you could charge for rent in that area. Post fake craigslist ads just to see if there is interest. Monthly rent is c
if a+b < c, that’s a good deal, take it!
Don’t Get Involved in Drama.
When people are living together under the same roof, there will be clashes of personalities. It’s very important for you not to get involved unless it affects the house itself, like holes got put in the walls or something. Most drama will work itself out. If tenants are complaing to you that another tenant is not washing his dishes, that is not your problem. If one tenant is threatening to harm another tenant or causing damage to your house, that IS your problem.
When you are forced to deal with issues, try not to take one side over the other especially if all you have is a he said/she said situation. Use whatever evidence is available but try to make it clear that both sides have their strengths and their weaknesses. It’s important that they realize how each other’s personalities work so that they may communicate with each other more effectively. If it comes to the point where neither can deal with one another, then you have to evict one. Most likely one of them will want to move out anyway. Obviously, the deciding factor for you will be: who is paying their rent on time? Don’t evict the person you disagree with or keep the one you like more. It’s a financial investment, not an emotional one. Keep the reliable tenant.
How I will change my strategy for the future.
Going forward, I will be focusing more on portfolio investments. I will use my money, what little of it there is, to invest in stocks and funds, particularly dividend yielding funds and event-based trading. But that’s another post all together. If I did invest in real estate again, I now know what things to look for in a house, i know what breaks down more often cause I’ve had to fix it. I’ll look in nice neighborhoods for cheap, old houses. I’ll find at least ten of these and do the numbers on a financial statement. If a+b<c, then I’ll take the best deal.
I’ve become more hardened in my business dealings over the last few years. Before, I was looking to be buddy buddy with my tenants, now I’m much stricter, more organized, and much more landlordy. That sounds kind of sad at first, but the truth is I get along better with my tenants now because they know what to expect. They know where my limits are and I know theirs. Rent is much more timely now, especially since I’ve been enforcing the late fees. Really, I think it comes down to knowing what to expect. If they understand your stance, there’s no need for them to test you.