Buying rental property

[splash]

Has anyone here purchased a foreclosed/HUD owned home as a potential rental property?  The house next door to ours recently went on the market, and since I'm nosy, I looked it up to see if there were any pictures of the inside.  There weren't any pictures, but I did find out that it's going for cheap. 

I mentioned it to my husband and jokingly said that we should buy it, fix it up, and rent it out.  What was initially a joke has now turned into a more serious discussion about looking into the possibility.  However, I'm a bit clueless about what kind of research I should be doing in order to see if this would be a logical/viable thing to actually think about. 

Based on looking in the windows, it doesn't look to be in terrible shape.  It needs updating and some general repairs, but so do many of the houses on the block.  The main thing that is currently concerns me is the fact that it apparently has mold (per a notice on the door).  I did see a small patch of mold on one of the basement walls and there's an allowance to update the bathroom (the mold is outside of that room), so I'm assuming that's where the mold issue is located. 

The area where I live has many houses for sale, so we're not thinking of this as a house to flip any time soon.  My initial thought process was that it's the house is next door, it's selling for cheap, and it's a chance to control who lives next to us and bring in some extra income.  Plus, I was also thinking it might help our property values as well.

However, I'm wondering if it would actually be a decent investment.  I realize this is something I should know, but what numbers do you look at when determining the value of a home?  I ask because I looked up this house on the kiva site and wasn't sure if the assessed value stated was the number I was looking for.  And just to explain further, I also looked our house up on the site and the assessed value was a very different number than the one that was used when we refinanced last year.  IF the numbers on the kiva site are the ones I need to be looking at, there seemed to be very little change from year to year. 

As I stated above, my family had rental homes, but I don't think any of them were purchased with an idea of future market trends.  One was a secondary house on the farm we lived on, one was an inherited property, and one was a farm my dad purchased for me when I was born (to be a graduation/wedding gift).  These were all rural homes, so I have no idea what kinds of things I need to think about or look into when buying rental/investment property in a city.   


I think this is starting to be just me rambling now, so I'll get to the point.  If we have an opportunity to buy this house, would you do it?  Pros, cons, thoughts? 

[KC0KEK]

I definitely wouldn't try to purchase it on the cheap. By that I mean although it's okay to try to get the best possible price for the house, you shouldn't scrimp when it comes to hiring a lawyer, inspector and anyone else whose expertise will be key for ensuring that you don't wind up with a property that requires more investment than you anticipated or that incurs legal woes down the road (e.g., the foreclosed owner coming back a year later arguing that he/she should still own the house because his/her lender didn't follow the rules in approving the mortgage and then foreclosing on it).

[aknowledgeableperson]

but what numbers do you look at when determining the value of a home?

The value of a home is what you are willing to pay for it.  Forget all of those other numbers, what are you willing to pay for it?  Have an inspection, a complete one, one that is more than a normal house inspection for purchase.  Have someone with electrical background, one with a plumbing background, check fo rlead based paint in an older home.  If you can't do the work yourself have a remodeling contactor take a look and see what a cost to fix up might be.

If you don't mind being a landlord and with the house being next door consider going for it.  Just make sure you have the budget to do it.

[splash]

Oh, I completely agree with that.  Although, do you think a lawyer would be necessary?  We didn't have one when we bought our house, but this is a different thing, of course.  We do know several lawyers, so we might luck out and they might offer to help us out.

I know people can change their minds, but I think they pretty much decided to cut their losses, so I don't think they'd come back to fight things.  You never know, of course. 

Right now, the house is listed for under 40k.  I did a very quick online check to see what the mortgage payment might be and it might be doable (I say maybe because it was just a fast thing I did to ballpark it). 

And barring any serious mold or foundation issues, most of the "problems" with the house look, from the outside, as cosmetic.  Well, that and the fact that it needs new appliances.  The housing stock in the area is from the 60s, so overall, things are outdated in most of the homes.  We bought our house several years ago and we're the second owners, so everything was/is outdated.  We have slowly been updating our own house, when time and money permit.  If this house is anything like ours, it's solid, but needs updating (new appliances/countertop/sink in the kitchen, bathroom updates, potentially pulling up the carpet, etc).

Also, I should say that we'd be the one doing all the work on the place.  Obviously, we'd pull all the proper permits and would hire out for jobs we can't handle, but we wouldn't be hiring a GC for the job.  I enjoy doing stuff like this, so I'd love to get into it.  Honestly, if I had properly done my homework, I would have checked to to see if we would have been eligible for a "remodeling" loan on our own home when we were looking to refinance. 

From what I'm understanding, this property has a small escrow allowance for repairs and is eligible for a 203k loan.  And, as long as I'm understanding things correctly, that means we could take out a loan for more than the purchase price and use the extra money to fix up the house (similar to a construction loan, I guess?).

I won't be heartbroken if this doesn't work out, but I don't know.  Today was the first time I saw the inside of the place (and that was just through the windows), but I can see so much potential.  It's a cute little house and, as long as there wasn't anything major wrong, it would be really easy to make it look really nice.  The kitchen is HUGE compared to others I've seen in the area (ours is 11x11 and this one has at least another couple of feet added on), the living room is kind of small, but that's not a terrible thing.  The bedrooms are all upstairs and should be fairly decently sized, considering the square footage of the main floor. 

[splash]

The value of a home is what you are willing to pay for it.  Forget all of those other numbers, what are you willing to pay for it?  Have an inspection, a complete one, one that is more than a normal house inspection for purchase.  Have someone with electrical background, one with a plumbing background, check fo rlead based paint in an older home.  If you can't do the work yourself have a remodeling contactor take a look and see what a cost to fix up might be.

If you don't mind being a landlord and with the house being next door consider going for it.  Just make sure you have the budget to do it.

Oops, I was typing as you were posting.  What am I willing to pay for it?  Frankly, if our finances could support it, I'm cool with the current purchase price.  Oh, and I keep saying things like "if our finances could support it", only because we haven't went that far with things yet.  We are literally only a week or so into this entire thing, so it's only been within the past couple of days that joking around has turned into anything substantial. 

AKP, the house is in the Red Bridge area, which is kind of your wheelhouse, so you're probably aware of the potential issues of houses in this area.  Also, I guess you could say we are lucky people, because we've got friends who are well versed in the trades (I'm not 100% sure we know a certified electrician, but I know we'd know people who know one and we're pretty much set on everything else). 

Personally, I don't think I'd mind being a landlord.  After my dad passed, my mom was left with three rental homes that were either recently vacant or (in the case of one person who was renting land) decided it would be fun to try and mess with a recent widow.  I've helped her establish some guidelines, such as making people provide references and sign a lease.  When my dad was alive, he didn't do leases or references (he generally went with his gut, I think).  Which is why I probably ended up spending most of my vacations as a kid cleaning up after people who left in the middle of the night.

Anyway, I guess you could say that I learned from my parents what NOT to do as a landlord, in the "modern" age.  Like, require a lease, references, and raise the rent to amounts that were comparable to the age of the house and area values.  Basically, after my dad died, I insisted she raise the rent amounts (and make future tenants sign a lease, give references), not because I was wanting to be an asshole, but because it was warranted and the market could handle it.  She kept getting shit tenants who'd skip out on the rent payments (honestly, because she was too damn nice), but also because she was renting WAY below market value and wasn't properly screening.  Basically, my mom was the perfect landlord for deadbeats.  No references, no lease, and you could get a 2br/1bath with a HUGE yard (and possible an acre or so if you needed) place to live for no more than $300 a month (utilities included, except satellite).  Also, can't pay your rent for 4-6 months?  No worries.  Just give her a sob story about how you and your wife lost their jobs and you're good, until she calls one too many times asking about the back rent and you bolt in the middle of the night, leaving the house totally trashed and half the appliances inoperable because they've been smashed with a sledgehammer.

Heh, basically that's my way of saying I'm aware of what it means to be a landlord.  If this does come to pass, I plan on screening heavily (hoping that us being next door will be a further deterrent) and enforcing some kind of "office hours".  They can be loose (my husband doesn't have a 8-5 job, so we keep weird hours), but I'd try to establish that a code of if it's not something you might call 911 for, maybe give some thought about if it could wait a couple of hours. 

Ok, now that I think about it, I'd probably be a pretty shitty landlord (low patience with morons).

[splash]

Heh, I was too busy rambling and forgot another question I wanted to ask. 


In this kind of rental situation, what about legal liabilities?  Not at all the same situation, but an example of what I'm meaning.  Last year, I was hanging out with some friends, in a house they own.  We were hanging out in their garage (garage doors open) and it was pouring outside.  I was being silly and ran outside to play in the rain and I ended up falling on my ass on the slick concrete.  I wasn't injured (maybe a bruise or whatever), but if something like this happened on my rental property, the injured person could sue me, I guess.  How do you prevent your house from being taken away?  Basically, how does one handle the liability factor?  Will insurance suffice or would there need to be a corp/LLC in place?  (Mental note to talk to people we know in the insurance industry!)

[KCAppraiser]

Getting a loan for the property might be difficult.  From my experience most lenders do not want to make loans that small and when they do, the interest rate is typically very high.  Unless there is a program I don't know about, which is possible, the house has to be owner occupied to get an FHA loan, DO NOT say it is going to be if it isn't.

[FangKC]

Just based on experiences my aunt has had, when you write the lease, be sure to write in that you as landlord will make monthly, or quarterly, inspections of the house to access maintenance issues. That way, you can get into the house to see if they are tearing it up, or damaging it in ways that the deposit doesn't cover.

[studentper]

I'm not an expert in the area, but I'd get one of your lawyer friends to take a look at the sales contract and the type of title the bank is providing. 

[mlind]

Inspections, inspections, inspections - every inch. 

I was a landlord for a while.  Luckily I had two sets of good tenants.  References from previous landlords, credit check, etc.  There are companies that will do a complete check (including criminal) for around $100.  They usually do checks on potential employees, but would work for tenants as well.  Pets?  Smoking?  Lots of things to consider. 

Check out local laws applying to landlords and tenants.  Nolo Press publishes good books on this.

[loftguy]

great suggestion mlind.

Splash, it's obvious that you are totally new to the game, though that should not scare you off. 

Some time in the library, or at Barnes and Noble, should be on your immediate calendar.  There are beaucoup volumes on landlording and you should look at the simplest first.  Your big lessons are pretty basic.  The exotic and esoteric will likely not apply to you.

[aknowledgeableperson]

I wasn't injured (maybe a bruise or whatever), but if something like this happened on my rental property, the injured person could sue me, I guess.  How do you prevent your house from being taken away?  Basically, how does one handle the liability factor?  Will insurance suffice or would there need to be a corp/LLC in place?  (Mental note to talk to people we know in the insurance industry!)

Have friends who are landlords in the St. Louie area.  Before selling out a few years ago they owned a pest control business under LLC conditions.  When they went into the rental business the LLC formed a subchapter S corp for additional legal protection I guess.  You can get landlord insurance to provide coverage for the house and liability.  Have friends whose daughter and son-in-law are renting in the LS area and paying $1,700/month rent.  House is fairly new and nice but $1,700?  Wow.

Guess one thing to look at is any additions to the house and properly done?  Other issues might be wood-rot around the windows and doors.  Don't know of many houses with foundation problems so those should the exception instead of the rule.  Many have wood burning firepalces so make sure the chimney is in working order.  And depending on when built the roof, furnace and AC made need replacing.

[splash]

Excellent suggestions all around, so thanks everyone!  I don't know why it didn't occur to me to head to the library for some resources, so I'll be doing that in short order. 

[taxi]

What's a library?

[loftguy]

What's a library?

That's where geeks, nerds and mousey women used to hide before they became cool.

[mlind]

That's where geeks, nerds and mousey women used to hide before they became cool.

And they all wore glasses.