Buying a house and renting it out? Is it a wise move?

Mike H: Buying a house and renting it out? Is it a wise move?
Here is my situation.

-I am currently living with brother and pay about $ 500/mo.
-I take home $ 2700/mo.
-I spend roughly between 300-400 on gas, going out, food etc. I probably can cut back.
-No debt and 20k saved up.
-I pre-qualify for 300k at 4% at WestStar Mortgage Inc
-I was told that FHA is coming out with a new rule that goes into effect by September 7 which will mean my monthly pymt will increase about 120/mo.

Now I was thinking that maybe I should buy a house before Sept 7 and rent it out. My coworker say he heard some horror stories about tenants basically destroying the home and when the owner bring them to court – they’re able to get out of it. Do you guys think this is a good move? My brother say I can still live with him for the next 5 yrs and he will cover me for 1 year where I do not have to pay rent. By 5 yrs hopefully I’ll have a higher wage and can pay the mortgage by myself.
@Bill

So what if I live there and rent out some rooms? Would that still be consider as rental property?

Answers and Views:

Answer by Josh Scott
It is wise as long as you get them to sign for any damages THEY make is their responsibility to pay for. ALSO you can almost like… interview them in a way to be safe. But as long as you have their signature on paper and someone was there to see the signing then you have legal proof if they damage the house and dont pay back OR fix it themself you can easily win the court case if anything happens.

Answer by Danny B
There is always an element of risk with any enterprise. The best answer to your situation is, should you decide to go through with this, practice due diligence. Background checks. Credit reports. Have a lawyer write the lease. Don’t buy a property you yourself would not live in, as “bargain” properties seldom are. And NEVER rent to friends or family.

Answer by acermill
Understand that “investment property (rentals) do NOT qualify for the same down payments and interest rates as do houses you intend to use as a primary residence. When you inform you lender of your intentions, expect a much higher down payment requirement, along with a higher interest rate. As well, become informed about what it takes to be a landlord. I have about 200 units which I own and manage, and most days I feel like I am running a KinderCare child care facility. Tenants seem to think they are entitled to MUCH more than they are actually entitled to.

Do your best to engage in a meeting with a current landlord, who might be able to give you some clues as to the pitfalls involved.

Good Luck !

Answer by Janice 10
You can find good tenants and there are not so good tenants, just as there are good LL and not so good LL. Buy a home you would like to move into with in the next five years, it is a buyers market and rent the home out until you know you can afford the mortgage on your own or you could find roommates to help pay and share expenses. You do have different options. Which one that will work for you is the best option. Best Wishes.

Answer by Bill
You will not be able to get a 4% FHA loan on rental property. You may be looking at a conventional loan in the 6% range if you have an excellent credit score. I don’t think you will qualify for a $ 300K loan with your current income. $ 300k@6% for 30 years=$ 1800p/mo not including taxes and insurance. If you were able to do this you would be stretched too thin. You would need a reserve of at least $ 6000 to cover the pymts for a couple of months in case of vacancy,repairs and maintenance. Good Luck

Answer by My Take on It
I don’t think that if you have never been a landlord before you should buy such an expensive property and then rent it out. Too many things to consider when you are a landlord, and if you don’t know what you are doing, you could end up like the landlords your friend was warning you about who get taken and their property trashed.

Now, what I *would* do is possibly look into buying a duplex. Or, if you live in an area where you live in the main house and rent out the basement, or if they have properties that have mother in law suites on them, do that. That way, you are on site, and I think it would dissuade your tenants from trashing things and you can keep an eye on your property and earn some money too.

Answer by skiingstowe
Hi,
1st. DO NOT buy a house for 300K. You can not afford it.

2nd. You may want to consider a property with four or more units in the 150K to 200K range. The more units you have the greater chance of having rents paid.
If you had a large house and the tenants stop paying, you loose. If they damage that single unit, you loose. More units equal cash flow ins. To a higher degree.

3rd. If you tell the lender that you want this as a rental you will have to have a higher downpayment, and higher Ins. cost with greater restrictions, so if you want to buy….buy a multiple uint property. If you are going to pay anyway, you need to maximize cash flow.

4th. Yes you can buy a large house and rent rooms, but each city or town has laws that pertain to boarding houses and you’ll have to play by those rules. I’d check out those rules prior to buying, so you know how to play that game.

5th. Do ALL back ground checks and check their credit history, and don’t be a softy that gets run by the tenant. You run them….they don’t run you. It’s your property….not theirs.

6th. If you do go with a bigger house and rent rooms. Do not let the lender know your intentions. If you live in one bedroom and rent the others, you don’t need to let the lender know this. All they need to know is you are going to live there, and you can afford the payments. What you do after is your business, and uncle Sams. Come tax time you’ll want to take advantages of the tax breaks for rental property, and a portion of that home allows tax breaks that other rentals get. I have a large Vic (5000 sq. ft.) With ten bedrooms and ten baths, and I can claim approx 85% as rentals which gives me great tax breaks. I also have three other large apartment buildings, and manage another six units, so my advice is be smart. Pick as many Landlords brains as you can….good start here, and learn as much as possible as quickly as possible. That way you’ll cut your learning curve time. The longer the learning curve, the higher chance you’ll lose some of your cash flow, and there’s really no need for that this day and age.