Buying a house in a city where you want to live in a couple of years
June 1, 2016 1:02 PM Subscribe
I'm considering buying a house in another city. Need help / stories / answers below!
I currently live in a very expensive city. I'm looking to leave in a couple of years and move to a new (smaller, more friendly) city. I just got a financial windfall and can buy a house in the new city (but not the current, expensive city) for all cash. Housing prices are rising rapidly in the new city, and in a few years, I might be priced out.
I found a house I really like. It's beautiful and also has great income potential (it's a duplex). I'm thinking of buying it, renting it out, and then moving into one of the units when I move there in a couple of years.
I have a few questions:
- What kind of research should I do about state law in the new state?
- How hard is it to get the logistics done (mortgage broker, home inspector, repairs, etc.) from afar?
- The new city is in a non-recourse state. If something goes really wrong with the house, I can just walk away, right? Does that hurt your credit (assume no foreclosure)? Does anything else bad happen?
- Is this a crazy idea? What can go wrong owning a duplex in another city?
- What else should I do before I make an offer?
I currently live in a very expensive city. I'm looking to leave in a couple of years and move to a new (smaller, more friendly) city. I just got a financial windfall and can buy a house in the new city (but not the current, expensive city) for all cash. Housing prices are rising rapidly in the new city, and in a few years, I might be priced out.
I found a house I really like. It's beautiful and also has great income potential (it's a duplex). I'm thinking of buying it, renting it out, and then moving into one of the units when I move there in a couple of years.
I have a few questions:
- What kind of research should I do about state law in the new state?
- How hard is it to get the logistics done (mortgage broker, home inspector, repairs, etc.) from afar?
- The new city is in a non-recourse state. If something goes really wrong with the house, I can just walk away, right? Does that hurt your credit (assume no foreclosure)? Does anything else bad happen?
- Is this a crazy idea? What can go wrong owning a duplex in another city?
- What else should I do before I make an offer?
As a former home-owner and someone who counts no fewer than 15 realtors in her friend circle, I'll give you as much info as I have on the subject.
What you want to know about first, is what are your obligations as a landlord. Understand everything about landlord/tenant relationships in your state, county and municipality.
The logistics are super easy to get done. A mortgage broker can be anywhere (although if you're buying with cash, you don't need a mortgage broker, right?) So you can cross that off your list. Your realtor can recommend a home inspector, or you can get one off of the ASHI website. Or ask friends in the area for home inspectors they've used and been pleased with. Do spend the extra money to inspect the roof and put the camera down the sewer pipes (OH, how I wish I had known to do this!)
Repairs. You're going to want a local management company to manage this property for you. You don't want tenants calling you with issues when you're two time zones and 3000 miles away. They will arrange for tradespeople to repair anything that comes up.
You can't just walk away from property. You owe taxes on it. You must sell it, or give it away, or cede it to the state, county, municipality. Non-recourse only applies to defaulting on mortgages, since you won't have a mortgage, again this doesn't mean anything to you.
Lots can go wrong with a dupex. But a smart business person will assess the risks, mitigate them as much as possible and go from there.
1. Tenants can stop paying. A management company will move to evict them. You may be out some rent during that time, hopefully the other tenant will pay to keep you in the black, not the red.
2. Tenants can have a conflict with each other. If you're far away it doesn't affect you, but they can trash your property pretty good until the inevitable murder-suicide.
3. Repairs. Large, expensive, scary repairs. Replacing the furnace, roof, foundation, etc. It'll happen sometime in the life of the property. Have at least $20,000 in savings to meet such needs.
It's not crazy if it's well thought out. If you've met with an accountant to discuss all the possible things you could do with your windfall and this is the best option. If you understand the tax ramifications (you'll pay an accountant about $1,000 to prepare your taxes annually if you choose to do this.)
Meet with an accountant now, to discuss your investment strategy with regards to your money. Really understand the costs and possible benefits from doing this.
Lastly, I'll ask you, what benefit is there to owning a home? Will you be happy living in a duplex for the long term? I recommend challenging your beliefs about home ownership, they are pretty irrelevant in the US today. Here's a good essay that's worth reading.
Me? I'd rather take that money, make some prudent investments and continue along my merry way. Man plans, God laughs. What if you DON'T move to this location? What if you need a wad of cash, but it's tied up in this investment. What if housing prices DON'T continue to rise?
People in 2006 were convinced that there was no real estate bubble, so many lost everything. I've lived through a few bubbles now, and frankly, I'm over it.
posted by Ruthless Bunny at 1:23 PM on June 1, 2016 [7 favorites]
What you want to know about first, is what are your obligations as a landlord. Understand everything about landlord/tenant relationships in your state, county and municipality.
The logistics are super easy to get done. A mortgage broker can be anywhere (although if you're buying with cash, you don't need a mortgage broker, right?) So you can cross that off your list. Your realtor can recommend a home inspector, or you can get one off of the ASHI website. Or ask friends in the area for home inspectors they've used and been pleased with. Do spend the extra money to inspect the roof and put the camera down the sewer pipes (OH, how I wish I had known to do this!)
Repairs. You're going to want a local management company to manage this property for you. You don't want tenants calling you with issues when you're two time zones and 3000 miles away. They will arrange for tradespeople to repair anything that comes up.
You can't just walk away from property. You owe taxes on it. You must sell it, or give it away, or cede it to the state, county, municipality. Non-recourse only applies to defaulting on mortgages, since you won't have a mortgage, again this doesn't mean anything to you.
Lots can go wrong with a dupex. But a smart business person will assess the risks, mitigate them as much as possible and go from there.
1. Tenants can stop paying. A management company will move to evict them. You may be out some rent during that time, hopefully the other tenant will pay to keep you in the black, not the red.
2. Tenants can have a conflict with each other. If you're far away it doesn't affect you, but they can trash your property pretty good until the inevitable murder-suicide.
3. Repairs. Large, expensive, scary repairs. Replacing the furnace, roof, foundation, etc. It'll happen sometime in the life of the property. Have at least $20,000 in savings to meet such needs.
It's not crazy if it's well thought out. If you've met with an accountant to discuss all the possible things you could do with your windfall and this is the best option. If you understand the tax ramifications (you'll pay an accountant about $1,000 to prepare your taxes annually if you choose to do this.)
Meet with an accountant now, to discuss your investment strategy with regards to your money. Really understand the costs and possible benefits from doing this.
Lastly, I'll ask you, what benefit is there to owning a home? Will you be happy living in a duplex for the long term? I recommend challenging your beliefs about home ownership, they are pretty irrelevant in the US today. Here's a good essay that's worth reading.
Me? I'd rather take that money, make some prudent investments and continue along my merry way. Man plans, God laughs. What if you DON'T move to this location? What if you need a wad of cash, but it's tied up in this investment. What if housing prices DON'T continue to rise?
People in 2006 were convinced that there was no real estate bubble, so many lost everything. I've lived through a few bubbles now, and frankly, I'm over it.
posted by Ruthless Bunny at 1:23 PM on June 1, 2016 [7 favorites]
- The new city is in a non-recourse state. If something goes really wrong with the house, I can just walk away, right? Does that hurt your credit (assume no foreclosure)? Does anything else bad happen?
Nonrecourse is a distinction relating to the mortgage. If you don't take out a mortgage, the recourse vs. nonrecourse distinction has nothing to do with you. If you do, what non-recourse means is that if you default on the mortgage, the lender must be satisfied with the proceeds of the foreclosure and cannot come after you personally to satisfy the rest of the debt. Note the key word "default" there--if you reach this point, your credit will be wrecked. Honestly, as with rabbitrabbit, I think that you're even framing the problem this way suggests that you haven't really taken on board the seriousness of the enterprise. I don't think the idea is inherently stupid, depending on the circumstances, but you need to be prepared to manage some complex moving parts, especially at the beginning, and to be able to withstand some risk of loss. It doesn't quite sound like you're there yet.
posted by praemunire at 2:40 PM on June 1, 2016 [2 favorites]
Nonrecourse is a distinction relating to the mortgage. If you don't take out a mortgage, the recourse vs. nonrecourse distinction has nothing to do with you. If you do, what non-recourse means is that if you default on the mortgage, the lender must be satisfied with the proceeds of the foreclosure and cannot come after you personally to satisfy the rest of the debt. Note the key word "default" there--if you reach this point, your credit will be wrecked. Honestly, as with rabbitrabbit, I think that you're even framing the problem this way suggests that you haven't really taken on board the seriousness of the enterprise. I don't think the idea is inherently stupid, depending on the circumstances, but you need to be prepared to manage some complex moving parts, especially at the beginning, and to be able to withstand some risk of loss. It doesn't quite sound like you're there yet.
posted by praemunire at 2:40 PM on June 1, 2016 [2 favorites]
Interest rates are super low right now so taking advanced that is a plus. I think rates on properties you plan to make income on are not as low as property you plan to use as a residence, so by not being able to move in right away you probably pay a higher interest rate for the length of your loan. Not sure how the duplex part factors in to that but maybe you could refinance once you move in.
I am currently in the process of buying a home in a different state from the one I live in. My realtor has been very good and does all the legwork, sends videos when she views the houses. I've gone out a couple times for inspections on houses we did not end up buying and I have to say, I highly, HIGHLY recommend seeing a home in person before you buy it. Pictures can be so deceiving, and even with Google Street view it's hard to get an idea of the neighborhood (noise, traffic, neighbors etc).
posted by WalkerWestridge at 2:53 PM on June 1, 2016 [1 favorite]
I am currently in the process of buying a home in a different state from the one I live in. My realtor has been very good and does all the legwork, sends videos when she views the houses. I've gone out a couple times for inspections on houses we did not end up buying and I have to say, I highly, HIGHLY recommend seeing a home in person before you buy it. Pictures can be so deceiving, and even with Google Street view it's hard to get an idea of the neighborhood (noise, traffic, neighbors etc).
posted by WalkerWestridge at 2:53 PM on June 1, 2016 [1 favorite]
Lots of good points so far. Also look at this from an investment standpoint. If you do some reading about investing, you learn pretty quickly that people, broadly speaking, advise investors to diversify risk so that one bad stock doesn't drag down their entire portfolio. It sounds like you're considering spending much or all of this windfall on this duplex, and without the windfall you may not be able to afford it otherwise. If that's all accurate, then you're essentially making a huge (to you) investment that is as un-diversified as it gets -- your not even investing in one company, you're investing in one asset: the duplex and the land it sits on. Not all investments like that are bad, but they are undeniably risky. Consider whether that's a good fit for your risk tolerance and other aspects of your financial life.
posted by craven_morhead at 3:56 PM on June 1, 2016 [1 favorite]
posted by craven_morhead at 3:56 PM on June 1, 2016 [1 favorite]
I've moved around a lot. The neighbourhoods I thought I wanted to live in when I first moved to a city were never the ones I ended up liking once I got to know the places. I hate the thought of where I'd have ended up stuck if I'd bought a house before moving.
posted by lollusc at 4:54 PM on June 1, 2016 [3 favorites]
posted by lollusc at 4:54 PM on June 1, 2016 [3 favorites]
How much time have you spent in this smaller friendlier city? Have you ever actually lived there? That is sort of unclear to me from your question.
If you've never lived there, then I think this plan is a mistake. I've moved a lot and lived in a bunch of different places. My original ideas about a city or town have never matched my actual experience of living there. Sometimes that's been a good thing. Sometimes that's been a bad thing.
Here are some things that are hard to tell about a city before you move there. Is it going to be easy or hard to find people who you like and who are about your age? Are there lots of people who are interested in being more than just friendly and actually want to be friends? Can you have the sort of career that you would like? What neighborhoods suit you best? How functional is the public transportation system? How bad is the traffic? How well does the weather suit you? How easy is it to do the sorts of activities that you enjoy? After a year, will the city feel too big or too small for you? What's the food culture like? What's the city culture like?
For all those reasons and more, I would never buy a house in a place that I'd never lived, no matter how nice it seemed after a couple of visits.
posted by colfax at 2:11 AM on June 2, 2016 [1 favorite]
If you've never lived there, then I think this plan is a mistake. I've moved a lot and lived in a bunch of different places. My original ideas about a city or town have never matched my actual experience of living there. Sometimes that's been a good thing. Sometimes that's been a bad thing.
Here are some things that are hard to tell about a city before you move there. Is it going to be easy or hard to find people who you like and who are about your age? Are there lots of people who are interested in being more than just friendly and actually want to be friends? Can you have the sort of career that you would like? What neighborhoods suit you best? How functional is the public transportation system? How bad is the traffic? How well does the weather suit you? How easy is it to do the sorts of activities that you enjoy? After a year, will the city feel too big or too small for you? What's the food culture like? What's the city culture like?
For all those reasons and more, I would never buy a house in a place that I'd never lived, no matter how nice it seemed after a couple of visits.
posted by colfax at 2:11 AM on June 2, 2016 [1 favorite]
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You'd need to educate yourself about how to be a landlord. Often times there are state laws and then municipal laws layered on top.
- How hard is it to get the logistics done (mortgage broker, home inspector, repairs, etc.) from afar?
If you're paying all cash you don't need a mortgage broker. If you AREN'T paying all cash, you should know that interest rates on investment properties are higher than they are for primary residences. If you're planning on living in the house, it makes financial sense to not buy until you're ready to live in the house. As for all the other professsionals (you don't mention real estate agent, but that'd be your first stop), get referrals and do some phone interviews. The logistics of buying a new duplex and then renting it out are a hassle even when you live in the same town, and would be at least twice as hard from afar.
- The new city is in a non-recourse state. If something goes really wrong with the house, I can just walk away, right? Does that hurt your credit (assume no foreclosure)? Does anything else bad happen?
I'm... not sure exactly what you're asking here. If you're even thinking about walking away from something so big, expensive, and time-consuming, you probably shouldn't even think about doing this.
- Is this a crazy idea? What can go wrong owning a duplex in another city?
Yes, I think it's a crazy idea. I think you're vastly underestimating how much work this would be. And there are so many things that could go wrong (expensive repairs, bad tenants, bad neighbors, hiring untrustworthy people, buying in the wrong area, etc.).
- What else should I do before I make an offer?
Do you know the city that you're thinking about buying in? If not, you need to do a lot of research about target neighborhoods, rental markets, growth outlook, etc. Have you owned real estate before? If not, talk to people you know who own houses about how much time and money they spend on maintenance and repairs.
posted by rabbitrabbit at 1:22 PM on June 1, 2016 [3 favorites]