Does it make any sense to buy a rental property before buying a residence?

February 22, 2006 2:01 PM

Would it make any sense to buy out-of-state rental property before buying a residence?

I live in San Francisco, where I'm renting because it's almost impossible to afford a home. I recently visited some relatives in Springfield, Missouri, and the city's housing market is booming due to an influx of retirees and its proximity to Branson, Missouri, which is "Las Vegas...if it were run by Ned Flanders."

Housing prices are incredibly cheap compared to San Francisco (3 bedroom/2 bath houses are available for under $100,000), and one of my relatives that lives there worked in real estate, so he's got connections and would probably be able to recommend a property manager.

So, I was thinking I could buy a house there and maybe have the tenants pay the mortgage. Would this make any sense?

posted by kirkaracha to work & money (12 comments total)

Generall the wisdom is that being a landlord is a real headache, and that being an absentee landlord is a migraine headache.
posted by JamesMessick at 2:06 PM on February 22, 2006

Why not use your relatives' real estate connections to find a good local real estate holding company and invest in it, or in its locally-managed properties? Real estate can be a great passive investment, but it's a terrible active investment unless youy have the ability (scale, skill, proximity) to run it efficiently.
posted by MattD at 2:13 PM on February 22, 2006

The Q&A you pointed to (have the tenants pay the mortgage) had some decidedly mixed things to say about this idea.

I think that the bottom line is that this is an investment; like other investments, you might do well or you might do poorly, but there are risks and success is by no means guaranteed. (Consider: property taxes, property insurance, property repairs and management fees, deadbeat tenants, tenants who destroy the place and skip town, a drop in housing prices, an economic slump that drives down average rents and/or increases the rental vacany rate; and major problems with the house that only surface in a year or two.)
posted by WestCoaster at 2:39 PM on February 22, 2006

A couple of things come to mind that might be problematic -- I don't know enough about the specifics to elaborate but in general I believe that there are tax consequences if you buy a property that is not going to be your primary residence.

Also, I personally wouldn't do this because I believe, if you're a first-time homebuyer, you can qualify for special mortgages that are more favorable than regular mortgages (i.e., reduced minimum down payments). I don't know the answer to this, but don't you forfeit those benefits if your first mortgage is for a rental house?

Are you going to eventually move to Branson?
posted by jerryg99 at 3:11 PM on February 22, 2006

You're asking yourself the wrong question. Whether you become a landlord before or after becoming a homeowner is far less important than evaluating whether to become a landlord at all.

It's a business. Do you want to get into the real estate business? Do you know what a Minnesota landlord's responsibilities are? Do you have the cash reserves to fulfill them? Are you prepared to continually educating yourself about ongoing changes to the real estate industry, local housing prices/conditions, etc? Do have a realistic business plan for reaching/sustaining profitability? Are you personally capable of saying an unequivocal "no" to your super-nice tenants' requests for special niceties, because their requests do not fit with your profitability plan? How would you realistically deal with a a tenant has taken advantage of your absenteeism by running a drug ring out of your property, or your property manager and the attractive tenant he's allowed to get away with not paying rent for the last 3 months?

Hint #1: if your plan calls for relying on a property managementy company to turn a profit for your, expect that every last penny of profit will just happen to be eaten by management fees and unexpected expenses.

Hint #2: if relative housing prices is the main basis for your profit model, expect to lose a bundle. If investing in cheaper housing markets were all that's needed to turn a profit, the smart money would be in 3rd world real estate. They're way cheaper than Springfield, MO.

Hint #3: what JamesMessick said.

If you want to do this, yes, it can be a good business and there's certainly profit to be made. It can also be an incredibiliy volatile business. Much is written about the housing bubble, but much less about the volatility that individual investors face. One bad tenant can wreak thousands in damage and unpaid rents. One bad winter can leave you suddenly in need of tens of thousands for a new roof, or exploded pipes. Things just come up when you're least prepared. As a homeowner, you'd have some wiggle room to postpone big expenses or DIY. Whereas as long-distance landlord, you could be stuck picking some random contractor out of a phone book and praying that he doesn't rip you off too badly for Sunday night emergency roof repairs. You need to be able to carry a large float to cover the unexpected, and plan on profitability being something that comes from the long-term average of your good and bad years

There are easier ways to generate income with a $100k investment.
posted by nakedcodemonkey at 3:18 PM on February 22, 2006

No, it's probably not a good idea. Being a landlord sucks. It is not just the sit-back-and-collect-checks affair everybody seems to imagine. And, as an investor, having enormous amounts of assets (and exposure) tied up in a piece of land sucks. The real estate market is the opposite of liquid: selling isn't even guaranteed. If you really want to invest in real estate then this is not the way to go about it. Betting all your money on a single property is a recipe for disaster. This is not a good idea.
posted by nixerman at 3:25 PM on February 22, 2006

Don't be one of "those people".
Californians have already driven up prices for homes in Idaho, Arizona, and Colorado making them unaffordable for the locals.
Leave the Midwest alone.
Please.
posted by madajb at 4:29 PM on February 22, 2006

Thanks for all of the helpful answers, everyone.

Are you going to eventually move to Branson?

Dear God, no.
posted by kirkaracha at 4:29 PM on February 22, 2006

There are easier ways to generate income with a $100k investment.

Please share.
posted by jjg at 6:45 PM on February 22, 2006

Well, supposedly the stock market averages about 10% a year over the long term.
posted by MrZero at 8:04 PM on February 22, 2006

Do it, after careful study.
And you are not investing $100K - only maybe 10 or 15%.
posted by growabrain at 8:09 PM on February 22, 2006

There are easier ways to generate income with a $100k investment.

Please share.

No mystery. Open any investing book/magazine, or talk to any accountant. Plenty of investment instruments (stocks, bonds, REITs, CDs, money market, etc.) are simpler than being a landlord. For a 100k+ investment, many brokers/bankers also offer preferred rates and waive various fees.

Landlording can be a fun, rewarding, very lucrative business for someone who is prepared to meet the challenges. But if you're simply looking to make money, then risk to principle, access to capital for ongoing business expenses, and personal expertise/effort are factors worth serious consideration.
posted by nakedcodemonkey at 8:58 PM on February 22, 2006