Would it ever make economic sense to buy a house and rent it out, while being a tenant in another place yourself?

June 21, 2004 1:07 PM

Does it ever make sense, if you live in a place where you can't afford to buy a house, to buy a place and rent it out, while still continuing to rent yourself, to save up money to buy your own place down the line?
posted by gottabefunky to home & garden (16 comments total)

Only if you can afford to make the house payment in the event of a deadbeat renter or a rent dispute. You run a very real risk of screwing up your credit rating, but if you plan ahead I don't see why it wouldn't be a decent way to make a little income.

Don't forget realtor fees & property taxes when figuring out whether you can make it work financially.
posted by bcwinters at 1:36 PM on June 21, 2004

It makes plenty of sense as long as your rental property is profitable. Think about it - if you don't have tenants, how long can you last paying rent and a mortgage? What if interest rates go up faster than you can raise rent? What if property taxes/gas/hydro/etc go up? What if the place needs a new roof or boiler a year from now?

I would say it's a risky proposition, unless you're very confident in the property's attractiveness to renters (like close to a college), your personal financial situation (carrying the mortgage), and the local tax/real estate situation.

The best way to hedge is to buy a multi-unit dwelling, like one of those 8 family three story apartment buildings. Lots more work, but you're more protected against a single renter skipping out on you. Of course, they're more expensive too.
posted by loquax at 1:40 PM on June 21, 2004

Don't forget realtor fees & property taxes when figuring out whether you can make it work financially.

And home insurance, utilities, maintenance, and down payment. Also, deadbeat renter implies that you found a renter in the first place. Finding renters for a decent period of time is very difficult.

IMHO, it's a smart decision to buy a place only if you can afford to pay for it by yourself. Then, either rent it out or make money by living in it with a couple of housemates.

Small aside, a close family member is dealing with this exact situation right now. Already bought a place and can't find anyone to rent the place. E-mail me if you'd like; I have a whole list of expenses/risks/rewards sitting in front of me.
posted by BlueTrain at 1:41 PM on June 21, 2004

gottabefunky: so your plan is to buy a place _somewhere else_ (presumeably where you can afford to buy), then rent it out. You're now paying mortgage and rent, and hopefully, you're making some of that back on the renter.

Hm.

Unless the rent will be significantly higher than your mortgage payment, I can't see how you'd get ahead.

My suggestion? Look for a lease-to-own deal in the area you finally want to buy in... you'll probably get a loan to cover 85% of purchase price, and you'll pay "rent" at a slight mark-up until you've covered the other 15%.

That's a very abbreviated explanation, of course, but you get the idea.
posted by silusGROK at 1:46 PM on June 21, 2004

Or, move to Canada, where a down payment is no longer required at all!

(In exchange for a 2-3% insurance penalty on the total amount borrowed and likely a higher interest rate.)
posted by loquax at 1:49 PM on June 21, 2004

Yeah, you can do that here in the US, too, Loquax, as long as you're willing to pay PMI & the higher rate.
posted by luriete at 1:55 PM on June 21, 2004

In a relatively stable housing market, I suspect it would be hard to make a good go of this. Let's say you buy a house for $200,000 and need to cover about $1,500/mo in PITI (principle, interest, tax, insurance) just to break even. First, look at houses selling for $200K in your area, look at houses renting for $1,500, and look at what a house about as nice as the $200K house rents for. I suspect you can do a little better than break even, but when you account for repairs (and with renters, believe me, you'll have repairs), it may be a wash. And you still need to cover the rent on the place where you actually live. Perhaps the house you bought to rent out is much larger than you'd want to live in yourself. In that case, I can see how the numbers might work to your advantage. If the house is, say, near a university, where the student renters won't be very picky about the quality of the place, and you may be able to charge a high premium, then things start working in your favor.

Now, in an up-and-coming market, things could get interesting. Let's suppose you can see the future, or at least take a calculated risk. There's a neighborhood in your area on the verge of gentrification--you can buy a house relatively cheaply, fix it up, and sell it down the line. Here, you aren't making your money off the rent so much, you're delaying gratification and making it off the eventual sale (if your gamble pays off). My own lender has been trying to convince me to convert to a fixed/floating mortgage--fixed at a ridiculously low rate for 5 years, and then floating after (I think that you're not paying any principle off with for the first 5 years of plan, though, so that changes the numbers a little). In this scenario, it would be easier to cover your monthly nut, and you plan on selling (or perhaps refinancing) eventually anyhow. Of course, you still need to cover rent on the place you live--you could do all of this at least as easily while occupying the house.
posted by adamrice at 2:40 PM on June 21, 2004

Unfortunately, it can take years for rental property to become profitable--initial income often has to go to upkeep, repairs, and improvements.

OTOH, you might consider a compromise: buy a two-, three-, or four-family, then reside on the premises. If you take this route, then the banks will consider rental income when they calculate your mortgage qualifications, and there are apparently some other financial advantages, tax-wise. Some of my colleagues have gone this route and are quite pleased with the result--in effect, the rent pays the mortgage.
posted by thomas j wise at 3:15 PM on June 21, 2004

When I bought a house, I had 3 lodgers. It was a bit crowded...
I'm now down to just the one.

I can't see how the scheme you propose can ever pay off. Whatever profit you're making on your rentees, you're paying back to your own landlord. Unless I'm missing something?
posted by salmacis at 3:25 PM on June 21, 2004

check your profile email ;)
posted by contessa at 5:31 PM on June 21, 2004

Excepting the case you have a very good deal (relatively high return, low risk), it does not make too much sense to me.

Here are my assumptions: you are renting the place and have extra money put aside (if you do not any savings, next time you have to do repairs you are in trouble). You have no credit card debt (if you do, pay it first). You want to invest the money to get extra income. Buying a house should be seen as an ordinary investment decision and should be compared with CDs, bonds, and stocks. You have to address all the following issues: return, risk, liquidity, credit history influence, tax advantages. Only if this particular real estate deal is the best of all possible investments, then proceed.
posted by MzB at 6:11 PM on June 21, 2004

Wouldn't you also need to consider that you'd have to pay taxes on the rent from your tenants?
posted by orange swan at 8:53 PM on June 21, 2004

And, if a place isn't your primary residence, you will have to pay a capital gains tax on the equity you've gained on the place when it comes time to sell.
posted by orange swan at 8:55 PM on June 21, 2004

you'd have to pay taxes on the rent from your tenants?

Only to the extent that it is actually revenue. Your entire mortgage payment (plus any maintenance expenses) would be deductible since it is a business expense.
posted by kindall at 9:14 PM on June 21, 2004

Only to the extent that it is actually revenue.

By which I mean, income.
posted by kindall at 9:15 PM on June 21, 2004

WAIT!

I don't know why - I assume it has something to do with the tax deductibility of interest payments, but every single entity I dealt with when borrowing money for my house asked if I intended for this to be my own personal, primary residence before purchasing. It's either the tax issue or lenders don't want to give you money for ostensibly starting a business, which in some ways is what you're proposing.

Talk to an expert about this plan.
posted by vito90 at 10:11 PM on June 21, 2004