Dear Monty: Question your motives buying investment property
By Richard Montgomery
Reader Question: My husband and I have the chance to purchase a second home. We value our home at approximately $265,000. We owe about $130,000 on the mortgage. Our monthly mortgage payment for our house is $1,100. That plus all of our other monthly bills comes to approximately $2,300 to $2,800 per month.
We want to buy a house that is on the internet for $215,000. The homeowner is an acquaintance. He stated that he would like to get about $190,000 out of the sale. It would be a private sale. So there would be no commission fees just closing cost?
We can sell our stocks which would bring about $40,000. My husband is not retired but has two pensions set up for when he does retire. So the $40,000 is more or less freed up for such a transaction. We could add additional dollars to make a 20 percent down payment and cover closing costs if needed. We would rather keep those extra dollars in the bank as a rainy day fund. We think the rental value of this house is about $1,300 to $1,500 per month.
We plan to rent out the house for a while; possibly for several years. We would buy the house with the intention that one of or even both of our sons upon graduating college will find gainful employment, at which time they could take over the house, and it’s payments.
We would like to know exactly how to go about purchasing the home without using an agent? Finally, what are the pros and cons of owning a second home? Any other answers you could provide to questions I haven’t asked would be appreciated.
Monty’s Answer: A notion that comes forth reading your letter is to suggest to you and your husband that there may be a few subjects for you to review together before you decide to go ahead with your plan. For example, your motive for buying this home is to help your two sons buy their first home when they finish college and land their first job. For most new real estate investors their goal is to improve the returns they receive on their savings and build wealth. If you decide to proceed this link outlines all the steps, except choosing a broker, you want to follow.
Consider that the reason you state may not be a good reason to buy an investment property. Not everyone can or should own rental property. Being a landlord is a risky business fraught with opportunities to lose money. Here is a helpful article about costly mistakes.
Proper due diligence
Additionally, you are making assumptions that may not be accurate. Many unexpected events can occur in three years. For example, it appears part of your motivation to buy now is that you believe that you will save money buying direct. Even if you decide to buy, it would be wise to look at several comparable homes before going ahead. Viewing other similar homes will help you better understand value.
What if your sons don’t want to live there? Or do not want to own a house? What if they relocate in another state or another part of the country with their job? What if you get a bum tenant who stiffs you for six months rent (there are renters out there who prey on new landlords).
When investing in real estate, scrutinize the property with a certified public accountant (CPA) to work out the numbers with pencil and paper. The advisor should have a practice that includes small rental investors. There are many variables with your idea, and there are a variety of other options to consider that may minimize your risk.
One option is to continue to save and keep the status quo. If and when the boys graduate and choose to stay close by, you can include them in the conversation and consider the proposition at that time. Another option may be co-signing a mortgage if they want to buy a house and need the help.
Finally, if you were to dismiss the idea of doing it for your children and embrace the idea of investing in real estate to build wealth for yourselves, that would be a better plan. Here is an article about thoughts to consider before becoming a real estate investor.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”