Rental Property

[ladonnarosso]

I bought my first home when I was 23 years old. I've lived there for 5 years now, gotten married, had a baby, and it is now time for me and my family to move to a larger home. My current home is a townhouse style condo, and I feel like it would be the perfect rental property, based on it's location and the fact that I (or my tenant) would not be responsible for the outdoor maintenance. I do believe I would have a positive cash flow each month that it is occupied, based on the going rate in my area for rent of similar houses and the amount that I pay in mortgage and HOA fees.

My main question is this; We plan to try and buy a single family home in the next year, after we have paid off our second car and our debt-to-income ratio is lower. What kinds of steps can I take over the next year to try and make sure that we are able to secure a second mortgage for a second home? Are there any special caveats that I need to know about when applying for a second mortgage that would be different than when applying for our original martgage? When I add both payments together, I am trying to keep our debt-to-income ratio at 43%, which would put the next home's mortgage around $1200/month. That is totally doable for us as long as the rental is occupied, but I am nervous if we have multiple months that it will remain unoccupied. Any advice for this (hopefully) first time landlord?

[snafu]

Before making a decision on being a landlord, I suggest talking to owners who have rented their units in your building. I'd talk to who ever you know on the Board who could send you in the right direction. Suggest you look at 'optimist' on Personal Finance thread entitled 'Sell Rent.' Choosing the right tenant is difficult. You need to plan 1% of the value of the unit for annual repairs, taxes, insurance, funds to cover vacancies, utilities and advertising. Did you plan to hire a rental agent?

[ladonnarosso]

I haven't considered using a rental agent, thinking that I would just advertise and choose the renters myself. What are the pros and cons of a rental agent? Thanks so much for your response. Since posting this, I've become more involved with my HOA and I'm talking to other homeowners who are currently renting.

[offbeatmove]

I know some pros of a letting agent like he/she can tailor a service to best suit your needs, including finding and checking the suitability of a tenant, managing the property, dealing with repairs and organizing insurance. If you do not use a trusted agent and the agency goes bankrupt, then you as the landlord will still be liable to the tenant for any outstanding money due to the tenant, such as their deposit. When you find a rental agent be sure to have a background check first before engaging.

[TBH]

You might want to talk to a mortgage broker about how hard it would be to qualify for a new mortgage without selling your place first.

I recently bought a rental property, and was told I had to have 2 years of land lording behind me before my rental income would be counted in a mortgage application. Until then, both mortgages are counted as debt, but the income I'm getting for the rental doesn't count in my debt-to-income ratio. I was able to qualify for a mortgage for the rental, but it was a little challenging.

If you screen tenants yourself, keep in mind that you'll need a lot of things--a rental application, a way to check their credit, a release form for the prospective tenant to sign giving you permission to check their credit and call their references, etc. I know a fair amount about real estate but I still had a lot to learn getting my first rental up and running. Now it's been rented for a few months and things are going well, but it was a very busy time at the start.

It also sounds like things will be a little tight at first. You do need to have enough of a cushion between the rent and your expenses so you can save up a buffer to get you through times of vacancy.

I know the idea of having a rental property is attractive. But it's only a good idea if the numbers work. If the numbers are too tight, it's too big of a risk.

There are a million books for first-time landlords. I recommend getting one from the library and skimming it before you decide.

Good luck! Owning rental property always seemed like an appealing prospect to me, and I'm glad I finally managed to do it even though it's been a stressful process and the learning curve was steep.

[ktmarvels]

We rented out our old house after moving to our new one. When it was friends living there we were the property managers. Now that we live even further away and we have strangers in the house we have property managers running it. My biggest word of advice is if you are thinking about refinancing the current mortgage do it while you are still living there. Once you move out it is no longer your primary residence and the rates are higher.

[skittles]

My main question is this; We plan to try and buy a single family home in the next year, after we have paid off our second car and our debt-to-income ratio is lower. What kinds of steps can I take over the next year to try and make sure that we are able to secure a second mortgage for a second home? Are there any special caveats that I need to know about when applying for a second mortgage that would be different than when applying for our original martgage? When I add both payments together, I am trying to keep our debt-to-income ratio at 43%, which would put the next home's mortgage around $1200/month. That is totally doable for us as long as the rental is occupied, but I am nervous if we have multiple months that it will remain unoccupied. Any advice for this (hopefully) first time landlord?

What is your current debt-to-income ratio? Do you and your wife both work? Get references for multiple smaller mortgage companies, I feel they are more likely to work with you and understand your needs than a major bank. Use the time to interview a few of them and get their advice on how to prepare your finances. They should be willing to do it for free. The loan officer who did our house flat out told us we wouldn't qualify for a 2nd property due to our income (I am self employed, and had less than 2 years of self-employed income), but a different officer at another company came through.

I think you already know this, but to be sure- the mortgage company will not allow you to use the expected rental income to offset your first mortgage payment, even though that is your plan. I think you are accounting for this when you say 'when I add both payments'. This happened to us earlier in the year when we were in pretty much the same position as you, except we moved from a larger house to a condo! Now I'm a first time landlord.

We were told that 2 years of rental income is required before you can use that income as a part of your DTI calculations. So I assume that if 2 years from today, we wanted to move back to a house and rent out our condo (and have 2 rental properties), we could include the rental income from our first house in our overall income calculations.

Also, how much are you planning to put down for the house?

As for the ease of renting- there are so many variables there that it is hard to give you advice. What kind of neighborhood is it- how desirable? What are the typical rents? What is your cash flow going to be? Are any major appliances/systems close to end of their life? What about the roof? The forums at Bigger Pockets might be useful for you.

Biggest piece of advice- either hire a good photographer or do it yourself, but take the best photos possible of your house, and STAGE IT!! Remove the junk and clutter- do as much cleanup as is possible. I listed my house on zillow and trulia (through postlets) and separately on craigslist. Within 5 days I had over 60 inquiries- set up a google voice number, or better yet if you are confident about the desirability of your property- no phone, just an email. I sent everyone a form response to avoid any problems, informing them of qualification criteria and told them about an upcoming open house for 2 hours that weekend. That was the only time anyone was able to see the house, and over 40 people showed up (I was shocked). The #1 thing they told me was the photos did it.

I asked interested people to put their email addresses on a sign-up sheet, and that I would email them an application after the open house. As soon as the last person left, I emailed everyone. By that evening I had 3 completed applications and all supporting documents (copies of IDs, pay stubs etc) from qualified people. I ran credit and background checks, all qualified, and the next morning, the first couple got me the deposit in certified funds, which gave them the house. So far it's been a good experience. Keep all your emails as proof. To be absolutely safe, you should pick the first tenant to get past all your screening- including giving you security deposit in certified funds. So set stringent qualification criteria to weed people out.

Set the minimum verifiable pre-tax income at 3x rental amount, or ideally more. Unmarried roommates- each should have at least 2x monthly rent as income. Decide whether you will allow pets or not. If so, are you going to charge a fee/pet rent? I charged a $250 additional security deposit per pet, so if there's no pet damage, they get it back. But I included in the contract that this could be used to pay for any other damage as well. Make the refundable security deposit more than 1 months rent. Get a solid lease agreement. Run a credit and background check and check their references. The best thing you can do is to get good tenants, so do not slack on any of these. Spend your remaining time learning all about this so you can feel confident of doing it yourself- if your cash flow is tight then a rental agent becomes a luxury.

Also, don't treat it as your house anymore, lose the emotional connection, it's business. Don't rent to friends or family-- too much scope for relationships going bad.

[krantcents]

I rented out my home when I bought a townhouse (downsized) years ago. The most important part of renting your home is the front end application and credit verification. You want to screen the prospective tenant to make sure you feel secure with your choice.

Be careful with secondary mortgages because banks have tightened down credit. I would ask the banker without doing an application because they may turn you down. Good luck.

[cashinasnap]

Well I can insist you to pay off your debt first, basis on which you should further think of owning another property. Yes renting out property is definitely a good idea in this regard.