Invest in rental?

F

flyeagle111

CFO
I have been going back and forth lately about whether or not to buy a house and use it as a rental. I would live in one of the bedrooms and rent out the other two (looking at three bedroom, 1500 sq ft homes). I live in Minneapolis and don't think renting it out will be an issue at all. The rental market here is good, especially for individual bedrooms.

Here's the thing- I have about 85K saved up, mostly in retirement accounts and no debt. I currently rent a bedroom in a house and my car is fully paid off. The houses I'm looking at are in the 140k-170k range. What sucks is I'd have to take about 30K out of the retirement accounts for the down payment (that 30K will be worth a lot in 35 years when I'm about to retire).

Any suggestions on whether to leave the money in the IRAs/401ks/taxable account or to buy a home for the rental purpose?

Thanks!
 
flyeagle111 said:
I have been going back and forth lately about whether or not to buy a house and use it as a rental. I would live in one of the bedrooms and rent out the other two (looking at three bedroom, 1500 sq ft homes). I live in Minneapolis and don't think renting it out will be an issue at all. The rental market here is good, especially for individual bedrooms. Here's the thing- I have about 85K saved up, mostly in retirement accounts and no debt. I currently rent a bedroom in a house and my car is fully paid off. The houses I'm looking at are in the 140k-170k range. What sucks is I'd have to take about 30K out of the retirement accounts for the down payment (that 30K will be worth a lot in 35 years when I'm about to retire). Any suggestions on whether to leave the money in the IRAs/401ks/taxable account or to buy a home for the rental purpose? Thanks!
Click to expand...

Talk to a good mortgage broker. There is no reason for you to be putting that much money down on a house.
 
Have you looked into renter's warehouse here in the cities? I'm sure they could give you a rent estimate for what you're looking for. Definitely a lot of great properties in the area that can be snatched up for a low interest rate!
 
Only reason I mentioned them is because of their resources when we were a tenant with them. I'm sure there are other options out there.
 
A few points to consider: Do you want to be a landlord? do you want to run a rooming house? renting rooms out can have a whole host of problems. How long do you intend to be in the area. Transaction costs for purchasing a home are usually 5% to 10% of the purchase price, unless you are going to keep the home for several years you will never recover this cost.

Taking money (or other property) out of any tax deferred retirement account makes it (the distribution) taxable as ordinary income. in addition there is a 10% penalty if you are under age 59 1/2 unless an exception applies.
If you still work at the employer who sponsors your 401K plan see if a loan against your 401K is possible. Loans are not income and thus not taxed, they become taxable if not repaid before you leave employment (other events may also make outstanding loan balance taxable). If you are no longer at the employer who sponsors the plan consider rolling it into a rollover IRA, this may give you better options. Money can be removed from an IRA without tax or penalty if replaced within 60 days. This can be relevant if a sale falls through at the last minute. Depending upon your tax situation you may want to convert some of your Traditional IRA money into a Roth IRA (making the amount rolled over subject to tax but not penalties.) Money may be removed from a Roth IRA for the purchase of a first home without penalty. Roth conversions are especially beneficial if you do not need to pull out the money this tax year and thus spread the taxation over more than one tax year. Check with a competent tax adviser before taking any money out of retirement accounts.

Purchasing a home for rental usage can be a great investment or a headache and a money pit.
-- Dave
 
Interest paid on your mortgage can be tax deductible so if you need a write off that might help. Are you planning on staying in MSP for awhile? Can you stand another winter with roommates in 1500 s/f?

I wouldn't take anything out of retirement, especially if you have to pay penalties to do so. Maybe spend another year saving a down payment and shopping for a good deal on a place? Its a great idea, I've got a number of friends who have renters pay their entire mortgage and live for free. The money they save in living expenses goes to other investments... In the long run they will be very wealthy people. But then again, they don't move every few years like pilots!

I am very much in the same situation. I have been looking at buying something for years, my biggest expense is rent. I struggle with the liabilities of owning a place, being a landlord, worried that I would loose money if the market crashes, paying insurance and fees...
 
Note that the no penalty withdrawal from IRA's is limited to $10,000 per year. The amount withdrawn is still taxed as ordinary income but will not be subject to the additional 10% penalty. Real estate offers a number of tax benefits, and can be a great way to build wealth, though it may take quite a few dollars out of your pocket in the short term. As others have mentioned rent is not cheap either and when is the last time your rent went down.
 
Just some thoughts I have on this topic:

I was renting a room in my house in Ohio for 500/month. The insurance company recently raised my premium and my property taxes went up slightly so my mortgage went from 480/month to 550/month (yeah I'm shopping around for better rates). But basically until my roommate moved out, I was living almost rent free, I only covered the utilities.

It was a pretty good experience for me and a socked away a lot of extra money every month, granted I didn't rent the whole house, just a room and I was around a lot to see what was going on. Furthermore, my roommate and I were/are good friends so I worked out fine, he was my sim partner from a previous regional carrier (we shared a hotel room for 6 weeks) so I could trust him. I'd be VERY leery about putting up an ad on craigslist, especially since I'm gone half the month.

If I rented out the entire house in my neighborhood, I would get around 750-850/month (its a 2.5 bedroom/1 bath). I'm actually considering doing that now so I can move back to Florida. But the house will require about $3000 worth of work to get to the point where I can rent it to a family and be up to code. It's in good shape but probably needs to be re-shingled, needs GFI outlets installed in the kitchen and bathroom, new carpet upstairs, and other minor stuff.

That said, if I do it I would recommend a property manager if your inexperienced at renting out property (like me). The ones I talked to in Ohio charge first month's rent (to find the tenant) then 10% of rent per month after that. I'm not sure if that's market price?, (I need to do more shopping around) but the one I talked to said she'll find tenants, check on the property regularly, be the one that gets called bc the basement flooded at 3AM, and take care of evictions if necessary. After the mortgage, taxes, insurance, property manager, and MX costs I don't think I'll be making more than $50 cash per month, but its free equity.

So its not quick money, if you can buy into a dip or put a lot down on a house that's move in ready you may be able to make a decent amount extra per month after rent. But, I still feel its a better way to go than a lot of the mutual funds/IRAs/etc out there, and you have much more control with what is going on.

MORE EDITS: You can deduct any repairs, appliance purchases, management fees, mortgage interest, and cleaning fees against the rental income from the house making it very tax advantageous. But, you need to own the property for two years or more before you sell (and make less than 250K profit on the sale) OR you have to pay capital gains tax. So basically, plan on owning the house for at least two years.

Also, when I talked to the bank during the purchase process 2 years ago I was able to qualify for an FHA loan (3% down but I have to pay PMI), but these loans are not available for pure rental property (I'll probably have lived in the property for at least 3 years before renting it out). I plan on using a VA loan to purchase property in Florida in the next 2-3 years, but again I can't it use as rental property.

Good Luck.
 
Last edited:
HVYMETALDRVR said:
Just some thoughts I have on this topic:

I was renting a room in my house in Ohio for 500/month. The insurance company recently raised my interest rate and my property taxes went up slightly so my mortgage went from 480/month to 550/month (yeah I'm shopping around for a better rate). But basically until my roommate moved out, I was living almost rent free, I only covered the utilities.
Click to expand...
How does that work?
 
You can probably find a property manager who will give you 8% and 75% of one month's rent if you push them hard. If you can't and they hold firm to 100% and 10%, let me know, because I'll be opening an office in Ohio ASAP. :)
 
ATN_Pilot said:
You can probably find a property manager who will give you 8% and 75% of one month's rent if you push them hard. If you can't and they hold firm to 100% and 10%, let me know, because I'll be opening an office in Ohio ASAP. :)
Click to expand...

She was a reference I got from a CA I worked with and told me that's the norm for Columbus... Apparently, I need to keep looking haha.
 
HVYMETALDRVR said:
: You can deduct any repairs, appliance purchases, management fees, mortgage interest, and cleaning fees against the rental income from the house making it very tax advantageous.

But, you need to own the property for two years or more before you sell (and make less than 250K profit on the sale) OR you have to pay capital gains tax. So basically, plan on owning the house for at least two years.
Click to expand...


Some items you can expense, and thus deduct in the current year. Some items you must capitalize (such as appliances) and thus deduct a portion of the cost over each of the next several years

There is No capital gains exclusion for rental property, the exclusion is only for your primary home.
 
flyeagle111 said:
I have been going back and forth lately about whether or not to buy a house and use it as a rental. I would live in one of the bedrooms and rent out the other two (looking at three bedroom, 1500 sq ft homes). I live in Minneapolis and don't think renting it out will be an issue at all. The rental market here is good, especially for individual bedrooms.

Here's the thing- I have about 85K saved up, mostly in retirement accounts and no debt. I currently rent a bedroom in a house and my car is fully paid off. The houses I'm looking at are in the 140k-170k range. What sucks is I'd have to take about 30K out of the retirement accounts for the down payment (that 30K will be worth a lot in 35 years when I'm about to retire).

Any suggestions on whether to leave the money in the IRAs/401ks/taxable account or to buy a home for the rental purpose?

Thanks!
Click to expand...

If this property will be your primary residence you can use an FHA loan. Some companies offer 5% down mortgages with PMI and sone will do 100% financing with no PMI in exchange for a higher interest rate.

Property is a great way to diversify your investments, while leveraging other people's money to acquire a tangible assets for yourself.

Another benefit to a buy and hold property investing strategy is that rents will increase over time while your mortgage stays the same and is eventually paid off, giving you a somewhat inflation indexed passive income. You can also use equity in that property to acquire others over time.
 
Stoneage said:
Some items you can expense, and thus deduct in the current year. Some items you must capitalize (such as appliances) and thus deduct a portion of the cost over each of the next several years

There is No capital gains exclusion for rental property, the exclusion is only for your primary home.
Click to expand...
It's all about the 1031 exchange, yo.

That is, if you want to move up. Which you always should want to move up :)
 
You must log in or register to reply here.
Back
Top