Mr. BFS and I would love to diversify our investments for retirement, and the rental property we have is making us crave more. We’re looking at our buying options and finances right now to see if we really need to wait until next year like we originally planned. Here is how it is looking.
I was browsing foreclosures in our area last week and noticed two in our old neighborhood. That area is perfect for rental property!
- Homes built in 2004 and 2005.
- $110,000 to $130,000 foreclosures with 3-4 bedrooms and 2.5-3 baths.
- The homes need less than $10,000 in repairs and basic renovations before renting.
- Great school district.
- A solid market for tenants at $1300-$1500 per month since the area is nice (safe suburbia close to groceries and entertainment).
- Well built homes (we have had very low maintenance costs on our first house in these last 6 years).
- Affordable property taxes ($2500-$3000 a year).
- No home owner’s association. Score!
- 5 miles away from our new house (10-20 minute drive depending on the time of day). That’s close enough to keep an eye on our properties but far enough away that we won’t be physically visited by our tenants very often.
The only thing holding us back is the cash on hand needed to buy another house.
The Financial Picture
At 4% interest, a 30 year mortgage after putting 20% down for one of the foreclosures available right now would run about $450-$500 a month plus about $300 a month for property taxes and home insurance. That’s $800 a month for a property that can easily rent for $1300 right after it’s fixed up. That looks to be a great investment!
Plus, even in the no-tenant months, we can cover $800 extra without risking our overall financial health. It would bring our monthly nut including taxes to $8000 again like late 2012 instead of the $7200 it is at right now. We have been hitting that income target for 2 years. We also only have one debt – the $205,000 mortgage we have left on our current house. So this would bring our debt up to about $300,000, but our properties would be valued at a combined $500,000.
BUT, buying another house right now would also mean we would need the cash on hand for 20% down, closing costs, and renovations. A realistic estimate on the high side of all of that would be $40,000. We do have a little more than $40,000, but that would pretty much wipe out most of our cash savings. We never would do that since padding is just plain necessary when you are self-employed.
- Wait until next year and see how much cash we can save up by then. The risk here is that there won’t be any foreclosures available in our old neighborhood by next year. We may have to expand outside of our comfort zone or pay $130,000-$150,000 for a non-foreclosure.
- Take out a home equity loan on our paid off rental home to cover that $40,000 needed around closing. But then we’d have two more loans on top of our current mortgage.
- Look into loans that don’t require 20% down. We do have 2 years of self-employed tax returns now, so finding a loan will be easier than it was last year hopefully. But self-employment may simply mean that banks will want 20% down. We’ll visit a couple and see what they suggest.
- Ignore rental properties completely and open up a SEP IRA as soon as possible instead. I just can’t see retirement accounts making the interest that would make them more profitable than $1300-income rental properties that only cost $800 a month. Property values in this area are still pretty low and make for great long-term investments (there aren’t many places where you can get a 2000 square foot home for $110,000).
We’re leaning towards talking to some banks and seeing what our loan options would be. If 20% down is necessary, we’ll probably wait until next year.
What would you be leaning towards in our position? What obvious options have I missed?