Loans Answers

Need advice on buying home vs. investing

Question: Hello all,

I really need some good advice from someone who has experience in buying and investing … I am in my mid 20s and have a little bit of money saved. I live in Southern Cali and I am single. I make a descent salary. And I am looking to do something with my money rather than just let it sit. Oh I am also in the 40% tax bracket.

I am currently renting an apartment for $1200.00 / month.

Here are my options:

There is a new property that I am buying (Almost closed on but still have the option to get out of) in the desert which I want to rent out. The property is 80K and will rent for around $700. This means very little (If nothing) out of my pocket each month and stilla good tax write-off. But I would still be paying $1200 to $1400 for rent each month for my own place.

My other option is to buy a place in southern Cali for around $265K and live in it myself.

I just don’t know which one is a better investment.

Another option is to buy them both but I am not sure I am ready for such a commitment. Especially since I don’t own anything yet and have no idea what the amount of work involved is.

Will it be harder for me to buy a house in Southern Cali if I already own a property (Like the rental in the desert)? meaning is it easier for a firt time home buyer? And is that Salary dependent?

Thank you all in advance.

Answer: I once belonged to a rental management association. Their frequently repeated motto was that in the rental business, people turn over a larger portion of their monthly earnings to you, than they do to any other business!

Think about that.

Now you are young, so I would say go ahead and purchase rentals. Learn about negative and positive cash flows, capital gains, depreciation, business expenses, etc. i.e. Everything you can write off once you go into the rental business.

Also may want to learn about HUD low income section 8 housing from a landlords point of view. I think in some situations, HUD will pay for damage caused by tenants.

Speaking of damage, it is very important to have a renter sign a rental agreement. This will protect you from the ding dongs, but otherwise is ignored in the case of good tenants. Bad tenants can do thousands of dollars worth of damage. More than any damage deposit will cover. An example is a renter whose dog damaged two doors and a gate from scratching. The doors and gate had to be replaced and this is not cheap. We’re talking $1200.00 damage that renter did adding up everything. Then there was the guy who overhauled his motorcycle inside the house. The floor was ruined by transmission fluid and had to be replaced. You will not be able to sue these people since they don’t have any money BTW.

Weeding out bad tenants is very important lately. Some landlords run a check through a renters check agency. They keep records of bad tenants. Also run a credit check. Any bad credit – don’t rent to them. If they are not responsible with their own finances, then don’t expect them to be responsible with your $80,000 house. Also landlords will check the driving record for DWI and multiple violations. Again, not responsible when driving… Also they will do a criminal check. You don’t want a drug lab under any circumstances. This can cost big bucks for environmental cleanup.

Get detailed rental applications which ask for background information, SSN, previous addresses, credit information, etc. Have each adult who will be living there fill out an application and check them out. Make the applicants pay for the checks. And have language in the rental agreement that only those applicants may live in your house and no others without your approval.

Some rental management associations provide these forms for free. Also will know about the laws and so forth. Good to join one of these and attend a few meetings when starting out. I would go around to some large apartment complexes and ask if they know of such associations in your area. Also they may give you copies of their forms and agreements if you ask nicely. Also ask about renter check services.

Expect periodic expenses like water heater going out, etc. Best to get things fixed right away and have it done right. There are rental management companies which will handle renting, repairs, etc. for a fee. Some of these companies have their own maintenance people.

Also become familiar with your state’s laws on renting. What non-refundable fees you can charge, rules on returning deposits, process for evicting a tenant, etc.

Home to live in?

Expensive homes sometimes are difficult to sell. The higher the price, the pickier the buyer. Now you might want to find a run down house in a very nice neighborhood. Trashy yard, fence falling down, etc. Best if it is a neighborhood where everyone else is buying and fixing up the properties. (On the upswing.) Then fix it up and sell for a higher price a few years down the road. Note that kitchens can cost $20,000 and up to remodel lately, so figure out what your costs will be before buying.

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