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House purchase question

Old 05-17-2007, 10:03 AM
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Default House purchase question

May have an opportunity to purchase a neighbor's house that abuts mine. I've been in the neighborhood 15+ years and plan to stay, block up from the water great neighbors, nice town. Its a single family house that has been very well maintained by its owner who is moving to be closer to her kids and grand kids. If I do buy it short term (3-5 yrs) I would rent it to a single family or older person/couple then my parents might move in as they are getting up there in age.
Never owned a rental house - what are the pitfalls I should look out for? Questions I should be asking?
Thanks for any insight.
Greg aka mymojo
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Old 05-17-2007, 10:12 AM
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Greg there is no pitfalls "IF" you get the right tenant.
Will you be the one performing all maintenance? If so you could be tying up your free time.
I have to assume you could return money into the property to avoid some taxes.......would you be the one doing this work?

I'd go for it.
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Old 05-17-2007, 10:43 AM
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Default RE: House purchase question

Three things to condiser:

Property taxes will probably be at a higher rate.
You have to pay taxes on the depreciation claimed when you sell it.
Think about an umbrella liability policy and/or an LLC. Both are cheap.


Mr.Landlord.com is a great place to get started. Always check credit when trying to get tenants
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Old 05-17-2007, 10:49 AM
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Thanks Garret - yes the tenant thing is the big if but I think managable. The house in question has new windows, roof, boiler cedar shingles paint only on the trim in typical New England fashion. Most repair work I'd have done by friends in the various trades (am an architect so have frineds who are gontractors, electricians etc.) so I know I'd pay fair money for any required work. The biggest plus from my point of view is I would have some control over an adjacent property so the possibility of a tear down for a spec house or McMansion would dissappear and I would pick the tenant. I'd also be investing in a known commodity in a down cycle in the R.E. market. Also gives my parents an option as they get oler and may want to live in a single story situation.....Lots of plusses but there must be downsides too, not sure of the current mortgage rates for rental property, insurance costs etc... will be chasing that stuff down this week.

Thanks for the info sweet pea - have formed an LLC for the business property I own so that sounds like the right route for this too. I'll look into that link you gave me!
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Old 05-17-2007, 03:22 PM
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mymojo - 5/16/2007 10:49 PM
Lots of plusses but there must be downsides too, not sure of the current mortgage rates for rental property, insurance costs etc... will be chasing that stuff down this week.
Greg I wouldn't worry about insurance costs (liability, fire, flood, wind, etc) and stuff like that.....that stuff is all factored into the rent. Ideally you need the mortgage, utilities, taxes, insurances and everything else to be covered by the rent plus a little bit more for you. Keep all your rental funds in a separate bank account......so if by chance one day you do need to go to court over things your personal banking matters do not become court knowledge.

The "real" downside to being a landlord is getting hosed by a problem tenant! The Landlord/ Tenant Act does not give you the landlord a lot of room to stand on when the tenant runs amuck! For you the landlord to evict a tenant when the tenant is being a real dickhead it can take you several months to get them legally out. And if loosing several months rent isn’t bad enough, you could also end up with a trashed place that needs dollars to bring it back into renting condition. There’s your real downside Greg......but there is an awful lot of good tenants out there!

So for you to rent the place out to a stranger you have to do a credit search on the person, enquire into their work history, check references and do a “surprise” visit to their current residence, knock on their door and say hi, “I’m just doing background check on you, mind if I step in”? ....seeing first hand how someone lives is sometimes your best judge of a person.
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Old 05-17-2007, 03:33 PM
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Downside:

Here is one for you. A few year back I am called by a bank to inspect a house that they foreclosed on - house was a rental. They were afraid that the tenant did some "damage"

1) All drains plugged shut and all faucets left running for god know how long

2) The tenant reached into EVERY electrical switch/plug/box and cut ALL wires as far into the wall as a pair of cutters would reach

3) The tenant went into the basement and cut every floor joist as far as they good reach with a 7 1/4 circular saw

4) The tenant went into the attic and cut every other rafter as far as they could reach with a circular saw

5) The tenant went into the basement, opened up the clean out trap on the sewer line, and filled it with concrete

How is that for a downside?
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Old 05-17-2007, 03:42 PM
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HOLLLLLLLLY COW...........that was one pissed individual, that or one Really Really sick individual!!!
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Old 05-17-2007, 03:48 PM
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Be ever so mindful of the future if you sell to your family or whomever !!!!!! If you declare on your taxes that this is
rental property and then sell...be prepared for the big tax bite as mentioned earlier....only way to avoid is to do a
10-71 tax exchange...(one rental property sold for another invested in)....also mentioned aboved....TENANT QUALITY..
Get a good contract (rental agreement...late payments etc...) and keep a close eye on your property....renters will
NOT care for the property as the OWNER will !!!!
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Old 05-17-2007, 04:08 PM
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RI Builder - man that is some serious damage! I cant imagine the story behind that disaster.

Meeting with my accountant next week to nail down the tax issues.

I guess my hope would be that the house is a single family that will command a pretty sizeable rent in a neighborhood of well kept homes-this should weed out the wanna-bes to some degree. Also near a university with a lot of visiting professors that need housing for a year or two. Wouldnt rent to students cause I can still remember my own college days.

As far as keeping an eye on the tenant and house - I cant miss it as its adjacent to my yard so I'll see it everyday.

Dont have a good temperment to deal with bad tenants so I'll have to think about that.

Lots to mull over - but I'd hate to say 5-10 years from now "damn! I should have jumped on that when I had the chance" it's already happened twice in my neighborhood in the 15 years I've been here. One place was available for $125k 10 years ago sold last year for 450 and another on the water was $325k 6 years ago and sold for $925k 2 years ago.

Thanks for the info guys-will keep you posted.
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Old 05-17-2007, 04:10 PM
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A current landlord will probably not tell you if the person is a headache because they are trying to get rid of them. They will probably tell you he is a great tenant. Credit check, last 3 landlords references. Someone who already got rid of a headache will be much more honest with you. Perfect credit only. Any foreclosures, leins, repos-no deal. No kids, no pets(especially cats) no section 8. Get first,last and security. Id imagine its a nice area(close to the water) so rent wont be cheap. Say its 2000 a month- someone moving in will pay you three months and possibly a month for a broker. Most people with 8k ready to go aren't dirtbags. Single LLC for this property. Dont lump it into your other one. Skip the umbrella policy also. The big tax hit would only occur on the gain. Sell to your folks for no gain=no capital gains tax or it will be longterm 18% after either 18 months or 2 years.
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Old 05-17-2007, 04:16 PM
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It's actually a Sec. 1031 exchange where you "trade" your property used in a trade or business or held for investment for property used in a trade or business or held for investment. What you could do down the road, when your parents move in, if they do, is gift parts of the house and land to them each year, you and your wife could give your mom and dad up to $48,000 worth of the property each year, until they own it. Then, if they wanted to sell it, they could utilize the principal residence home sale exclusion to shield the gain, then you could get the asset back from them after their deaths. I know, it sounds morbid, but it's life. Otherwise, you could simply allow them to use the house for however long and then, you could move into it as a principal residence for two years and then sell it using the principal residence exclusion by yourself. The downside to this is you would have to pick up the depreciation taken while it was a rental property and pay capital gain tax on it at the rate for "unrecaptured Sec. 1250 gain". Given that the depreciation is taken over 27.5 years straight line, that recapture won't be a whole lot.
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Old 05-17-2007, 04:56 PM
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"but I'd hate to say 5-10 years from now "darn! I should have jumped on that when I had the chance" it's already happened twice in my neighborhood in the 15 years I've been here."

Greg, that statement speaks volumes. There are so many people that will not take risk. No risk no reward.

"I'd also be investing in a known commodity in a down cycle in the R.E. market." Nothing wrong with that at all.

Even though people buy into this media hype of a "down cycle", to me it's just a minor correction if that. Tell me where the price for land is getting less expensive and how about the cost of building materials.

You indicate that the same scenario has happened in your neighborhood on two occasions, why would it be different for a third time? Answer is it won't. You'll say "what if" 10 to 15 years from now if you don't move on it.

If you can swing it I'd go for it. Good advice to be selective on the tenants. There are good tenants looking for a nice place to live.

Dartmouth is a nice town why wouldn't someone invest in real-estate in Dartmouth? You just need to find the right tenant and like you indicated, for the money you'll have to get for the rent that will most likely insure you'll get good tenants. People that make enough money to afford to rent a nice house typically don't trash a place like RI Builder described.

Both of those real estate deals beat the stock market over that time frame why not go for it?


PS: I'm not a real estate investor and I don't play one on TV, but I've yet to loose money on a real-estate deal so it seems to me that if you do the do diligence thing, (it's a known entity), and hang onto it for a while you'll end up on the positive side.

Good Luck.
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Old 05-17-2007, 07:02 PM
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Thanks all - great advice all around. I'll keep you posted on the outcome - palms are getting a little sweaty - similar to the first solo trip out on the boat.......
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Old 05-17-2007, 07:35 PM
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Dont let your rental broker list it on MLS. Thats where alot of section 8 rental people look for apartments. It is also illegal to discriminate against people unless it is a 3 family or less and you live in it. Then you can deny someone based on anything. You have to be careful with the family thing with the lead paint laws. Unless the place was built after 1978 or it was certified deleaded, someone can put you through a headache. Most people watch their kids well enough but some people see $ by letting the kid eat paint chips.
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