Does this make any sense? (tenants, duplex, foreclosed, mortgage)
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I'm looking to sell our current home and cash out around $100k, then use those profits to buy a foreclosed duplex for $50k cash, plus another (guessing ?) $20k from the sale profits to rehab the property. IF the roof/electrical/plumbing/mold all check out and I could paint, refinish floors/add carpet, update kitchens/baths (nothing fancy, just new vinyl floors, paint existing cabinets, etc) on the cheap, would it make sense to own this duplex outright and rent it out, using the profits against the rent we'd pay to rent a family home in our same neighborhood? (* We're very creative/experienced at finding low priced materials & have a network of professional contractors who'll do the work at friend prices.)
I project rental income would be $1,700 a month. That's the rock bottom rental price of a 2 bedroom in the area for $850 a month x 2 units, minus taxes and insurance (let's call it $1,000 net), while I spent $1,850 a month on a house to rent for our family. That's a net housing expense of $850 a month, which is $500 less than the $1,350 we currently pay for mortgage/taxes/insurance, plus we'd own the duplex outright vs. still owing $150k on the next house we buy, we'd have documented cash flow & the ability to approach the bank for a loan against the duplex to do whatever in the future.
Here's the challenge: (you may have seen this coming ), My wife wants to sell our current house and use the profits as a down payment on another, nicer home for our family. She wants to own (or feel like she owns?) the home she raises her family in. I can't fault her for that. What I have been doing is gently showing her the math & explaining the advantages of owning the duplex outright & she's coming around to the idea.
So, I want to make sure this makes sense. Does it? Is my math wrong? Am I leading us down the wrong path?
I think there are a few things you've not factored into your equation. First is ongoing maintenance and marketing of the rental properties. One new furnace or a roof for the duplex will eliminate that $500 net savings pretty quickly.
People in rentals tend to move fairly often and that would include you. The cost of moving every two or three years would also eliminate some of the savings you've imagined.
Plus if you're without a tenant (or 2) for a month or more then your math goes out the window. Do you have the cash to carry the duplex when there is no income ? Plus your rent will be due no matter what happens to the duplex. I can't see any pluses in your plan.
Plus if you're without a tenant (or 2) for a month or more then your math goes out the window. Do you have the cash to carry the duplex when there is no income ? Plus your rent will be due no matter what happens to the duplex. I can't see any pluses in your plan.
I wouldn't say that there is no pluses but OP need to understand that his plan is not as simple as $50K for rental property + $20K rehab = instant $1700/month rental income. Take rental versus rental buying a new home to live out of the equation. I am only looking at the first part of OP question. Taking $70K+ to invest in a rental property for cash flow.
There are some negatives when you rent the home you are living in.
1) After your initial 1 year lease is over, the landlord could decide (for whatever reason) that they want you to move out. You have to find another place, usually with 30 day notice. This means you drop everything to find a different rental/sign lease and move all within the 30 day window.
2) No upgrades. Don't like the old loud fridge that came with the rental home? Well, you could buy your own. But don't expect the landlord to get a new one unless the old one breaks. Same with the paint, carpet, landscaping and everything in the home.
3) Maybe the landlord decides t sell the home. You have to allow buyers into the home and you can't say 'no'. Then you wonder.. what if the new buyer doesn't want it as a rental. So then you have to worry about getting notice to move out when your lease end-date arrives. Or maybe the new buyers wants to keep you as tenants. You are stuck in limbo. If you move to a new rental, the same thing could occur there.
4) Maybe the landlord doesn't respond when you report maintenance issues. Maybe the AC stopped working and maybe 10 days pass before the landlord decides to stop by and take a look and then announce 'yes, something is wrong with the AC'. I will look into getting a repair person. Another week passes and they tell you they are still working on getting someone out there.
I wouldn't say that there is no pluses but OP need to understand that his plan is not as simple as $50K for rental property + $20K rehab = instant $1700/month rental income. Take rental versus rental buying a new home to live out of the equation. I am only looking at the first part of OP question. Taking $70K+ to invest in a rental property for cash flow.
You're right, I shouldn't have said "No pluses", but his plan will only work if he gets tenants right away, and doesn't have any negative cash flow. Plus, what does he do for income while he's rehabbing ?
Owning rental properties with no mortgage is a weird little niche of the real estate business -- it is something that often holds appeal to immigrants but is not really financially wise in the US where tax policies favor folks that participate in the lending market...
The subquestion of "owning" one's primary residence vs being a rental is similarly something that needs to be considered from the perspective of US tax / legal policies -- numerous studies have shown that for most families in the US home ownership ( and increased "apparent worth" ) as a function of easy lending / tax policy is highly beneficial...
The caveat is that any diversion of income must go toward "wealth building" vs consumption...
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), My wife wants to sell our current house and use the profits as a down payment on another, nicer home for our family. She wants to own (or feel like she owns?) the home she raises her family in. I can't fault her for that. What I have been doing is gently showing her the math & explaining the advantages of owning the duplex outright & she's coming around to the idea. 
