The Passive-Income Seeker
Jake Rheude, 25, director of business development at an ecommerce fulfillment company in Knoxville, Tenn.
“I bought a $170,000 three-bedroom townhouse in Knoxville last year after socking away enough money over nine years—from gifts, income from after-school jobs in high school and a $4,000 loan from my dad—to cover a 10-percent down payment.
Because I didn’t put down 20 percent, I’m on the hook for PMI (private mortgage insurance), which is $49 a month for two years. Still, I consider it a great investment. My monthly payment is $950 including taxes and insurance, which is probably $400 less than what I’d pay to rent a comparable property.
I’m particularly attracted to the home’s rental potential. I’m a single guy and enjoy living in Knoxville, but don’t know what the future holds. If I move one day, I’m confident I’ll be able to rent it out to college students who live in the area.
It feels good to have a future passive income stream in the pipeline. Adding a rental property to my portfolio will be a huge asset in the long run.”
Expert insights: “Putting down 20 percent is the rule of thumb because it gives you a cushion should you have to sell into a market that’s since declined. It also lowers your monthly payment and means you don’t need additional insurance. So putting down less than that makes maintaining a solid emergency fund all the more important, should disaster strike. You’ll also want enough wiggle room in your budget to afford all related housing costs (think: taxes, insurance, maintenance, HOA fees and the like).
As for renting it out, my biggest advice as a longtime landlord is to remember that you’re likely going to have vacancies in between tenants—even in active renters markets. Build this into your budget so you aren’t blindsided by dry periods. Also, depending on how far away you live, it might make sense to hire a property manager to help with maintenance and repairs.”
The Unsuspecting Fixer-Uppers
Yenni, 29, and Jonathan Desroches, 29, pet care company owner and a senior hardware engineer in Worcester, Mass.
“Jonathan and I were thrilled when we put down 10 percent and bought our three-family home in August 2013 for $295,000. We live in one unit and rent the other two for $2,400 per month, which covers our entire mortgage, taxes and insurance.
The house is now valued at $335,000—a nice uptick in just a few years—but there’s a huge downside: Post-sale, we found over $125,000 in necessary repairs, from mold to structural issues to water damage and more—all of which our inspector should have noted. We’ve leaned on our savings and a mix of family gifts and loans to cover $90,000 so far.
We also discovered during the sale that our seller’s agent happened to be our buyer’s agent’s boss and fiancé. (Hello, conflict of interest!) Plus our mortgage broker forgot to submit our rate-lock forms, which bumped our interest rate up from 3.25 percent to 4.25 percent.
In a nutshell, it’s been a nightmare. If we could go back in time, we’d do way more research and definitely hire a more qualified inspector.”
Expert insights: “As Yenni well knows, it’s really important to find a trusted inspector. I recommend going with someone who belongs to the International Association of Certified Home Inspectors because they’ve taken a certification exam and adhere to a standardized code of ethics. Her situation also drives home the potential pitfalls of putting down less than 10 percent; without a fully loaded emergency fund, big-ticket home repairs can be a huge financial burden.
Also, the relationship between the buyer’s and seller’s agent should have been disclosed to her in writing, and is in clear violation of Massachusetts’s disclosure laws regarding dual agency. At the very least, it sounds like she wasn’t treated with proper care, but I’ll leave it to a Massachusetts attorney to say whether she has any financial recourse.”
May 5, 2017
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