Hello I Am 1% readers! My name is Erika, and I run the blog From Shopping to Saving where I talk about personal finance from the perspective of a 24-year-old former shopaholic. We get deep over there and talk about saving, shopping (or lack thereof), self-improvement, and more. Click at your own risk!
A little background: I’m definitely not in the 1% but I am striving to be part of this elite group! I live with my BF in a guest room in BF’s parents’ house. We do not pay rent, but we do pay for utilities and BF does a lot of their car repairs/pool maintenance.
The Investment Property Dream
We first did a cost analysis of buying an investment property. We would get to live rent-free while having someone else pay for our property. At the very least, we could get almost 50% of it paid off. After a few years, we could sell it off and earn a nice little profit.
We finally saved 20% for a down payment, but our experience with investment property hunting has been a whirlwind of events…
We kept pressing on, submitting offer after offer. After a slew of offers being turned down in favor of cash offers from other investors, and passing up on homes requiring nightmare-ish repairs, we finally decided to take a second look at our decision.
We came to the conclusion that the cost analysis shouldn’t have been the only factor in determining such a huge ($200k) decision.
A Second Look
After being outbid many times, we decided to take a second look at our decision. Were we doing the right thing?
We realized we were so involved in “wanting” an investment property and we were focused on believing that it would simply pave the way for financial freedom and comfort that we lost sight of weighing out the pros and the cons of actually owning an investment property.
Our first choice was to find a 2-bedroom condo with a low HOA that would allow us to have the rent cover the mortgage completely. Other investors had the same idea and knew where the booming rental markets were, so we were constantly outbid. Since our spirits were low from being outbid so many times, we started looking into 1-bedroom condos. Most of these properties had outrageous HOA fees or Mello Roos. Also, the rent for a 1-bedroom doesn’t cover the mortgage plus more…we would be losing money because of the high HOA.
After taking a second look at our decision, we came up with a few cons that we overlooked before.
Cons of an Investment Property
The places in our price range that were not scooped up by investors were all extremely old, and required a lot of repairs and renovation. So if you do decide to invest in an older home, know how much money you’ll need to put into it.
Naturally, we had to think of the types of tenants that would be occupying the property. Would they short us on rent? Would they be more careless with the property and cause more damage? This led us to thinking about tenants in general and how a lot of people have disregard for living spaces that are not “theirs.”
If you’re looking to buy a property solely as an investment, there’s no way to predict a positive growth in equity. Circumstances change and you may need to sell the property at a loss much sooner than you anticipated. In addition, you may end up living in this property if you have too much debt and can’t get qualified for a second property in the future.
Strict Loan Requirements
Lastly, this was another huge deal breaker for us. For FHA loans, government loans like Sallie Mae, and other agreements resulting out of foreclosures and REOs, you have to live in the property for at least a year. If you buy the place intending to use it as an investment property, then you HAVE to let your lender know. Your interest rate will be higher and I know there are other fees associated with going that route. You definitely don’t want to get yourself in trouble with mortgage fraud.
It Wasn’t the Investment We Wanted
As with all good things, you can’t get a free ride. There are always stipulations to follow and you have to decide what works for you.
It was at this point when we realized that we should not be getting an investment property “just because,” and we knew that it would not be a good investment after taking all of these points into consideration.
In the end, we decided that we would just keep saving for a large down payment on a home where we would want to live. We don’t have to think about being a landlord, managing the property, coming to fix repairs, or all the other headaches of having an investment property.
Also, I got accepted into grad school so it all worked out in the end!
Have you ever thought of investing in real estate? If you are a landlord already, do the cons of owning an investment property outweigh the pros? Do you have any advice for us future landlords?