When Is An Investment Property No Longer An Investment?

When Is An Investment Property No Longer An Investment?

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

Age/Repairs

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.

Tenants

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.”

Future

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?

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


Related Posts

13 Comments

  1. Noah

    You made the right decision. It’s very easy to look at someone who invests in property and think, “Wow, they have it made and are living on easy street”. The truth is that investment properties can be a huge time and money-suck if you don’t know what you are doing. I also think, because you are technically not married, that owning an investment property with your BF is risky. If you two were to break up, one or both of you would most likely want to sell the property, thus possibly negating any profits.

    My boss has talked extensively about rental properties at work during education classes and 2 things that I remember are: always hire a property manager and don’t invest in condos. Having someone else handle all the problems is the best check you will write all month. It’s also better to not be the one who collects the rent because some tenants will try to negotiate when their rent is late and play the “well, you are so rich so why can’t you let it slide this month” card. Condos also aren’t the best investment because there are always a ton of them on the market. They also don’t increase in value nearly as much as a house. HOA/Mello Roos doesn’t help in most cases either.

    Reply
    1. From Shopping to Saving

      Exactly! I was so blinded by the fact that we were going to get someone to pay our mortgage, while not looking at all other sides. My mom used to rent out rooms in our home when I was young but I think even that is risky since you live with the tenants, and getting them to pay the rent would be like pulling teeth if you became close to them.

      HOA always goes up, and lots of HOAs are very high in this area – no less than $300. It’s absurd.

      Reply
  2. so

    1. Get married (or at least engaged) prior to buying together.

    2. Why not just move into a duplex or triplex and live in one unit? That’s how we got started.

    3. Is your grad school in the same city? I’m confused.

    4. The pros definitely outweigh the cons. I love the monthly rent check, and with a manager there is minimal hassle. Plus, you get to be a (small) business owner, which actually does a lot to alleviate my stress at my normal job.

    Reply
    1. From Shopping to Saving

      Yeah we would love to get an investment property later down the road. Me not having a job is a huge factor, and then as you said, we are not married yet. Our first property where we’d want to live will have to be small, not a huge house. Most likely a townhome or duplex like you said.

      My grad school is not in the same city, which is why I need to quit my job and move.

      I like the idea of a property manager!

      Reply
      1. so

        Didn’t realize you were going to law school. I’d just focus on that for the three years to get maximum ROI and take your time getting to know the market. For that first year, just grind out. I did nothing in terms of investing / money plans my first year of law school, but made law review and immediately made more in my first summer than I ever had in a year of work.

        Most of the smart lawyers I know have investment property. As I said, actually owning something and making executive decisions helps alleviate the stress of having to look after clients.

        Reply
  3. Jonathan

    In this economy, I wouldn’t settle for a property where the rent just covers the mortgage. We’re buying properties in Southern California where the rent is 2 1/2 times the mortgage payments. Since there are also property taxes, insurance, and maintenance to consider, if the rent only covered the mortgage you’d have to be pretty sure the rents were going to rise quickly or the property was going to appreciate quickly to offset your monthly loss!

    Reply
    1. Noah

      Jonathan, where in CA are the rents 2.5x the mortgage? I live in Southern CA and rents are almost about even with the mortgage payments.

      Reply
      1. Jonathan

        Check out the high desert along I-15! 80% financed on a $100k house means mortgage payments around $400. Rent – $1,000.

        Reply
  4. krantcents

    I am a former landlord who owned apartment buildings and a shopping center. For 3 years, I rented out my home. For me, the pros outweigh the cons by a mile. I made a ot of money in income property. I admit that apartments, once you get to a certain size is much easier than other income property. You can have a resident manager and he/she will take care of the day to day problems.

    Reply
  5. Nate

    It is not a great investment idea for you guys right now because of where you are in your lives – you have much more important financial priorities. If I were you I would take that cash and pay for grad school without loans. I spent the first couple years clearing 55 k in student loans. Then we paid for my wife’s grad school with grants and our own money (while I was making 38k a year at the time). After that we cleared all car loans and all remaining consumer debt. Now we are putting 20% down on rental property – there are great deals in SOME markets – you really have to run the numbers or look elsewhere. I just bought a brand NEW townhouse – mortgage $481 a month – prop taxes 133 a month – HOA locked at 75 a month (can’t go up) in a fabulous neighborhood with one of the best school districts in the state. Rent is $1100 a month (you can see it cash flows above all expenses by couple hundred). Oh and the seller wrote me a check for 20k for taking the property (essentially got my deposit back). This deal took me 8 months to find. And I just found the next one. BUT if we only had 1 income and student loans and other financial obligations I wouldn’t do it. Take your time and clear those other things first WHILE learning the business in the meantime. God bless you both and enjoy the journey!!!!

    Reply
  6. Nate

    I did forget to mention to focus on increasing income as well! I went from 38k a year to 70k to 110k and now I make 140k a year (just a bachelor’s degree and some certification by the way – mostly extremely hard work. My wife now makes about 40k. So we focused on that side of the equation for about 3 years while learning real estate and getting our finances super strong. Then we stepped in the water. Make sure you will get a ROI on your grad degree (seriously run the numbers). If the ROI isn’t there then just work with greater focus and passion – take on high profile projects/assignments and enjoy the ride!! God bless your journey!!!

    Reply
  7. [email protected]&More

    I did think about owning a rental property and even did a three post series on it.

    Part 1 – The Beginning http://www.moneylifeandmore.com/rental-property-the-beginning-part-1-34/

    Part 2 – The Numbers http://www.moneylifeandmore.com/rental-property-the-financial-side-part-2-79/

    Part 3 – The Decision. http://www.moneylifeandmore.com/rental-property-the-decision-part-3-143/

    I don’t want to spoil it for you but I learned a lot through the process that eventually ended up influencing our final decision.

    Reply
  8. jessie

    Thanks for sharing. I think your blog is just what a lot of people need to hear. “There’s no such thing as a free lunch” is a good reminder for me, I think. Investing in a home has associated risks as does not-investing in a home. Whatever the situation, I think having a little patience can go a long way for most people. Personally, as I’ve been looking at real estate in Draper Utah, I’ve found a few places that I like, but I still have a hard time chewing on my potential risks. What really makes it tempting, is when my friends take on even bigger risks when they invest in real estate. Anyway, it’s nice to see another risk-adverse person out there. Thanks again for sharing.

    Reply

Leave a Comment

Your email address will not be published. Required fields are marked *