In part 1 of this series I explained the background of the rental property I am considering buying with my family. If you haven’t had a chance to read it catch up here.
In part 2 of this series I went over the numbers and the financial implications of the potential transaction. You can read it here.
Welcome to the final part of the Rental Property Series! Now, on to how we made the decision!
After we had seen the townhouse and determined how much everything would cost my parents, my girlfriend and I sat down in my living room and decided to talk it all out.
The first question we asked was why did we want to own this rental property. My parents wanted an investment that they could make some money on down the road when we eventually sell. I also wanted an investment out of it. In addition to that the tenant would be my next door neighbor so it would be nice to be able to control who lived there to a point (I wouldn’t break any laws or discriminate).
The next question was could we afford it. In total we would need about $15,000 on the low side to $25,000 on the high side (if everything went wrong) each up front in cash. I could pull from various targeted savings accounts that were definitely not for buying a rental property, as well as save up enough money in the next couple of months while we wait for the townhouse to close and begin renovations. My parents were in a similar situation, but we all felt like we could make it work without compromising our financial situations. It would be a bit tough if we ended up on the high end, but we were very comfortable with the low end.
Next, we started getting into the tricky information.
- Did we want to hold the property long term and collect rent forever? Probably not, because it wasn’t generating a ton of cash flow.
- Did we want to pay off the mortgage early? If we did, the cash flow would significantly increase but we could probably get a better return on our money elseswhere.
- Who would do the repairs? It would depend on the complexity but I lived next door and would probably take care of the simple repairs.
- How long could we hold the property until we rent it so we can do the repairs ourselves? I would like to get it done as soon as possible but my Dad travels a lot for work so it would probably be at least six months of some weekends dedicated to the townhouse.
- How would we decide what repair materials to use? I would want middle of the road quality while my parents liked the higher end materials.
- Who would do the tax work? I have done tax returns before so it makes sense for me to do it.
- Would we distribute the extra money above our costs or keep it in an account for the property? We wanted to keep it in the property until we were comfortable we had a decent buffer then we would revisit this topic.
- Did we have a set time frame or dollar amount we would sell at? I didn’t, but my parents will be entering retirement soon and they may end up needing extra money.
- How would we agree when to sell? It would depend on the situation.
- Could this cause fighting in our family? With all of the variables I think it had the potential to.
After considering all of the above and even more we decided to think about it for at least a day or two. It only took me a couple hours though until I had come to my decision. While I think it was an OK opportunity I didn’t want to do it at this point. Why? Here is my reasoning.
- If this investment property was great deal a cash investor would have picked it up already. The property has been on and off the market for months.
- I didn’t want to potentially get in a fight with my family over an investment property based on needing to sell for a loss or some unexpected event.
- I have other financial goals and buying the investment property would put me way behind. I would be emptying my next car fund as well a other money I have earmarked for other goals.
- It would consume a ton of my free time for the foreseeable future and the return wouldn’t be stellar.
- I would have to put a ton of cash in up front to get a small monthly benefit a couple years down the road and hope property values begin climbing again to get a decent profit when we sell.
In the end it just didn’t make sense for me. My parents understood and there were no hard feelings. In retrospect I think we had all been watching a bit too much HGTV and we let the excitement get the best of us. I don’t think it would have been a great investment and I’m glad we decided against doing it. I hope you enjoyed reading this series as much as I have enjoyed writing it!
What are your thoughts? Did I do the right thing? What would you have done?