Rental Property – The Decision (Part 3)

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?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. From the sounds of it it doesn’t really sound like you were on the proper financial setting to have a rental property. I think it was a wise decision because taking from your car replacement fund, or any other fund just simply isn’t a wise idea. Especially considering it might take awhile to build it back up.

  2. You’re reasoning reads as sound financially I think. Plus, one has to consider carefully before ‘going into business’ with friends or especially family. You may be risking a valuable relationship for not a lot of money!

  3. @Jason – I do think I was a little short, but my new car fund is in amazing shape considering I have a 2 year old car with only 40,000 miles. I had a lot of work related travel and put the mileage money away for my next car (less the true cost of gas).

    @Kurt – If I could have afforded it on my own I may have done it but the family factor is definitely delicate. I didn’t want things to have the potential turn nasty even though I doubt they would.

  4. I think you have to go with your instincts. I think you made the right decision. I’m one to get hyped up on some HGTV too 🙂
    But down the road (or even sometime soon) you could come across that perfect opportunity.

  5. Dude – I am looking into the same thing. I’d say you made the right choice. It takes a big person to say no. It sounds like you went with your gut which is usually the right choice.

    • Thanks! Maybe down the road I’ll get a shot at another rental property! Also, when I eventually move into a bigger house I am going to turn my townhouse in a rental property.

  6. Financial Conflict Coach says:

    Knowing when to walk away from a deal is one of the most important lessons many people never learn.

    It seems like you are confident in your decision.

    Who knows, maybe the seller will reach a breaking point and dramatically drop the price and contact you. Perhaps at a different price the investment would be a good move.

    • Thanks, if no one buys in about 30 days it is going to go into foreclosure and then we’ll see what it gets listed on the market for after it comes out of foreclosure.

  7. Owning an actual property is a huge decision. If you still want to get into real estate, look at investing into a REIT – specifically a mortgage backed REIT. There are a lot of good options out there and they pay great dividends! Better than owning a property as long as interest rates stay low.

    • REITs are an option but I don’t understand enough about them and I get the sense that it wouldn’t be a proper investment for me at this time. Plus it seems like once the economy starts turning around things will get tougher for REITs, but I have no clue honestly.

  8. Hey Lance,

    Buying a rental property is an awesome way to build wealth, but you are wise in waiting. It is important you have a really clear understanding of how the game is played, including your exit strategy. Also, know that things do go wrong all the time.

    If you have any questions as you move forward on this, email me or check out my blog! I love talking about this stuff with people! (I mean hey, I built a whole blog around it and have been living it for years!)

    Good luck sir!

    • Thanks Brandon. I will probably end out renting out my current townhome when we eventually move into something bigger. Buying a rental property isn’t out of the question either though so I’ll definitely keep your offer in mind.

  9. I think you did the right thing, mainly because it would have been a tough partnership, and like you said, not worth it to get in a fight down the road because people can’t agree on selling. Enjoyed this series.

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