Looking to buy my current family home from my parents and turn it into a rental property. Give me your two cents

[pinker]

Also posted on r/personalfinance

Hello Y'all. I (25M) am planning on buying my current family home at 200k and am applying for a mortgage. My parents are buying their retirement home. I am ready with my 20% down, with my parents giving me 15% of a gift of equity. I have some more in savings (emergency fund) that I can use for this if needed.

Can the mortgage rates be close to prime if I buy this straight as my rental property? What would be the best way to go about buying this property? Should I instead buy this property as my current primary residence and then after a year (or however long the contract says) before I turn it into a rental property? I was thinking of applying for a HELOC mortgage and playing it down faster as I am planning on settling down in this house five to ten years down the line. I am also gone for 3/4 of next year for an army mission and I plan to travel more so this will probably be given to a management company or I will have to manage somehow while I do my traveling (months at a time) for work/ army.

About me:

- Income: $45k/year - Full-time job, $5K/year - Part-time Army drill

- Future income: $71.2k/next year (**45k next year - Army mission, 15k from my full-time job while on army mission, and another 11.2k when I come back) **[Low bowling by maybe $5k]

- Expenses: $6000/year; living with my parents (Highest it can be). Broken down: Gas for car: $2880/year, phone bill: $300/year, car insurance and health insurance: $1320/year, Fun money: $1500/year. I bought a used car and has been paid off. Living and food expenses: $0/year.

- Investments: $1100 (tsp and 401k: did the match for both), $400 (IRA in 2021)

- Debt: 30k - Student loans @ 4.8% ($300/ month starting May), $25k - Personal Loan @ 2.99% ($500/ month starting this Feb)

- Savings: 4k - Emergency Fund

Edit: I will be an O2 on February 2023. One month into my mission

Edit 2: Updated expenses to make it more detailed and included the investments section. Also, I graduated from college six months ago.

 

[warriorinchrist14]

@pinker Have you run the numbers to see if it will be profitable as a rental after accounting for mortgage, taxes, insurance, repairs, capex, vacancies? Not every house makes a good rental property.

 

[pinker]

@warriorinchrist14 I am in the process of doing that right now. The plan is to eventually live in the home say 10 years or so from now and make it my primary residence after my traveling is done and i settle down. But yeah I'm crunching the numbers

 

[co3159]

@pinker

I am ready with my 20% down,

With a VA loan you may not need this at all if you can qualify. You mention part-time Army drill, so I dont think you will, but I don't know enough details to make a firm statement on that.

with my parents giving me 15% of a gift of equity.

Do you have this in writing anywhere? Words are nice and flowery, but 15% equity doesn't mean shit unless you have that money in hand. I wouldn't go forward expecting this unless it's written down and agreed to as a term of selling.

I have some more in savings (emergency fund) that I can use for this if needed.

How much is "some more"? One unexpected roof repair can easily get into the low 5-figure territory. I see you have $4k in an emergency fund. A general rule of thumb to use is that you could spend upwards of 10% of a home's value in the first year just buying shit that you didn't have before. Things like a lawn mower, window fixtures, a new fridge, washer & dryer, other lawn tools, etc etc.

Should I instead buy this property as my current primary residence and then after a year (or however long the contract says) before I turn it into a rental property?

Definitely go this route if you buy. It will allow you to find all the small (and large) things that need to be fixed before renters move in. If you start off with this as a rental then you find mold somewhere, now you are typically obligated to pay for your tenants to stay somewhere else while also paying for repairs. By staying there first you can head off any potential problems and get things sorted out, maybe a few rooms need paint etc. But I don't think you can afford to rent this place out...

- Future income: $71.2k/next year (**45k next year - Army mission, 15k from my full-time job while on army mission, and another 11.2k when I come back) **[Low bowling by maybe $5k]

Don't count your eggs before they're hatched. Future income means jack shit, I wouldn't use these numbers to calculate anything. Ops tempos can change, you could get injured and not deploy. Too many variables to use these numbers at all. These numbers aren't much better than me saying I'm going to have $10k more to invest because I'm gonna bet $5k on red.

- Income: $45k/year - Full-time job, $5K/year - Part-time Army drill

- Expenses: $5000/year; living with my parents (Highest it can be)

- Debt: 30k - Student loans @ 4.8% ($300/ month starting May), $25k - Personal Loan @ 2.99% ($500/ month starting this Feb)

Here's the biggest problem I see. Your income is hovering at $50k/year. You have $55k in debt before taking on a mortgage.

Can you afford to buy this house? Yeah, I think you can probably make it work.

Can you afford to rent this house out? Absolutely not. What if there's another round of eviction moratoriums and you have tenants that can't pay? You still have an obligation to pay the mortgage. Now you'd be at $255k in debt, and no place to stay.

On top of that, your "expenses" category isn't very detailed. That's a big eyeopener to me. It looks like you should have $45k/year to throw around at a larger savings account and investments, but you don't even touch on that.

How much are you saving for retirement? You're 25 years old, you shouldn't be waiting to save for retirement, you have time on your side to let compound interest do it's thing.

Do you have a car payment? Have you calculated for car maintenance? Your budget is full of holes and I wouldn't even touch renting out a place until you get better numbers to work off of.

 

[pinker]

@co3159 I have been in for three years, and I heard I might be able to qualify but unsure at the moment. I will call tomorrow to find out. I will also get that letter of equity signed by my parents and notarized as well.

I didn't think about the 10% of expenses so I will look into it. I've lived in this home for over 16 years and I know every kock and cranny that is wrong or can go wrong (not much). Everything still has years since most appliances and fixtures are within five years. Roof still has at least 9-10 years, windows are lifetime warranty, appliances are less than two years old and there were a kitchen and bathroom remodel in 2019. I know the property pretty well but I keep the 10% in mind. It will be hard since I am already tight on cash to get the home. Especially since as you said, I shouldn't count my hens before they hatch and expect my future income.

I was looking at the rental prices for a starter family home (3BR, 1Ba) in my area, and its around $1100 to $1500, and they are, frankly speaking, looking like shit. The front yard is messed up while our home looks decent, like a family home. I will do more market research on this and talk to some realtors in my area to get a better idea.

Yeah, I was surprised at how long the moratorium lasted. I can't afford it if this happens to me. Going forward, it seems like I need to know all my numbers fully before I make a decision then. I will create an excel and work on the numbers.

Also, I do have about $1500 in investments but I didn't include them since it is all in a retirement account (401k, tsp, IRA). I will update my detailed expenses and include investments shortly.

 

[klintala]

@pinker If you have the money for a down payment, avoid a VA loan.

 

[pinker]

@klintala Why avoid a VA loan? Assuming I qualify?

 

[klintala]

@pinker It's the VA funding fee. Makes VA loans the most expensive loans. You're probably better off trying to get a traditional mortgage loan.

I'm assuming you aren't a disabled veteran. Only then is that VA fee waived, then the VA loan becomes the best option.

 

[pinker]

@klintala Gotcha. Thanks for letting me know