Last week, I asked you about your rules for landlording. In the past, I put a lot of emphasis on the credit report. A fellow landlord told me he thinks the rental history is just as important. Here is what you think:
Mario (a seasoned landlord) from Debt Blag had this to say:
…rental history has been a better predictor of how reliable a tenant they’ll be than credit score.
I think about it this way: The only reason credit scores even exist is because we all needed a way to figure out how much to trust someone when nothing tangible is at stake other than being able to borrow again in the future.
Very wise words. I had never thought about it like this, but it makes perfect sense.
Reader Chris mentioned this:
I have a short term vacation rental that brings in over $70k per year (gross) and all the rent is paid well in advance. Far more than I would get with one long term tenant and minimal headaches. Plus I get to use the house on vacations 30+ nights a year. Works for me.
Although this strategy would require more work (turning over the rental weekly), I like it a lot. A vacation renter isn’t going to give you long term headaches. Also, services like the excellent Airbnb provide insurance should a renter trash your place.
Reader June points out that the best renter on paper could turn out to be a nightmare:
I will say that great credit is not an indicator of a great person or great tenant. This guy was an officer in the military with impeccable credit. To be fair, he paid on time every month. Until he broke the lease, moved out without cleaning, turned into a complete arrogant…dude, and threatened to sue us for taking money out of his deposit for damages that he does not even deny he caused and for cleaning. We actually don’t know if he would have sued or not because we ended up just writing him a check. Why we did that is a long story but it just comes down to that it all happened during a major personal crisis and it was worth it to get him out of our lives.
Impeccable credit, Master’s degree, steady employment, made plenty of money, great rental history, seemed like a decent person when we met him, in the end, we’ll just say that we hope he has all of the luck in life that he deserves.
Uggh.
Finally, Mrs. PoP from Planting Our Pennies had this to say:
Our ideal tenants are versions of us about 10 years ago in college and grad school (good students, honor societies), and we know that we didn’t have much of a credit history so we don’t stress too much about that number.
I love this. We don’t live in or near a college town, so I can’t replicate her strategy. Along similar lines though, my idea renter would be someone working in the high tech industry that is new to town. They’d be looking to rent for a year while they find a place to settle down and buy.
Now, on to this week’s question about the rent-and-flip.
We’ve flipped multiple homes and were really successful at it. We’d buy houses that were structurally sound, but cosmetically ugly. We’d do all of the work ourselves; tearing out the pink and blue toilets, ugly kitchen and orange linoleum tile. We’d make it look beautiful and throw it back on the market two years later*. We were successful every time.
With kids though, we haven’t done a flip in 5 years. I wouldn’t have any time for the children and they’re only young once. Once both kids are in school and I’m not working a 9-5 any more, I’d like to take on another flip or two. However, I found a perfect flip candidate last week. Really nice homes on the street go for $400,000+. We could probably get into this one for $275,000, put $25,000 and some hard work into it, and make a nice profit.
The problem is that our younger child won’t be in full-time school for another 2 years. I just don’t have the time for it now and I refuse to hire out** for the work, so my solution is to rent the home for a couple years. The issue is that the rental numbers are horrible. This $275,000 home would probably pull in $1600/month. After putting 20% down on the home, I’d only be making a couple $100/month. Bad, bad numbers.
So readers, let me know if this is a terrible idea and what you’d do in this situation. We may make an offer next week and we’d appreciate your advice.
*Before we had kids, we’d live in these homes as we were fixing them up. This was an awesome strategy as we didn’t have to pay dime in capital gains because of the “2 out of 5 rule“. Now that we have kids, I don’t want to be moving them around, so we’ll stay put. For now. (Mrs. 1500 note: We are NEVER, EVER moving from our current home. I have lived in more than 22 houses, including 3 in second grade. I. AM. DONE. MOVING!!!)
**I have had horrible luck with finding good people. I’ll only hire out if I absolutely cannot do it myself.
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Pretired Nick says
Making $100/month is probably realistically like losing $500/month once repair, vacancies and other hassles are figured in. So you might lose $12,000 over two years. Do the numbers still make sense after you figure that in. My guess is that if the neighborhood is really that solid, you’ll at least appreciate at around that same amount (or more), so I’d say this is a decent rent-and-hold strategy for a couple years. Tax and realtor commissions is probably your biggest expense item for your spreadsheet outside of the repairs themselves. I’d say it’s close enough to go for it, but only if you’re really hungry for another one. I’m so burned out on working on houses, it’s hard for me to imagine jumping on something like this right now.
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1500 says
Bleh, good points. We do have a couple things going in our favor. The Mrs. got a real estate license just so we could avoid most of the fees. I would also do the maintenance myself.
The ‘hood is really good, but I’ve also heard that one should never count on appreciation. I’m not sure how I feel about that…
debt debs says
LOL love what your daughter said about the red carpet. Red carpet was popular in the 70’s but it doesn’t look that old. We had it in our living room as a kid with black and white furniture and mod lamps. Very snazzy-like, Austin Powers style. OH…. Behave!
A couple of hundred a month after interest payments is better than zero, if you’re sure of it. I’m interested in following because we are thinking of buying a second property and renting when our debt is paid or doing the flipping houses thing.
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SavvyFinancialLatina says
I have no experience here but it does seem like a huge undertaking in the middle of your home renovation plans.
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1500 says
Pain is right. I’m already tired all of the time…
Even Steven says
I think it is worth it to wait, I think you guys are in a great place financially and no reason to complicate things with a house project that you plan on doing yourself that you do not plan on moving into. I’d pass.
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1500 says
Complication, yes…
Mrs. Pop @ Planting Our Pennies says
We went through this a similar thought experiment a couple of months ago when an MLS listing popped up with a house a couple blocks from our own that by our conservative estimates was listed at least $70K under its $240K fair value.
We compared flipping immediately to renting at cost for 5 years and selling after we were no longer working – and the tax benefits from the latter scenario put that one on top even allowing for the lost opportunity of having $ in the market for 5 years. (Seriously we will likely pay so much less in taxes when we live off investments instead of W2 income.) You might not get hurt too much by not being able to live in it and avoid capital gains taxes that way if the sale happens once you’re FI.
We also considered holding it to have been a riskier play in terms of cash flow since any maintenance issues or vacancies would not have been covered by the likely rent and we would have doubled our major storm exposure by having two properties so close to one another.
Nevertheless, we probably would have made an offer on it had the property not been an unlabeled short sale. As it is, it’s currently “pending with contingencies” for well above what the list price was and rumor around the neighborhood is that the bank is still not willing to accept the short sale.
For stuff like this that won’t cash flow immediately, we view it in the same way that we would making a big bet on a single growth stock name. A little outside our comfort range, but worth an educated bet every now and then as long as it’s not the bulk of our investments. You seem a lot more comfortable with big swings on single names, so maybe this is exactly what you want to move into?
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1500 says
“We compared flipping immediately to renting at cost for 5 years and selling after we were no longer working – and the tax benefits from the latter scenario put that one on top even allowing for the lost opportunity of having $ in the market for 5 years.”
This is a great point. Taxes, taxes and more taxes. This is one of the main reasons I cling to some of these stocks too: “Wait until 1/1 so I can pay the taxes, next year. No, let’s wait another year after that!.”
Charles@gettingarichlife.com says
Is that a 30 year fixed rate. If you’re going to do a flip why don’t you get a 5 year arm which is a point lower. You can also pay down points which you will break even in three years and get a 2.5 or 3 percent arm loan, it will increase cash flow. Doesn’t matter if rates rise because your holding period is under 5 years
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1500 says
Ah, a 5 year ARM is an awesome suggestion!
No Nonsense Landlord says
Look at the percentages. 15% returns are good, less than that you really have to consider if it is worth it. I am investigating hard money lending, just to see if that might be a good option too.
And never trust a past landlords recommendation, unless it is backed up by paper checks like a credit score. People who rely on past landlords get lucky, they are not smart.
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1500 says
Ahhh, hard money lending. I’ve been reading about this as well.
Thanks for the advice on past landlords. It worries me that the “past landlord” would actually be their best friend on the other end of the phone.
Gretchen says
Haha! Your daughter is awesome! Just my opinion, but now is the best time to pass on another house. You just jumped into self-employment and like you said – they’re only little once. Couple that with the not-so-great returns, and just remember that another deal on a house will come along. Maybe next time the timing will be perfect :_)
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Ree Klein says
I say take a pass. Another, perhaps better, deal will show up!
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1500 says
True. There will always be another deal.
Mom @ Three is Plenty says
With the kiddos at home, and Mrs 1500 not wanting to move again, it doesn’t sound like you’re in the best place to be flipping a house at this moment.
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Barbara says
I’d say wait for it. I like the flipping strategy and it seems like you have a good feeling for bargains. So trust that a new opportunity will come up in a couple of years when you are ready to dive into it. Now it seems like a hassle, minimal returns (if any, net) + risk. Plus you might see a better deal in the meantime and be bummed out you can’t jump on it cos you got this one waiting…
Michelle says
I was a fantastic renter with blah credit. Not bad, but not off the scale amazing. I would say that you should look at rental history. Does the tenant pay rent on time? Have complaints from neighbors, etc. Dave Ramsey (who makes me crazy sometimes) suggests that you speak to at least the past 2 landlords. I think that is a smart move. If the current landlord wants to unload the tenant on you, you’ll figure it out by speaking with the second landlord. I am also about to rent out my baby property. I love my place but it’s almost time to buy in another year or so. I am slowly getting things fixed so that I can do that. As for the current property-is it necessary for you to a flip when all of the factors that would make it ideal aren’t in place? I think you should stick to your original plan and wait until the youngest kiddo is in school. There will always be an ugly property for sale. Also, real estate goes up and down. You may be able to find an even “cheaper” property at that time.
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Zol says
Can you lowball the heck out of it since you are waffling back and forth? Worst they say is no and you pass.
Days on market? Someone currently living there? People will accept some ridiculous offers if they truly want to unload it.
Mario says
Your numbers sound like you could end up ahead, but I wouldn’t put that much effort into that little bit of upside. I may have already said so, but I’m finding the same problem looking in a lot of places — the rental numbers just don’t match up to what homes are selling for.
And thanks for including my comment 🙂
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