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October 4, 2007
Is it foolish to count on rental income?
We've been thinking to buy a coop in Ditmas Park, Sunset Park, or a similar nabe. Lately, though, I've noticed a couple of 2-family houses that, if we were to rent out half the house, would leave us paying only slightly more on a mortgage than we'd be paying in mortgage + maintenance in a much smaller coop. I love the idea of having our own house that we could expand into as our family and (hopefully!) income grow. But I'm wondering whether it's smart to count on rental income - because it would be a helluva stretch to afford without it. Assuming that the rental is in decent shape, is this common? Do people generally figure they'll be able to rent out the apartment to afford their mortgage? Or is that hideously ill-advised?
Comments
We've been renting out 3 apartments for fifteen years. We've only had 1 problem tenant in all that time. Go for it.
Posted by: Brooklynnative at October 4, 2007 12:19 PM
I believe when you apply for a mortgage they will take what you expect as rental income (or what current owner gets) and count about80% of that as expected income. Expect that you may have to money aside for general maintenance, etc, and you may miss a month here or there in between tenants. We own a two family, could not afford it without the rental income and have done well thus far with tenants. We found ours through a broker, who did all the leg work at no cost to us. Remember that you are basically sharing a house with the tenants, so you want to screen for lifestyle issues as possible (noise etc), but it really can make the house you want more affordable. Also remember that a lot of these older houses require a lot of maintenance costs. Good luck!
Posted by: guest at October 4, 2007 12:31 PM
I think relying on rental income is a very very safe bet. I own a 2-family house, initially we needed the rental income to make the mortgage but now we don't. I have to say we have never had problems find good tenants. Actually the biggest problem i have had is now that we use it as a one family i have people constantly asking me if one of the units is for rent!! Also remember over time you probably will make more money and also rents go up. So its great to have the option of either turning the house into a one family or having extra income. Finally you have a lot of tax advantages to owning a 2 family house! so when you say its only slightly more expensive for you to own the 2 family than to own the coop that's probably not true. You probably will find that with the tax advantages you gain it will actually be cheaper. Good Luck.
Posted by: guest at October 4, 2007 12:54 PM
Like the others, I also have had a very positive experience renting the garden apt. of my brownstone out to tenants. We renovated the place in 2001 to make it a two bedroom and the first tenants moved in that August. We have not missed one month of rent since then, despite having one leave, a sublet guy come in, both leave and two new tenants coming in (who promptly reupped for another year). We have had several small repairs to deal with, but nothing even approaching half a months rent. We raised the rent when the new tenants came in. Basically, our philophy has been to provide a great place (washer/dryer/dishwasher) for slightly less than top price, in hopes of having reliable, hassle-free tenants, and so far its worked perfectly. List it with a broker - they actually work for their money and its paid by the tenant.
Posted by: guest at October 4, 2007 1:08 PM
Thanks all for the great responses! Another question: to what extent do you all think this depends on neighborhood? We're looking at places that aren't totally prime - moving toward Sunset Park - do you think that it will be a big difference in finding good tenants there as opposed to somewhere like Park Slope?
Posted by: hangonsloopy at October 4, 2007 1:24 PM
I am 12:54 - I don't live in a prime neighborhood (Kensington) and I haven't had any issues.
Posted by: guest at October 4, 2007 1:30 PM
Agree with all the commenters above. Just to add: there are more things to think about on both sides of the ledger. 12:54 is right that there are tax advantages. Balanced against that are the costs of maintaining a home (there's much less to maintain and fix yourself in a coop or condo) and you want to make sure you have enough cash or credit line in reserve to fix quickly whatever goes wrong in the rental (not to mention your part of the house). check Craigslist for comparable rental listings in the area (and look specifically at the by owner listings), take 10% off for overzealous pricing, then take 20-25% off as the banks do to allow for missed months between tenants and repair costs etc., and use that number as a guide to whether you can carry it. Also factor in whether the rental unit in the house you are looking at is in rentable condition or whether you will need to put $$$ into it and factor in both the cost to renovate and the months of lost rental income (estimate the repair time, then double it). But if it is even a clsoe call, go for it. You will be in a much better position down the road. We wish we had done this much earlier than we did.
Posted by: slopefarm at October 4, 2007 1:31 PM
Just one other point of view. As with any investment there are risks invloved and while the commenters above have had wonderful experiences with tenants there are those who are going through hell as we speak trying to collect rents, I own a live in a one family because I did not want to rely on renters to pay my mortgage, but own two multi family homes that I rent out, this way I know I will always have a place to live based on my income alone,
just remember to have enough in your cash reserve for those vacancy periods and if your tenant decides to slack off on paying you rent, I don't want to discourage you but landlords often get shafted with NYC laws, at the end of the day it is a good investment as long as you can support the risks, good luck,
Posted by: guest at October 4, 2007 1:45 PM
I agree with 1:45 - there is a risk. The laws totally favor tenants and if you end up with a deadbeat it will take a minimum of 6 months to evict. Be careful, check references, credit history, employment and rent below market to allow yourself to pick someone you feel you can trust. Just do what Dubya does, look 'em in the eye and feel their soul.
Posted by: Brooklynnative at October 4, 2007 1:59 PM
Budget in everything, not just the mortgage, as you weigh this decision. Because renovations and maintenance on a house are very costly. Even in houses that are in good condition. The houses that are a bargain will be expensive to renovate. Get a quote for homeowners insurance, because that is another $3,000 to $5,000 a year. Get a thorough inspection that tells you which mechanicals need updating. If the heat or hot water go out, your tenant gets to stay in a hotel you pay for, while you fix the heat this Winter.
Posted by: guest at October 4, 2007 2:16 PM
I have heard that if you offer a month to month agreement as opposed to a year long lease - it is easier to get rid of dead beat tenants. Of course you're taking a risk of unexpectantly losing tenants - but if you find good tenants who consider you a good landlord - the risk lessens.
Posted by: guest at October 4, 2007 2:55 PM
if a tenant wants to move, you cant really stop them. I support doing a lease that gives you an out w/ 2 mos notice.
Posted by: slick at October 4, 2007 3:14 PM
2:55,there are month to month agreements but the eviction process is never easy, especially with lengthy with court proceedings etc. as I mentioned above NYC laws favor the tenant, It can also get even more complicated if there are children living there also, there are many variables to consider,
Posted by: guest at October 4, 2007 3:15 PM
Also it is better to look for a two family that can be delivered vacant. Buying with existing tenants can add difficulties that have been discussed many times on this board. I have a three-family and had existing tenants inheriting the tenuous relationship they had with the previous owner.
It's ideal to start off fresh with tenants of your own choosing.
Posted by: 1910 at October 4, 2007 3:23 PM
We bought a 3 family in Sunset Park ( 47th st & 6th Ave ). It's been 6 years and I have not had any trouble with tenants. Rental income is great! , I say go for it!
Posted by: Rick at October 4, 2007 7:39 PM
Go for it !
Posted by: guest at October 5, 2007 10:45 PM
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