House Prices MUST Be Near the Bottom

I was absolutely shocked to see that low end house prices in my area have come way down. It’s possible to buy a house for $125,000 that is in relatively good condition. The cheapest house that was available during the peak of the real estate market was over $200,000. Prices are getting to the point that, with $25,000 down, we could acquire a rental property and be cash flow positive right out of the gate.

So, needless to say, I currently have the rental house “bug”. I’m seriously considering jumping in to the landlord business, although I certainly have some reservations. Here are a few of the things I’m considering:

-Stability of my employment
-Stability of the rental market in the area
-Hidden problems with potential properties
-Monthly costs to own a rental (which I need to be sure is covered in the rental rate)
-Types of renters at the bottom of the market

While I’ve recently learned that there will be what I’d call “massive” layoffs in the IT division of my company, I’ve also been told I shouldn’t be at risk at this point. That makes me feel a little better, but it’s hard to feel too good about my employment while people around me are experiencing the shock and stress of getting laid off. In theory, once I buy a place and get it rented out, I shouldn’t be quite as worried about my employment. The problem with this is that there are plenty of scenarios that could really be an issue if I lost my job. What if I end up with a renter that just stops paying the rent? It could be months before I could get them evicted. What if the house needs major repairs at some point and I can’t rent it out for an extended period of time? As long as I am employed, none of these scenarios would hurt us. I wouldn’t enjoy having to pay the mortgage on another house that wasn’t rented out, but I could swing it. If I ever lost my job and didn’t have a renter, it would hurt much more.

I’ve been doing a lot of reading about the rental market being weaker than it’s been in a long time. This might mean I’d have trouble finding a good quality renter and may find myself “bottom feeding” for sketchy renters. If that’s the case, it would also increase my risk of getting a renter that decides to quit paying his rent or trashes the house. I also might find myself with a vacant house for extended periods of time. Like I said above, this wouldn’t kill us as long as I’m employed.

While I’d like to think I’m pretty savvy from a real estate perspective, I also recognize that I’m probably much more ignorant about rentals and real estate than I realize. There are plenty of things that could go wrong when trying to find the right rental. The only comfort that I have with this is that I’ve owned a few houses and have a pretty good eye for potential issues. I also have a “best friend” who is a contractor and would be happy to look at any potential place for me. I think having issues with a rental is a manageable risk.

I also need to realize that there are plenty of costs that I need to consider when deciding whether I should buy a potential rental. I need to identify the total taxes I’ll be facing, insurance costs, total mortgage costs including principal and interest, any neighborhood association costs, and I should also make sure that there are no outstanding assessments against the property for things like sewers or water systems. All these things will help me understand the total monthly costs of owning the place. If comparable rents in the area aren’t yielding that amount, I probably wouldn’t buy it. In the past I’ve thought maybe I’d buy a rental, even if it was slightly cash flow negative, but I’ve decided that if I can’t at least be cash flow even every month, I don’t want to go down the landlord path.

I mentioned above that I need to be concerned with the type and caliber of renter I might be able to get. If the rental market was red hot, I might be able to get some pretty good quality renters but with the rental market being weak now, I have to come to terms with the fact that I won’t be able to be as picky as I might like. When trying to rent out a lower end house, I have to prepare myself for dealing with more rental drama than if I was trying to rent a “middle of the market” type property.

Even with all these things to consider, the idea of someone else paying the mortgage on a property I own is still very tempting. I’m going to be watching the housing market in my area very aggressively for a potential property. At the same time, we are continuing to save as much as we can. If the stars align, I may just end up buying an investment property.