As my partner and I are active landlords and property investors, it’s no surprise that people approach us with real estate offers. Sometimes they’re great deals, too – people occasionally inherit properties they want to get rid of quickly and therefore cheaply, or learn of a house at a great price that just isn’t selling. With the current housing market downturn, it’s happening more and more.
Recently, a good friend approached us when a realtor suggested he look into renting his house instead of selling it. Though his house was on the market and he was looking to find a buyer, he’d instead gotten an offer from a prospective tenant. Since he wasn’t interested in becoming a landlord, he came to us.
You’ll know from my Ten Tips for Buying a Residential Rental Property series that I closely evaluate all real estate decisions according to a number of criteria including price, location, structure, size, maintenance issues, safety and local regulations. I called upon those ten critical commandments yet again as I analyzed the opportunity.
The property in question is an upscale 3 bedroom, 3 bath townhouse, built within the last ten years, kept in great condition, and listed around $330,000. It has a small fenced backyard and is within a desirable, conveniently located development which offers centralized groundskeeping and facilities like a swimming pool for a monthly fee. There is an association which governs the community and sets regulations for how the properties must be used and maintained.
It’s a wonderful property, but in my assessment, not a wonderful rental investment. The ten topics I covered in my series formed the components of my evaluation:
Price – The selling price, $330,000, is relatively standard for similar properties in the neighborhood, but a 3BR rental in that area fetches around $2,000 a month plus utilities.
With a 10% down payment of $33,000, I’d be mortgaging $297,000. The mortgage calculator at bankrate.com shows that at 5.65% for a 30-year fixed mortgage, I’d be paying around $1,714 a month in mortgage alone. Add around $6,000 in yearly taxes, $500 in annual rental property insurance, plus $200 a month in association fees, and I’d need to charge $3,000 in rent to make my margin, which the unit simply won’t bear.
In general, if I’m renting a property like this for $2,000 a month, I’d want mortgage and basic costs to total no more than $1,500. $742 in costs leaves only $758 for mortgage.
To accommodate that, my friend would have to give me a $190,000 discount off his asking price, something which obviously isn’t going to happen.
Neighborhood – The placement and qualities of the community attract great tenants, but also mean neighbors who would prefer not to live next to rental properties. If they lobby the association, there could be trouble. And with shared walls between the units, noise issues are magnified.
Regulations – Even without looking into the township regulations, I know that with this association’s rules, the property owner can be fined for any violations related to noise, garbage, parking, etc. It’s a big additional liability to take on. A bad tenant could end up costing quite a lot in fines.
Parking – Each townhouse has a 2-car garage and access to several guest parking spots, so parking is sufficient for the unit’s capacity.
Simplicity, Accessibility, Replaceability – Maintenance of the townhouse is relatively standard, however there are a few features of major concern:
* White wall-to-wall carpeting – Running throughout the entire house, this could be incredibly expensive to replace should I get a less-than-fastidious tenant. In rentals, carpets tend to have a short shelf life, and pure white carpets are the very worst.
* Laundry facilities on second floor – Should the washing machine overflow or its supply hose rupture, the entire interior of the first floor could be ruined.
* Shared walls – As the townhome is not an end unit, it shares walls on both sides. Any maintenance issues neglected by the neighbors could become my problem. The association might cover it, but it could be a hassle.
* New construction – Sadly, they don’t build ‘em like they used to. Doors are hollow-core and it is likely that the sheet rock and interiors will not handle abuse well and need more repairs over time. Nail pops can present a problem as these townhouses age.
There are some pros, however. With townhouses like this, maintenance of the roof and property exterior/siding are fully covered. Snow removal and landscaping/lawn maintenance are also provided within the monthly association fee.
Cement Slab Construction – The house is indeed built on a slab, with no crawlspace or basement. This means that ground floor plumbing systems will be difficult and expensive to access if anything goes wrong, and termites could present an issue.
Safety – The house’s age means there’s little risk of lead paint, but a few of its loveliest selling points present hazards as a rental. It boasts a large fireplace, so there’s an added risk for a tenant setting the house aflame. The living room has a cathedral ceiling, with a wooden-railed balcony looking down from the second floor. The railing is not terribly strong, so there is a risk of someone falling from this balcony onto the floor below. There is also additional risk of injury changing lightbulbs, etc. since a ladder would be required to reach the tall ceiling.
Proximity – The property is within 20 minutes of my primary residence, making it easily accessible if issues arise.
Size – The house is well-sized for a small family, and the yard is adequate but small enough to require minimal maintenance.
Utilities – As this is a single-family dwelling, it would be a simple matter to assign full responsibility for utilities to the tenant.
While this is a very nice property, its price, combined with the range of potential additional costs from maintenance to association fines, make it an expensive and risky prospect as a rental. My partner and I declined the offer, and have advised our friend to continue his attempts to sell.
Published or updated February 22, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.