OT- need some opinions on this...

jose bagge · May 28, 2008

I'd like some opinions on this, particularly those of you that have been the polar opposite of me politically on this post-
Got a good guy that's worked for me for 5 years. he bought a house 3 years ago for $300k, mortgage about $1800 until ARM blew up to $3200/mnth. he lost the house in foreclosure-him, wife, two kids living in freinds basement because they can't even rent with his wrecked credit. Makes about 55k a year.
I can buy basically the same house two blocks away for 120K in foreclosure, no money down w/ my credit rating PITI about 1100/month. Rents in the area are 1300-1500; I'd rent to him for 1300 w/ no deposit and salt away the positive cash flow for repairs, etc. My gain would primarily be depreciation as a rental plus any potential gain if the market turns back up- probably even work a lease-to-own deal with him. He's hugely interested, the deal will be easy to make...does this smack too much of "company store", even though I'm working the deal and not the company?

Bigger picture- foreclosures as flips are a loser in this market because sales suck- what about foreclosures as rentals, particularly to those who lost homes to foreclosures? There are hundreds of these homes out there in this area- and hundreds of folks looking for rentals in the same situation. This isn't 'section 8" stuff- these are nice homes in nice neighborhoods with good people who just took on lousy loans. I'm not interested in becoming a slum lord, but it seems likea good business move and good for some folks too.

VADAVE · May 28, 2008

It is a good deal, both for you and for him. Just be careful, do not rent him the house he lost to foreclosure as he will start thinking it is his house and then you real do lose.

Hotflashjr · May 28, 2008

Not a bad idea at all. Just make sure you have lawyers and legal documents "just in case". You also have to look at the thought that you could possibly lose a good worker if he were to be evicted due to non-payment on the house that his boss owns. Could make for a real awkward situation at work as well.

rhouston · May 28, 2008

I own one rental that was my first home. Renters are a curious lot. You have now way of knowing how this person will treat your property. It's funny how people care for things they do not own. The fact that this person bought a 300K home on a 55K income speaks volumes about his fiscal responsibility. I have a 160K home (cost to build on land I owned free and clear) my combined family income is close to twice what his is and I would never have tried for a 300K loan and certainly not an ARM.

Repairs will be your responsibility and as always Renters want it fixed NOW. There will be furnace and hot water heater repairs, Roofs and driveways that need upkeep. Not to mention that 5 to 10 years from now when he moves out the house will need complete renovation to be rented again or put on the market.

Last but not least is NEVER RENT TO FRIENDS OR FAMILY. YOU WILL GET BURNED

Now with all that said Do as you see fit.

noncompos · May 28, 2008

Getting into your first rental house, as a landlord, is a big step...there're lots of people out there who make money with rentals, and as many (if not more) who found it a nightmare...
You need to ask why the "professionals"--people in real estate for a living--haven't snapped up all these good ?? deals...
rhouston is right on about renters often being a pig in a poke...you'd need to set up your purchase so you could walk away from it cost-free (no deficiency) if you couldn't get renters and couldn't carry the payments yourself...you need to be able to do most repairs yourself, to keep down expenses...do some research on being a landlord (forewarned is forearmed).
If you've been influenced by any real estate ads or real estate people saying "... now's the time to get in on the ground floor..." don't forget they're not really unbiased observers...
This's not meant to be dismissive-it really may be a good opportunity in your area-just a heads-up to do your homework first. (My parents had a rental) Good luck.

John (C-IL) · May 28, 2008

$200/ month isn't enough "rainy day fund" on a 120k house. That fund needs to be closer to 5% or $600 per month.

John (C-IL) · May 28, 2008

The old saying is:

"When your outgo exceeds your income your upkeep will be your down fall"

At $2400 a year you are looking at 4 years "profit" just to do a HVAC overhaul.

Kirk Grau · May 28, 2008

My in-laws have several rentals around town. It works for them since FIL is very handy and almost never requires professional assistance (and he likes doing that kind of stuff). Like others have said rentals come down to "Tenants and Toilets". In-laws try to screen tenants, but still have had to evict a few over the years.

Your situation might have an upside in reducing stress on the fellow who works for you, who knows might be a better employee.

It might come across as "The Company Store", but you probably have to watch that it does not look like a cushy deal for a favorite employee as well. I say your both adults and as long as everybody goes into it with their eyes open, the i's dotted and t's crossed it might be a win-win for both sides.

Good Luck

Kirk

Aaron Ford · May 28, 2008

55K and making a 1800 house payment? He did not need the ARM to go up to get into trouble. If this is net pay, he is only making 2291 a paycheck. 1300 is going to be a reach even if all his other finaces weren't in trouble. He is likely paying top interest on his credit cards due to the foreclosure. My gut instinct is that this fella would be hard pressed to make a 1300 dollar rent payment. 55k does not go very far. I struggled with rent, student loans, and one car payment. And gas was cheaper then...

It is a good thing you are trying to do, but no good deed ever goes unpunished.

Make sure everything is written down so no ones feelings get hurt.

Hope it works out,

Aaron

Anonymous-0 · May 28, 2008

Bone up on the tenant landlord laws. Have a lease. Be prepared to be acused of stuff your clueless about. Bad checks. Slobs. Eviction. Scrutinizing applications. Chewing dogs. Cat urine. Get the money upfront.

rhouston · May 28, 2008

NO DOGS! I read of a landlord that was sued by a person who was bitten by the tenants dog. Some smart lawyer decided the landlord was responsible because he should have known the dog was vicious. I do not remember if the suit was successful or not but it does start a precedent for the Landlord having responsibility for tenants animals

Yes the story made me sick!

Anonymous-0 · May 28, 2008

Bad idea. What if: employee becomes disabled? employee starts to slack off at work? you have to cut back on work force? he trashes the house and moves out? one of his kids get seriously and your healthcare plan does not cover major chuncks of the expenses? you ever had to fire him? How would you be able to deal with this man as BOTH an employee/ex-employee AND renter? This could be almost as bad as kinfolk deals. Tom

Mike (WA) · May 28, 2008

From a financial standpoint, it makes sense for the long term, if not the short. $200 positive cash flow isn't a lot, and may not keep up with repair expenses, but if you are in a financial position to supplement it when needed, you'll be OK. Of course, the beauty of the deal is you are getting it dirt cheap (probably considerably less than cost of construction), and will make $$$ when it goes up in value (and I said when, not if- we've been through many of these cycles before, and things always recover). This highly publicized "recession" we are supposed to be in is in real danger of not even getting off the ground- April housing starts went up at the higest rate in years. The doomsayers in the media are doing their best doomsaying, but it may not be enough (although the fuel price thing sure does throw a crimp in things).

Now, all that being said, renting to an employee has many downsides, as has been pointed out by others. You need to do a good analysis of this guy's character- how is he going to react to future misfortune? Also, how did he keep up his previous house?

paul · May 28, 2008

What worries me about becoming a landlord is the market is full of people with wrecked credit & broke from not being able to realize what an ARM would do to them. If you had/have an ARM during a period of historically lowest interest rates in a half-century, you likely are not real fiscally savy or you are a bad credit risk & couldn't get a real loan.

I'd not want to get into renting to such folks as just a fun kind thing to do. History says they will fall down the same bad paths again of not being able to manage their money.

--->Paul

Ohio Mike · May 28, 2008

If you do buy the home and put your employee in it I would set the rent up to be an automatic withdraw from his wages. You already know his work record and doing this for him should make him even more dedicated to you and that could be a big plus. Be careful and run everything through a good lawyer, make sure all is in writing that way no he said, I said crap cause it's all in black and white. Good luck, sounds like good business sense to me.

Anonymous-0 · May 28, 2008

One rule of thumb is if they drive a red Pontiac don't rent to them. For some reason or another the type that drive those cars are the worst risk.

glennster · May 28, 2008

jose, i have 3 rental propertys, my largest a 12 unit building.if you have the capital available, the current rental market is strong due to the foreclosures. i use the 1 % rule to see if a rental cash flows. one percent of the property value should be the monthly rent...100k house....1k mo rent. do credit check and criminal background checks on tenants. i have an llc corporation and it handles all rental issues. in time the rental income will pay off the property, then you can either 1031 exchange to another property, sell outright, or use it as an equity line of credit and buy more properties.

Tradititonal Farmer · May 28, 2008

How much are the taxes and the insurance you are going to have to cover? $200 ain't going far.If he could pay $1800 before why not $1800 now?

jim in N M · May 28, 2008

Jose, sounds like you'd be a good person to work for.Not many folks like you around anymore,It sounds like you want to buy just one house,not a bunch. On forcloseure's I go to the bank holding that bad mortgage and offer them a good bit less than the present balance,If there are a lot of these house's in forclosere the bank should make you one heck of a deal and then rent it to your good employee and maybe give him some type of rent to own deal. It keep him with you and it helps him also. Now having said that ,If he does leave you and the house ,just rent it to someone else,or sell it ! just my .02 cents worth......Jim in N M

Chris Jones · May 28, 2008

He may be a very nice guy but something is wrong if he let himself get into a foreclosure situation. He didn"t see the potential for the payment to go up???? The world is full of nice people who think it"s perfectly ok to say hey we don"t have the money for rent this month--I"ll get it to you later. They really think there is no problem with that. The seem to think especially when your their friend that you"ll surely cover for them if they can"t get the money for the rent a few months. Be extra careful lending to friends and family!

GeneMO · May 28, 2008

Hey, If you can make the deal work for you, go for it. Renting to your helper is a completely seperate transaction so to speak. shouldn't be a problem.

As for the forclosure mess. it boils down to this. Folks bit off more than they can chew.

It'll teach a bunch of folks a good, but costly lesson. Kinda like the great depression taught our grandparents.

I hope the lenders take it in the butt!!

Gene

ericlb · May 28, 2008

jose this is more bout gut feelings than leagle beagle stuff, you know the man and i dont, will he keep up his end and take care of the house and do right by you? and can you afford to do this and not short your family? in spite of what others have said about not doing this for friends family ect i have a man that had done this for me, to date he's fronted me for 3 pickup trucks, 1 tractor, 2 semi rigs, and several grand to get by on while i was sick and doing my best to imitate a dead guy, ive paid back all of it now and at 8% intrest, but he can afford to do that for me, and ive worked for him most of my life untill about 2 years ago, [im gettin old] he had his secretary draw up papers stating what we agreed to as to terms, payments ect and had it notorized, it worked great,

Noah W · May 28, 2008

My partner and I do that on the side. He does the labor, I keep the books and other stuff. We try to buy foreclosures and houses on the cheap. Our bank will loan us 85% of the tax value. We won't buy unless we can buy for 60% or less of the tax value. We borrow enough to thoroughly through the house to make it as nearly maintenance free for a few years as we can. We get enough rent to pay the taxes and mortgage, and stash a few $$$ away for repairs. We have an LLC set up so we can use the services of Veri-Check. It is what most rental companies use for tenant background checks. It takes a lot of work initially to get things right, but itis working out good for us so far.

Anonymous-0 · May 28, 2008

Well he wont be a tenant you can play hardball with so to speak.You would know better than I if you have been a landlord.I have heard a few landlord horror stories like the tenant that went to bleed the radiator and forgot,or the guy who moved his senior mom in and you cant kick out a senior citizen even if the bum son doesnt pay rent anymore.You know the mans character.As far as "company store" in my opinion not at all your only trying to help the guy out.Shame he couldnt save the first home from forclosure.You should consider once hes in the new rental thats it for a long while as far as you reselling.I personally have no landlord experience other than renting bays of my barn;one guy was at my door every 1st of the month cash in hand and the other never paid then died and his sister sold the car.Good luck whatever you decide.

TomH in PA · May 28, 2008

He's living in a friend's basement. That has to be rough after moving out of a nice house, but it's cheap (or free) so it gives him a chance to pay down his other debts, or at least build up some savings. If you rent him a place for $1300 a month he'll be living in a nicer home but will be stretched for money again.

You know the situation better than any of us. But ask yourself if this is a favor the other guy needs right now.

dave guest · May 28, 2008

Landlord or slumlord as they call me. Over 15 years. Hardest money you will ever make and best education you can get. Best tenants I ever had were bad news. I thought building would be problem. Problem was people. 8 payments at one time. Worst was dope. Police dept. said get dope tenants out or they would take deed. I cannot believe a landlord is responsible for tenants. They filled out papers real nice. One family lit barbecue in dining room because their gas was shut off. One tenant shot her husband and killed him on front porch. One time gas co. dug up gas line in street and turned off gas. No notice at all. I lost good and one bad tenant. Had tree fall on house. Insurance company would not pay because I didn't sign page 14 of insurance policy. They took premiums though for 5 years. Sent over Thanksgiving dinner to people and they stole the pots and pans. One tenant broke 3 windows to get a good shot at her boyfriend when he got out of bar. This was a big city, and the worst of the worst. Hope you have better luck. Be MEAN very MEAN!

Anonymous-0 · May 28, 2008

If he is a good employee, what are you going to do the first time he is late on the payment, calls you on Sunday afternoon to unclog the toilet, the trash man didn't pick up the trash, the kids left the tub water running and it over flowed, he doesn't know how the window got broken? The list of problems being a landlord just goes on and on. I had one guy who always had the cash for his rent when I went to pick it up. He always stood in the door way so I couldn't see in. I got suspicious after while and told him I needed to check the house out. They had it completely trashed inside, this is after I had worked all winter remodeling it. I raised the rent to the point he couldn't afford to stay anymore to get him out. Never again being a landlord.

MarkB_MI · May 29, 2008

My wife and I have been landlords for fifteen years. What an education!

Regarding buying foreclosures for rental properties, this may not be too bad of an idea if you're in a area where the economy is still fairly strong. All those people who've been foreclosed on still need a place to stay. (That's not the case here in Michigan; everyone is packing up and moving south.)

Remember, you make your money on real estate when you BUY. Don't pay a nickle more than you must.

OT- need some opinions on this...

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