Rental property

[Phantom Warrior]

Another financial question for you all.  I'm increasingly intrigued by the idea of rental property.  Sometime around early 2008, if everything goes according to plan, I will be graduating from Officer Candidate School.  I'll probably be getting BAH from the Army to live off post and have a bunch of money in the bank from my deployment this year.

So, I ask myself.  What if, instead of sinking that BAH into rent every month, I bought a house and used the BAH to make my mortage payment?  I could even rent out a room for extra money.  Eventually, in two or three years, I'd have to PCS to a new duty station.  At that point I'd have to sell the house or find someone to take care of it.

I've heard of rental property management companies.  Is that something where I could let them take care of the house for a fee and get a check (or just continue to build equity) every month?  In general, what advice would you give someone looking into rental property?  I appreciate your thoughts.

[Brad Johnson]

Use you BAH to get enough for the down payment (usually 10-15% on a rental mortgage) then let the rent cover the debt service while you put the BAH into other diversified investments.

It's a double dip. Someone else is buying the house for you (via rent payments) while the BAH money is going into something that will grow for you long-term.

Brad

[Jamisjockey]

I've got a few friends that have had rentals.
Your biggest obstacle is you will need to repair the home.  People break stuff.  Stuff breaks.  Stuff wears out.  
Rental companies typically take 10% of the rent, sometimes more (like for resort rentals).
If you have money saved for things like water heaters, drywall damage, and whatnot, then your plan is sound.   Oh, and a couple months of rent saved in case of a non-rental.
 Basically, someone else making your house payment, means one day you're going to sell the house and have that money that someone else invested for you.  
Save 6 months of rent, plus at least 5k for repairs.

[matis]

Brad and Jamis have given you good advice.


Rental houses have been very good to me.


You benefit from 1) appreciation; 2) mortgage paydown; (by your tenants!) and 3) tax write offs, especially depreciation.


You do need to read some books and take some seminars on investing in rental houses.  Avoid the guys who make their money from selling courses.  Look for seminar teachers who actually own lots of real estate themselves.  The first kind can only lead you astray, and that can be extremely costly.  Some of the best courses are by Jack Miller and Jimmy Napier.  Avoid the get-rich-quick and the no-money-down guys.  Just buy good houses, at least a bit under market and in decent neighborhoods.

And you must learn ways to buy houses under market.  In some markets where prices are still comparatively low, you still have plenty of upside.  In overpriced areas, your risk is multiplied many times and you may get wiped out.  These houses, too in time will probably go up.  But you can lose your shirt while you wait.

And as mentioned, you need cash reserves to tide you over vacancies and repairs.

It's like any other business or investment.  You've got to learn how to do it.

But it's very safe once you learn a bit and since real estate in decent areas trends up, this form of investment is more forgiving than most others.


When you own rental houses, time is truly your friend.


matis

[Otherguy Overby]

Here's what I've done:  You buy the rental as owner occupied you get a better loan rate.  Also ask the seller to pay a home protection plan.  Keep the home protection, renew it every year and you'll have insurance for plumbing problems, apliance failures and AC repairs (even as and especially if the place is a rental).  It saved me a BUNCH of money when a pipe broke in the slab...  Someone to call when you are deployed.  The other statement about a financial cushion is right on.  You need to be conservative when you are getting started.  You can't relax until you've several rentals and positive cash flow.

Rental management is also a must if you are gonna be deployed and well worth the money so not to have to deal with tenants.

Last, a there's a really big tax advantage when you sell if you can show 2 years out of five as owner occupied.  Otherwise if you've a good gain you'll have to do a tax deferred exchange.

Ask away there's several of us here who are interested in Real Estate and even have a bit of experience...  

[The Rabbi]

If you can't make an open-ended commitment to the property and cant be there to manage it yourself then don't do it.