On becoming a Slumlord, Part 2

To buy an older home or a newer home...

I really don't think is a right or wrong answer here. Both types of homes have their pros and cons, so I'll talk about each separately.

Buying a new home guarantees you have the builder's warranty for at least one year. AND if anything goes wrong after that for the first two or three years that is related to construction, they will more than likely fix it for free even though the warranty has run out. This has been my experience. You just have to know how to bat your eyes and sweet talk them...sexist, I know, but predictable. You also know that the appliances will be new, so you won't have to worry about a water heating going out or replacing a fridge for a number of years. The paint will be new, the plumbing will work properly, etc. etc. Essentially, your repair costs will be minimal. Finally, your rent home will be in a more desirable area that is more likely to attract better tenants.

However, you are likely to have a larger mortgage payment than if you went with an older home. This means you will have to charge more for rent, your taxes will be higher (depending on location of course), and the insurance might be higher. If you do this right, there is a balance and you can actually make some money buying a new home. A newer home is more attractive to renters who can afford to live in the nicer areas, and I have found they are more likely to take care of your property as they care about the conditions they live in.

Buying an older home can be a crapshoot at times. The inspector will likely find more things wrong with the home, and it may be in a less desirable neighborhood. The latter of course depends on whether you are buying in the tony, charming yuppie part of town in which people buy these older homes, pay a fortune for them, and remodel them thereby maintaining the integrity of the older neighborhood. If you are doing this, be prepared to spend a pretty penny just keeping the home in accordance with the neighborhood HOA. With an older home you can expect to find previous repairs completed in a half-ass manner, which means you will most likely need to go in at some point and have those repairs "repaired" at a much higher cost. You also run the risk of having to replace water heaters and appliances, which can be costly. You may also need to go in and have a number of repairs completed just to get the house in rentable condition.

If you are considering this with the attitude that you're in it to make money and don't care about the overall condition of the house, then an older home may be the way to go. But be warned, as in all areas of life, if you do this half-ass your returns when you try to get rid of the property will be half-ass. AND half-ass repairs will cost you more in the long run.

I rented a 1930s duplex in a charming, well-kept neighborhood in OKC during my internship year. It had wood floors, a lot of space, a washer and dryer and the tile in the bathtub was new. It was also painted in really great neutral colors. However, I soon discovered the decades old heating system was in poor repair and a fire hazard, the window A/C units were not kept up properly, it was infested with roaches, and the vines climbing on the outside of the house were growing inside the windows (the gaps in the windows were that bad.) I also came home one day to find a busted pipe in the bathroom that was flooding my poor little dog out of her home. The landlord essentially didn't care to have repairs done in such a manner that the integrity of the house was maintained, but instead from the standpoint of how cheap could she get the repairs completed. She also didn't care that roaches were eating my sweaters. I imagine if she tried to dump the duplex, she would have a hard time it was in such bad shape.

A friend of mine bought a house in 1973 for about $26,000 and has been renting it over the years. Again, there has been a half-ass approach to having repairs completed. Now, the value of the house rose to about $130,000. Yet, when it came time to dump the property, it sat on the market for a year and a half because the foundation was in such ill repair no one wanted to touch it. It also needed some major repairs. It has taken almost $75,000 to get the house in good enough shape to sell it, which she finally did. However, when you compare the value of the house to how much she made in the sell, she didn't really make that much money. Of course, she was just glad to get rid of it.

Overall, you really have to look at the cost of buying and maintaining the home versus how much you can actually get in monthly rent. Take a long hard look at this...Also consider whether the mortgage payment is so much that you can't afford to make that payment along with your own home payments when it is sitting empty for a month or two waiting for the next renters to move in. There have been times when we have had two houses empty at the same time...it's not easy making three mortgage payments at once.

Of course, if you have the cash to buy a property outright, then by all means go for it. You'll be way ahead of the game!