Money Tree Vs. Money Pit: Choosing the Right House

A rental house can be a money tree or a money pit. You get to choose what it will be. That choice is made at closing 95% of the time.

If you know you want to turn your personal property into a rental, it is important that you mind your numbers from the very beginning. Often times your easy success or failure (without large market appreciation guided by forces out of your control) can be determined before you even walk out of the closing room.

This what I look at to make sure that I am well off no matter what happens in the larger realm of the world.

Endless Money Pits Occur When:

• Properties can’t be rented out
• Mortgage is WAY over rental income
• Tenants don’t pay rent
• Tenants don’t take care of the house

While market conditions can change, these issues can usually be predicted based on choices made when choosing the house.

Not every house is cut out to be a future rental property.

A great rental property is one that can:

• Rent quickly because it is in a highly desirable neighborhood with a “run of the mill” personality that appeals to lots of different people
• Rent is more than the mortgage
• Can be easily maintained long distance

I love investing in real estate ESPECIALLY if I can buy the house as personal property turned investment property when we leave the area. Here’s why:

• Low Downpayment – Personal is 0% -5%, whereas Investment is 20-25%
• Easier Qualification – Personal is easier to get approved than Investment
• Lower Interest Rate – Personal is usually 1% less than Investment

This only works if the house is going to be a money tree and not a pit.

How to Choose a Money Tree House

• Make sure you can rent the house QUICKLY – Every day it sits on the market is rent lost.
• Make sure the rent covers your mortgage with a margin – Make sure this money goes into an emergency savings account.
• House needs to appeal to the masses – While it is fun to watch HGTV’s “craziest” houses, you don’t want yours to be the equivalent in your neighborhood. The last thing you want is for future tenants to call it the Easter Egg House or the Concrete Backyard.
• Eliminate Extra Expenses – Landscaping, pool service, and the like usually do not add value to the home, but do cost you money.
• Fully loaded may only load your purchase price – While we all want that perfect house with every upgrade (stainless steel, granite counters and backsplash, tile floors, etc.) note that you will pay for these upgrades. The problem with these upgrades is you usually can’t recoup the price when you sell it.

What’s been your experience? Have your rental properties been money pits or money trees?