By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
QUESTION: We are buying a new house and have been advised to keep our old house as a real estate investment. We would rent the house for approximately the amount of our mortgage payment. (1)Do you feel this is a smart idea; and (2)What can you tell us about finding and checking out tenants?
ANSWER: Buying a new house and retaining the old house is probably the MOST BASIC form of real estate investing. Single family homes are always the easiest form of real estate to sell and finance. The investment strategy is fairly simple. If you keep your present home, say a $150,000 value, and purchase a new $200,000 home, any future appreciation will affect BOTH properties. A ten percent increase in value over the next couple of years will get you a $15,000 increase in the value of your rental home AND a $20,000 increase in the value of your new house. On the surface, I would always suggest this type of real estate investment, however I don’t know your personal financial situation well enough to give you further advice on “yea or nay.”
Picking and dealing with tenants is ABSOLUTELY a major concern. This should be done with the help of a real estate professional. If you keep this property, I strongly recommend that you join an APARTMENT ASSOCIATION in your area. Through the association and their magazines, you will be helped with real estate forms, vendors for carpets, drapes, eviction services, etc. The association will probably have a tie-in for credit and eviction reporting. In any event, renting your house is not for the “innocent.” You will definitely need professional help. Many brokers will want to manage your property for you on a monthly basis. In your case, this will probably not be necessary, as it is my understanding that you will be moving to a community near your existing house. Obviously, depositing your rent check and paying bills is no problem and you could drive by from time to time to make sure that the property is being cared for.
QUESTION: We have just received a fairly small inheritance which would come close to the amount of money we still owe on our mortgage with _____ Bank. My husband is insistent on paying this off so we can own our house outright. What are your recommendations?
ANSWER: I have been asked this question in various forms over the years. The first time I was asked this question it was the wife’s desire to pay off a sewer bond with a similar inheritance. Via phone call I learned that your interest rate is in the low 7% range and that this loan will be paid off in approximately four years anyway.
Though it “feels good” to pay off your home, it also feels good to have money in the bank for financial or medical emergencies. If the interest rate on your home were higher—9-11%–I would definitely recommend paying it off. In this case, however, my advice would be to put the money in some type of bank certificate that will get you a yield in the 4-6% range. In this way you will have this money for emergencies. If your house were paid off and you had a minor emergency you would have to desperately scrounge around or re-borrow money on your house. Once you have the money in the bank, if possible make monthly over-payments to your lender and your loan will be paid off in a shorter period of time.
My advice on this subject is analytical and the desire to own your home “free and clear” is a strong emotion. Your husband may accept my advice as good advice but still wish to pay the loan off. It’s your choice, not mine.
Peter Rosenthal
VIP Trust Deed Company