Have you ever dreamt of investing in real estate or owning a vacation home? My husband and I talked numerous times in the past about doing both but remained reluctant to pull the trigger. However, we are now embarking on our second property transaction in less than 18 months; accidental landlording prompted by love instead of profits.
After visiting Florida with friends in 2012 and again 2013, John and I discussed purchasing a vacation/rental home there that would ultimately become our snowbird destination in retirement.
Around the same time, we also pondered entering the real estate game in our home state either renting or flipping houses instead.
I read lots of information on real estate investing, discussed some pros and cons with my brother who owns a handful of rental properties, and ran lots of financial and mortgage calculations.
While we never ruled out the idea, John and I did not make a conscious decision to move forward with any property purchases either. In January of 2016 that changed.
Look Out Florida, Here She Comes
My mom retired in late 2015 with eager plans to spend the winter of 2016 in the warmth of the sunshine state. She found a home to rent for three months, and in early January I drove her down with the intention of settling her in and flying home after a week. Within two days we were setting up a plan B.
While we were near the land of Walt Disney, the mice we were encountering were not Mickey and Minnie. I refused to leave mom with them, and the hunt for a new rental ensued. (Note: The rental had more issues than just the mice. Getting recommendations from family and friends isn’t always enough.)
At the height of the snowbird season finding another short-term rental proved extremely difficult. Eventually, we began looking at homes for sale in retirement communities but didn’t want to make any hasty decisions. Instead, we drove 1200 miles back home after only three nights at the rental and one at a nearby hotel.
Upon her unexpected return home, mom encountered some additional life changes which prompted a move in with us at the end of January. She continued to harbor an intense desire for Florida and warmer weather.
Ultimately we decided to purchase one of the homes we toured while in Florida and finalized the sale in late February. Thanks to mom and us each having a healthy opportunity/emergency fund we were able to act on this transaction with just a small loan which we then paid off in less than a year.
We took mom back to Florida then, and she spent an enjoyable 2 1/2 months getting familiar with her new community. She plans to spend approximately six months there each year, and we vacation there 2 – 3 times per year.
In the year and a half since the Florida home purchase, John and I’ve also been fortunate to rebuild our opportunity fund due to well-paying careers and side hustles. That fund is now coming in handy again.
Accidental Landlording or How Not to Buy a Rental Property
Recently, we learned some loved ones were in an unfortunate situation of not being able to find an affordable home to rent. Regrettable prior decisions, simple mistakes, some poor luck, and bad timing put them in a position of an expiring lease with no new place to go.
Within a couple of days of learning about their predicament, we decided to purchase a home that they will rent from us. Now, just ten days later we’ve already applied for the mortgage on a single family rental property.
While I continue to believe we are doing the right thing for our family, and we are going into this transaction with our eyes wide open, I fully admit it is not the wisest financial move. Here’s why:
- We are buying in a seller’s market – Housing prices in our area are higher than they have been in years. Sellers are receiving multiple offers and homes are snapped up in days if not hours of being listed. In fact, we put in our offer on the house we are buying in less than 24 hours of its listing. Two other proposals were received, but we had the strongest offer.
- We are buying a home that is move-in ready versus a fixer-upper – John and I enjoy DIY, and we always thought we would find a rental income property in need of some TLC and improvements. The fixer-upper homes we viewed were either in need of way too much work or were just priced too high. Ultimately we found a home that was well cared for and only needs some minor touch-ups.
- I was viewing homes specifically for them versus viewing homes for rental income – I found myself evaluating each home we toured with our family in mind, wondering if they would like certain aspects. Separating needs versus wants became critical.
- A mortgage is needed – John and I had no plans to take on additional debt, the mortgage on our home is our only current debt, so this was a huge decision. Interest rates have risen a bit, and the interest rate on investment property is even higher. Our ‘renters’ of course will be covering the payments.
- Our opportunity/emergency fund will be nearly depleted – This fund has gotten some use that’s for sure! Once again we will tap it and work to rebuild it quickly. Because we have no other debt and spend very little on wants, this shouldn’t prove too difficult, but it is a concern.
- Unexpected events happen all the time – On the verge of becoming accidental landlords, I have a healthy concern for the next potential unplanned incident. Without a funded emergency account we may need to dip into other savings accounts delaying other goals.
- Emotions are involved – It’s family and finances, need I say more?
Risks and Expectations When Renting To Family
There are risks with any investment in real estate. Add the mix of family, and you may also increase the complexity.
I’ve spent hours and hours identifying potential risks, outlining our expectations, and communicating with our family members to understand theirs as well.
Due to prior considerations, experience renting and purchasing real estate, reading of numerous personal finance websites and books, and discussions with real estate experts and current landlords, however, I do feel more prepared than many probably would, given the above situation.
We’ve been acting very fast in executing this real estate transaction, and while I feel prepared, there’s no doubt there are things we haven’t considered.
Additionally, we know things often don’t go as planned no matter how much preparation happens.
Things to consider:
- Additional costs beyond the purchase price such as inspection and closing costs
- Lease length and other terms
- Fair market rental rates
- Non-homestead property taxes
- Property insurance
- Rental insurance
- Additional liability protection
- Personal tax implications
- Repairs and improvements
- Utility costs
As mentioned above, there are risks with any investment in real estate. When you add the mix of family, you may add another layer of complexity with emotions and additional expectations you wouldn’t have with strangers. With open communication, structured agreements, and managed expectations, on both sides, things can work out satisfactorily for all.
Accidental landlording may potentially delay our FIre (financial independence/retire early) goals. However, love trumps money this time.
Let me hear from you now. Do you have rental properties or are you considering investing in real estate? Any experience renting to a family member? Have you ever fallen into accidental landlording? Are we completely nuts? Please feel free to share your thoughts and any advice below.
Update: The rental house is purchased and the lease is signed! Check out the next Accidental Landlording article, dealing with how to rent to relatives.
Never miss a post, the latest happenings around here, new healthy recipes or resources ~ Join us below!