I am thinking it would be great to purchase a condo in Scottsdale, AZ. The market there has been going up more than 5% a year. I rent a condo there for a month in the winter. I am spending what would be about 4-5 months mortgage payments! I am wondering if I can afford to buy the condo or if it would ever be advised with this volatile time? I am retired, so limited on funds and would need to have a mortgage.
In my honest opinion, limited on funds means no. As a landlord, you will be responsible for the upkeep, maintenance and mortgage payments during those times when you don’t have a tenant.
Could you afford to pay for a new water heater if it goes bad? Or repair damage from a renter after they move out? You will have their security deposit, but sometimes that isn’t enough. Are you up on all the landlord-tenant rules for your state?
I know it’s tempting, but maybe if you are able to save enough to cover any unforeseen emergencies, then you could consider it.
Good luck.
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This is certainly a possibility but you definitely need to go into it with your eyes wide open. Rental rates in the right properties in the sunbelt are going to keep going up but you can’t get a year round renter if you are planning on using it yourself.
You can hire a management company, but for shorter term vacation type rentals expect to pay 25% or more of the rent to them, where a regular leased rental may be managed for 10% or so.
So, how are you going to rent it out? Airbnb? You would have to make sure that is allowed in the community. Short term leases? Going to be hard since you probably want it for yourself in the prime season and no one is going to want a short term lease for the summer in Arizona unless you rent dirt cheap in the summer.
The numbers. Say you are looking at $150,000 condo for an example. There are two issues, down payment and cash flow. For a vacation property expect to pay 20% to 30% down, its a complete different process than your primary home. Say you have great credit and can get a mortgage for 20% down, thats $30,000 you would need to invest.
Now, what about cash flow. You would ideally want the monthly income average to be at least double your mortgage+insurance+taxes. Thats definitely not a sure thing with short term rentals.
If you do have a surplus, you would also have to pay ordinary income tax on the “profits”, although you can deduct some depreciation, which then may be taxed when you sell. (Please see a tax accountant before making this decision so they can explain all of the taxramifications - they are considerable).
So, the other option is to take that $30,000 you need for a down payment and invest it in a private REIT such as Fundrise. At 7% return that would get you $2100 cash (taxable of course) per year. Apply that towards your month in Scottsdale and overall you would probably be ahead with a lot less headaches.
If you were looking at creating a rental empire, and had a plan to become a landlord of several properties over time to build wealth, there would be completely different answers to this question, however if you are just looking for an investment that would save you money on your one month winter getaway, I would recommend considering all the facts but in reality stay away from this investment for all of the reasons I have cited.
Good luck.
Thanks, JeremyM. Your advise sounds reasonable. Since I’m not real savvy in investments, could you elaborate a little more about the REIT? I’m not familiar with that term or type of investment.
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