Owning a Duplex and Attending Grad School

[HuskyNamedNala]

I am not attending grad school yet, but I am working and saving cash. One investment I was considering is a Duplex. Ideally, I'd live in one half and rent out the other and make a few hundred extra a month (I've read at least $200 is a reasonable expectation).

I am going to be applying to graduate programs full time this coming fall, maybe this idea is a little weird, but would owning a duplex in the area, while simultaneously renting it out be viable while in a graduate program? My first order estimate for rent would be around $1000/month for half the duplex, but with mortgage payments Id estimate maybe $200 would go into my pocket.

Has anyone tried something like this? I see it as an opportunity to ave some place semi-permante while supplementing income. If I decided to move, I would just keep the duplex and rent the other half out. There is the risk of having no or bad renters though.Thoughts?

 

[jtbell]

Who's going to mow the lawn, shovel the snow, etc.? Who's going to be on call if the heat (or AC) goes out, or the sewer backs up, or a window breaks, or...? What happens if you have a Tenant from Hell, or just a plain old deadbeat?

 

[jim hardy]

A good friend did just that and became quite wealthy before age 40.
Now tax laws regarding depreciation have changed a lot since then

but if you're handy at home repairs i'd say it's an excellent idea.
Just look at the cash flow... and insurance... finance industry has it figured to keep us "another day older and deeper in debt"
so you have to buy right.
Cash in pocket? Murphy will prevail - things break at worst possible times
But if you just break even, it's paying your rent.

 

[Choppy]

It's not a bad idea, but it's important to go into these things with your eyes open. Business types refer to something like this as "passive income" but in my experience that's a real misnomer.

Consider the down payment. Do you have sufficient money for this? Usually it's about 5-10% of the price of the home. That's money that you have to come up with independent of the mortgage.

Do you have someone willing to co-sign with you? Most banks are not willing to offer up a mortgage based exclusively on income from renting the property out. They expect you to have your own source of income independent of the rental property, or someone that they can come after if you can't make the payment.

Do you understand your responsibilities as a landlord in your local area? Unfortunately not all tenants are little old ladies with a steady income who make all payments in time. Under what conditions can you evict tenants? (When/where I was a student, in principle a tenant could only be evicted after about six months of not paying rent. Technically you could pursue the person in court to recover that money, but it was possible that you wouldn't see that money for years.) Are you able to carry the mortgage payments if a tenant stops paying? Or what about honest, good tenants who leave when the school year ends? Will you have tenants over the summer months? If you're planning to rent to students, what guarantees will you have that they won't use the house for a party pad?

Similarly, you have to think about other responsibilities. If it's just your own house and the washing machine stops, you can run down to the laundry may for a few weeks until you can replace the machine. But if your lease guarantees a washing machine, you either have to repair it yourself or call someone into do it, or replace it right away. Even if it's Sunday night and you have an exam the next morning.

And what about the possibility of the house depreciating? For graduate school, you're looking at an investment over the next 4-6 years or so. In the long term it's fairly safe to rely on the price of real estate increasing. But over a roughly five year period, I wouldn't be so confident. Real estate prices could fluctuate. And when you finish your PhD, you may have to sell quickly to take up a new post-doc position in another city? Can you take a twenty-thousand dollar hit if the market slumps or if you have to sell quickly? This risk can be mitigated if you understand the market, or if you are hand enough to increase the value of your house - say by renovating kitchens or bathrooms.

 

[Borg]

There are management companies that will handle everything for you such as finding renters, evicting bad ones, and handling maintainence. They do take a cut from the income but they can help to reduce the worries.

 

[onethatyawns]

A friend of mine did this, but it wasn't specifically while she was in grad school. She has rentals in different states and counties, which I believe she acquired through her years on very modest income. If the numbers add up, go for it. If they don't, don't go for it. You should be able just set up an equation of sorts, along with an approximate variance, and see where you're at.

 

[HuskyNamedNala]

To tell you the truth I didn't consider maintenance to require a big chunk of time unless something serious happens. I would think the hardest part is finding reliable renters. I had no plans to sell the rental property any time soon, even after I move from graduate school. If I were to move and keep the property, I would rent both halves out and hopefully have a little extra income that can go towards savings or other investments. My understanding is with a duplex it is pretty easy to break even if you live in one half, but it is usually not worth the investment unless 250$ or more is made a month. Quite frankly, I am looking into options like these due to student loan debt. I work an engineering job and have a good salary, but even with very high monthly payments it will still take 5+ years to pay off.

 

[Greg Bernhardt]

To tell you the truth I didn't consider maintenance to require a big chunk of time unless something serious happens. I would think the hardest part is finding reliable renters.

Being a landlord is never as care free as it seems. Something always goes wrong, there is always something to fix and good reliable tenants are as rare as striking oil in your backyard. It could be a very good idea, just do your research and know what you're getting into :)

 

[Borg]

Being a landlord is never as care free as it seems. Something always goes wrong, there is always something to fix and good reliable tenants are as rare as striking oil in your backyard. It could be a very good idea, just do your research and know what you're getting into :)

Very much agree with this. I have a friend who owns 30+ homes and he has a very strict set of parameters that he follows with regard to selecting homes and renters. He always performs a credit check and will not rent to anyone below a certain score (their deposit is based on their credit score). If a tenant does not pay within 5 days of the rent being due, he begins the eviction process. There are people who will rent a property with no intention of ever paying the rent and state laws can make it very difficult to evict a tenant. In many cases, it can take months to evict them and the longer that you wait, the more difficult it can be to get rid of them. The whole time, you aren't making any money and they are usually damaging the property.

I know another person who spent months evicting a tenant from a Manhatten, NY condo. When he was finally able to enter the home, they had ripped up the expensive hardwood floors and a good chunk of copper plumbing. Make sure that you have good insurance.

 

[StatGuy2000]

One of my good friends did exactly what you are doing -- purchasing a home and renting it out to pay off her mortgage. As a means of paying off your mortgage I think it is a good plan, but I would agree with the other posters that you do have to make sure you are doing this with your eyes wide open.

One important thing to have is a co-signer -- preferably someone with a stable income who you can trust and who live in the area and can possibly serve as power-of-attorney in case you will not be available to address specific issues that may arise with tenants e.g. maintenance, repairs, etc. I would also be careful who you are renting the property to -- doing a credit check on prospective tenants, interviewing potential tenants (or having your co-signer/power-of-attorney do the interview for you), among other things.