patrick.net

I haven't done this, but here's a thought experiment I've been running in my head that might be useful to you:

Suppose you had a friend whom you trusted perfectly to look after your best interests. Let's call him Duane. Let's say Duane similarly trusts you. You also have identical taste in homes, identical finances, and two identical homes just came up on the market for identical prices (say they're new constructions in one of these mass-produced home-hives that are so ubiquitous these days.)

Is it better for you and Duane to each buy your own homes next door to each other and live in them, or for you and Duane to buy your own homes and rent them to each other for the exact same PITI-cost?

The only difference I can see (that can't be assumed away through collusion so perfect it can only exist in a thought experiment) is that in the latter case you can both deduct depreciation and in the prior case you cannot --either way, you can deduct mortgage interest.

You don't have a Duane, but nor do you need one. I think the experiment shows that it's perfectly sane --in some senses optimal-- to rent while you're a renter. The other problems you raise are valid, particularly the long-distance landlord one, but I wouldn't worry too much about renting while playing landlord. Unless you really want to own just-because and are worried about deferring that; which would be reasonable, but would also be a value-tradeoff that random dudes on the Internet couldn't really help you wrestle with.

We did it for a while. Very similar boat you're in. Bay area - too expensive to buy. Bought elsewhere and have been renting them out. A property manager is taking care of them, so pretty hassle free so far.

I view it this way - do you invest your money in stocks, bonds, etc. while you are renting? If so, investing in RE is the same thing just a different investment. The main thing is making sure it is a good investment. Just like there are bad stocks, there are bad RE investments.

MTHOM,
thanks for your reply. Can you share more details? location, how much the property manager charges ..etc

"I can pick up a decent rental property in these areas with a hefty down (40-60%) and be cash flow positive by renting them out"

You should check out the capitalization rate and make sure this is worth it. 40-60% is a lot down, and you might be able to get better returns elsewhere. It doesn't sound like these are good rental properties if you're having to put that much down.

Other than that, it is very difficult to be a long-distance landlord. Many people would recommend using a management company, but it's also a lot harder to keep tabs on the management company when you live far away. Sacramento isn't that far away from the Bay Area, however.

In addition, you should consider whether it pushes forward your life goals. If you want to buy a house eventually, it might not make sense to use your potential down payment on an illiquid investment with poor return.

Also, maybe you should consider somewhere with better cashflow and return on investment like Oklahoma instead of Arizona.

I have actually done this. I lived in NYC and rented out a house I already owned in Alabama. A few experiences / thoughts -

1) I did not use a property management company, but would do so if I had it to do over again. While I thought I had a great renter, at one point the check didn't come and she did not answer the phone. Then the phone was disconnected. I had to fly down and check it out. She moved out without informing me - but at least she repainted and laid new tile in the kitchen. I bumped into her years later and with embarrassment she explained she got in a financial bind and did what she could to 'repay me' for the missed rent. The moral: even good people get in trouble and they might not pay. So, either hire a management company (and) or plan on months where you have NO rental income at all.

2) Arizona? Do you really know the rental market? I am guessing post-bubble there are lots of places where houses appear to be very cheap and you might assume you can get positive cash flow. However, there could be many, many vacancies and good renters may be hard to find. Are you sure you'll get the rent you want? Worse, can you even find a decent, reliable renter at any price? I would be leery of markets that were extreme bubbles and therefore appear cheap but are really more of a mess than an opportunity.

3) Similar to #1, most landlords will tell you never buy a rental that is far from your home. Sure, you can get someone to manage it or hope to find a really, really good renter who you trust. But generally, it is a bad idea (in my opinion) to be an absentee landlord. Too much can go wrong. I have an acquaintance who leveraged that 'sweet, sweet CA equity' to buy something like 26 rentals in other states. He recently got crushed. He had one case of a rental management company collecting rent and telling him they were empty. Others were stripped an vandalized. Others he wanted to sell, and was underwater. It strikes me that there are a good deal of CA people who are true believers in real estate and 'rich dad poor dad' and it doesn't always work out as planned.

In short, in theory or philosophically there is no problem renting your primary residence and owning a rental property. I just wouldn't go into it too naively and make too many assumptions.

My first post!

There is some slightly misleading information in this thread. Thought I could help out.

I rent in San Jose but own a place in Florida. I've been doing this for 3 years.
Most of the advice above is sound.

The one point I'd like to make clear is about the deductions. A primary residence allows you to deduct the interest + property tax from your personal income tax. The rental will let you deduct losses (including depreciation if you want) from personal income tax, but ONLY if you make less then 150K (AGI) a year (or have Realtors license). I learned this the hard way as my salary has gone up over the years.

If you hit the 150K limit, then you can carry forward the deductions for when you sell the house.

Check out this link for details on the deductions:
http://moneygirl.quickanddirtytips.com/real-estate-deductions.aspx

permanent_marker says

MTHOM,
thanks for your reply. Can you share more details? location, how much the property manager charges ..etc

We bought in CO. The property manager takes 50%, but they do short term rentals and pay for all of the advertising etc. It's a little cash flow negative with the down economy, but not too bad. We only have about 12 yrs left on the mortgage so it will be paid off soon enough and then will obviously be cash flow positive.

Normally from what I've heard, a long term property manager takes 10-20%.

I like this calculator to determine if a property is a good investment:
http://www.goodmortgage.com/calc_investment_property.htm

Roberto, are these parts of Phoenix ok areas (crime-wise)? In the BA, cash-flow positive houses tend to be in the 'hood. Could you name some of the parts of Phoenix that rent well and are low crime? Sounds worth looking into.

robertoaribas says

many parts of Phoenix cashflow like crazy.

Yes, it's kind of shocking how much gross rents can be as a percent of purchase price. I'll spam my own forum here - check out the numbers for Phoenix in Patrick's Property Finder