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So we’re thinking about buying a rental home, either in our college town or the town 10 miles north of us. I’ve written here before that we were briefly landlords in the late 90s when we moved to a larger home and rented out our starter home. But we felt we didn’t have the bandwidth to be landlords, so we sold the place after a year. That was a major financial mistake.
Why are we considering this now? I won’t bore you with all the details, but we’re planning to have our daughter and her pets, with a paying roommate or two, live there while she finishes school and establishes herself in more steady work. We’ve been financially supporting her while she’s been recovering from serious injuries sustained in car accidents in 2022 and 2023. But paying rent, especially in the expensive part of California in which she now lives, is not only a drain on our finances as we approach retirement but also feels like flushing money down the toilet. We’d rather re-direct that money to an actual asset that could be worth something over time. Anyway, here are the practical questions I feel we need to research before we (possibly) take this leap in the next few months. (We’ll wait until interest rates drop, as predicted, this fall.) The questions:
Is there anything else I should put on the list?
“We have no particular desire to become landlords…”
So buy a good REIT like Public Storage (PSA) or Realty Income (O) and live life to the fullest!
In addition to the questions you asked there are a few additional concerns you may want want to address.
The IRS rules disallows business losses that involve related parties. If you are letting your daughter live in part of the residential rental property for no rent or less than fair market rental your tax deductible expenses would be limited. Given that you are still working if the non family part of the rental is a net loss that loss may be suspended under the passive loss rules based on your other income.
https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/personal-use-of-business-property-condo-timeshare-etc/personal-use-of-business-property-condo-timeshare-etc-1
You would be buying and (maybe/likely) financing a non-liquid asset that causes additional complexity in your personal returns that you may not want to deal with. My past experience as a CPA (retired) is any rental purchase will require a higher down payment percentage, a higher mortgage interest rate and higher insurance cost than compared with a house you buy for a home. Some HOA rules can prohibit or make renting a property a headache. If you have a tax preparer you may want to discuss your planning with her/him.
In your comment, she will have opinions about who she does and doesn’t want to live with, but we have opinions about the kind of tenant we (don’t) want, you recognize the additional potential conflicts. I observe that you as owner would bear dealing with the property should your daughter decide to move.
Life events can go terrible. Many people want a legal shield to protect themself from unlimited liability using the limited liability company form of ownership on rental properties.
A further thought I had was what are the housing plans for your husband and you for the long term? If you are thinking about aging in place maybe this is the time to find a single level house with the necessary accommodations for when/if mobility or other health issues arise and just gift your daughter the use the smaller house for her remaining college years.
I hope my thoughts help, Bill
Thanks, Bill. I can’t believe how helpful you all have been. I’m going to make a list of all the ideas/questions from these comments to discuss with my husband. I didn’t know about that tax issue, for example. I do know that we can’t use our IRAs to buy the place as an investment property if a family member is using it.
We assume that our daughter probably wouldn’t live in the place long-term. It is a strong rental market in our college town and the surrounding towns, and if we make a good decision about a property, it should be possible to find good tenants. Most rentals here are one-year leases, too—that’s just the norm.
My husband and I currently live in a condo—a flat with no stairs—that’s on the top (fourth) floor of our building. There’s an elevator, but sometimes it goes down, or if there’s a fire alarm or a power outage, we have to take the stairs. That’s fine in our 60s, but we had a hair-raising moment when we all had to evacuate the building due to a fire alarm, and we had to help our barely mobile neighbor down three flights of stairs. His wife said, “Just leave us. When we decided to buy on the fourth floor, we agreed that if anything like this happened, oh, well.” But obviously we weren’t going to do that!
Anyway, we actually really like our condo, which we bought new in 2019, but this issue does give us some pause for the future. There’s a new 55+ community being built in our town right now, and we’re not in any hurry to move, but we might take a look.