by Adam Dawson
Through most of July this has been a huge stressor for me, but I think it’s finally coming to a close.
This spring, when interest rates were at historic lows, I got a new job and had a little sign on bonus, we thought it would be time to get a house in Austin before the market got away from us. Prices have been rising dramatically and we feared we’d get priced out if we waited too much longer. Rents have also been going up steadily, each year we basically had to pay $100 more per month than the year before, so the rent vs. buy equation started to make real sense for us.
In the frenzied Austin market, we were surprised at how quickly good homes would go under contract. We wanted to get a little bit out of the city and spread out a bit but not too far away from work and the friends we’ve made here. We bid on a couple properties, but our offers were beat by others offering $2000 – $10,000 over the asking price, within a day or two of being listed for sale. Nutso!
We finally found this little retreat in the Texas Hill Country west of town on 2 acres the first weekend it went on the market. It had a main house and a guest house/cottage. It was WAY over our budget, but the cottage was rented and we figured that if we kept it rented out, our part of the payment would only be a little more than we were paying for a shabby house in a sketchy ‘hood across town. So because of the cottage, we were able to realize our little country homestead dream, build equity faster, and get into a beautiful property.
As long as the cottage is rented.
Our tenant informed us he was moving out at the end of his lease – he also bought a house in the area on some acreage. So one month after moving in, we were dusting off our landlord skills (more on that later) and preparing to rent out the guest house. I thought it would go quickly based on our experience renting in Austin, and it seems that houses and apartments for rent in the Austin TX area get snatched up as soon as they hit the market. That being said, I increased the price by $75/month and listed on craigslist.t.
….Crickets….
Actually a few people came and scoffed at how small it is. It turns out that the urban chicken coop hipsters don’t REALLY want to get back to the land. About a week ago I started to worry we might not get it rented by August 1 and would have to cover the August mortgage payment on our own. I also feared I may have to use a realtor to list the property and then lose another month of rent to the agent’s commission. Many landlords in this area skip the broker route because places rent so quickly with no more marketing than a simple sign.
Not having an August 1 rent payment would mean a detour on the debt payoff plan as some of the snowball payment would be diverted to the mortgage. Not a financial disaster, but definitely a major diversion.
Over the weekend, a nice young couple who is moving from California (and is accustomed to shoebox apartments) decided they loved our goats and wanted the place. We are working on the application now, but fingers crossed – this will work out and we’ll get a rent payment August 1.
If this cottage idea works out it will really contribute to our financial stability, but if we have trouble renting it somewhere along the line, it will set us back. You can debate the wisdom of this decision…..starting now!
You should definetly save a portion of the rent to build an “no tenant” emergency fund, one thing is for sure, this will happen again and you need to be prepared.
Good luck on getting the tenants in.
This is a great idea. We’ll have to see if we can divert part of the rent payment.
Yikes! I hope the couple work out for you as tenants. One option, but you’d have to furnish the cottage if it isn’t already, would be to rent it out on AirBnB. It could be a way to generate income between leases. But that would depend on whether you live in an area appealing to tourists wanting a quiet place to spend a few nights.
The cottage looks adorable, though. The CA couple are probably thinking it’s a steal 😉
As to the real estate market the same thing is happening here in Boston. Fortunately, I already own and was able to refinance my mortgage to a low rate, but my coworker and his wife have been looking for a house. They’re having the same experience you had – getting out bid within a day or two of the house going on the market. It’s been a bit crazy. I suspect the prices will drop and demand will slow down if the rates keep rising.
We actually did try AirBnB. Our market seems to fill up for 2 weeks a year – SXSW and Austin City Limits. Austin is the headquarters of HomeAway, and so there are thousands of vacation rental properties in the area. Very hard to compete.
You are treading on dangerous ground. Owning rental property with no emergency fund is exactly how I turned $8K of debt into $52K of debt. I thought I could do the “no money down, rent for more than the payment” route. In my case it was a duplex. Turned out one unit needed a major wiring repair that I funded out of pocket (well, actually on credit card). Suddenly the rent was not quite covering the payment plus the extra I had spent on repairs. Then tenant turnover caught me, including one case where they skipped out on last month of rent and did $2000 worth of damage. It just takes two months of vacancy to totally wipe out anything that might have been gained in the process. Suddenly I was funding the property out of my savings and monthly budget. So I decided my best answer was to sell — right before the housing meltdown. Then to ensure that I properly learned my lesson about the hidden expenses of rental property, a major storm took out a very large tree branch which caught the power line and ripped the electric meter clean off the wall. On a Sunday, of course, so I had to pay electricians and tree trimmers overtime to get the lights back on. The good news is that I was able to sell the property for enough to cover the mortgages, but not enough to pay back the amount that I had racked up the credit cards. Almost four years later we still owe $30k because it is much harder to get out of debt than it was to rack it up.
Wow! Sounds like a series of unfortunate events! I’m glad you got out of this troublesome property. I hope you’re able to eliminate your card debt.
Although RBmt’s story does sound like he got hit hard with costly unanticipated repairs, I bet his story isn’t too unusual. My Mom is a realtor and used to do property management as well, but actually got out of the business because it was so stressful for her. There’s ALWAYS some emergency…usually at night/holiday/weekend when the rates are doubled. Plus, with the litigious society we live in nowadays, people sue in a heartbeat. Sorry – not trying to scare you, but I would DEFINITELY say you should be putting some money aside for the rental property. You could use it for repairs, as needed, or to cover gap months if you have ever some time between tenants.
wait, maybe because i’m sick right now that i don’t understand fully (90% sure that this is the case, lol)… but you don’t have a mortgage debt???
That is amazing. or is your total debt not including your mortgage… or is it including your mortgage?
It’s only $100K in debt, which is amazingly low if it does include mortgage loan.
Congrats on your paying down that $58,000!!!
Hi Thia,
We have mortgage debt but we are not including it in the paydown plan that we are tracking via the blog. We are just as committed to paying it off, we just won’t be tracking it here. i can see why that would be confusing. thanks for your support!
Ooo. This scenario makes me cringe.
I wish you both the best of luck, but if there are no renters for a few months, are you going to be able to make your mortgage payments and pay the minimums on the loans?
There is enough income to cover the payment, but we’d have to reduce our debt snowball payment. We could cover all the minimums. It is very important for us to start budgeting soon, we will talk about that soon.
I have to agree with the other poster about being on dangerous ground. I understand the whole housing market thing…the same thing is happening in our area…I purchased a home three months ago and it was the same situation with homes going fast and being difficult to outbid. I understand the rental situation as well since rents went up every year in my apartment.
That being said, you have a mountain of student loan debt. I understand the part about education being important however that amount of debt is staggering. Choosing a college you can’t afford and then a house you can’t afford is part of the same issue. In both cases, it was more than you can afford. Even if you rationalize the house with the whole rental property income, you still have the issue with a house you can’t afford. It’s not just the house but the maintenance on the house and the maintenance on the rental property. You have a job and yet you’ll get to be the landlord too. That means that you’ll cover repairs on your property and repairs on the rental house. On top of that, you have property that you can’t afford to clear out and hence the goats. Creative yes, but it doesn’t take away from the fact that you can’t maintain the property. You’ve lost sleep over getting the cottage rented. Buying more than you can afford keeps you in debt, regardless of how “good of a deal” it is.
Let’s hope for your sake, your wife doesn’t get pregnant with twins and then you have a property, a rental, student loan debt and a growing family. And let’s hope you don’t have a disabled child or a child with medical issues and that could be even more devastating financially. This is not meant to be a downer, but to look at things from a different perspective. Life happens to everyone and I hope for your sake, things work out as planned. I really do wish you all the best.
I invited this discussion so thank you for contributing to it! Thank you for putting all the pieces together into one big picture.
I do think it’s common for a family to feel the pinch for a while after purchasing a home, no matter how much or how little debt they have. And I’ll say that we will love and nurture any child God gives us, regardless of our financial situation.
Ah, the new home pinch… Yep, I felt that and I don’t have children! In fact, watching my money fly out the door of my then new condo was why I ended up reading this blog – look for ways to save money 🙂
ehh, I know she’s trying to be helpful, but this seems a bit extreme. If we consider all the possible “what ifs” in life then we could ALL be in financial ruin within days/weeks/months. Some good points were made, and I had to chuckle being that MY situation is such that my husband and I moved into a new, expensive place literally about 2 weeks before I got pregnant with twins (which were totally a surprise). You figure it out. : )
On the plus side, they didn’t buy a McMansion decked out with granite counters and stainless steel applicances!
Another option in the future would be to use the cottage as an office. If Adam decides to strike out on his own the cottage would make a great commute!
Jen from Boston is like our biggest supporter! yes, it’s a bit of a fixer upper, and the main house is certainly modest – about 1500 sqft.
the cottage would make a great office. there are so many options with it. renting it out is probably the least interesting, but the most economical for the time being. we’d love to donate it at times as a retreat for families or pastors at some point. we’d love to use it as a vacation rental or even have our families stay when they come to visit. sigh, someday.
Wow, why all the hate for the McMansion with granite counters and SS appliances? I guess it’s become the “standard” for going into debt?
This property with acreage and 2 houses in the Austin area is probably more than what I paid for my McMansion in Georgia. I see a difference in lifestyle/tastes here, not a difference in wiser decisions. I get the feeling because it’s “living off the land” with the potential for a small farm, etc that it’s a virtuous choice?
Either one of these scenarios can be a recipe for disaster if you’re over-extended.
@Cathy C – Sorry if I came off a bit harshly. I don’t begrugde anyone their McMansion if they can afford it. I DO think it’s insane when I see first time homebuyers on HGTV rejecting a perfectly fine house with a clean, functional kitchen with white appliances because it doesn’t have granite and SS. And they’re going to buy their McMansion with 5-10% down :/
As to whether your place is more expensive than Adam & Emily’s I’ll let the Southern property owners figure that one out. From where I am y’alls are in a way cheaper area!! 😉
I forgot that add that I have my own McMansion of sorts… the condo version. But I can afford the mortgage payments and put 20% down. Seeing as I have yet to put up bathroom mirrors after several years a fixer upper would have been a very bad choice for me 😉 So, no, I am not one of those uber frugal people who scowl at those with nice things. I was just countering the notion that buying their property was a bad decision by pointing out that at least they bought something with features they can leverage to generate income and/or cut costs in other areas.
Thanks for the reply, Jen!
I completely agree with you:) I think I’ve heard a bit too much grumbling lately about all of the “evils” with choosing to own a larger upgraded home. It took us 20 years to be able to afford a McMansion (and I say that sort of tongue-in-cheek because our house is 2800 sq ft which is small for a McMansion).
I had to stop watching a lot of the HGTV shows for the reasons you stated. I fear we have a lot of younger people in our neighborhood that truly can’t afford their large homes. We got our HOA newsletter the other day and at least 50 homeowners have failed to pay their annual HOA dues. They’re 6 months past due!! Do these people not realize they can seize their homes?!?
You know what’s really sad? The average mortgage on these McMansions down here is about $1200 a month. That’s only about $200 more than renting a small apartment in our city and they STILL can’t afford it YET THEY BUY IT. I just want to know what bank is still handing out loans like candy?!?
WOW – That’s a lot of HOA fee delinquencies!!!
Many people only look at the mortgage payment and don’t factor in all the other costs of owning when they buy. Luckily, I had good advice when I started looking and factored in tax, insurance, condo fee, etc. And, while the mortgage can stay the same with an FRM, everything is just going to go up.
I still watch HGTV, but mostly the renovation shows now, although Love It Or List It is sometimes difficult because the homeowners are just ridiculous whiners. They flip out that the deseigner can no longer give them their dream kitchen because she had to blow the budget on silly things like fixing the foundation so the house wouldn’t fall down. Good grief.
Dream Mom covered the pessimistic post so I’ll forget what I was going to say and try for positive.
It’s gotten much harder over the decades for the median family to do well, live well. I commend you on falling back on your wits to try and make it work.
(I can’t believe I just said something that positive.)
(but then you discounted it with the next sentence.) :-/
When Claire was blogging here, I tried, not always successfully, to say something encouraging even in the most difficult moments of her journey. it was a good exercise for me that built character even in a small way. thanks for contributing and for finding something positive to say!
Eek. I’ll try not to be a total Debbie downer here too, but I don’t think I can put a positive spin on this. Unless you have a lot of experience in being a landlord/ owning investment properties and have a lot of money, I don’t understand why anyone would willingly choose to buy a rental property right now. I realize it was a package deal with your primary home, but this could get ugly. Just being truthful.
Take it from someone who has lost a lot of sleep over rental repairs, going 3 or 4 months without tenants, broken leases and trashing out the property (over $2,500 in damages). We had a new house built 3 years ago and couldn’t sell our old one. It lingered on the market forever, so we chose to rent it out. BIG mistake. We should’ve continued sucking up the mortgage until it sold, reduced the price, ANYTHING to get out of that house and not have a rental property. We even pay a property management company and it’s still a major headache.
The only debt we have remaining is mortgage debt and we have a large amount of discretionary income and I’m STILL losing sleep over that rental.
I truly hope your experience is a better one. My teeny little positive spin on this is even with the countless times our rental set us back during our debt payoff, we still managed to get it done. It just took longer and stressed me out.
Thank you for sharing your experience – that’s the reason we are here! Thankfully this rental unit is small and simple, and passed the inspection with flying colors. So here’s hoping the maintenance won’t be too bad for a few years.
That said, your points are not lost on me. Taking on this property is certainly a risk, and we will try to make sure we set aside maintenance money, no-tenant reserves, and screen for high-quality tenants as much as possible. Hope it works out 🙂
I love that the both of you are openly sharing your journey with this community of people. Your creativity, love, perserverance, and resourcefulness are so inspiring. Your home is a place of rest and beauty and such a reflection of the two of you!
Thanks! I believe you are right
I have been a landlady for almost a year now and so far it has worked for me. I am hoping it will work for you too.
I agree with the commenter who advised setting aside some funds for no-tenant times and maintenance money.
Once the debt is gone I am sure you will not be stressed about the unit as much. Sending positive vibes from accross the ocean:)
Thank you! I read about your rental. Seems like you’re having fun with it! 🙂
So, with all this land that you have, do you have a veggie garden? That could save money in the long run after start up costs buying seeds, soil, equipment, etc. One of my friends has a green thumb and he has a garden every summer. And every fall he cans tomato sauce, strawberry jam, etc. to use over the winter. I haven’t asked him how much is saves his family of five, but I imagine quite a bit.
Ah….yes! great question.
sadly, no. but it’s a qualified no because it’s on the list! i have an area set aside for a 3000 sq ft garden. but in our area, the soil is so poor that raised beds are needed, so getting started can be very expensive. i’ve been browsing craigslist for free lumber, and we should have access to all the compost and goat fertilizer we could use. but we will have to buy soil.
we will hopefully get started in the next few months. in this area you can grow some things all year round. we have big garden plans. hopefully we can go a little at a time.
Bummer about the poor soil, but it sounds like once you’re able to get going you’ll do really well. I’m jealous about the year round browing season for some veggies. Not that I garden at all, but the whole local food movement loses its appeal when you’re in New England in February!
I have followed this blog since right before Beks ended her journey. I was very sad that Claire quit posting before her journey was complete. I adored her and miss her very much. I love the style that Adam and Emily have and will be cheering them on.
Part of this journey is that we are all different. What is the point of beating someone up with a decision they made just because you wouldn’t/couldn’t have made the same decision. Who are WE to judge someone for their personal decision. I do think that people in this day in time have forgotten the mantra “people who live in glass houses should not throw stones”
Part of this payoff process is learning from our lessons. NOT being slapped around by others for our errors. All that will do is cause the person(s) who are sharing their VERY personal experience to help others to not be as truthful with us as to not hear the haters. Because lets be honest-who wants to be knocked around every day?
Just my .02-keep the change!
Heather
My family has owned a lot of rental property over the years, and my number one piece of advice is to screen your renters carefully, and extensively. It is hard to remind yourself to be picky when you haven’t had a lot of interest, but it is soooo important. I watched an Aunt take some renters without doing an application, providing non-familial references, running credit checks, verifying employment, etc, and the tenants fell behind after two months. It took almost 18 months to evict and had a devastating effect on my Aunt’s finances. It was painful to watch. Also, if you get good tenants, do whatever you need to to keep them. You may want to raise the rent every year, but if it drives them out and the place sits empty for a few months, any increase you would have had is wiped out. But, as long as you can make all your minimums, I think this is a great boost to your debt repayment. Good luck!
Adam, what are all the websites you have your guest house listed on? We get a lot of responses when we use HomeAway to list our FL home.