Looking for some thoughts on purchasing a rent house as an investment. I've read about the common advantages/disadvantages, looking to get some first-hand info. I live in a very small town, lots of housing available for cheap, but there's virtually no "decent" homes to rent. You can get like a 3/1 home built in last 20 years for ~65,000 or less (seriously). From what I understand, one can obtain financing for 20% down with good credit. On the one hand, having a tangible asset producing cash flow monthly sounds great. On the other, should I merely take that ~15,000 or whatever and pay down the mortgage on my house and/or throw it in Vanguard? I'll hang up & listen.
I would not be excited about buying rental property in most small towns in Mississippi. The exception would be small towns outside of growing areas, but even then they'd have to be close enough to be considered 'suburbs'. In most places, you get cash flow with cheap properties and with more expensive properties, you need some appreciation to get a good ROE. If you're not in a growing area, you need to expect depreciation, not appreciation. That means you basically need to generate positive cash flow immediately with a 15 year note. The nicer and more expensive a rental you have, the more hesitant people are to spend money renting and the more likely they are to qualify to buy something, even if it's not as nice as what they can rent. So you generally end up getting a lot of turnover, with people renting until they can find something, although you do occasionally get the long term renters, which turns a decent rental property into a great one not just by cutting down on vacancies but generally by cutting down on headaches.
That said, there are good buys everywhere and there's not a whole lot I wouldn't touch for the right price. If I were going to buy in a small town in Mississippi, the first thing I'd look for is which direction the housing is 'migrating.' Lots of small towns have a clear trend as far as building nicer, newer houses on one end of town and the other end being the 'bad side of town.' Even though the population is stagnant, there are still houses being built and some areas see some appreciation as older units in the bad part of town essentially become worthless. If you can buy something that you think will still be decent in 15 years that will cash flow with a 15 year note and 20% down payment, that will probably be a good buy. I would not buy on the lagging end of the trend because even though you can likely cash flow it immediately and own it out right in 15 years, you likely will have put up with the headaches of rental property to own a house that is worth 75% or less of your original purchase price.
You can also make good cash flow in crap properties as long as you can handle the headache. I would not mess with that, especially not with one property, unless you can get a rental manager that is already dealing with a lot of properties in the low end market. Chasing people for money, going to justice court, having to do repairs everytime the rental is turned over, being threatened by your bad tenants and having to evict the ones that are sympathetic, etc. to me it's only efficient if you basically make that your full time job and that would not be a good job.
The other option to think about is just going out of town altogether. It will cut down on a lot of options as far as renters, but you don't have to worry as much about the neighborhood going bad if there is no neighborhood, and to me it seems like the people that want to be in the country tend to not be as bad of tentants. The one thing you have to be careful depending on county codes is whether somebody will throw up trailers around you after you've bought a house.
All that said, I don't know that I'd bother with rentals unless you are maxing out your tax advantaged savings. The problem I did not think about before I got into them is that you take all this depreciation and avoid showing consistent small profits that would be taxed at your marginal tax rate. When you're done with depreciation and want to sell, all of the sudden you have a significant gain that is not taxed as a capital gain. You can keep doing 1031 exchanges to avoid this I guess but looking back at it, I probably undervalued the difference in tax advantages of tax preferred retirement savings versus rental properties. Still not sure what the right differential is.
