We discuss what kind of house to buy as a rental property here. Having heard a lot of reasoning, perhaps what’s warranted is a post on what not to buy.
Don’t buy your retirement house: This is one of the most frequent stories I hear from wannabe investors: “If I buy a rental now, I can move into it when I retire as it will be paid off then”.
So, what’s wrong with this thinking? Well many things. First, it’s speculative and we don’t like that here. We buy properties that are currently depreciated in a good market (not a depreciated market). We don’t buy properties for its appreciation. If that happens, that’s just gravy. The thought behind the rental house being your retirement home is largely motivated by appreciation fantasies and someone else paying your “entire mortgage”.
Secondly, the purpose: We don’t buy properties that “you” would like to live in – either now or ever. This is not to say that when we finish out the properties we don’t provide a well updated, fully functional and safe clean home, we absolutely do, but the criteria that the home has to be somewhere I would like to live in – or can see myself living in does not arise. Owners who approach properties with this mindset end up over upgrading and over customizing the properties and it often does not pan out.
Third – Too much passion: A rental home is someone else’s home. For you it’s a producing asset. Each piece of property is a business onto itself. When you buy with a mindset that you are going to live in it someday, you get over attached to it. You’ll never appreciate your tenants as paying customers if you are over-attached to “your home”. You’ll make a big deal of minor things – like the lawn not being mowed one weekend as the tenant is out of town.
Fourth – It’s limiting: So how many retirement homes are you going to have? With this thinking you are limiting yourself to one rental property. I know a 70 year old lady who has 1700 rental properties and she’s still not retired! Don’t limit your business by thinking you are going to retire in it someday.
I can go on with reasons – but for the sake of brevity of this post, I’ll stop with this one: Predictability. You can’t predict what’s going to happen 30 years from now. That’s crazy. You can’t even predict what will happen 5 years out. The area the property is in might decline or become too trendy or yuppie for your taste (remember you are old now and retired). You don’t know how your personal life is going to change. You may not even want to live in this country, let alone an exact address. When you are planning long term you can’t be that specific. All you can say is, “I may have some rental properties in my portfolio”. That’s it.
So don’t let all of these “other attachments” that may never happen ruin the sharp focus that you need to have when selecting a rental property. “Stay in the meat”. Buy a property for today that’s depressed in value compared to the properties that immediately surround it (in that subdivision, of that type, age and size). Fix it up wisely: clean, up-to-date and functional. Get a well qualified tenant and make money today. Accumulate wealth and then you’ll be ready to buy whatever kind of retirement home you want, be it in Dallas or Belize – who knows!
