I wasn't financially ready to become a landlord, but I took the risk anyway — and now it's paying off
- I bought my starter home with the intention of one day renting it out, but when it came time to make that decision, I was nervous.
- Despite having credit card and student loan debt, I decided to take a risk on keeping the property as an investment because it would be too difficult to get into the rental market later on.
- Eighteen months later, I'm happy with the decision I made, even if I'm still not in the ideal financial situation to have a rental.
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My husband and I were sitting in a cafe having breakfast, as our baby toddled around the mostly-empty space, long bored with our discussion. When the waitress passed by with a fresh pot of coffee we waved her over, and as she refilled our cups we studied — yet again — the page full of numbers between us.
"Looking at this, I can convince myself it's a good idea and convince myself that it's not a good idea," my husband said.
I felt exactly the same. We had been debating for months whether to keep our starter home and rent it out when we moved into a larger space. The alternative — selling the house to pay down debt — was also appealing. Our mortgage broker could make either scenario work, so it was entirely up to us.
"Either decision is a good decision," I said. "And this has always been our plan. I say we try it."
A financial risk, in hopes of reward
When my husband and I bought our first home, I wasn't sure about the house, which was small and basic. But my husband thought it was perfect because of its income-generating potential: it would be an easy-to-rent and easy-to-maintain property. Although we were barely scraping together a down payment, he was already thinking about our future as landlords.
Three years later, when it came time to actually commit to two mortgages, we were nervous. We still had credit card debt and student loan debt. We were on much more solid financial footing than we were when we bought the home three years earlier, but I was the only one working while my husband stayed home with our daughters. Taking on to two mortgages seemed scary, especially since I knew that any responsible financial advisor would probably tell us not to risk it.
And yet, we were within reach of a goal that we had long had. I was raised by parents who never owned a home, and just getting on the property ladder was a massive financial and emotional step for me. Having the opportunity to become a landlord just a few years later seemed almost impossible, and like an opening I had to pursue.
Talking ourselves in circles
As my husband and I shopped for a new home, we continued to talk ourselves in circles about whether to rent out or sell our house. We had hoped that really analyzing the numbers over breakfast that morning would give us a clear answer, but it didn't.
In the immediate aftermath of moving, we would turn a small profit on the house each month. It wouldn't be enough to entirely cover the debt payments we would continue to have to make on credit cards and student loans, but the profit would cover the interest on those debts. We were confident that with my income continuing to rise, we could pay those debts off within two to five years, even if we kept the rental property. Then, we'd have little debt, and an appreciating asset that generated a profit every month. It seemed ideal, but our worry was whether we were jumping into having a rental a few years too early.
On the other hand, if we sold the home, we could pay off our debt and save on interest each month. We would have less risk and less responsibility.
A business decision that came down to emotion
Even as we debated whether or not we were financially ready to have a rental property, my husband and I knew that we wanted to become landlords. If we sold our first home and paid off debt, we would simply be saving up to buy another investment property in the future.
Ultimately the numbers did guide our decision, but not in the way I expected. It came down to the cost of entry into an investment property, and that helped us decide to keep our first home and rent it out.
We had bought our home for very little money, and put just 2.5% down as first-time homebuyers. Now that we had lived in it for a few years, we were able to have a rental property that cost us less than $5,000 to get into. However, if we purchased a property specifically to be a rental in the future, we would have to have at least a 20% deposit, which would mean we'd be paying at least four times more to enter the rental market.
Knowing that being landlords was definitely in our plan, we decided that we had to take advantage of the low barrier to entry that renting our starter home gave us. Eighteen months later, we're happy with that decision.
When I budget each month, the first thing I do is allot the funds for both of our mortgages. Keeping both homes is our financial priority, and luckily we've been able to do it without stress.
Looking at our finances, even now, we're probably not in an ideal situation to have an investment property. We've paid off our credit card debt, but I still have student loans. However, the income we make on the property, though small, helps us have extra funds to direct to debt. If we waited until everything was perfect, we might have never made the plunge into an investment property. But since we took the risk, we have a small investment income, and the emotional and mental satisfaction of knowing that we're pulling off our long-held goal of having a rental property.
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