I own my house outright. Bought it in '00 with 55% down, then paid it off in '05. It's not a McMansion, it's a small home (3 bed/1 bath/1 car garage). I have another piece of land that I'd like to build a larger house on (five kids) and have kicked around the idea of borrowing the money to build the new house and then renting out our current home to pay the mortgage on the new home.

Has anyone here done this, and if so, is it generally a sound idea? Any input from experienced folk is greatly appreciated.

I know at least 10 people that do that and I know a few guys who own multiple rental houses that started that way.

Investing money to generate a return and pay personal bills like a mortgage is a generally sound idea.

Your exact idea? Who knows. What do the numbers show? Every market is different.

Have a good rental contract and know your state landlord/tenant laws. Expect some empty house times and plan accordingly.

Have a good background check system in place. Make friends with local LEOs. When you are renting to a new person, before you rent the house out, run the name by your LEO friend. He can't outright give you much info but he can tell you if renting to this person is a bad idea.

Don't rent to friends.

Don't rent to family.

As a landlord, you have to be firm. Lots of people interpret firm as mean. So be it. You're not in the charity business so don't let people tug on your heart strings. Doesn't matter if they have no job and lots of kids. Don't pay/get evicted. If you can't do that, then don't rent your house.

Having said that, I think it's a good idea.....If you can keep in mind the above recommendations.

Sound idea if you find good renters. Other words: the toilet will not flush, the screen has a hole in it, the door squeaks, the hot water went out, can't pay on time, skipped the country, knocked the window panes out, etc.

Most renters in our area have a handyman on speed dial.

1. Why would a renter have a handyman on speed dial instead of calling the landlord (who is responsible for repairs unless its a triple net lease which you almost never see in residential).

2. What does that really have to do with it being a good investment or not?

My dad always comes up with those types of reasons. "Well that idea isnt worth a shit. First you have to find renters, then you have to pick one. If they dont pay then you dont get any money from them...."

Yeah dad, no shit. Whats your point?

Worked for me.

Kept and rented the first and second houses. Then sold both at the height of the bubble so combined they paid for the one I'm in now.

Getting the right renters was key for me.

Good tenants are hard to find.  

Harder to find a library than a Glock kind of hard.

Look on rentometer.com to see what neighborhood rents are, and if it's worthwhile.

Will you in any way be relying on the rental income to pay for the other house or is it all gravy for you?

By that I mean if the rental sat empty for a year would it put you in a bind in any way? If so I would not do it.

Some houses are better to rent than others. If you have done a lot of nice things to it, nice landscaping, etc you will likely find tenants will neglect it. We own rent houses and when we moved we decided to sell our old house and not keep it is a rental for this reason. When it sold we bought another house to rent out that was better suited to be a rental.

Me personally I am debt averse. I would sell the house and pay as much as I could in cash on the new one. Debt equals risk. If you do keep the house and take a mortgage on your new house you are essentially taking a loan on your personal home to invest. That doesn't seem wise to me. I like rentals but I don't borrow money to invest. Many people do though and it either works and they make great returns due to the leverage factor or it doesn't and they go bankrupt.

It's a great idea.