The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: The_Learning1 on March 29, 2014, 08:50:27 AM
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I was transferred out of state two years ago and kept a house in my old town -- where I may eventually get transferred back. In a fit of optimism a couple of years back I bought the house with a fifteen year mortgage, which still has 11 years to run. I pay 3.5 percent on this. With insurance (costly, because I rent out short term to students) I have a 2750 monthly payment on my house -- which only generates an average of 2,000 a month. I earn 180,000 a year.
My question, am I better off continuing to rent the house off at a loss of $700 a month, which I hope to get back with a tax refund at the end of each year, or should I just sell the house, pocket the 100,000 I will make, and consider myself a winner?
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Lay out more of the numbers.
Market Value:
Original Purchase price:
Original Mortgage Amount:
Interest Rate: 3.5%
Mortgage Term: 15 years
Term remaining: 11 years
Amount remaining on mortgage:
Gross Rents:
Taxes and Insurance (the T&I of your PITI - the P&I we'll figure out from the above info):
I assume because of short term student rental you will see a little higher maintenance and turnover costs than normal. How's your vacancy? Is it empty in the summer months?
What are your goals with the property? What do you intend to do with the proceeds? How will this affect your AA?
Feel free to add any other numbers you think are relevant; I've probably forgotten some and will come back with more questions. ;)
Welcome to the forums!
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I was transferred out of state two years ago and kept a house in my old town -- where I may eventually get transferred back. In a fit of optimism a couple of years back I bought the house with a fifteen year mortgage, which still has 11 years to run. I pay 3.5 percent on this. With insurance (costly, because I rent out short term to students) I have a 2750 monthly payment on my house -- which only generates an average of 2,000 a month. I earn 180,000 a year.
My question, am I better off continuing to rent the house off at a loss of $700 a month, which I hope to get back with a tax refund at the end of each year, or should I just sell the house, pocket the 100,000 I will make, and consider myself a winner?
I'm puzzled about why your insurance is costly. What do you mean by "short term"? I rent to students and that has no impact on my very reasonably priced landlord insurance.
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Wow! Thanks very much for the quick replies. I am running out the door to go to work. Will get back with the answers first thing tomorrow morning. I really appreciate the quick and thoughtful replies!
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My understanding is that you can't deduct your rental losses once your AGI hits $150k. If your AGI is over that (not sure what your tax circumstances are), then you really are losing out.
They call these alligator properties or something like that because you have to feed it each month or it will eat you alive. I have one, and my AGI is over the limit, and I'm putting in about $350 month on it (not counting repairs). It's not a good position to be in.
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My understanding is that you can't deduct your rental losses once your AGI hits $150k. If your AGI is over that (not sure what your tax circumstances are), then you really are losing out.
True, in the short term. But your losses do accrue and when you sell the property you can deduct those losses. So you get no tax write-off each year, but you don't lose at the end of the day.
Here's a way to analyze the question: if you didn't own the property now, would you buy it at the current market value and rent it out? If not, then you should sell it.
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I don't know that I'd choose to hemorrhage money now to hopefully get some kind of tax write off later. $700 a month is a lot of out of pocket cost and I'm sure his property doesn't meet the 50% rule, or even come close to it (mine doesn't)
I would consider buying at current market value, but my loan is much more than that because I bought in 07 before the crash. So the current market value doesn't really factor in. And I can't short sell (I don't meet the criteria) and so I'm stuck until appreciation and paying down the mortgage get me to a place where I can sell. That said, at least mine has extremely low vacancy and few repairs. But crossing my fingers that the HOA dues don't go up much more. Sigh.
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I think it is important to factor in what the real estate market in your area is doing also. We have a rental townhouse that we used to live in which similarly ends up costing us money each month, though in our case it is significantly less than for you. Aside from the fact that our tenants are in a 1-year lease right now, what is keeping us from selling immediately is that the market has been going up faster than the extra money we have to come up with each month to make things balance out. While we don't intend to keep in long-term for completely different reasons, in the short term, the numbers seem to work out to "keep it, for now".
In your case, I would want to see some significant appreciation in real estate values to make the situation interesting since you have such a large negative cash flow.
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Okay, here are the numbers:
Market Value: Hard to assess, but I think based upon comps and local price-per-square foot averages, 450,000
Original Purchase price: $260,000
Original Mortgage Amount: 234,000
Interest Rate: 3.25%
Mortgage Term: 15 years
Term remaining: 12 years
Amount remaining on mortgage: 206,000
Gross Rents: *
Here's the tricky part. I am overseas. My gross rents were $41,149 last year but I have a full service management contract and all rental expenses are deducted so I only get the amount that comes after all expenses. last year that was 19,447. My house is across the street from a medical school so I rent out short term to doctors in residency. I have cleaning services, trash collection, everything taken care of for these tenants. (Who are ideal tenants, they work all the time, don't party, are spotless. But because they are short term I pay VERY high insurance, reflected in my escrow accounts, because I am considered to run "a boarding house" and insurance is very high for this.)
Here's my mortgage:
Payment: $2,773.96
Principal and Interest: $1,644.25
City Tax: $536.30
Hazard Escrow: $417.95
I earn 180,000 a year (gross) and pay US federal and state taxes. One more factor impacting the potential to sell: there's a massive road rehabilitation project in front of my house right now (it's resurfacing, planting trees, beautifying, etc. I believe the project will raise the price of the property significantly but it won't end until November of this year.
Is this a good investment or not?
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Again, what do you mean by "short term"? Medical residencies generally last a few years, so I am still puzzled by why you would be considered a boarding house--wouldn't the residents generally move in for at least a year and then renew the lease until their residency is over, unless some other circumstance comes up (e.g. they get married and want to find an apartment to share with their spouse instead of a roommate situation)?
I'm asking you this because I wonder whether your insurer is fleecing you. I rent a house to 4 grad students at a time, on one-year leases, and pay like $800/year for landlord insurance. I find it hard to imagine why medical residents would be moving every couple of months, so I am just trying to nail down how often your tenants leave, in order to nail down whether your insurer is milking you for cash when they could just as easily sell you a normal landlord policy.
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What is the outlook for property appreciation? I have a house that does not cash flow, but I have been seeing 8%+ appreciation the past two years with a projected 5.5% for the future. With leverage this is coming up with a 15%+ return.
I would wait until the road improvements are complete.
A good chunk of your monthly outflow is going to principal on your 15 year loan so it is not lost.
Good luck
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I guess I should have clarified. I can't get the students to sign long term leases because they're doing 3 - 6 month short term study-residencies. The advantage to me is that they're great tenants; the disadvantage, because of the way the program works, is that I can't get them to sign leases, so my insurer charges me killer rates. You bring up an interesting point however: maybe even if I get lower rents, going to six month leases gets me out of the "boarding house" rates, and drops my insurance. The negative of that, however, would likely be non-medical tenants, (in other words, just ordinary students) which would be much more wear-and-tear on this Victorian house in pristine condition with beautiful antique floors and fixtures. That's my problem. If I enter the ordinary rental market I will likely trash the house, thus reducing its currently high resale value.
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At the very least, increase the deductibles on your hazard insurance with your current company and then get quotes from other companies as well.
Does the management cost include the payments for the mortgage and the services you listed (cleaning, trash, etc)? You pointed out that you have to contribute $700 every month but that you got $19,447 back after management services. I would expect it doesn't since your mortgage alone is $33,276. What exactly is this company doing with $1,800 a month? You're paying 52% of the revenue from the property for management and services.
I'll echo that waiting until November looks like the best option if you want to sell. If you intend for it to be an investment property for the next several years, however, consider refinancing it to a 30 year loan. At 4% over 30 years, your P/I payment will be around $980. The difference between what you pay now, and a refi will just about put you at even month over month. Additionally, if you look at your management company and insurance costs, you could turn this into a solid investment.
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Okay, you guys are smarter than I am. My calculation was way more basic than that. I just divided the amount I get (approximately 19000 last year) against the total mortgage, and came up with the seven hundred dollar figure. Your right, Fireman, that my costs are high. The one positive about this is that the 19,000 I got last year covers every single house-associated expense except the mortgage itself. So that's how I decided that my monthly "contribution" was 700 (Income after expenses - mortgage and escrow (insurance & taxes). I am kind of stuck needing a manager. I live 8000 miles away and am in a job where I am out of touch and traveling a lot. I need a really good manager otherwise I would have huge problems fast. So the guy I have is good, but expensive.
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If you are 100% positive it'll appreciate a bunch this year, keep until the prime selling season in 2015. If not, ditch it as soon as your tenant's leases are up. You are losing money pretty rapidly on this place and the standard advice ("would you buy it to use as a rental knowing what you do now?") is good.
-W
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Can you find a way to get them to sign leases but offer "end of residency, with paperwork confirming" as a valid reason to break the lease? Seems like they'd be willing to sign that.
Do you have a reliable friend in the area that would act as a property manager for you? Most people would be willing to earn some extra cash to do the work of a property manager, but would do it for far less than a company.
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Do you have a reliable friend in the area that would act as a property manager for you? Most people would be willing to earn some extra cash to do the work of a property manager, but would do it for far less than a company.
This may not be legal depending on where you live. A property manager in my state needs a license.
That aside, I'd rather pay a good PM their going rate and have the experience that goes with it than pay half to a friend who doesn't know what the f they're doing.
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If you can help it, do not hold unto a negative cash flow property. Sell your house and invest the proceeds.