Eliminating Housing Cost

[coreyP]

Hello community!

I am looking for a "what would you do?" opinion.

In a very general overview, I current own my home with a mortgage payment around 1150 and have done a comparative market analysis on the rent in my area and they are anywhere between 2000 and 2750.

With that being said, I have been entertaining the idea of renting this house out and down sizing/grading a bit and purchasing another home to live in.

Essentially, estimating this on the low conservative end of the spectrum from my "due diligence", it appears as if I rented this out I could cover my mortgage for my current home and then also cover the mortgage on the new primary residence.

What are your guys' thoughts on this? Would I be essentially be eliminating my biggest cost of living, housing? Is a form of house hacking? Pro's and con's?

Almost sounds too good to be true. Pinch me.


Corey

[waltworks]

Read the "sell or rent" sticky at the top of the page and post some hard numbers, and we might be able to answer your question for you. Otherwise, who knows.

I can say, however, that if you're in a market where rents are $2500/mo for a property like yours (and you're in the US) I'd be shocked if the place wasn't worth $500k+. Which means it's probably a stupid move to rent it out.

-W

[coreyP]

I'd say my the current value of the home is about 300,000. Homes in this area can fetch between 350k to 450k, the problem is no one in this area moves, there isn't really any sold comparables.

I'm curious why you say if the house was worth 500k it would be a bad idea?

Thanks for the time!

[Mustache ride]

I'd say my the current value of the home is about 300,000. Homes in this area can fetch between 350k to 450k, the problem is no one in this area moves, there isn't really any sold comparables.

I'm curious why you say if the house was worth 500k it would be a bad idea?

Thanks for the time!

Because you would make more money selling the house and putting the profit in the market.

[Jon Bon]

Because prices have badly outpaced rents in most parts of the country. As a rule houses were meeting the 1% rule. Sometimes 1.5% depending. Now things are at .08% or so which makes them not very profitable as rentals.

With the limited info I have from you renting is not the best answer. Talk to a realtor or better yet get an appraisal for a few hundred bucks if you are serious.

I dont love single families as rentals either but that is just me.

[coreyP]

Because prices have badly outpaced rents in most parts of the country. As a rule houses were meeting the 1% rule. Sometimes 1.5% depending. Now things are at .08% or so which makes them not very profitable as rentals.

With the limited info I have from you renting is not the best answer. Talk to a realtor or better yet get an appraisal for a few hundred bucks if you are serious.

I dont love single families as rentals either but that is just me.

In a sense of the 1% percent rule, mine does fall in that category. I actually bought it about 3 years ago for 200k, and there are comparable rent sales for 2000 to 2600 within a half mile.

In today's market I would guess it would appraise for around 250k.

I'm assuming you mean that as if you prefer multi's? What is it that you prefer with multi's vs SFR's? I'm curious your opinion. It seems in my local area, you are able to get more cashflow per door with SFR's as well as longer term tenants. Which in my opinion are two huge pluses.

Cheers

[theoverlook]

The 1% rule would be applied to the current market value of the property since that's what you would be, in essence, "turning down" to rent the house instead of selling it.

[thepuglife]

I keep hearing the same advice -- to sell if there is a lot of money sitting in the building because you can make the same or more in the stock market. I am worried that advice rests on the notion that the current stock market conditions will continue for the foreseeable future. Most of the long term stock investors that I know are saying that is impossible and we will be seeing a big correction soon. I understand that happens in RE too, but if the property is in a good location and you have low vacancy rate, it seems like you could ride out a correction/recession with more stability in RE.

[theoverlook]

That advice rests on looking at long term returns from the market - ie averages over the last 100 years or so. Your short term returns may be depressed by a correction but over the 10-20-30 year haul they are pretty likely to revert to the mean. Ie, approximately 9.8% annually for an S&P 500 fund. Many small landlords do not achieve 10% returns on their money, meaning they would have had more money by buying an index fund instead of owning real estate.

[belly05]

Hi CoreyP –

I am in a very similar situation to you so figured I would throw in my 2 cents.  In 2017 I moved from my primary residence into a smaller house.  My situation differs a little bit in that I moved from a 2 family, into a small single family home.  While living in the 2 family I had approximately 1400 square feet of living space, and in the new single family home I have 850.  A little over 1 year later, looking back at the move I’m extremely happy that I did it, for me the benefits have been:

-   I’m able to live in the single family home completely “free”.  Obviously as everyone else has pointed out there is still opportunity cost in having my money tied up in the 2 family residence + the single family residence.  However this has really proven to work well for me, I work for myself so my income stream can be a little up and down, having all of my housing costs (including utilities) covered by the steady monthly rent from the 2 family has really freed me up mentally.  Basically it took pressure off me, or at least the feeling that I “needed” to land some work every month to pay the bills.

-   The smaller home living area forced me to de-clutter which has been great.  Additionally its way more efficient to heat/cool this new house which has been a very fun.  I’ve essentially followed along a couple of MMM’s improving utilities articles and I’ve been able to get my gas/electric down to around $20/month.

-   I didn’t realize it at the time but I do enjoy the added privacy the single family residence gives me over the 2 family (my girlfriend loves that part of it as well!)

So for me while it’s not the most efficient use of my money, it has given me far more happiness than selling the 2 family and moving the excess money into the stock market.

[tralfamadorian]

Hello community!

I am looking for a "what would you do?" opinion.

In a very general overview, I current own my home with a mortgage payment around 1150 and have done a comparative market analysis on the rent in my area and they are anywhere between 2000 and 2750.

With that being said, I have been entertaining the idea of renting this house out and down sizing/grading a bit and purchasing another home to live in.

Essentially, estimating this on the low conservative end of the spectrum from my "due diligence", it appears as if I rented this out I could cover my mortgage for my current home and then also cover the mortgage on the new primary residence.

What are your guys' thoughts on this? Would I be essentially be eliminating my biggest cost of living, housing? Is a form of house hacking? Pro's and con's?

Almost sounds too good to be true. Pinch me.


Corey

I'm not as presumptive as some of the others that renting is not a feasible option. Run the numbers and see where you end up. Your rent range is wide- can you contact a couple of property managers in your area to get a more narrow range?

Rent:

Rent Income:

Costs:
PITI (Principal, Interest, Taxes & Insurance):
Vacancy (10% of rents):
Management (10% of rents):
Maintenance (10% of rents):
CapEx (10% of rents):

Net * 12months:


Sell:

Selling Price - 6% Realtors - 2% Misc - Mortgage Balance = Net

Net * 7% Yearly Market Returns: