Author Topic: Rent out/buy new? Stay put/buy rental? Trying to avoid FOMO in growing area...  (Read 598 times)

ShePersisted

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    Hello,
    Your expertise is needed. I live in Boise, ID which is one of the fastest growing cities in America and is projected to continue growing by 200k+ people over the next few years. There’s a bit of a shortage of houses/builders and rentals. So, we are trying to decide whether to rent out our primary residence and buy a new primary residence closer to the downtown area or sell and buy a new house and/or rental or stay where we are and buy a rental. Or any other combo we haven't thought of yet.

    Current situation:
    •   ~$150k in equity
    •   Current monthly mortgage payment (including taxes & insurance) - $1750
    • Currently owe $247k on mortgage
    •   Rental estimate - $2000 (excluding cost of property management if we go that route)
    o   The rental market is good and houses in my area rent out in less than a week right now
    •   No landlord/rental experience
    •   Combined Salary $180k annually
    •   Down payment options - we don't really have extra savings so would likely need to do a HELOC for our down if we don't sell
    •   Credit score >800
    •   Debt = $250 per mo in student loans and $485 for car payment
    •   When we spoke with a lender, the ballpark for debt to income was 40% (if we were to buy a $500k house, use a HELOC for the 15% down, pay both mortgages, and include our existing debt).
    o   If we exclude our current mortgage amount, our debt to income is reduced to 30.3%, though we can’t actually consider this income yet
    The primary reason we went to move is to be closer to downtown which is where we do a lot of recreational activities (mtn biking, running, snowboarding etc). We find we are driving there (about 35 minutes each way) at least 3 times a week during nicer months. We also like the area more, as it is more diverse than where we currently reside and there’s just more to do in general (parks, restaurants, events etc).

    Other than that, we don’t really have a reason to move. Our house is a good fit for our family and very affordable. We want to start investing in real estate and building experience and creating some passive income.

    Concerns/Fears
    •   The normal stuff – we don’t want to over extend ourselves and want to be able to afford to take care of vacancy and repairs.
    •   FOMO! - We don’t want to buy at the top of the market, but with the growth we’re experiencing, we also don’t want to miss out on buying before things really start skyrocketing. Crystal ball, anyone?
    o   With so many people moving here from areas with higher costs of living, we might not have the situation after 2008 where people couldn’t afford their homes and investors got great deals, so we can’t bank on that happening either…

    Thank you for reading! Your advice is greatly appreciated!
« Last Edit: May 16, 2018, 09:25:34 AM by ShePersisted »

Cwadda

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Quote
Current monthly mortgage payment (including taxes & insurance) - $1750
Quote
Rental estimate - $2000 (excluding cost of property management if we go that route)

This is all the info you need to decide whether your primary residence would make for a good rental property. The answer is "no."

PM would run you $200/month and repairs/CapEx would be another $200/month at least. You're also factoring in a 0% vacancy rate, which might seem reasonable but from an investing standpoint, is not practical.

So you'd be losing money every month.

Find a better property.

ShePersisted

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Thank you for the response, Cwadda. So, if we don't rent our house out, we can sell it or stay in it. If we stay in it, we have more $ to invest in rental property. If we sell it, we could buy a new house and invest in a rental property, but would have less $ to do this.

If we can sell @ 400k, and pay 4.5% commission (our broker charges 1.5% for the sell), we would be looking at $135k after paying off our mortgage (owe $247K). Excluding additional fees/costs.

Do you have a certain price range you would suggest for rental properties?

Obviously I'm a novice and have taken note of the suggested books on this forum for my next trip to the library, but it's very helpful to get input that's more personalized.

Thanks!

Cwadda

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Thank you for the response, Cwadda. So, if we don't rent our house out, we can sell it or stay in it. If we stay in it, we have more $ to invest in rental property. If we sell it, we could buy a new house and invest in a rental property, but would have less $ to do this.

If we can sell @ 400k, and pay 4.5% commission (our broker charges 1.5% for the sell), we would be looking at $135k after paying off our mortgage (owe $247K). Excluding additional fees/costs.

Do you have a certain price range you would suggest for rental properties?

Obviously I'm a novice and have taken note of the suggested books on this forum for my next trip to the library, but it's very helpful to get input that's more personalized.

Thanks!

Shopping for rental properties is nothing like buying a house. It's better to think of it like buying an asset that people happen to live in. I.e. "If I invest $50k cash for a property, I will receive a 15% annual rate of return."

At that point it just comes down to numbers. The property can be any price, so long as it's turning a profit over time. A general benchmark is to look for properties that yield a 1% monthly rent of the total purchase price. I.e. A napkin math says a $100k house should bring in $1k/month to even be considered a decent deal.

That said, it's easier to find a house worth $200k for $2k/month than it is for one worth $400k and rents for $4000/month. See what I mean by this? Could you find someone to rent your current house for $4000/month? Probably not. But could you find a $200k duplex that rents for $1100 per unit? A lot more likely.

kenmoremmm

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didn't boise have a huge run up in population prior to the last bubble bursting? definitely seems like a great place on the whole.

ShePersisted

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Cwadda,
Thank you, this is helpful. My thought was that our current house would continue to build equity and someone else would be paying for some of those costs, so it could be a good thing, but when you start crunching the numbers, it appears that's not the case. I'll have to learn more about finding the right properties using the 1% rule.

I appreciate your input!

ShePersisted

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Yes, Kenmoremmm. We saw a lot of growth then as well. Unfortunately, we bought at the top of the market right before the burst, but we planned to stay a long time and it's been almost 11 years so the value has exceeded what we bought it for.

Boise is a great area overall, at least for me, but I've never lived more than 100 miles away. :)