Author Topic: Rental income of one place to pay for rent of another place?  (Read 1060 times)

Albatross

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I live in a HCOL where very basic apartments go for about US$1m.

Instead of being tied down to living in one of these expensive shoe-boxes, I was considering buying one in a relatively LCOL overseas as an investment, renting it out to some yuppy family, and using the rent to pay the rent of wherever I wanted to live in HCOL. The net effect of this could mean I use the whole rental income to pay off my rental expense (unlikely I'll be able to cover the full rent in HCOL, but it could help).

Advantages: I can live wherever I want and if I don't like the neighbours I can move, buying overseas will mean diversification in a HCOL which is now the most expensive residential market 7 years running.

Disadvantages: hidden costs (?), added complication / having to manage a property, renting a property won't feel like home.

Has anyone done this? Thoughts?

Lmoot

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Re: Rental income of one place to pay for rent of another place?
« Reply #1 on: May 21, 2018, 07:12:29 AM »
Have you had any experience renting out a property and the expenses that go along with it? You'll be lucky if your rental income leaves you with more than a couple hundred dollars after taxes, insurance, property management fees, mortgage, repairs. Also, charging rent in a LCOL area in order to pay for a HCOL area rent? Repeat that outloud LOL. That doesn't make too much sense. How on earth can a LCOL rent carry a HCOL rent? That's like someone earning 6 figures, getting a loan from someone close to the poverty line.

Freedomin5

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Re: Rental income of one place to pay for rent of another place?
« Reply #2 on: May 21, 2018, 09:18:03 AM »
At first, I was going to ask why buy overseas? Why not just buy in your own country but in a cheaper neighborhood. But then I looked at your other posts and realized you were in Hong Kong, so there is no other "cheaper local" neighborhoods unless you cross the border into China. I doubt you'll find a property whose rental income can cover HK rents.

If I were in HK, I wouldn't even consider property, and especially not branching into China. I'd just put my money all in ETFs, and continue renting a cheapie place out in the New Territories or somewhere relatively cheaper for HK. I might consider buying a place in the country where I eventually plan to retire (if I do not plan to retire in HK) and renting that out until I retire, though I don't think I would use the rental income to cover my current rent in HCOL city. As Lmoot already stated, you're probably not going to make more than a couple hundred USD, which is barely a drop in the bucket when we're talking HK rents.

We have a condo in Toronto -- the rent basicallly covers the mortgage payments, taxes, and condo fees. We're not using it to supplement our current HCOL city rent (Shanghai) -- there's not enough left over to do that.

cchrissyy

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Re: Rental income of one place to pay for rent of another place?
« Reply #3 on: May 21, 2018, 10:36:08 AM »
I rent out a place I own while being a renter somewhere else.  But it only works because they are both HCOL and the rent coming in is more than the rent going out.  obviously, right?  So while your idea isn't bad, the part where you'd somehow make more money in a LCOL area than what you pay in the HCOL makes no sense.

havregryn

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Re: Rental income of one place to pay for rent of another place?
« Reply #4 on: May 22, 2018, 07:45:58 AM »
I am sort of considering doing something similar.
We live in an area where I would need to spend cca 1,2 million euros to buy a house. I can rent something fairly ok for 2500Ä per month.
But I don't think it is a total no brainer as mortgage interest here is 1.5-2% and heavily tax deductible and there is no such thing as property tax as people living in HCOL areas in the US know it.
Meaning that I would miss out on a lot of free money and equity building if I strongly held the position of not wanting to buy anything just because rent takes less of my cash flow than paying a mortgage.
But I hate the thought of tying up so much money in a single asset, so we are currently considering the approach of owning multiple rental properties here and abroad to diversify our real estate investments, use tax benefits and cheap leverage but avoid tying 1.2 million into a primary residence as that is just unthinkable.

It's not possible to actually cover the rent from cash flow on these properties if we mortgage them but if I count in the equity we would build (again, I remind you of our interest rate) it seems to me like a fairly sensible approach.

On the other hand yes, I am having a hard time emotionally committing to the idea of renting a family home and buying property purely as investment simply because I am not convinced it is really the best approach when it comes to quality of life.

I am still torn on this.
So can't help you really, but you're not the only person having these thoughts.

Albatross

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Re: Rental income of one place to pay for rent of another place?
« Reply #5 on: May 22, 2018, 09:23:32 PM »
Also, charging rent in a LCOL area in order to pay for a HCOL area rent? Repeat that outloud LOL. That doesn't make too much sense. How on earth can a LCOL rent carry a HCOL rent? That's like someone earning 6 figures, getting a loan from someone close to the poverty line.

Just a quick response tot his before I respond to others - thanks for the 'constructive' feedback - my post made it clear that it would not likely cover the full HCOL rent (I never said it would). I also didn't say how many LCOL properties I'd buy to assist with the HCOL rent. I also didn't say whether I'd buy a mansion in LCOL and rent a shoebox in HCOL. In those latter scenarios, I'd have a better chance of covering my rent.

Your first point I think makes sense (re hidden costs) which is why I posted this query in the first place. There is also an understanding where I live (Hong Kong) that the property prices are very inflated. I don't want to buy into a bubble.

Thanks anyway.

Albatross

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Re: Rental income of one place to pay for rent of another place?
« Reply #6 on: May 23, 2018, 12:27:03 AM »
If I were in HK, I wouldn't even consider property, and especially not branching into China. I'd just put my money all in ETFs, and continue renting a cheapie place out in the New Territories or somewhere relatively cheaper for HK. I might consider buying a place in the country where I eventually plan to retire (if I do not plan to retire in HK) and renting that out until I retire, though I don't think I would use the rental income to cover my current rent in HCOL city. As Lmoot already stated, you're probably not going to make more than a couple hundred USD, which is barely a drop in the bucket when we're talking HK rents.

We have a condo in Toronto -- the rent basicallly covers the mortgage payments, taxes, and condo fees. We're not using it to supplement our current HCOL city rent (Shanghai) -- there's not enough left over to do that.


Thanks Freedomin5 - a question: since one should only put money in equities if it's for a time-frame of 5+ years, would you still put money in equities if there was a chance that the property market cools / crashes? I ask only because the property market here is very much tied to the performance of the stock market. If I put my money in equities, I wouldn't have the cash to buy property if there was such a crash. I've therefore kept my money in liquid cash, in anticipation of buying within the next 5 years. Does this make sense to you?

Regarding rental property - I have enough to buy a rental property outright, so the full rental income (net expenses, handling costs etc) will be treated as income, instead of paying off the rental property mortgage.

Freedomin5

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Re: Rental income of one place to pay for rent of another place?
« Reply #7 on: May 23, 2018, 07:04:20 AM »
Initially, it sounded like you were asking if real estate can be used as an investment to generate a steady income to cover your housing. If that is the question, there are probably ETFs that generate dividend income, and I would use ETFs to generate the income to allow you to cover rent.

Now it sounds like youíre thinking of purchasing a place in HK because youíre talking about pulling the money out to buy a property in HK if the real estate market crashes (Iím assuming youíre thinking about how it crashed by 30% a few years back). In which case, you will have to run your numbers through a rent vs. own calculator. Generally, in HCOL areas, renting makes more financial sense than buying.

You have to calculate it this way:

If you were to put all that money into buying a property, what would be the return on your investment (annual ROI)?

If you were to rent and put the left over money into an international ETF, what would be the ROI?

Which one gives you the better ROI?


Btw, youíre right, and I would never put my money into the Asian stock market. Itís too volatile for me. I keep our money in US Index ETFs and Canadian Index ETFs.

Seadog

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Re: Rental income of one place to pay for rent of another place?
« Reply #8 on: May 31, 2018, 11:02:23 AM »
To me this seems like a bad idea because of the tax treatment. In short, you have all the downside (all rent is income and tax accordingly), and none of the primary residence benefits such as free capital gains on the increase.

This was what jumped to mind when that ridiculous book rich dad poor dad started going on about how a home was a liability and it's better to rent.

Two situations:

#1) You buy a home cash, you live in it. The return for this 500k or whatever investment is a) free place to live b) free capital gains

#2) You rent out said home, and then use the rent to rent an identical one next door. Except now you have to come up with 40% more on top of your net rent proceeds to cover the income tax due on this income, and you face another large tax bill on it's sale.

According to RDPD, situation #2 is better since you have an asset generating money, and are renting someone else's liability that you can easily rid yourself of. That's why I took issue with the book and particularly that point, is that it completely ignores utility value and tax consequences of such a setup. If there were true tax fairness, anything an asset generates would either be taxed on its market value, or not. Funny how depending on what exactly a home generates ($ vs personal accommodation) it is taxed differently.   

Finally, I rent, but income come from hands off market investments. If you want to go the RE angle, make it a business with multiple properties, such that you can treat it as such for tax purposes, and have it run wholly hands off. Or just buy REITs.

One of the finance podcasts I listened to made the salient point that if the only way you can make a property look attractive is by doing the renovation/rent collection/management yourself, then you haven't bought an investment. You've bought yourself a handyman's or a property manager's job.

clarkfan1979

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Re: Rental income of one place to pay for rent of another place?
« Reply #9 on: May 31, 2018, 07:29:12 PM »
My wife and I used to live in Fort Myers, FL, which is probably considered a low cost of living area. Our total mortgage was $650/month. We now rent it out for $1850/month and live in Hawaii. After considering $200/month for repairs we basically have an extra $1000/month of cash flow to help us with the expensive housing in Hawaii.

I also got a 50% raise moving from Florida to Hawaii. Our savings rate might technically be lower in Hawaii. However, we save more total money in Hawaii than Florida. Instead of saving 25% of 65K, we save 20% of 95K.

expatartist

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Re: Rental income of one place to pay for rent of another place?
« Reply #10 on: May 31, 2018, 08:33:04 PM »
Rental returns in HK are terrible, though interest rates are low and there's virtually no property tax. Most experts in HK agree there's not going to be a bubble popping here, maybe some deflation now and then but not a massive crash. The increasing flow of Mainland capital's not going to stop whatever regulations are put in: HK companies always find way to funnel Mainland cash into the city, whatever controls are put in place by the CCP and HK gov't. When SARS hit in 2003 and property prices crashed, the only way to buy was 100% cash - and still not cheap by US standards. At that time, Mainland influence was negligible. That likely won't be true again during this century.

So what options does that leave for people who want to live here? For many, it's investing in property overseas. This fulfils an emotional need as well as cultural expectations of providing for extended family if they move overseas or all goes to hell in HK. It gives face and prestige and is a tangible investment rather than flimsy theoretical paper like REITs. Every week there are expos featuring property in Australia/NZ/the UK.

I'm immigrating to HK and struggle with this too. Luckily, any option's off the table for me for 5 years until permanent residency, thanks to the 30% stamp duty payable for non-PRs.

Albatross

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Re: Rental income of one place to pay for rent of another place?
« Reply #11 on: June 07, 2018, 08:47:17 PM »
...
But I hate the thought of tying up so much money in a single asset, so we are currently considering the approach of owning multiple rental properties here and abroad to diversify our real estate investments, use tax benefits and cheap leverage but avoid tying 1.2 million into a primary residence as that is just unthinkable.


havregryn - thanks this is the sort of thing on my mind as well - I hate the idea of having so much in home equity when my capital could be working for me, instead of having a holiday in some nice HCOL property.

My wife and I used to live in Fort Myers, FL, which is probably considered a low cost of living area. Our total mortgage was $650/month. We now rent it out for $1850/month and live in Hawaii. After considering $200/month for repairs we basically have an extra $1000/month of cash flow to help us with the expensive housing in Hawaii.

I also got a 50% raise moving from Florida to Hawaii. Our savings rate might technically be lower in Hawaii. However, we save more total money in Hawaii than Florida. Instead of saving 25% of 65K, we save 20% of 95K.


clarkfan1979 - thanks, this is the sort of 'geographical arbitrage' I vaguely had in mind and congrats on your situation. Property is a hot topic here because even the upper-middle class income earners in HK are having to spend 20+ years of pure income (i.e. not including expenses) to pay off a shoebox.

Rental returns in HK are terrible, though interest rates are low and there's virtually no property tax. Most experts in HK agree there's not going to be a bubble popping here, maybe some deflation now and then but not a massive crash. The increasing flow of Mainland capital's not going to stop whatever regulations are put in: HK companies always find way to funnel Mainland cash into the city, whatever controls are put in place by the CCP and HK gov't. When SARS hit in 2003 and property prices crashed, the only way to buy was 100% cash - and still not cheap by US standards. At that time, Mainland influence was negligible. That likely won't be true again during this century.

So what options does that leave for people who want to live here? For many, it's investing in property overseas. This fulfils an emotional need as well as cultural expectations of providing for extended family if they move overseas or all goes to hell in HK. It gives face and prestige and is a tangible investment rather than flimsy theoretical paper like REITs. Every week there are expos featuring property in Australia/NZ/the UK.

I'm immigrating to HK and struggle with this too. Luckily, any option's off the table for me for 5 years until permanent residency, thanks to the 30% stamp duty payable for non-PRs.

Thanks expatartist! Yes agreed with all you said. I also get the feeling that HK will become a bit of a Japan in terms of asset prices - no real 'drop' but perhaps a stagnation over the next 20 years. There are just too many rich mainlanders. I'm still considering the option of buying an overseas (UK) property and having it managed - at least it'll tie my cash to inflation somewhat.

Good luck to you and in some ways you're lucky you needn't have the 'problem' of where to buy yet, as strange as that sounds. Funny that the 30% stamp duty just isn't a problem for mainlanders washing cash.