Standard property management fees are 8-10% of the gross rents.
I've been waiting for you to rejoin the thread. I value your input on these issues.
Taking your advice to heart, I upped my carrying costs from 40 to 50% of gross rents even though we'd be managing ourselves. It makes a surprisingly small difference. The extra 150/month in rent works out to such a small percentage of total returns that the graphs aren't significantly different, and any additional profit we make by self-managing will just be gravy.
The last sentence is ridiculous to say, if I'm understanding it correctly. You'll pay the costs at some point. That's like saying "if I sell these stocks, I pay 15% capital gains.. so by not selling I have an immediate 15% ROI!" But again, maybe I'm misinterpreting that.
My wife made a similar comment, only she was much more harsh about it. The spreadsheet lists accumulated value from the property over time, but does not account for the eventual sale, which will cost more in the future as the asset value increases. I'll add a new column. Yay for spreadsheets on a Friday night!
how long will paying out of pocket slow your path to FIRE? And how much more of a stache will you need to support an alligator if you ER?
This is totally a worst case scenario, but if we had to carry the house indefinitely with NO renter, like if we just wanted to live in two houses, it would drop our savings rate about 12%. Since we're currently saving something like 60% of our income and have no intention of retiring when we reach FI, I'm not too worried about it. Is that grotesque?
Besides, it's not like deciding to rent it this year is a commitment to rent it forever. If it turns into an alligator we just unload it and take our little piece of equity elsewhere. It's still an asset, not a liability.
Keep in mind the equity is what you'd have from cashing out, not the fair market value minus mortgage.
If I look at it that way, then the returns on the rental are suddenly astronomical. For example, in year one I would lose 2769 in cashflow, gain 4920 in equity payments by the renter, and get 1545 in tax deduction for a total return of 3696. If that's on a mere 28k in extractable equity, that's over 13% in year one.
Year two is even better. If rent and property value both go up 2.5%, then in year two I lose less in cashflow, gain more in equity paydown, get the same tax deduction, plus 2.5% of 280k is another 7k in equity from price appreciation, for a total two year paper gain of 13228. On my 28k, that's like 23% annually. Which seems ridiculous. What am I doing wrong?
I was instead calculating my ROI on the 50k. The same numbers on 50k are a more reasonable 7.4% in year one, and 13% in year two. Still not bad.
What if you could get a 280k property that appreciated like yours, but was cash flow positive by several hundred per month (after the 50% rule and paying the mortgage)?
One alternative way to view this problems is to find what rent I would need to charge to make it worthwhile. At dinner this evening a friend who just rented her house for 30% above zillow's rent estimate suggested I should be asking much more. If I can charge 1800, the math changes considerably and my returns almost double.
At what rent would you consider this property a good investment?
Equity and appreciation don't pay the bills, and may not be there when times are tight.
A valid point and a useful warning for people who live on on the margin. But we're filthy rich mustachians. I can't envision a realistic scenario in which times will ever be tight for us. I sleep well at night.
Paper equity is great, but how fast can you tap that?
I'm no hurry. If the sell vs keep-renting calculus changes in a year or two, we'll sell. Selling now is an irreversible decision. Renting it out now is not.
Even without the appreciation, which I expect to be substantial, renting it makes us more profit from years 4 through infinity compared to investing the equity at 7% in the stock market. With appreciation, it makes more money than investing in years 3 through infinity.
counting on the appreciation (and speculating - by paying negative cash flow) is not generally a great idea.
I would agree, if we were living in the house. But with a renter, we gain more in mortgage reduction per year than we lose in cashflow per year, so our net worth still goes up.
...really? You think fellow Mustachian community members would purposefully try and decive others here
Not others, just you. You're evil.
Okay, maybe you're not evil but just advising caution and due diligence. I'm doing that due diligence by berating you and AnotherReader, hoping you experts will poke holes in my math and show my why this is such a bad idea.
Right-o, sounds like you've made up your mind then. It's not a terrible investment since you can carry it, I just think there are much, much better ones. But yes, you may be seeing why rental property is such a great wealth builder - leverage, equity gain via principal paydown and appreciation, tax benefits (depreciation), and cash flow (though you're skipping that one).
I'm not decided, I'm leaning and seeking reasons to be dissuaded from leaning.
And I'm only skipping the cashflow if it doesn't rent for at least 1712, which it might, and even then I'd only be skipping it for a few years up front.
I am a big fan of rentals. I just think that if one is willing to do rentals, might as well get good ones, instead of settling for the path of least resistance (oh, I already own this one, so though it's quite mediocre, I don't have to do any work to get a better one, so I'll just couch it as "I'm not a 'serious' real estate investor" and not worry about it.)
I can see your point; if you're going to be a real estate investor, invest wisely. But in this case there are other considerations, like avoiding any unnecessary transaction costs and retaining the property for eventual reoccupation. I already know the property is sound and well cared for, so I avoid the risks inherent in buying a new place. I have a good feel for the neighborhood and future appreciation rates. It's a familiar investment and feels less risky because of it.
/knowing you, the facepunches in this post won't be misinterpreted
My ego is FAR to large to be injured by a post containing zero profanity, zero personal attacks, and only vague allusions to alternative suggestions which might yield better results. Seriously, does anyone really get butthurt about receiving free advice on the internet?