Author Topic: Rental Property Math.. Make Sense?  (Read 2435 times)

cbr shadow

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Rental Property Math.. Make Sense?
« on: March 26, 2014, 12:20:28 PM »
Id like to run some numbers by everyone here to make sure Im understanding everything correctly..

My wife and I are moving overseas for two years for her job.  I've posted about this already, so I wont get into any more detail on that in this post.  Id like to focus on our current house/mortgage numbers. 

Current house value: ~$200k
Currently Owe: $190k in 15-yr mortgage
Payment with taxes Escrowed : $1901


We have three options of what to do with the house while were gone.

1)   SELL My realtor said she thinks wed get $200k fairly quickly.  After fees wed end up paying $2,000 to sell the house. The realtor says she thinks our area is in an upswing and if we can hang on to the house for a bit we could get more.
2)   RENT WITH MGMT COMPANY I think we could rent it out for ~1600 possibly, but many similar houses just sit there on the market in our area at that price, so maybe a bit less
3)   RENT TO FRIEND A close friend is willing to live in our house and pay $1300/month.  The friend is very trustworthy and honorable.  This seems to make the most sense since we wont need a rental management company and trust him.

This post/question is focused on #3.
I ordered an Amortization Schedule from our mortgage bank, and I see that right now of our $1901.82 mortgage payment we pay:
-   $500 Interest
-   $900 Principal
-   $500 Taxes (taxes likely to go down a fair bit in the near future)

So if Im thinking about this correctly, of my $1901 monthly payment my friend would pay us $1300 and wed pay the other $600.  That $600 would buy us $900 less in the principal of our loan.  This seems like a good option assuming we have cash that would be tied up (we do).

I realize there will be other expenses like home upkeep (AC/Furnace, Garage door, any other issues).  Small issues my friend would take care of like a clogged toilet. 

What are your thoughts on this?

SDREMNGR

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Re: Rental Property Math.. Make Sense?
« Reply #1 on: March 26, 2014, 12:42:24 PM »
I'd go with option 3.  You are basically breaking even (including principal reduction and maintenance costs) or slightly negative but not huge deal.  If you think you can get much more later then hold.

The bigger issue is what happens if your friend turns out to be a bad tenant.  I have seen a lot of bad situations from family or friends who turn out to destroy homes and not pay rent.  It gets ugly and personal.  Just an FYI.

nawhite

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Re: Rental Property Math.. Make Sense?
« Reply #2 on: March 26, 2014, 01:00:16 PM »
Option 2 over 3. Even if you dropped the rent to $1500/month, if the management company takes 10%/month, you still end up with $1350/month and the management company deals with finding new tenants, collecting rent and complying with landlord laws. You get more money and you don't get sued and you don't lose a friend if things go poorly.

At the same time, assuming you aren't planning on moving back in after you are done working overseas, I'd say sell.

Standard rule of thumb is 50% of rent goes to maintenance and vacancies. So if you rent for 1500, you take 50% away for maintenance and vacancies, you have $750/month. Your taxes and interest on your mortgage are $1000/month so you are losing money and have cash flow issues.

Villanelle

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Re: Rental Property Math.. Make Sense?
« Reply #3 on: March 26, 2014, 01:11:15 PM »
You will also need to pay insurance, any HOA you may have, and the maintenance costs to which you alluded.

Do you plan to move back to the same area and the same house after the two years?  Are you fairly confident that will actually happen?

DH and I faced a very similar situation.  At the time we moved overseas, our house was down about $125k from when we purchased it.  Thankfully, due to down payment, we were not underwater.  But we thought there was a good chance we'd return to that area and that house.  We couldn't rent for a profit (after all costs, but before taxes), but we decided it was worthwhile.  Yes, it was based largely on timing the market, but we felt pretty confident the market would start to recover and we were afraid of being priced out of the market, returning to buy less house for more money.  So we decided to rent, with a management company.  Our numbers were more attractive than yours, however.  And, (though I know that trying to time markets is always bad practice), we felt fairly confident that the market had to be near the bottom. 

I can tell you it has worked out for us.  Our 2.5 year stint overseas became  4.5-5.5.  We are currently at the nearly 3 year mark and our house is back up ~ $75-100k and due to a refi, we are no longer losing any money on the rental.  We've realized that home is not the best fit for us going forward so we will likely sell no matter where we end up, but with the hindsight, we made the right decision. 

Is $1300 the max your friend is willing to pay?