Author Topic: Rent being twice the mortgage, nothing makes sense  (Read 4123 times)

Sulame66

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Rent being twice the mortgage, nothing makes sense
« on: February 21, 2017, 11:34:48 AM »
https://www.zillow.com/homes/for_sale/Bedford-TX/29159948_zpid/16946_rid/0-300000_price/0-1136_mp/globalrelevanceex_sort/32.918574,-97.053051,32.799756,-97.237587_rect/12_zm/

This is fairly average for this area. At ZERO DOWN, the mortgage is $970. Toss is an average $275 ish a month for property taxes, you're at $1,250. Rent it out at $1,650 and make them pay their own utilities, and you get a free house + $400 a month.

Edit: Forgot insurance. An extra $100-$150 a month

What am I missing???
« Last Edit: February 21, 2017, 11:49:43 AM by Sulame66 »

Heroes821

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #1 on: February 21, 2017, 12:20:26 PM »
I think you're failing to account for vacancy and repairs.

nereo

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #2 on: February 21, 2017, 12:44:06 PM »
hereos821 basically already said it, but you're missing vacancy and maintenance.

Very broad rule of thumb is that 50% of your monthly rent will go towards vacancy and maintenance.  Sure, some years you'll have no vacancy and very few repairs, and then other years you'll need to replace the roof and replace tenants, hopefully in the same quarter.

So:  If you rent it out at $1,650/mo that's $19,800 per year.  $9,900 of that might go to maintenance and vacancy, leaving you with $9,900.  Your PITA is $16,200.
See the problem? 
Now, you do get to write of depreciation and bank the "P", but its unlikely hte home will reliably cash-flow every year.

trashmanz

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #3 on: February 21, 2017, 12:50:24 PM »
Also have taxes on the rental income right?

Heroes821

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #4 on: February 21, 2017, 12:58:36 PM »
Also have taxes on the rental income right?

True some states raise taxes for rental properties. I know South Carolina TRIPLES property taxes if it's a rental.

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #5 on: February 21, 2017, 01:05:04 PM »
So I hire a property management company to manage the rental and just hope it doesn't go vacant? Dallas is a very hot market, I can certainly see vacancies at times, but 50%? Idk ..

I can't find anything showing what the tax on a rental property would be

Also, we're talking about 'profit' as money I'm making a month. That's like gravy to me. If I end up paying X a month and get X back, I still get the house for free. That's the part that is confusing.

« Last Edit: February 21, 2017, 01:06:49 PM by Sulame66 »

Heroes821

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #6 on: February 21, 2017, 01:16:16 PM »
The point is it's not for free.  If it was for free then every property that rents for $1 more than the mortgage +escrow would be a "free" house.  The rough calculations of vacancy and repairs are averages from large groups rentals, much of this is discussed in the real-estate forum section.  As far as the "hotness" of the Dallas area, I agree with you, but that is probably better for flipping than for long term renting because the area is growing in population so quickly.

nereo

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #7 on: February 21, 2017, 01:40:31 PM »
...
Also, we're talking about 'profit' as money I'm making a month. That's like gravy to me. If I end up paying X a month and get X back, I still get the house for free. That's the part that is confusing.

Part of the confusion lies in the differences in terminology that you and I are using. 
When I say "cash-flow", that is whether or not you will money leftover at the end of the year after taking in your rent and paying out your mortgage (PITA) + any necessary repairs. 
You are talking about a "free house" - which as I understand how you are using it means that you will take in about as much as you pay out over the length of the mortgage, leaving you with a paid-off home in the end.

They are NOT the same thing, and it's important to understand that.  You could (in theory) wind up with a "free house" after 30 years if your rent exactly matched your expenses, but I would call that a bad deal. why?  because 1) much better deals exist (i.e. homes that cash-flow every year) and ii) landlording takes work, and 15 or 30 years of work, stress and risk might not be worth it.  If your figures include a property manager to fill vacancies (which cuts into your profits) and if you contract out all repairs (also costs $$) and if you can put $0 down, sure... in the long term you will come out ahead.  But if that were the case I'd advise skipping the property manager (which might take 8% of rent, read: profits).

Regarding the 50% rule, as Hereos said it's based on a ton of data across all markets, and should be a guide but not gospel. On average properties sit vacant for 1 or 2 months/year (because you can almost never get someone to move out ont he 31st and someone in on the 1st; there's also painting and repairs to be done during this time).  Evictions happen, as does damage from renters and renters who suddenly decide to leave for whatever reason.  Finally, maintenance and periodic upgrades runs about 1-2% of the home price per year, so on this house that's $2000-4000. Not all of this comes each year; some years you will have $300 in repairs, while other years you will need to shell out for a new roof (~$10,000).  To keep fetching high rent prices you'll need to periodically freshen up the interior or it will feel dated and run down.
Over a decade or two vacancies and maintenance add up to about 50%.  Hopefully less (maybe even 35-40%).

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #8 on: February 21, 2017, 02:01:27 PM »
...
Also, we're talking about 'profit' as money I'm making a month. That's like gravy to me. If I end up paying X a month and get X back, I still get the house for free. That's the part that is confusing.

Part of the confusion lies in the differences in terminology that you and I are using. 
When I say "cash-flow", that is whether or not you will money leftover at the end of the year after taking in your rent and paying out your mortgage (PITA) + any necessary repairs. 
You are talking about a "free house" - which as I understand how you are using it means that you will take in about as much as you pay out over the length of the mortgage, leaving you with a paid-off home in the end.

They are NOT the same thing, and it's important to understand that.  You could (in theory) wind up with a "free house" after 30 years if your rent exactly matched your expenses, but I would call that a bad deal. why?  because 1) much better deals exist (i.e. homes that cash-flow every year) and ii) landlording takes work, and 15 or 30 years of work, stress and risk might not be worth it.  If your figures include a property manager to fill vacancies (which cuts into your profits) and if you contract out all repairs (also costs $$) and if you can put $0 down, sure... in the long term you will come out ahead.  But if that were the case I'd advise skipping the property manager (which might take 8% of rent, read: profits).

Regarding the 50% rule, as Hereos said it's based on a ton of data across all markets, and should be a guide but not gospel. On average properties sit vacant for 1 or 2 months/year (because you can almost never get someone to move out ont he 31st and someone in on the 1st; there's also painting and repairs to be done during this time).  Evictions happen, as does damage from renters and renters who suddenly decide to leave for whatever reason.  Finally, maintenance and periodic upgrades runs about 1-2% of the home price per year, so on this house that's $2000-4000. Not all of this comes each year; some years you will have $300 in repairs, while other years you will need to shell out for a new roof (~$10,000).  To keep fetching high rent prices you'll need to periodically freshen up the interior or it will feel dated and run down.
Over a decade or two vacancies and maintenance add up to about 50%.  Hopefully less (maybe even 35-40%).

If a home cash-flowed, based on your definition, every year, then wouldn't it essentially be what I'm trying to do? Which is basically a 'money growing on tree situation'. If I could guarantee that every dollar I paid out got me a dollar and a nickel back, why would I not do it? A property management company just gave me a quote of $100 a month + 75% of the first month's rent as a one time fee. $100 out of $1,650 is 6%, and if that completely eliminates me needing to expend any money, energy, or thinking about the rental property, that's worth it to me.

But, it sounds like it's a bad idea, based on everyone's opinion here. Which I assumed. I've never found any situation with real estate where it would be beneficial to me. Everyone else seems to become millionaires through it, but every time I try to make it work I just look like an idiot. And the annoying part is that I'm putting the max into my 401(k) and Roth, all back-ended, when I could just be getting an extra $15,000 a year now to use in real estate investing which would put me so far ahead of the game that by the time I retire I wouldn't even need a 401(k) payout. Shrug

Heroes821

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #9 on: February 21, 2017, 02:27:31 PM »
...
Also, we're talking about 'profit' as money I'm making a month. That's like gravy to me. If I end up paying X a month and get X back, I still get the house for free. That's the part that is confusing.

Part of the confusion lies in the differences in terminology that you and I are using. 
When I say "cash-flow", that is whether or not you will money leftover at the end of the year after taking in your rent and paying out your mortgage (PITA) + any necessary repairs. 
You are talking about a "free house" - which as I understand how you are using it means that you will take in about as much as you pay out over the length of the mortgage, leaving you with a paid-off home in the end.

They are NOT the same thing, and it's important to understand that.  You could (in theory) wind up with a "free house" after 30 years if your rent exactly matched your expenses, but I would call that a bad deal. why?  because 1) much better deals exist (i.e. homes that cash-flow every year) and ii) landlording takes work, and 15 or 30 years of work, stress and risk might not be worth it.  If your figures include a property manager to fill vacancies (which cuts into your profits) and if you contract out all repairs (also costs $$) and if you can put $0 down, sure... in the long term you will come out ahead.  But if that were the case I'd advise skipping the property manager (which might take 8% of rent, read: profits).

Regarding the 50% rule, as Hereos said it's based on a ton of data across all markets, and should be a guide but not gospel. On average properties sit vacant for 1 or 2 months/year (because you can almost never get someone to move out ont he 31st and someone in on the 1st; there's also painting and repairs to be done during this time).  Evictions happen, as does damage from renters and renters who suddenly decide to leave for whatever reason.  Finally, maintenance and periodic upgrades runs about 1-2% of the home price per year, so on this house that's $2000-4000. Not all of this comes each year; some years you will have $300 in repairs, while other years you will need to shell out for a new roof (~$10,000).  To keep fetching high rent prices you'll need to periodically freshen up the interior or it will feel dated and run down.
Over a decade or two vacancies and maintenance add up to about 50%.  Hopefully less (maybe even 35-40%).

If a home cash-flowed, based on your definition, every year, then wouldn't it essentially be what I'm trying to do? Which is basically a 'money growing on tree situation'. If I could guarantee that every dollar I paid out got me a dollar and a nickel back, why would I not do it? A property management company just gave me a quote of $100 a month + 75% of the first month's rent as a one time fee. $100 out of $1,650 is 6%, and if that completely eliminates me needing to expend any money, energy, or thinking about the rental property, that's worth it to me.

But, it sounds like it's a bad idea, based on everyone's opinion here. Which I assumed. I've never found any situation with real estate where it would be beneficial to me. Everyone else seems to become millionaires through it, but every time I try to make it work I just look like an idiot. And the annoying part is that I'm putting the max into my 401(k) and Roth, all back-ended, when I could just be getting an extra $15,000 a year now to use in real estate investing which would put me so far ahead of the game that by the time I retire I wouldn't even need a 401(k) payout. Shrug

I don't think anyone is saying renting for profit is a bad idea. I think we're stressing that your calculations on expected profit are skewed higher than they should be.  Expect less and be pleasantly surprised if the rental exceeds the lower expectation.

There are tons of resources on here that can provide more in depth information on getting into rentals, which can be a profitable business.  Real world example.  My $1100 mortgage house (includes taxes and insurance) Rents for $1430 in San Antonio. Property Manager takes $125 a month.  It took 3 months to get tenants approved and in the house.
Getting the property up to rental code in Texas required silly things like a peep hole in the house to garage door. I hidden bolt lock on the front door that can't be unlocked from outside.  Total fixes and repairs and cleaning probably ran me $1500 all said and done.  So $4800 in the negative before generating my $205 in profit. If nothing breaks I'll make that money back in... 24 months.

I don't plan on renting this property longer than 1 year, but your estimated profit margin in your example is enough to my situation that it is relevant.  Also Mortgages for houses that planned to be rentals are always higher on interest rates.  Is the property move in ready for renting in Texas?

rubybeth

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #10 on: February 21, 2017, 02:48:47 PM »
https://www.zillow.com/homes/for_sale/Bedford-TX/29159948_zpid/16946_rid/0-300000_price/0-1136_mp/globalrelevanceex_sort/32.918574,-97.053051,32.799756,-97.237587_rect/12_zm/

This is fairly average for this area. At ZERO DOWN, the mortgage is $970. Toss is an average $275 ish a month for property taxes, you're at $1,250. Rent it out at $1,650 and make them pay their own utilities, and you get a free house + $400 a month.

Edit: Forgot insurance. An extra $100-$150 a month

What am I missing???

Your numbers seem weird. Assume $205,000 with no down payment, an interest rate of 4.25%, PMI at around 1%, property taxes of $3,234 a year, plus insurance (around $100/mo), and you're looking at more like $1,500/mo, likely a bit more: http://usmo.org/2mjtkBb

And that's assuming you can get a mortgage with 0% down and a PMI rate that low for a property that won't be your primary residence.

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #11 on: February 22, 2017, 03:10:11 PM »
I'll talk to a realtor and see how the math works out. Worst case scenario I wait a year when all my debt is paid off. Housing prices will outpace my income so I get no benefit there. I would still argue losing $5k up front and building a home that other people are paying for + giving you $200 a month is worth it. If I were just buying that house normally, I would need $40,000 to $50,000 up front (assuming it's 200-250k based on mortgage) and then would be paying the $1,150 myself. The only trade off is I'd live there and wouldn't be losing the $900 to live elsewhere, which means I'd still be losing $250 net more a month. So, mathwise, it's still a much better option than buying for myself

Drifterrider

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #12 on: February 22, 2017, 06:52:03 PM »
https://www.zillow.com/homes/for_sale/Bedford-TX/29159948_zpid/16946_rid/0-300000_price/0-1136_mp/globalrelevanceex_sort/32.918574,-97.053051,32.799756,-97.237587_rect/12_zm/

This is fairly average for this area. At ZERO DOWN, the mortgage is $970. Toss is an average $275 ish a month for property taxes, you're at $1,250. Rent it out at $1,650 and make them pay their own utilities, and you get a free house + $400 a month.

Edit: Forgot insurance. An extra $100-$150 a month

What am I missing???

As a tenant, you have no responsibility to repair the property (unless you break it).  You can also walk away.  Some people don't plan to stay very long.  Some people can't get a mortgage.  Tenants don't have to buy a new roof; repair broken/frozen water lines, pay for special assessments (well, not directly anyway).

Fortunately, many such people exist thus, landlords.

nereo

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #13 on: February 22, 2017, 07:01:11 PM »
I'll talk to a realtor and see how the math works out. Worst case scenario I wait a year when all my debt is paid off. Housing prices will outpace my income so I get no benefit there. I would still argue losing $5k up front and building a home that other people are paying for + giving you $200 a month is worth it. If I were just buying that house normally, I would need $40,000 to $50,000 up front (assuming it's 200-250k based on mortgage) and then would be paying the $1,150 myself. The only trade off is I'd live there and wouldn't be losing the $900 to live elsewhere, which means I'd still be losing $250 net more a month. So, mathwise, it's still a much better option than buying for myself
Just understand that realtors are salespeople. It's like going into BestBuy and asking a blue-shirt whether you ought to buy a TV. Just go in with your eyes wide open.

No one here is saying being a landlord is always a bad idea - it can often be a very good wealth builder. Our concerns are simply that your numbers seem overly rosy.
Ask yourself a few questions:
1) do you have the extra savings to cover an unexpected ~$10k expense?
2) could your money earn better returns elsewhere?

I have no motivation to desuade you from this - I've just seen too many people get into trouble

Ocinfo

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #14 on: February 22, 2017, 07:19:07 PM »
Being a landlord never gets you a free home. It's considered a passive source of income but it almost never is. Even if you have a property manager there will still be headaches. I have a rental that is honestly very problem free (2 weeks vacancy in 6 years and I gutted it/remodeled so most things are new) and it can still be a hassle. All I'm saying is to make sure you have the right personality/mindset to be a landlord (how would you feel about getting a call at 10pm that the faucet won't turn off and it's flooding the bathroom? If you have a property manager, they'll likely call an after hours plumber and bam you have a $1,000 bill. If you manage it yourself then it's going to be a long night).


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JAYSLOL

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #15 on: February 22, 2017, 11:17:14 PM »
House insurance is expensive in Dallas!  I'm insuring a $500K rental home for 100% replacement value and 1% deductible for $100/month.

$1650 / month rent for a $200,000 property - I'd pass.  You can probably make that rent to price ratio work in your favor at a higher price point (the 50% to maintenance and vacancy breaks down at higher property values, a heater is a heater and costs no more to install on a more expensive property, for example), but at $200K I'd be only interested if I could get at least $2000/month.  Conversely, if you can get that $200,000 property for $160-170K, the numbers may work out.

Are you managing it yourself?  If not, say goodbye to another 8-10% off the top plus 1/2 of the first month's rent.

Wow, it sure is interesting to see what people in other places think about the rent/buy problem.  Housing costs (both price and rent imo) are crazy in my part of Canada, 200k homes don't exist, unless you count apartments or mobile homes.  This isn't even Vancouver or Toronto, we are talking small town BC.  The average house price in my town is probably ~$500k, and it would rent for $2000-2500.  A duplex "worth ~$350k" would rent for $1500-2000, Apartment "worth ~$200k" would rent for $1000-$1500 and a room in a shared place or very small suite is $600-$1000.  I have a killer deal on rent at the moment (<$700 for half a house on an acreage).  So there is ZERO chance i'm going to be buying a house around here as long as i can keep my costs this low and the prices are as high as they are.  I really don't understand where the money (ok, not money, debt) is coming from around here, and more importantly why people are spending such a high amount of their income on housing.  Don't get me wrong, it's a wonderful place to live, but it damn sure isn't the tech capital of North America.   

rubybeth

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #16 on: February 23, 2017, 07:01:30 AM »
I'll talk to a realtor and see how the math works out. Worst case scenario I wait a year when all my debt is paid off. Housing prices will outpace my income so I get no benefit there. I would still argue losing $5k up front and building a home that other people are paying for + giving you $200 a month is worth it. If I were just buying that house normally, I would need $40,000 to $50,000 up front (assuming it's 200-250k based on mortgage) and then would be paying the $1,150 myself. The only trade off is I'd live there and wouldn't be losing the $900 to live elsewhere, which means I'd still be losing $250 net more a month. So, mathwise, it's still a much better option than buying for myself

Don't talk to a realtor, talk to a LENDER (i.e. a bank) about the actual math. They will show you how much it will cost on a worksheet--they can just email you this. You're also not including closing costs in your calculation at all--which can be hefty if the seller won't pay any of them for you. My husband and I are in the home buying process (still looking for the right house), and  I've asked for lots of different scenarios to be shown to me so I can compare different lenders' offers, as well as costs on particular houses (like a $150k house vs. a $140k house).

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #17 on: February 23, 2017, 07:39:57 AM »
So it's either a good idea or a bad idea, just like every other $$ investment. I have no way to know if it's a good idea or a bad idea, just like every other $$ investment. Maybe if I look around the $150 mark and can still get $1,400-$1,500 I'd mitigate much more of the risk. $205 at 0% down is $1,570 a month all in (taxes, insurance, PMI, P&I) and rents for $1,600. $155 at 0% down is $1,234 a month all in and rents for $1,400. So not only do I lower my exposure almost $350, I get almost a 2:1 return on that $350 in the rent differential. A smaller house also means less repairs and less to go wrong.

Or, once again, it's just a pipe dream that will fail.

Heroes821

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #18 on: February 23, 2017, 07:56:55 AM »
So it's either a good idea or a bad idea, just like every other $$ investment. I have no way to know if it's a good idea or a bad idea, just like every other $$ investment. Maybe if I look around the $150 mark and can still get $1,400-$1,500 I'd mitigate much more of the risk. $205 at 0% down is $1,570 a month all in (taxes, insurance, PMI, P&I) and rents for $1,600. $155 at 0% down is $1,234 a month all in and rents for $1,400. So not only do I lower my exposure almost $350, I get almost a 2:1 return on that $350 in the rent differential. A smaller house also means less repairs and less to go wrong.

Or, once again, it's just a pipe dream that will fail.

That sounds kinda hostile man.  People here have repeatedly said that investing in real estate can be a GOOD idea that can be highly profitable. Check the real estate section on the forum. Read about how the cash flow works from people with decades of experience renting properties. 

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #19 on: February 23, 2017, 10:01:49 AM »
I just read that I'm required to put 25% down on a property I'm aiming to rent

Well, there goes that idea

Back to maxing the 401(k) and focusing on retirement

rubybeth

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #20 on: February 23, 2017, 10:39:28 AM »
I just read that I'm required to put 25% down on a property I'm aiming to rent

Well, there goes that idea

Back to maxing the 401(k) and focusing on retirement

That's kind of what I figured. It's a good thought experiment, or perhaps you can save up some cash and look for a less expensive property to use as a rental.

Sulame66

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #21 on: February 23, 2017, 11:30:30 AM »
205 house @ 0 down would have a 1600 total payment. @ 25 down would have an 1150 total payment. Rents for 1600. I break even first scenario, make 450 second. Assuming 50% vacancy and other issues, 225 a month on the second. To make up the 50k I put down I would need to rent 200 months = 16 2/3 years

Pass

Mr Mark

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #22 on: February 24, 2017, 02:49:37 AM »
I think you should use a spreadsheet to look at cash flow taking account of mortgage costs, management fees, a % for vacancies, repairs, taxes (property and income), etc. See what the present value of your net cash flow is compared to your cost of capital  (i.e. what would your initial cash investment make somewhere else).

This will help to see where the value comes from and how sensitive it is to key unknowns  (like repairs and vacancies ).


notsofast

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #23 on: February 27, 2017, 08:45:12 PM »
 "A property management company just gave me a quote of $100 a month + 75% of the first month's rent as a one time fee. $100 out of $1,650 is 6%, and if that completely eliminates me needing to expend any money, energy, or thinking about the rental property, that's worth it to me".

A management company doesn't pay your repair and maintenance bills related to the property, they pass that on to the owner.  Their monthly fee is simply to compensate them for marketing your rental, running background check, handling maintenance issues when they arise etc.  And typically their rates are higher than what many DIY landlords can do the repairs for themselves, even if that DIY landlord is just setting up the appointment and not doing the work him/herself.

Dicey

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Re: Rent being twice the mortgage, nothing makes sense
« Reply #24 on: February 28, 2017, 05:19:02 AM »
I just read that I'm required to put 25% down on a property I'm aiming to rent

Well, there goes that idea

Back to maxing the 401(k) and focusing on retirement
If you don't have a decent DP, then you're also unlikely to have sufficient funds to cover vacancies and repairs, so now is not the time for you to buy rental property. Doesn't mean it won't come later, but more ducks need to fall in line first to ensure success.