Author Topic: Apologies Beforehand for multi-part (and long) newbie question.  (Read 3427 times)

weston

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Apologies Beforehand for multi-part (and long) newbie question.
« on: October 16, 2013, 07:36:59 AM »
Quick background. Wife has to retire in a year and a half. She clearly is starting to worry about filling her days in retirement. I will continue to work. Which brings us to the old homestead.

I want to sell the McMansion and move into something smaller and invest the remainder in a conservative mix of low cost index funds. Wife wants to move but hold onto the McMansion and rent it out (again I suspect that she wants to do this primarily because she is worried about not having enough to do). I'm trying to get her (and me) to look at this possibility from a strictly business perspective and hope that some of you will take me by the hand since we have never owned investment/income producing property.

Assuming that lease makes tenants responsible for things such as lawn care, water/sewer. garbage fees, electric and plumbing repairs...I believe that would leave us with anticipated expenses of :

Mortgage (principal and interest)
RE taxes (which will increase since we will no longer have a homestead exemption)
Property Insurance (Is that likely to increase once it is no longer owner occupied?)
Pest Control
HOA and maintenance fees (and any special assessments)
Structural Repairs

Am I missing anything obvious on the likely expense side of the ledger?

Now assuming after calculating these expenses if we can get enough rent to be profitable what would be a reasonable way to...

1. Spitball carrying costs. I know it will vary tremendously depending upon an almost infinite variety of factors but how do you allow for the fact that the house will likely be sitting vacant for at least part of the time?

2. Determine lost opportunity costs (hope I'm using the term correctly)? Let's say that after agent commission, closing costs and paying off mortgage balance we have a few hundred thousand left over. If we stick it in a very conservative mix of investments (she's early 60s. I'm late 50s) what is a reasonable rate of return to expect so that we can weigh what we would be giving up in investment returns as a result of retaining ownership of the house.

Any other factors that I appear to be missing?

Thanks.

monarda

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #1 on: October 16, 2013, 09:38:11 AM »
Interesting.

Insurance will increase a bit when not owner occupied. When we did this, it was about a 15-20% increase. (but I don't know how much the policy would have increased had we stayed)

A couple of things will influence your strategy.

How long does your wife intend to do this? Long term? Or just until the housing market picks up some more to sell it at a better price?
How many years left on your mortgage?

We're renting out a house at a good profit until the market picks up. Whenver that will be. Then we'll sell.

weston

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #2 on: October 16, 2013, 09:47:45 AM »
Interesting.

Insurance will increase a bit when not owner occupied. When we did this, it was about a 15-20% increase. (but I don't know how much the policy would have increased had we stayed)

A couple of things will influence your strategy.

How long does your wife intend to do this? Long term? Or just until the housing market picks up some more to sell it at a better price?
How many years left on your mortgage?

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I think what she intends will probably be determined by how much income it might generate and how much of a pain in the ass it might be to be a landlord. If it generates enough $ and she doesn't have to put up with midnight phone calls about stuffed toilets she would probably be happy to allow it to continue until one of us croaks. Even with the recent down turns in the market the house is worth twice what we paid for it. At the peak of the market it was probably worth 3x what we paid for it, but I don't expect to see those resale prices again in the foreseeable future.

We have about 14 years left on the mortgage.

salmp01

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #3 on: October 16, 2013, 01:41:44 PM »
What is the value of the home and how much do you anticipate that you'll get for rent?

weston

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #4 on: October 16, 2013, 01:58:43 PM »
I believe the house would sell for approx 500K.

Current Mortgage balance is 72K

Wife said she checked some available rentals in our area and she believes we can get approx 3K per month. I myself haven't really checked current rental rates.

KingCoin

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #5 on: October 16, 2013, 02:53:12 PM »
Sell it.

If you want to play the real estate game, redeploy the capital into some properties that make sense as rental investments (see the 1% rule). This would have the side benefit of giving your wife even more to do  including learning how to identify a good investment property, house hunting for said properties, managing multiple properties, etc. You can tell your wife to head over to bigger pockets if she's interested in learning more:
http://www.biggerpockets.com/real-estate-investing

If the McMansion is newish and will require minimum ongoing investment, the area is good enough to attract extremely reliable tenants, and the real estate market is firm and rising, your current property could be construed as a very defensive investment (that assums the 3k/mo and 500k numbers - if your wife is pitching the idea, she might be waxing optimistic). My guess is that properties that you're looking to move into will me much more attractive from a numbers standpoint.

unpolloloco

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #6 on: October 31, 2013, 01:24:06 PM »
Run the numbers - it'll show the property to be a pretty bad rental vs sale.  I calculated a very optimistic 3-4% return, making wild assumptions.  You can do much better elsewhere!

TrulyStashin

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Re: Apologies Beforehand for multi-part (and long) newbie question.
« Reply #7 on: October 31, 2013, 02:05:09 PM »
You'd be better off selling it and using some of the money as a downpayment on one or two smaller foreclosed homes that will meet the 1% rule.  Foreclosures will likely need some repairs, thus she'll have a project to manage right away.  She can spend plenty of time researching how to be an effective landlord and what areas of your city are desirable yet still have good deals for patient, savvy investors.

You might earmark, say $20k or $30k of the proceeds from the sale of your home to buying one foreclosure.  See how that goes and how she like being a general contractor/ property manager/ landlord before sinking more money into this business.  And it is a business.......... if you want to do it right.