Author Topic: brave new world as a landlord  (Read 1666 times)

ericbonabike

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brave new world as a landlord
« on: August 20, 2019, 11:40:34 AM »
My wife and bought a new house about 2 months ago.  We've only owned the "old" house for two years and thought we could be cash positive if we rented it out.

We did a crapton of work on the new house (replaced flooring, bathroom overhaul, landscaping, fence for our dogs).
About two weeks ago, a friend of my wife's called her and asked her if she could rent our house.  My wife describes her as a "super neat freak" who wants to rent for a period of 6-7 years.  We signed a two year lease with her, and she showed up with her first two months of rent.  Boom.   Asked us to "cash immediately". 

I'm pretty stoked, and our old house will be rented out about three weeks after we moved out of it for the indefinite future. 
I don't know what the future holds, but I'm glad we took the risk to do this.  My biggest concern is the tax implications of rentals.  Recaptured capital gains, legitimate deductions, etc, etc

One question I had:  My wife, and our two daughters, and I have spent a combined 30ish hours working on the "old" house, to get it up to snuff.  Deep cleaning, some minor plumbing, spackling, repainting.   How do I deduct this from future rent.  If I had paid somebody to do it for me, I could have.  Do I have to start an LLC and pay all four of us a wage or something weird like that??


SwordGuy

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Re: brave new world as a landlord
« Reply #1 on: August 20, 2019, 05:01:15 PM »
Why would you bother?  The money will just pass thru to your taxes either way, except you'll have to pay social security (both halves) if you pay yourself a paycheck.   Not sure that really helps you much.

waltworks

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Re: brave new world as a landlord
« Reply #2 on: August 20, 2019, 10:49:04 PM »
You thought you would be cashflowing, are you? Post some numbers.

-W

BuffaloStache

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Re: brave new world as a landlord
« Reply #3 on: August 20, 2019, 10:53:59 PM »
Congrats! I'm in a similar boat (although your renter sounds better than mine!) and the new renters move in this coming weekend.

Another Reader

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Re: brave new world as a landlord
« Reply #4 on: August 21, 2019, 06:45:44 AM »
Any tenant that asks to rent and gives you two months rent as incentive is a highly suspicious tenant.  Did you run credit and background checks on her?  If not, your wife's "friendship" may cost you a lot of money.

Guizmo

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Re: brave new world as a landlord
« Reply #5 on: August 21, 2019, 07:59:24 AM »
Any tenant that asks to rent and gives you two months rent as incentive is a highly suspicious tenant.  Did you run credit and background checks on her?  If not, your wife's "friendship" may cost you a lot of money.

I made that mistake once. NEVER AGAIN!

OP, I hope you got a background check.

ericbonabike

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Re: brave new world as a landlord
« Reply #6 on: August 21, 2019, 08:01:30 AM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that? 



ericbonabike

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Re: brave new world as a landlord
« Reply #7 on: August 21, 2019, 08:04:19 AM »
renter is in process of getting divorced. Is my wife's BFF of almost a decade. 

I was concerned about some of those same things too.  But, we signed a pretty ironclad lease.  She is a neat freak. 
I'm pretty happy with it all.

waltworks

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Re: brave new world as a landlord
« Reply #8 on: August 21, 2019, 08:23:24 AM »
No Capex, maintenance, vacancy or management expenses included, eh?

Congratulations, you now have a potentially super stressful job (renter in the midst of a divorce? awesome...) that pays negligible/negative money...

-W
« Last Edit: August 21, 2019, 08:42:06 AM by waltworks »

MoseyingAlong

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Re: brave new world as a landlord
« Reply #9 on: August 21, 2019, 08:31:37 AM »

Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

You deduct the cost of materials.

If you want to deduct wages also, set yourself up as a separate business, have the rental business hire and pay you, then pay income and employment taxes on those wages. You will find that rental income is less taxes than employment income.

Best wishes on your rental. Sounds like a nice way to start.

Jon Bon

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Re: brave new world as a landlord
« Reply #10 on: August 21, 2019, 09:12:50 AM »
The question I ask every single time......

What is it worth to sell? does not sound like a great rental.

Just because Rent > mortgage/taxes/insurance does NOT make it a good rental. Most houses that people want to buy to live in make poor rentals.

However yes don't pay yourself. The the profits just pass though too you. And you get plenty of tax benny's from this as well. Paying yourself adds complexity for zero reason.

Papa bear

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Re: brave new world as a landlord
« Reply #11 on: August 21, 2019, 09:29:22 AM »
For the accounting and tax questions, I suggest you familiarize yourself with IRS publication 527.

https://www.irs.gov/pub/irs-pdf/p527.pdf

You have some good advice from some of the other seasoned landlords who have cautioned you on quite a few things.  Make sure your insurance company knows the house is a rental and get an umbrella policy as well.


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Mother Fussbudget

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Re: brave new world as a landlord
« Reply #12 on: August 21, 2019, 09:32:43 AM »
Welcome to the world of Real Estate Investing!  People have been using rental properties as a retirement income vehicle for DECADES, and there are good reasons - positive cash flow being the primary one.

I suggest you check out "Landlording on AutoPilot" from the library, and be sure to read the chapter on DEPRECIATION (it's chapter 2 in the first edition - chap 21 in the 2nd edition p. 211-213), and depreciation's positive effect on your overall federal tax burden. 

Summary:  As a rental property, you can depreciate (i.e. deduct) the value of the rental house (just the house, not the land) over 27.5 years.

NOTE:  I just went to Amazon.com, searched 'Landlording on AutoPilot', clicked 'Look Inside', clicked on chapter 21 from the table of contents, and read pages 211-213 that spell out the advantages of depreciation in common everyday language. Also, the Kindle 'sample' I have is from the first edition... not sure if the sample you can download is still from the 1st edition

As for expenses, it helps to not only track expenses and keep the receipts, but categorize them into the same buckets as shown on Federal Income tax form SCHEDULE E this will make your time spent doing taxes a lot simpler.  And don't forget you can usually DEDUCT mortgage interest off rental properties - I do it by having a pass-through LLC, and put it on the expenses line of my LLC.  Insurance, fees, property taxes - all deductible on your Federal income taxes.  I modified my FIRE number based on the net rents I was receiving, and found I had reached my FIRE goal before I actually stopped going to the 9-to-5 job.  (my required monthly income went DOWN by the amount received in net rents paid - I used a 50% of rents-paid to be extra cautious, and it still worked out in my case.  I FI'd last year, haven't drawn on my 401K, and actually added to a new Roth solo-401K thanks to the business).

SO MUCH additional reading is available - the sticky topic in this sub-forum has great books to read.  BiggerPockets.com is a place where REI (real estate investors) hang out, and share their experiences.  In any case, welcome, and best of luck!  - MFB

ecchastang

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Re: brave new world as a landlord
« Reply #13 on: August 21, 2019, 02:03:22 PM »
Overall in today's market, your rental is not a great, but not a bad deal.  If you were on a 30yr mortgage instead of a 15, the numbers would look better for sure.  The other question to ask is what is the potential for long term appreciation, both from a value of the house but also the price of the rents?

Another Reader

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Re: brave new world as a landlord
« Reply #14 on: August 21, 2019, 02:51:25 PM »
Bought a number of properties from overconfident, inexperienced landlords when they realize the mistakes they made when the market is in the toilet.  Looking forward to buying more from folks like the OP.

clarkfan1979

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Re: brave new world as a landlord
« Reply #15 on: August 21, 2019, 04:22:47 PM »
Bought a number of properties from overconfident, inexperienced landlords when they realize the mistakes they made when the market is in the toilet.  Looking forward to buying more from folks like the OP.

The numbers look good to me. Cash flow might be a little tight, but it's newly rehabbed and on a 15-year. I personally wouldn't rent to friends. The risk of potentially losing the friendship is not worth the potential profit, for me. It is just as easy to rent to strangers. 

Archipelago

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Re: brave new world as a landlord
« Reply #16 on: August 21, 2019, 08:17:49 PM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

ecchastang

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Re: brave new world as a landlord
« Reply #17 on: August 22, 2019, 06:59:30 AM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

Except that you left off home appreciation in your return.  At 3%, the paid off house is worth 205k, in 15 yrs, based on a 132k value.

Another Reader

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Re: brave new world as a landlord
« Reply #18 on: August 22, 2019, 10:00:57 AM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

Except that you left off home appreciation in your return.  At 3%, the paid off house is worth 205k, in 15 yrs, based on a 132k value.

Because houses always appreciate...

I love the newbies that think they know it all.  Ask the folks that bought in 2006 and 2007 how that appreciation thing has worked out for them.

My suggestion is that you start hanging out with some seasoned investors that have been through a downturn.  Or two.  Because if you don't change your perspective, those folks will be eating your lunch in a few years.

Jon Bon

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Re: brave new world as a landlord
« Reply #19 on: August 22, 2019, 10:17:32 AM »
Because houses always appreciate...

I love the newbies that think they know it all.  Ask the folks that bought in 2006 and 2007 how that appreciation thing has worked out for them.

My suggestion is that you start hanging out with some seasoned investors that have been through a downturn.  Or two.  Because if you don't change your perspective, those folks will be eating your lunch in a few years.

Ignoring what Another Reader said for a second (who is right, but not my point)

Generally cheap SFH make terrible rentals. A roof on a 120k house costs about the same as the roof on a 350k house. So those big cap ex items wipe you out for YEARS. Buy rental houses that are designed to be rentals. Don't shoe horn your former primary residence into a rental because "Rent>Mortgage"

But yes @Another Reader there are many of us who are looking forward to "buying season"




ecchastang

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Re: brave new world as a landlord
« Reply #20 on: August 22, 2019, 12:25:14 PM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

Except that you left off home appreciation in your return.  At 3%, the paid off house is worth 205k, in 15 yrs, based on a 132k value.

Because houses always appreciate...

I love the newbies that think they know it all.  Ask the folks that bought in 2006 and 2007 how that appreciation thing has worked out for them.

My suggestion is that you start hanging out with some seasoned investors that have been through a downturn.  Or two.  Because if you don't change your perspective, those folks will be eating your lunch in a few years.
Certainly not a newbie.  Been in real estate for 18 yrs.  Just stating that the numbers above aren't exactly accurate from an ROI standpoint.  Believe me I understand everything doesn't keep going up.  I made that exact statement 5 minutes ago on another thread.  But Stocks also can go down or flat for years or decades. 

clarkfan1979

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Re: brave new world as a landlord
« Reply #21 on: August 22, 2019, 01:50:23 PM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

Except that you left off home appreciation in your return.  At 3%, the paid off house is worth 205k, in 15 yrs, based on a 132k value.

Because houses always appreciate...

I love the newbies that think they know it all.  Ask the folks that bought in 2006 and 2007 how that appreciation thing has worked out for them.

My suggestion is that you start hanging out with some seasoned investors that have been through a downturn.  Or two.  Because if you don't change your perspective, those folks will be eating your lunch in a few years.
Certainly not a newbie.  Been in real estate for 18 yrs.  Just stating that the numbers above aren't exactly accurate from an ROI standpoint.  Believe me I understand everything doesn't keep going up.  I made that exact statement 5 minutes ago on another thread.  But Stocks also can go down or flat for years or decades.

This is a great point that often goes unaddressed on this forum. Based on a long-term buy and hold, why are we allowed to assume that the stock market always go up, but rental houses do not?

For me, what ever your answer, it should be the same for both asset classes.

Another Reader

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Re: brave new world as a landlord
« Reply #22 on: August 22, 2019, 02:22:10 PM »
I don't assume any asset class goes up over a specific time frame.  Historically, over time, both asset classes have gone up over longer periods of time.

If you stocks tank, that's not good, especially if you rely on selling them for income.  However, the 4 percent rule assumes that the market will behave in the future the way it has in the past.  The market will go down, but history says appreciation will eventually bail you out even if you sell shares to generate income.  Your paper asset portfolio is not leveraged and holding costs are close to zero.  No need to come up with cash to keep your paper assets if the market declines.  You can just wait it out.

If you own rentals, you have to pay the operating costs whether or not the properties generate any income.  If leveraged, you have to pay the mortgage.  There is a lot more risk of losing not only the income but the assets themselves.  Astute choices of what you buy and when, deleveraging to reduce risk and increase cash flow, and managing the properties correctly reduces but does not eliminate the risk of losing a property.  Pricing that risk appropriately is an important element of your success or failure.


waltworks

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Re: brave new world as a landlord
« Reply #23 on: August 22, 2019, 03:37:36 PM »
Yeah, for folks who are new to this: with the 1% rule (keeping in mind that it's just a guideline), you should *beat* stock returns handily. Which you want to do, because:
-Leverage is dangerous. You want a return premium for using it.
-Houses are semi-illiquid and expensive to buy/sell. You want a return premium for being locked into your investment.
-You don't have to do *anything* as a stock/bond investor, except buy the investment in the first place. There will *always* be management work involved with RE, unless you pay to outsource it. If you self-manage you need to include your time as an expense. You want a return premium to cover that.

RE is awesome. Nobody is saying otherwise. I think it's probably the only remaining asset class where individual investors can market time, pick investments, and use leverage and generally succeed if they're diligent and smart.

But it's not shooting fish in a barrel and the appreciation on your house in the last decade doesn't make the 1% rule irrelevant.

-W

theoverlook

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Re: brave new world as a landlord
« Reply #24 on: August 26, 2019, 07:35:25 AM »
The house meets the 1% rule, bought at $120k only 2 years ago and is renting for $1,250/mo. Sounds great. Few people do that well when renting their prior primary residence.

The only reason cash flow is tight is the 15 year mortgage, which you only need to worry about for 13 more years. I think you can do it and make a ton of money. Good luck. I bet you'll do great.

Papa bear

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Re: brave new world as a landlord
« Reply #25 on: August 26, 2019, 10:15:47 AM »
The house meets the 1% rule, bought at $120k only 2 years ago and is renting for $1,250/mo. Sounds great. Few people do that well when renting their prior primary residence.

The only reason cash flow is tight is the 15 year mortgage, which you only need to worry about for 13 more years. I think you can do it and make a ton of money. Good luck. I bet you'll do great.


Everyone is missing the point that OP wants to cash out refi the house at its market value, and THEN rent it out.  You would evaluate the rental as a new purchase at that point, not the original purchase price.

PLUS using the original purchase price and current market rents ignores opportunity cost of capital. 


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Jon Bon

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Re: brave new world as a landlord
« Reply #26 on: August 26, 2019, 10:51:22 AM »
Did we ever get a FMV for this one?

Paid 120k to years ago plus 12k plus sweat equity. House could be worth MUCH more now.

Getting tax free capital gains is probably going to be the deciding factor on this on IMO.


Papa bear

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Re: brave new world as a landlord
« Reply #27 on: August 26, 2019, 11:11:38 AM »
The house meets the 1% rule, bought at $120k only 2 years ago and is renting for $1,250/mo. Sounds great. Few people do that well when renting their prior primary residence.

The only reason cash flow is tight is the 15 year mortgage, which you only need to worry about for 13 more years. I think you can do it and make a ton of money. Good luck. I bet you'll do great.


Everyone is missing the point that OP wants to cash out refi the house at its market value, and THEN rent it out.  You would evaluate the rental as a new purchase at that point, not the original purchase price.

PLUS using the original purchase price and current market rents ignores opportunity cost of capital. 


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Bah, I might be messing up threads.  Too much real estate work and talk. 


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ecchastang

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Re: brave new world as a landlord
« Reply #28 on: August 26, 2019, 11:53:29 AM »
Did we ever get a FMV for this one?

Paid 120k to years ago plus 12k plus sweat equity. House could be worth MUCH more now.

Getting tax free capital gains is probably going to be the deciding factor on this on IMO.
Absolutely!

ericbonabike

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Re: brave new world as a landlord
« Reply #29 on: August 27, 2019, 06:49:51 AM »
think we could sell for 140ish right now.  Maybe 150ish.
In 7 years?  I have no idea.  The area I live in is a Low to Medium COL and is ( I believe) experiencing quite the housing boom.  Hence my desire to not sell it right now.   We live in an older part of town, convenient to downtown, convenient to the nearby state park,  but on the cheap side of the street.  Older homes a few blocks away are being bought up, torn down, and 300-400k mcmansions are being built.     It's possible that our cheap few blocks will be undergoing a similar gentrification in the next decade or so.

We also are trying to leave our options open.  Our new house is a bit bigger, and quite a bit closer to where my daughter's mother lives.  So, it makes sense for us to live in that bigger house.  But my girls are 14 and 12.  So, in 5-7 years, I could theoretically sell that second house tax free and move back to my smaller, cooler home.   My wife and I both prefer our old home's location.  But appreciate the convenience of the newer home.    The only question I have, is will we want to move our son to a new school at that time.   I can't forecast the future, so if I can keep my options open, make a bit of money by renting out, I'll do that.


If home #1 becomes my "forever" home, and we move back into it, then capital gains recapture is no longer a consideration.   I can sell home #2 tax free. 


ecchastang

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Re: brave new world as a landlord
« Reply #30 on: August 27, 2019, 07:15:26 AM »
think we could sell for 140ish right now.  Maybe 150ish.
In 7 years?  I have no idea.  The area I live in is a Low to Medium COL and is ( I believe) experiencing quite the housing boom.  Hence my desire to not sell it right now.   We live in an older part of town, convenient to downtown, convenient to the nearby state park,  but on the cheap side of the street.  Older homes a few blocks away are being bought up, torn down, and 300-400k mcmansions are being built.     It's possible that our cheap few blocks will be undergoing a similar gentrification in the next decade or so.

We also are trying to leave our options open.  Our new house is a bit bigger, and quite a bit closer to where my daughter's mother lives.  So, it makes sense for us to live in that bigger house.  But my girls are 14 and 12.  So, in 5-7 years, I could theoretically sell that second house tax free and move back to my smaller, cooler home.   My wife and I both prefer our old home's location.  But appreciate the convenience of the newer home.    The only question I have, is will we want to move our son to a new school at that time.   I can't forecast the future, so if I can keep my options open, make a bit of money by renting out, I'll do that.


If home #1 becomes my "forever" home, and we move back into it, then capital gains recapture is no longer a consideration.   I can sell home #2 tax free.
With that in mind, keeping it as a rental is not a terrible decision.

Jon Bon

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Re: brave new world as a landlord
« Reply #31 on: August 27, 2019, 07:20:44 AM »
think we could sell for 140ish right now.  Maybe 150ish.
In 7 years?  I have no idea.  The area I live in is a Low to Medium COL and is ( I believe) experiencing quite the housing boom.  Hence my desire to not sell it right now.   We live in an older part of town, convenient to downtown, convenient to the nearby state park,  but on the cheap side of the street.  Older homes a few blocks away are being bought up, torn down, and 300-400k mcmansions are being built.     It's possible that our cheap few blocks will be undergoing a similar gentrification in the next decade or so.

We also are trying to leave our options open.  Our new house is a bit bigger, and quite a bit closer to where my daughter's mother lives.  So, it makes sense for us to live in that bigger house.  But my girls are 14 and 12.  So, in 5-7 years, I could theoretically sell that second house tax free and move back to my smaller, cooler home.   My wife and I both prefer our old home's location.  But appreciate the convenience of the newer home.    The only question I have, is will we want to move our son to a new school at that time.   I can't forecast the future, so if I can keep my options open, make a bit of money by renting out, I'll do that.


If home #1 becomes my "forever" home, and we move back into it, then capital gains recapture is no longer a consideration.   I can sell home #2 tax free.

Makes sense to me. Just know that you probably are not going to make much if anything on this house. The numbers are not bad, but as I said up thread. A furnace on a 120k house costst he same as a 350k house. My advice for you since your local is stay on top of any deferred maintenance items. In theory that  lets you get more usage out of the expensive items in the house.

Maybe honestly reaccess after a year. See how much money you actually made when you file your taxes and when its time to find a new tenant. You would still be eligible to get those sweet sweet tax free capital gains.

Also a minor nitpick, im convinced "forever home" is a term made up by realtors to con buyers into buying more house then they need. No one knows what the future holds, so the notion of forever home is bunk!

Good luck out there. Let us know how it turns out or if you have specific questions.


electriceagle

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Re: brave new world as a landlord
« Reply #32 on: August 29, 2019, 09:05:46 AM »
Numbers:

House was 120,000.
Bought two years on 15 year note 3.375. Current mortgage balance is 88k.
We spent another 12k on it fixing it up before we thought it would become a rental.
PITI (principle, interest, taxes, insurance):  850.
Rent:  1250. 

monthly surplus = 400 per month = 4800 annually.

If I consider maintenance costs at 1% of home value = 1300 annually.

so, annual surplus less projected maintenance =3500 annually.


Again, I guess my question is:
I have a rental and I need to replace the wax seal on toilet.  If I pay a plumber, it might cost me $100.  Which I get to deduct from rental income.

If I replace it myself, do I only get to deduct the cost of the wax seal ($7)?  Or do I get to "pay" myself a fair wage on top of that?

Best case scenario, you are looking at:

$120k * 20% down = $24k + $12k spent on fixing it up
$3500/$36000 = 9.72% annual return

But you have not factored in CapEx, vacancy and property management (or your own time) costs. Realistically speaking you are looking at a break even rental plus headaches.

S&P is the better route.

Except that you left off home appreciation in your return.  At 3%, the paid off house is worth 205k, in 15 yrs, based on a 132k value.

Because houses always appreciate...

I love the newbies that think they know it all.  Ask the folks that bought in 2006 and 2007 how that appreciation thing has worked out for them.

My suggestion is that you start hanging out with some seasoned investors that have been through a downturn.  Or two.  Because if you don't change your perspective, those folks will be eating your lunch in a few years.
Certainly not a newbie.  Been in real estate for 18 yrs.  Just stating that the numbers above aren't exactly accurate from an ROI standpoint.  Believe me I understand everything doesn't keep going up.  I made that exact statement 5 minutes ago on another thread.  But Stocks also can go down or flat for years or decades.

This is a great point that often goes unaddressed on this forum. Based on a long-term buy and hold, why are we allowed to assume that the stock market always go up, but rental houses do not?

For me, what ever your answer, it should be the same for both asset classes.

The entire stock market (i.e. your broad ETF) is likely to go up in the long term, but you can only buy a few houses. If you could buy a tiny slice of every house in the country, you might be able to make broad assertions about appreciation with real estate too.