Author Topic: Cash Flow  (Read 3791 times)

2527

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Cash Flow
« on: May 24, 2013, 12:54:21 PM »
Sometimes I think about renting out the townhouse we currently live in, and buying a single-family home nearby.  I've been around landlording (my dad did some) but I have no first hand experience.  Here are the numbers:

Based on what nearly identical townhouses rent for, rent is $2500

Mortgage, $1140
Tax, $500
Insurance, $100
HOA, $170
Sewer, $40
Allowance for vacancy, $250 (10%)
Allowance for repairs, $250 (10%)

That's about break even, then there is depreciation and tax considerations.  Renters in the neighborhood are typically people who transfer into the area and want to rent and get a feel for the area before they buy, and couples with children in the school district who get a divorce and need to maintain two households, but want to stay in the district. 

These numbers are based on a value of about $360,000, and a mortgage of about $240,000 (30 yrs, 3.75%), so equity of about $120,000.  Prices are still depressed about 10% from the 2007/8 peak.

Do the allowances for vacancies and repairs look realistic?  Is break-even worth the headaches of land lording? Anything else I should be asking?

I'm open to people's thoughts.

Thanks, Jeff
« Last Edit: May 24, 2013, 01:54:55 PM by Jeff L »

arebelspy

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Re: Cash Flow
« Reply #1 on: May 24, 2013, 02:09:05 PM »
That seems worthwhile to turn into a rental.  Not a home run that you'd choose, perhaps, but the numbers are there cash flow-wise to break even, and due to transaction costs of buying/selling, you'll gain the equity pay down (4.5k/year initially and climbing by a few hundred/year) and appreciation/depreciation benefits.

Assuming your equity is about 90k after transaction costs, your return on investment from just the equity paydown is about 5%.  Add in the other benefits and it's not too bad of an investment.

Unless you have a better option for the equity, renting it out instead of selling isn't a bad plan.  If you had other alternate investments, compare versus those.
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tryan

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Re: Cash Flow
« Reply #2 on: May 24, 2013, 02:12:18 PM »
I run at 4-5% vacancy ... but I didn't see you account for HOA "special assessments" so it might be a wash.  You be the judge.

I like that the mortgage payment is LESS THAN HALF the rents. 

2527

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Re: Cash Flow
« Reply #3 on: May 24, 2013, 02:36:18 PM »
Thanks for the comments. 

I agree it isn't something I would buy into but holding it for a few years til prices recover might be a good idea, or there might be some years of high inflation that make the price appreciate faster compared to equity.  If it works well, I could hold it for the long haul.  It is nice to borrow money at 3.75%.

We've lived here now for 6 years and so far that haven't been any HOA special assessments.  But the monthly fee has climbed from $125 to $170 which exceeds inflation, I'm pretty sure.

Selling it outright and putting the cash into the stock market when the stock market is at a record high seems to be a version of "sell low, buy high."
« Last Edit: May 24, 2013, 02:39:19 PM by Jeff L »

arebelspy

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Re: Cash Flow
« Reply #4 on: May 24, 2013, 02:56:53 PM »
I like that the mortgage payment is LESS THAN HALF the rents.

This should always be the case, IMO (in a theoretical case where you financed 100% - and then you should put down 25% so it's much less than half).  It's just nice how easy that is nowadays due to such low interest rates, especially on a former owner-occupied, like in the OP's case.

Selling it outright and putting the cash into the stock market when the stock market is at a record high seems to be a version of "sell low, buy high."

Well I don't know if the market is high or not, or what it will do, but the return on this, even at break even cash flow is decent enough to keep it as a hedge on inflation, at the very least.  Just don't pay that mortgage down early, IMO.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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tryan

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Re: Cash Flow
« Reply #5 on: May 24, 2013, 04:13:46 PM »
Quote

Quote from: tryan on Today at 02:12:18 pm
I like that the mortgage payment is LESS THAN HALF the rents.

This should always be the case


Hmmm ... tell that to Honobob.

honobob

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Re: Cash Flow
« Reply #6 on: May 24, 2013, 04:24:56 PM »
Quote

Quote from: tryan on Today at 02:12:18 pm
I like that the mortgage payment is LESS THAN HALF the rents.

This should always be the case


Hmmm ... tell that to Honobob.
  tryan you left out "IMO"  anyway I've heard it from all the flyover guys!  If it works good for you fine.  I'd
rather have growing rents and appreciation.  No muss no fuss millions.

arebelspy

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Re: Cash Flow
« Reply #7 on: May 24, 2013, 04:43:08 PM »
Interesting.  I've never heard of positive cash flow referred to as "muss" and "fuss."
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honobob

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Re: Cash Flow
« Reply #8 on: May 24, 2013, 04:57:04 PM »
Interesting.  I've never heard of positive cash flow referred to as "muss" and "fuss."
read tryans posts over the internets.  Cleaning fridges, dealing with deadbeats, bad tenants, underwater properties on and on.  There seems to be a price to pay for that couple of hundred bucks a month.  Also probably a toilet story or two.   That's definitely muss!
« Last Edit: May 24, 2013, 05:00:16 PM by honobob »

Another Reader

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Re: Cash Flow
« Reply #9 on: May 24, 2013, 05:00:33 PM »
There is a bit of muss and fuss to tenant management, but I'm not sure there is less than with more expensive properties.  We have had a couple of problems in my Silicon Valley neighborhood, which is packed with engineers, lawyers and accountants.  Rents start around $3,500 and the houses are back in the 7 figures.  One poor guy had a set of tenants where the police were regular visitors.  One afternoon I drove by and they had three very scruffy young men in cuffs, sitting on the curb.  When these tenants moved, he sold and the buyers gutted the place.

The OP should be fine with what he proposes.  That mortgage payment makes the idea feasible, which is why buying owner-occupied properties and converting them to rentals after a year or two is a successful asset building strategy for many.  Condo fees will likely go up faster than inflation, especially as the complex gets older.  If his is a desirable rental area where rents will also increase, holding the property for a while makes sense.