First time landlord- maybe

[teamzissou00]

We have a two story home, 1600 sq ft in a fairly desirable neighborhood with great schools.  We have put some decent additions in the two years we have owned it (fancy tile floor in kitchen/entry/hall and new garage door).  We bought it for 193k and owe 174k and monthly all in pmt is $1250.

I'd love to have a good renter pay down my loan and watch the home's value grow as well.  I'd love to figure a way to pay it off in the next 17 years (when I turn 50) and have a pure income property.  I have zero experience in this.  Does it make financial sense?

I'd pay a property mgr, expect to pay for lawn care & trash & pest. 

I conservatively think we could rent for $1500/month. Minus $150(prop mgr) & utilities $200 that leaves me $1500- $350 = $1150 net income to pay my $1250 mortgage.  Is that correct?  My rent is possibly too conservative. 

How do I make this work?

[meadpointofview]

Yes it makes financial sense and my only two cents is think about doing the prop. management work yourself.  You can do it.  There are services to check credit and background, and I am sure you can figure out how to mow a lawn or paint the house (when needed).  Save that money and pay down the loan quicker or use it to pay down other debt.

Is the property in an HOA?

[teamzissou00]

No HOA

I may move for work, so not interested in being a prop mgr

Is it OK to owe money each month?  I'm also going to be out of pocket on house maintenance

[Kazimieras]

I'm a landlord of a duplex and would recommend that you have your properties be cash-flow positive, and by that I mean make sure you never owe for the property to maintain itself. Houses are funny things and can jump up in value or drop like a stone. While gaining equity in a place is good, you are putting all of your eggs in one basket if you are not able to take some money out to do repairs, etc. There will be times with no renters, or renters that damage the property, or repairs that will exceed your current plans, and shelling out for that really sucks.

[meadpointofview]

Mine is not cash flowing yet but that is because I bought at the height of the bubble.  I could raise the rent on my 7 year renter but the risk of him leaving is too great for me, I would prefer to cover the $50 per month that is cash flow negative and have him pay the majority of the note for another 7 years.

As soon as he leaves I will raise the rent to market rate.

[Another Reader]

As a long term landlord, my opinion is that you will be significantly cash flow negative on this property.  You have not accounted for vacancy and collection loss or repairs.  In the markets I deal with, the tenants pay for landscaping maintenance and all utilities, so that's a plus for your numbers, if that's how things are done in your market. 

I would start by talking to management companies in the area.  Get their opinions of market rent, vacancy rates and anticipated expenses.  Call on every for rent sign in the neighborhood.  Ask other landlords how they make the numbers work.  After doing your research, you will have a much more accurate picture of how your investment will perform. 

[teamzissou00]

Is the only way I get positive on it to re-fi?  Is every landlord putting down 30-50% up front? 

What if I go negative by$100/month for 5 years and then re-fi for a lower payment?  I guess I'm not sure how you manage to be cash positive

[gecko10x]

I know about as much as you do, Slate, but I wouldn't do it voluntarily with those numbers. Even with the renters paying utilities (and how are they only $200?), you're only at 108% gross yield. That doesn't account for increased property taxes, insurance, maintenance, and vacancy.

We are now (reluctantly) renting our previous house, with a property manager, and our gross yield will be about 200%.

[Another Reader]

I don't buy properties where you live, because they don't cash flow.  There is too much competition from people wanting to buy homes to occupy and from investors that are willing to do without cash flow and bet exclusively on appreciation.  For example, here in Silicon Valley, there is a huge influx of Asian money looking for investments.  Some of these folks think about real estate as something they will own for generations and the family wealth they are starting to accumulate now will be there for their grandchildren and beyond.  Betting exclusively on appreciation is much too risky for me.  My time horizon is much shorter.

If you can get your payments down by refinancing the property as an owner-occupied property while you still live there, you should consider doing that.  Run the numbers with the reduced mortgage payment to see what the effect is.  There is no guarantee you can refinance in 5 years at all, much less at a lower rate.

[samustache]

  Does it make financial sense?

Probably not. Where are you going to live while you rent it? Unless it's rent free I wouldn't do it.  Like the other landlords said, you will likely be significantly cash flow negative once you start adding in vacancy / repairs. Even if it were paid off, you'd be better off mortgaging it and buying something with a better return.

[teamzissou00]

So how would it have made sense?  If I had put 80k down on a 200k house and only owed 800/month and rented for 1500?

So only have an income property if you can put down 40%?

[arebelspy]

So how would it have made sense?  If I had put 80k down on a 200k house and only owed 800/month and rented for 1500?

So only have an income property if you can put down 40%?

No.  That's forced cash flow, and is a terrible return on your investment.

If it doesn't cash flow at 100% financing, especially with today's rates, it's not worth buying as a cash flow play (though that doesn't mean you should finance at 100%, but just that in a theoretical world if you did, it should cash flow).

You may be buying based on your knowledge of the future appreciation, but in general most long time landlords avoid that strategy.

[teamzissou00]

In my head this made sense.

If I plan on keeping the property for the next thirty years.

If I break even each month and have annual new lessor house maintenance of $3k and major maintenance of 5k every 5 years for a total cost of 4k/year out of pocket.  Maybe 6k if two months are vacant each year. 

I'd get 5k in loan pay down right now and that # increases each year.  After 10 years I would gain equity of 50k and have out of pocket expenses of 4-6k x 10 = 50k. Looking at this its break even unless the house appreciates

Is my rationale good?

[teamzissou00]

Also, if we ditch our current house instead of renting it out, we want to buy a 1 story that would be our retirement home (we hope).  My work could move us.  Does it change the decision to rent a house if you want to come back to it? 

When we sell our current house we will pay selling costs upward of $15k on a sale of $225k.  Paying this much more than once doesn't sound fun. 

[arebelspy]

In my head this made sense.

If I plan on keeping the property for the next thirty years.

If I break even each month and have annual new lessor house maintenance of $3k and major maintenance of 5k every 5 years for a total cost of 4k/year out of pocket.  Maybe 6k if two months are vacant each year. 

I'd get 5k in loan pay down right now and that # increases each year.  After 10 years I would gain equity of 50k and have out of pocket expenses of 4-6k x 10 = 50k. Looking at this its break even unless the house appreciates

Is my rationale good?

Okay, let's assume that's all true.

Now compare it with an alternate investment where you have the same rent coming in, but a much lower mortgage payment because you purchased in an area where the purchase price was so much lower.

Suddenly you have the same equity paydown (tenant paying the mortgage for you) to end up with a free and clear house, but you're getting 4k/year cash flow, instead of paying 4k/year.  Then you roll that into more, etc.

There's a limit to how many cash flow negative properties you can buy.  There's no limit to how many cash flow positive properties you can have (and then the tenants are paying down a bunch of properties for you, or you're reinvesting the cash flow into equities, or speed boats, or whatever).

[meadpointofview]

I agree with the other replies that encourage you to get into the rental market only if you can cash flow but the point here is (I think) that you don't have a lot of cash to put down in this house or any other house. 

My point is simple.  If you stay in the house it is a 100% expense to you.  If you rent it out, someone else is paying a majority if not all of the mortgage and expenses.  What then would you do with the money that went to pay your mortgage?  Rent a cheaper place would be my suggestion, until you find another property to "buy right" and turn it then into a cash flowing rental, and so on.

Here is some info about refinancing a rental.  In today's market you have to come to the table with 30% down for a conventional non owner occupied loan.

[teamzissou00]

Ok- so lets say I drop my landlord fantasy for now. 

We sell our current house and...

My work may move me at any time. May have no one place of living for 10 years- should we just rent homes and save a huge down payment for when we think we are settled?  Will the same house be 50% more expensive then? 

[Hamster]

In many markets there is no way to buy a single family residence as a rental that will give decent returns unless there is dramatic appreciation. In those markets, it makes more economic sense to rent or to buy a multifamily property and either occupy one unit or rent the whole thing out.

If you can't sell the property, then renting it out cash-flow negative for a while may be a way to minimize your losses, and iit's better than spending on things like buying cars, but if your goal is to invest in real estate, then look for sometging that will cash flow unless you have a particular insight that you will have a high likelihood of significant appreciation in the near term.

Here is some info about refinancing a rental.  In today's market you have to come to the table with 30% down for a conventional non owner occupied loan.

Not that it makes much difference, but my bank requires 25% down or 75% LTV for an investment mortgage

[Praxis]

We have a two story home, 1600 sq ft in a fairly desirable neighborhood with great schools.  We have put some decent additions in the two years we have owned it (fancy tile floor in kitchen/entry/hall and new garage door).  We bought it for 193k and owe 174k and monthly all in pmt is $1250.

I'd love to have a good renter pay down my loan and watch the home's value grow as well.  I'd love to figure a way to pay it off in the next 17 years (when I turn 50) and have a pure income property.  I have zero experience in this.  Does it make financial sense?

I'd pay a property mgr, expect to pay for lawn care & trash & pest. 

I conservatively think we could rent for $1500/month. Minus $150(prop mgr) & utilities $200 that leaves me $1500- $350 = $1150 net income to pay my $1250 mortgage.  Is that correct?  My rent is possibly too conservative. 

How do I make this work?

First, your mortgage seems high.  Either your interest rate or your taxes are higher than I'm estimating.  If it's your interest rate, consider refinancing to something below 4%.  I'm assuming 4% interest, 1% annual property taxes, and estimating very high on insurance prices and I still end up almost $200/mo lower than your payments when I plug it in to a calculator.


Second, why are you paying the utilities in that $1500 rent?  Is this common in your area? My tenants pay their own utilities.

Third, frankly, a cash flow negative property seems completely bonkers to me.  You're absorbing a ton of risk and effort to whittle away at a mortgage that'll take you thirty years to pay off for a property that's not worth *that* much, and tying up your capital in the process.

I'm particularly biased because I'm a value investor, but I've yet to buy real estate that, in the end, didn't rent at 2x the mortgage.  Granted, this is much higher than usual and I put a lot of effort in to finding good deals, but when I'm used to renting at 2x the mortgage, renting for less than the mortgage blows my mind.

I assume you're in WA, like myself?

[Praxis]

Here is some info about refinancing a rental.  In today's market you have to come to the table with 30% down for a conventional non owner occupied loan.

You are incorrect on this.  I'm doing a 75% LTV cash out conventional refi on an investment property as we speak, with an interest rate in the 3's.  However, I had to use a mortgage broker to find a bank that would be willing to do this.

[meadpointofview]

Not totally incorrect then.  That sounds like a special deal or the rules have changed since November of 2012

[Another Reader]

25 percent is doable up to 4 loans.  What are the terms of your refi?  There's a hit for non-owner occupied and another for cash out with most lenders.  I would expect close to 5 percent now on 30 year fixed, given that owner-occupied refi's with no cash out are at 4 percent now.

[Praxis]

25 percent is doable up to 4 loans.  What are the terms of your refi?  There's a hit for non-owner occupied and another for cash out with most lenders.  I would expect close to 5 percent now on 30 year fixed, given that owner-occupied refi's with no cash out are at 4 percent now.

It's 0.5% over the owner occupied rate, so still under 4%.  30-year fixed, 75% LTV.  My mortgage broker did well.  I'd talked to a couple local credit unions on my own beforehand and the one I had gone with in the past adds an extra 1.5% to do investment properties (i.e. close to 5%).

After this refi, I suspect I'll have to go with portfolio lenders for future refis.

[MrMoneyPinch]

Ok- so lets say I drop my landlord fantasy for now. 

We sell our current house and...

My work may move me at any time. May have no one place of living for 10 years- should we just rent homes and save a huge down payment for when we think we are settled?  Will the same house be 50% more expensive then?

The thing is: you can't know in advance.  It could multiply by 2 like it was the 00's, or stagnate for a decade like it was the nineties again.  The only thing you can know is: if you keep it, it sucks up a part of your stash every month.  If you sell it, you liberate your current equity PLUS the difference between renting and the interest+maintenance+taxes on it, all to be flexibly allocated on stash or anything you fancy.
Also: I wouldn't advise buying any property you don't expect to keep for a while because of the transaction costs.