Author Topic: House rented now what? -Case Study  (Read 2090 times)

oilhunter

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House rented now what? -Case Study
« on: May 25, 2016, 05:33:45 PM »
I would like to receive some guidance on what happens next. I bought my house in 2014 at the age of 24 near the local university and midtown. When I got laid off due to the oil downturn, I decided to rent out my home. To my surprise the house rented out in less than 24hrs. Not knowing it would rent  this fast I didn't have the proper time to get all my affairs in order. 

From what I read so far , most of the MMM recomends the Umbrella insurance as well the landlord insurance. Sounds like the LLC can creat more work as I only have one property at the moment.

Below are some facts. Currently I'm living in Chicago and the house is in Oklahoma and  has been rented for two months and I don't have a PM. I've decided to try and remotely manage the house( could change).

It's probably not the most cash flow positive out there but it breaks even for the most part.

Do you guys track all related expenses to the property in order to deduct income. I've started to create an excel spreadsheet for now.

I'm curious if there is anything else I need to keep in mind of.

Purchase price $170,000
Interest rate 3.785
Current balance $149,000
PITI- $1311 ( includes 154 in PMI)
1yrs lease at monthly rent of $1450 w/ 100 discount if paid on the first.

Plan is to diverte all income and extra cash until I get to 20% equity. Then stock pile for 2nd property, assuming I understanding land lording.

fishnfool

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Re: House rented now what? -Case Study
« Reply #1 on: May 25, 2016, 06:20:20 PM »
Yeah, your gonna want to keep every receipt and even write off a portion of your phone bill, Internet etc. Anything you use in the course of managing your rental. You can also write off travel for inspection or repairs. No, you don't need a LLC. A umbrella is good to have but not really necessary with one rental IMO. A landlord policy along with fire/liability is gonna cover you for any loss.

iamlindoro

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Re: House rented now what? -Case Study
« Reply #2 on: May 25, 2016, 07:45:54 PM »
This sounds like a pretty bad case of ready, fire, aim to me.

The right time to discover how to be a landlord is definitely before you turn your home into a rental.  With no offense intended, I don't think you'd going to need to worry too much about plowing all those extra rent dollars into the mortgage.  You have a PITI of 1311 and a rent of 1450 (and 1350 if they pay on time? Why?!?!?).  Add to that vacancy, repairs, capital expenses, turnover expenses, and the additional annual insurance cost of switching your homeowner policy over to a landlord policy (which you absolutely MUST have) and you are going to be pretty substantially cash flow negative over the medium and long term.

Yes, you definitely need liability coverage exceeding the maximum amount you honestly believe you could be sued for in a liability case.  Someone trips off your porch and becomes paralyzed? You may find yourself on the losing end of a million dollar or greater lawsuit.  That's not to scare you-- I think landlording is awesome-- but it is definitely something that you should go into with eyes wide open, and you should be working to protect yourself against liability.

I carry $1 Million in liability coverage on each property, and a $2 Million umbrella policy on top of that.  Whether you need an LLC I'll leave as an exercise to you, but you may want to consult with an attorney (and an accountant) about the pros and cons of doing so.

My advice to you would be to get rid of the on-time discount at your earliest opportunity.  This property is already going to eat you alive even without it.  If the property doesn't make sense as a rental (which it doesn't appear to), sell.

oilhunter

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Re: House rented now what? -Case Study
« Reply #3 on: May 26, 2016, 07:53:40 AM »
Thank you for your comments. I'm aware this property won't help me reach FIRE anytime soon. I didn't buy the property with the intention of renting it out and that's why its not within the 1% rule.
 
However assuming my expenses increase due to an increase in insurance and maybe an added PM. I'm okay with eating the cost if it means someone else is paying my house for 1 year or 2. The way I see it I could potentially pay $1200 a year to keep my house, which is a house I intend to move back once I return to the state. Some would consider this property cash flow negative but it allows me to keep my home.

I think some would advice against it, however my current plan is make my normal payment and the rent collected will go straight to principal. With the help of this tenant I hope to reach 20% equity in the home by the end of the lease term. After that the PITI will decrease by $154. After that I'll keep a 3 months buffer then deploy rent into an index fund or buy a home that meets the 1% rule.This home is considered in the A class in a great area and will attract good tenants. I assume normal wear and tear and repairs should be minimal.

Should I decide I no longer want the home, I think you are right to say it isn't the best home to rentout. However it is in a good location and I think it could potentially reach the 1% rule.


Tumbler

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Re: House rented now what? -Case Study
« Reply #4 on: May 26, 2016, 11:08:52 AM »
I only own one rental property (4-unit) but I would tend to echo the advice in this thread.

The ROI on dropping the PMI seems to be worth it to me...you would need to sink another $13K in the property to reach 20% equity - saving you ~$1850 per year. That's a 14% return on your investment. Has the value of the property gone up due to market changes or improvements? It's possible that refinancing with a new (higher) appraisal might bring you to that 20% equity mark...just a thought.

FIRE2022

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Re: House rented now what? -Case Study
« Reply #5 on: May 26, 2016, 03:59:33 PM »
It might not be necessary to refinance to get rid of PMI. If the property has appreciated enough such that your outstanding loan is now less than 80% of the value of the property, you can write a letter to your bank asking them to remove PMI. They will probably want to perform an appraisal paid for by you ($400), and if the appraisal supports the value you claim, then PMI will be removed.

Tumbler

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Re: House rented now what? -Case Study
« Reply #6 on: May 26, 2016, 04:02:37 PM »
FIRE2022 - Good point! That is as long as the house was purchasing using a conventional mortgage. FHA properties have PMI for the life of the loan (unless you refinance).

oilhunter

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Re: House rented now what? -Case Study
« Reply #7 on: May 27, 2016, 09:32:48 AM »
Tumbler- the house was purchased using a conventional mortgage. So the PMI should go away once 20% has been met. I will look to see if the home can be appraise and hopefully allow me to reach 20% faster.

-Once again thanks everyone for your comments. I think I have a piece of mind knowing that I'll have the landlord policy.