Is It Possible to Make $$ on Rentals in Expensive Areas?

[oldtoyota]

If I rented out my house, I could maybe get $500 more than the mortgage. The "profit" might not even be enough for regular upkeep. One broken oven could take two months worth of profit.

Do you know where I could find out more about scenarios of 1) how to calculate if I can make money off of a rental house that still has a mortgage and 2) more info about how to do this in expensive areas of the country (DC)?

[Johnny Aloha]

The best online resource is biggerpockets.com.  Search for 50% rule and understand the assumptions within it.  Read through the forums to get an idea how experienced investors analyze deals and make decisions.

Obviously books are also a great resource, and arebelspy has suggested many in these forums.

[arebelspy]

Calculate your ROI.  You will need more details than you've posted so far - P&I, taxes, insurance, estimated rent, etc.  Details on deferred maintenance, if you have it.

Then compare the opportunity cost, both of your cash-on-cash return, and overall return (taking into account expected appreciation, principal pay down on the loan, tax benefits, etc.)

Decisions like this should be done with data and hard numbers.

[foobar]

How expensive and area is doesn't matter. It is all about the how much rent you can bring in versus the costs. In a lot of high cost areas, renting is significantly cheaper than owning over the short term. You will struggle to buy a property that will be cash flow positive from day 1.  Over time, as rents rise you become cash flow positive. And ideally the high cost area keeps appreciating and your leveraged investment makes big bucks. The one big downside is that a lot of high cost areas also have a lot of  regulatory red tape which may or may not apply to you depending on what type of unit you own.

If I rented out my house, I could maybe get $500 more than the mortgage. The "profit" might not even be enough for regular upkeep. One broken oven could take two months worth of profit.

Do you know where I could find out more about scenarios of 1) how to calculate if I can make money off of a rental house that still has a mortgage and 2) more info about how to do this in expensive areas of the country (DC)?

[totoro]

high cost areas might make sense if:

1.  You suite a home in an expensive area and rent both up and down and you plan to hold for ten years or more and expect to benefit from appreciation and principal paydown.
2.  You operate a vacation or executive rental - location and zoning dependant

[jamccain]

The best online resource is biggerpockets.com.  Search for 50% rule and understand the assumptions within it.  Read through the forums to get an idea how experienced investors analyze deals and make decisions.

Obviously books are also a great resource, and arebelspy has suggested many in these forums.

50% rule won't apply in this case, but biggerpockets.com is where oldtoyota should be asking such questions. When I say should, he'll get high quality answers...actually if he...or she...just does a search they'll find the answer many time over.

[leaderscorp]

It depends on the place your house is located. Normally, house that are located in the city are much more expensive. Where are you living anyway?

[tryan]

If the rent bearly covers the mortgage, consider renting furnished as a "motel alternative".  I have doubled the income and they run 80-85% occupacy (depending in proximity).

I did a 30 day minimum (not trying to compete with hotels).  If the area has lots of business clients this is a no-brainer.

[honobob]

Looks like a good place to discuss the merits of buying in an expensive area.  I invest in Honolulu, San Francisco and Vegas (well 1994).  I think the worst thing is to be in an expensive and not have the ability to participate in the market.  I think the BEST thing is to be in an expensive area and have the resources to participate. 

People seem to think an area becomes expensive and and then remains stagnant.  Generally the same market forces are in place that continues to generate the rent and appreciation growth that made it an expensive area to begin with. 

Tryan
You're not seeing the forest for the trees.  The MARKET determines things like cash flow and appreciation.  Now if you don't have the resources to cover initial negative cash flow then you can not participate in this market successfully.

Now if you'd read my book, you'd know that my first property was bought with negative cash flow, partly because I could only get a 15 year mortgage but also because that was the market.  Anticipated rent increases and appreciation plus just excess demand over supply cause the market to be willing to accept negative cash flow.  Now that little $2,000 investment that you would have mocked has returned over $400,000 in rents PLUS over $400,000 in equity!!  OK, I threw a hundred or so a month for a few years but with annual rent increases of 6%, negative soon became positive.  That little rental then funded each negative cash flow purchase afterwards.  Like a little snowball rolling down a mountain.  All my properties are fungible, in that although recent ones are not throwing off cash, the portfolio is. 

Now my real estate experience has been very positive, no vacancies or evictions, 6% rent increases and 9-11% appreciation.  Great people from Chicago Playboy bunny from the early 70's to grad parties for state champions and dinners with some of Hawaiian music royalty and just some great people.  Your experience seem so negative but hey if it's working for you great.  I'm not putting down your style.  It's just not the type of real estate investment that I would be interested in. 

So in your case, what would the typical deals be that would generate $800,000?  I would rather have $400,000 in equity than a hundred or two extra in rent a month.  Why don't you start a thread where people can compare their real estate styles?

 The MARKET determines things like cash flow and appreciation.  Now if you don't have the resources to cover initial negative cash flow then you can not participate in this market successfully.

True if you agree to pay full market price ... plenty of ways NOT to pay full price.  I simply won't buy if it won't cashflow positive month to month ... it's not about resources for me.

, no vacancies or evictions, 6% rent increases and 9-11% appreciation.

... tell that to the ones who bought 2007-20011

 I'm not putting down your style.  It's just not the type of real estate investment that I would be interested in. 

Probably more about "goals".  I wanted my property to free me from my day-job.  It did that.  I don't see how negative cashflows will ever achieve my goals. Nor would I wager a six figure sum on mythical forcasts of price - or rent - appreciation (the last 5 years are proof of that).

But to each his own.

Tryan,  what is MAGICAL about "cash flow"?  Any property can cash flow with enough down. You are ignoring what the market is telling you.  Also, don't you buy properties that you then have to invest more money into to collect rents?

You did not respond to the experiences your cash flow brought you. I seem to remember a lot of work and pain involved.

I also did not see a reply of what you would have to do to get to $800,000 either in rents or equity.

As far as market value, you probably did pay market value.  You got lesser prices but that is because you had to add something to get that price  that the market discounted the price for!  Unless...........You're not hanging at the Ronald McDonald house talking up parents, "Wow, kid with cancer, the medical bills must be tough.  Hey, have you thought about selling your house?"  I could not do that.

[tryan]

Tryan,  what is MAGICAL about "cash flow"?  Any property can cash flow with enough down. You are ignoring what the market is telling you.  Also, don't you buy properties that you then have to invest more money into to collect rents?

Mythical - not magical - .... so there is no disagreement that from  2007-2011 your forecast did not hold water.  Meanwhile you're bleeding every month.  Not my idea of "cash flow".

You did not respond to the experiences your cash flow brought you. I seem to remember a lot of work and pain involved.

I also did not see a reply of what you would have to do to get to $800,000 either in rents or equity.

The cash flow has bought me plenty of experiences.  Skiing 20-30 times in the winter.  Golfing when I can't ski.  All possible because I have no day-job.  WWWork is contracted out (especially if it's a rehab).  Sometimes I'll keep some of the job (like a kitchen design or light carpentry).

Your $800k figure is just a play on numbers (did you back out the years of negative cash flow ... whats the time frame ....  what expenses were backed out ...  taxes? ... realtor fees).   Point being if it were real and repeatable you wouldn't still be working a day job.

As far as market value, you probably did pay market value.  You got lesser prices but that is because you had to add something to get that price  that the market discounted the price for!  Unless...........You're not hanging at the Ronald McDonald house talking up parents, "Wow, kid with cancer, the medical bills must be tough.  Hey, have you thought about selling your house?"  I could not do that.

Not sure where you're going with this one .... Ronald McDonald?  Banks, Fannie, Freddie. HUD have all turned to auctions to move houses FAST.  Cash in 30 days.  This creates a short window to purchase a property below market.

[Nords]

If I rented out my house, I could maybe get $500 more than the mortgage. The "profit" might not even be enough for regular upkeep. One broken oven could take two months worth of profit.
Do you know where I could find out more about scenarios of 1) how to calculate if I can make money off of a rental house that still has a mortgage and 2) more info about how to do this in expensive areas of the country (DC)?

Heh-- welcome to the wonderful world of Central Oahu.

Bigger Pockets is a great resource, as is Frank Gallinelli's website RealData.com.  (Just read the blog, don't buy the products.)  As another poster recommended in another thread, you could read a library copy of Jane Hodge's "Rent vs Own".  The trick is to buy an incredibly cheap home (requiring lots of sweat equity), or to have an incredibly cheap mortgage (can't help you there), or to have incredibly high market rent.

Another option would be to console yourself that you own an asset which is cash-flow neutral and gaining long-term value at about the rate of inflation.  Of course you could achieve the same warm & fuzzy feeling by owning a portfolio of I bonds or TIPS, too.

Since you're in the DC area, I'd also suggest that you target military tenants by listing your place on AHRN.com.  Even if you don't have a military ID you can still register for a landlord account and list your property.  (You just wouldn't be able to browse the rest of the site to assess your competition.)  You'd have to figure out your market rent from other sources of rental data like Zillow or Trulia or CoreLogic or the local media websites. 

[oldtoyota]

The best online resource is biggerpockets.com.  Search for 50% rule and understand the assumptions within it.  Read through the forums to get an idea how experienced investors analyze deals and make decisions.

Obviously books are also a great resource, and arebelspy has suggested many in these forums.

Thank you!

[oldtoyota]

Decisions like this should be done with data and hard numbers.

I know. That is why I'm asking you guys. =-)

Your post is helpful. Thanks!

[oldtoyota]

I appreciate your help, everyone.

[Undecided]

Another option would be to console yourself that you own an asset which is cash-flow neutral and gaining long-term value at about the rate of inflation.  Of course you could achieve the same warm & fuzzy feeling by owning a portfolio of I bonds or TIPS, too.

But if someone else is paying down the principal on the mortgage, that's a pretty understated view of the benefit, no?

[foobar]

It is an understatement. Lets look at very simple look at what is going on.
You buy a 500k property and put down 20% (100k which could have been invest at 8% S&P was 9% with dividends. I am using 8 as a guess of the after tax return)
The appreciation since 1990 has been 4.72% (who knows what going forward would be)

Where are you in 30 years?
home is worth 1.99 million
cash would have been worth 1.006 million (make it 10% and you would have gotten 1.7 million)

Assuming the property has been cash flow neutral through all of those 30 years, you will have achieved equity like returns not ibond ones. Of course you will have done 30+ years of work doing property management. Spend that time working and invest that money and the stock market returns will be higher.

It definitely requires a lot more capital to play in the pricey market. A lot of people have 25k to invest (your buying a 100k house). Not as many have 125k(your buying a 500k house) and it gets even worse if when you want to diversify. If you have 5 100k houses the odds of all of them being vacant at the same time is low.  And there are a lot of places where you wil not be cash flow neutral for 5+ years. Are you willing to lose 10k/yr for while to make 20k/yr later? A lot of people can not afford that. For others it is a great tax strategy to shift income from prime earning years (40%+) to lower ones (25%)

Another option would be to console yourself that you own an asset which is cash-flow neutral and gaining long-term value at about the rate of inflation.  Of course you could achieve the same warm & fuzzy feeling by owning a portfolio of I bonds or TIPS, too.

But if someone else is paying down the principal on the mortgage, that's a pretty understated view of the benefit, no?

[arebelspy]

Decisions like this should be done with data and hard numbers.

I know. That is why I'm asking you guys. =-)

Your post is helpful. Thanks!

Did you ever gather the data and hard numbers mentioned to properly calculate this?

[oldtoyota]

Decisions like this should be done with data and hard numbers.

I know. That is why I'm asking you guys. =-)

Your post is helpful. Thanks!

Did you ever gather the data and hard numbers mentioned to properly calculate this?

Yes. I still have some questions though.

The insurance and taxes are rolled into the monthly payment. Is there a reason I would need to break them out? For my calculation, I did not. However, it's easy enough to change the way I calculated.

My house is a 3BR 2 BA walking distance (I mean steps) from the train station.

I do not know what to do with these rents. I am including apts because I have not yet found rents for the exact same type of house as mine, and I think I could compete with them based on space. Some folks want a yard.

The homes I list below are newer than mine, so I am assuming my rent would be lower that the new homes and higher than the apartments:

APTS
$1500 for 1BR "luxury" apartment at a train station
$1775 for 2BR at same place

HOUSE
$2195 4BR far from train
$2499 3 BR new town home far from train
$2700 3 BR 3 BA not close to train


Deferred maintenance is not a huge concern. We're taking care of some issues--which will cost some $$--and I'll have to get the final prices on the maintenance before I can do a true calculation.

One factor I had not considered before is that rents could go up due to a lot of investment in the area. My area is a hidden secret with very good home prices and good proximity to public transportation.

I'm planning way ahead, I know, yet I'd like to see if I can find a distressed property to move into while renting out my current house. A number of foreclosures have been sold around me. So far, new owners have been sprucing them up, so I think the rents here will go up over time even in our "old" homes.

I'm in the research phase now. Since this will be my first property, I am trying to learn all that I do not know.

Btw, I ordered via the library that book you recommended to me. I eagerly await it!

[arebelspy]

Yes, taxes and insurance are an expense.

Debt repayment is separate. 

Break out the Principal, Interest, Taxes and Insurance.  Should be easy to find on your mortgage statement.

[oldtoyota]

Yes, taxes and insurance are an expense.

Debt repayment is separate. 

Break out the Principal, Interest, Taxes and Insurance.  Should be easy to find on your mortgage statement.

Okay. Thank you. I did it wrong then, so I'll go back and recalculate.

[oldtoyota]

Yes, taxes and insurance are an expense.

Debt repayment is separate. 

Break out the Principal, Interest, Taxes and Insurance.  Should be easy to find on your mortgage statement.

ANNUAL
Prop taxes $3,383.71
Interest $6483.52
Insurance: looking for this #
ANNUAL TOTAL: $9867.23
Divided by 12: $822.27

Prop taxes/Interest: $822.27
Principal: $702.15
Insurance: looking for this because it's not charged monthly or on my bill.

I am not understanding why I would split out the numbers just to come up with the $1500 or so I pay to the lender? I presume it has to do with some items being counted as expenses while the debt repayment is considered separately??

[arebelspy]

I presume it has to do with some items being counted as expenses while the debt repayment is considered separately??

Yes.  If you bought with cash, you'd still have taxes and insurance.  You wouldn't have debt repayment.

Everything is calculated with your gross revenue, vacancies, and expenses.  Then you take out debt repayment, if it exists.  So the principal and interest is separate from the other expenses.

[oldtoyota]

I presume it has to do with some items being counted as expenses while the debt repayment is considered separately??

Yes.  If you bought with cash, you'd still have taxes and insurance.  You wouldn't have debt repayment.

Everything is calculated with your gross revenue, vacancies, and expenses.  Then you take out debt repayment, if it exists.  So the principal and interest is separate from the other expenses.

Thank you. Based on what I'm seeing, it looks like now is not the right time to rent out. I might be able to do it if rents go up due to all the "luxury" development around me. Also, I am going to track down my neighbor to make sure my assessment of projected rent is in line with what he is actually charging.