Should I buy a house and rent out my townhome?

[TheAnonOne]

Hey guys, I am looking for some math behind my numbers to see what options are available.

I currently own a townhouse, and I owe 67k against it. I am a bit lost on what exactly is the best course of action based on mathematics.

Costs of the townhome-
$67,000 mortgage (15 year, 3.25% payment $650)
$225 monthly association dues.
$300ish a month in bills<- presumably the tenant would cover these

What I could get for it....
SELL: $145,000 -> $160,000 , so I could walk away with around 70-90k depending on what I get, and what the sale costs...
RENT: $1200 ->$1300 per month.


I could buy another house for myself to live in but it would cost anywhere from $230,000 to $275,000 for a single family. I don't mind continuing to occupy the townhome but in EITHER case it requires about $8,000 in repairs.

I am a bit torn on my options. My guess is that I could net ABOUT $1,000 a month from rent (minus any maint so maybe average 800?). The $1000 then needs to pay the $650 mortgage, so the cash flow would be around $350. Though, most of the payment is principal.

I don't know if its worth it to take that on with the costs of another (more expensive) house.

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I suppose the third option would be selling it and buying another house, but this option would be more about lifestyle than money, I can't see a reason why buying $100k more house would help my FIRE plans.... UNLESS losing the $200 association dues helped the picture that much... but that cost will be replaced by having to mow my own lawn, replace my own roof/siding ectectect


Thoughts? and, thanks for the input!

[ketchup]

Rule of thumb long-term is generally 50% of gross rent going to non-mortgage expenses (insurance, taxes, vacancy, repairs, upgrades, renovations, etc.).  If your gross rent would be $1200-1300, that leaves $600-650 to cover the mortgage.

So that would leave you roughly cashflow-neutral, but you're on a 15 year note so you'd be paying it off faster than the typical 30-year.  Non-liquid return against money tied up in the house would be (pretending the payment is $600 principal):

$7200/yr / ( (145k - 67k) + 8k in immediate repairs)

$7.2k / $86k = 8% return

Once you've paid it off, you'd cashflow about that $600/mo.  $7200/yr cashflow on an asset worth about $145,000, which is a 5% return.

So you'd be about cash-flow neutral with an 8% "return" paying down the loan, and then wind up with a 5% cash return after paying it off.

An OK return, but nothing worth buying another house for yourself over.  If you had a different reason to move, and could stand the lack of liquidity and work of managing the property yourself (and have a plan of what to do with that end of things when you're not available) and want to diversify your investment portfolio into real estate, it could be a reasonable investment.

My two cents, anyway.

Also plenty of HOA's have rules about renting out your property so you'd want to make sure what you're doing is kosher.

[TheAnonOne]

Rule of thumb long-term is generally 50% of gross rent going to non-mortgage expenses (insurance, taxes, vacancy, repairs, upgrades, renovations, etc.).  If your gross rent would be $1200-1300, that leaves $600-650 to cover the mortgage.

So that would leave you roughly cashflow-neutral, but you're on a 15 year note so you'd be paying it off faster than the typical 30-year.  Non-liquid return against money tied up in the house would be (pretending the payment is $600 principal):

$7200/yr / ( (145k - 67k) + 8k in immediate repairs)

$7.2k / $86k = 8% return

Once you've paid it off, you'd cashflow about that $600/mo.  $7200/yr cashflow on an asset worth about $145,000, which is a 5% return.

So you'd be about cash-flow neutral with an 8% "return" paying down the loan, and then wind up with a 5% cash return after paying it off.

An OK return, but nothing worth buying another house for yourself over.  If you had a different reason to move, and could stand the lack of liquidity and work of managing the property yourself (and have a plan of what to do with that end of things when you're not available) and want to diversify your investment portfolio into real estate, it could be a reasonable investment.

My two cents, anyway.

Also plenty of HOA's have rules about renting out your property so you'd want to make sure what you're doing is kosher.

The HOA allows rentals, so I am good on that front.

Yea, the kicker is that it's not a half bad return, but it does force me to move somewhere else, which somewhat shoots this in the foot. The only thing this would do is build huge equity, being that I would be making two mortgage payments.

Would be interested in hearing from a few more people to see other points of view!

[ketchup]

Rule of thumb long-term is generally 50% of gross rent going to non-mortgage expenses (insurance, taxes, vacancy, repairs, upgrades, renovations, etc.). 

Does that rule of thumb really apply to a townhome?  I was under the impression that the 50% rule was for evaluating an apartment complex / multifamily.
In your experience, are your rentals costing you 50% of your gross revenues?

The number originally came from single-family houses.  I've often heard 60% for multifamily.

And the numbers are over the long term.  Includes shelling out for big ticket items like a new roof, HVAC, etc. as everything ages.  Here's one analysis someone did on BiggerPockets.



$257/month over the long term just to maintain everything listed (numbers will of course vary).  Not included: insurance, taxes, vacancy, evictions, management (do you want to fix that broken toilet at 3am on Christmas Eve?).

Over one given year (or five) you might be at 20% expenses or 80%.

Underestimating expenses is often the downfall of newbie investors.

I'm not saying the 50% "rule" is set in stone; obviously one needs to figure out their own numbers, but to ignore it completely or hand-wave it away would be unwise.  Also, the cheaper the house, in general, the higher proportion of gross rent is going to expenses.  50% of a $700/month house doesn't give you nearly as much to work with as 50% of a $1500/mo house.

I only have one rental, but the 50% rule has proven pretty dead-on for me (~4.5 years owned so far), not including paying myself for management.  If I were paying for that, it'd be more like 60%.  It is a cheaper rental (the aforementioned $700/mo house).

[ketchup]

That is a very informative table.  Do you have the numbers on the rent they charge to compare against the maintenance expenses or perhaps the cost of the property (the image URL didn't give me much info on where I could find the supporting data)?

I have one SFR rental myself as well.  $3400/month rent new construction completed last year and I am curious about how this will play out for me in the future.  I'm only currently setting aside 10% of rent revenue for maintenance & vacancy (with the idea that I would increase that by 1% every 2-3 years). If $257 is a reasonable averaged out over 20 years maintenance cost than maybe I'll be okay - probably should increase that number by about 20% for my property as some items will be more expensive but others are about the same price.

It wasn't about a specific property, just a general case based on what the particular investor has experienced in his market with his properties (Class B property in Ohio).

$257/mo is of course not set in stone.  You'll want to adjust for your area, the size and features of the house, etc.  If your property commands $3400/mo in rent it's probably pricier to maintain than a Class B property in Ohio.  I'd make your own similar table and figure out real pricing and timing for your market so you can properly anticipate and plan for everything.

[Megma]

Since it's a townhouse, you'll probably have lower maintenance costs than the 50% rule project because you're not paying for some big ticket items like the roof, siding, driveway, as these are included with your dues. I don't see that anyone mentioned this so I'm bringing it up.

If you want to have a rental and want to move it doesn't look horrible to me, but it's also not amazing. But if it's only a financial transaction (ie no other reason to move, it seems like you don't want to move to me) it's probably just better to stay put and if you want a rental, look for something that makes an amazing rental.

I'm actually planning a very similar action with almost the same numbers as you. I live in a TH that I bought ~2 years ago with the idea that it can be a rental in few years when I want to move to a SFH (I felt a SFH was out of budget when I bought but I wanted one). Its in an area with lots of rentals - my total PITI+HOA is around 900/mo and rents right now are ~1200 for houses like mine, I plan to stay in it 1-2 more years, then will rent it. Hopefully rents will rise a little more but I will probably be looking at a break even situation for a few years probably. Unfortunately, I bought it mostly bc I wanted to live there and did not consider the rent ratio as much as I should have but I have since learned more of what to look for on the forums.