Author Topic: Mortgage  (Read 1840 times)

chicklets123

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Mortgage
« on: February 06, 2020, 09:34:13 AM »
We have a rental property that has $340k on it. The mortgage rate is 2.3%. The payable allowance amount it $68k a year.

Monthly:
Rent is $2000 (could be $2200)
Insurance -$7
Maintenance fee -$478
Mortgage -$1608
Property tax -$140

Net -$233/month?

Should I be paying down the mortgage or keeping the money for spare $. Or towards another property? have all our other $ in equities.

Thank you


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« Last Edit: February 06, 2020, 12:06:48 PM by chicklets123 »

thd7t

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Re: Mortgage
« Reply #1 on: February 06, 2020, 10:09:43 AM »
I may be misreading this, but are you losing around a round $650/month without vacancies?  If so, I think you should consider option 3: get rid of this stinker!  However, you should not prepay a 2.3% mortgage.

nereo

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Re: Mortgage
« Reply #2 on: February 06, 2020, 10:12:13 AM »
Agree with thd7t - unless your numbers are off you are massively losing the cash-flow battle.
Is there a particular reason why you want to keep this property?

chicklets123

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« Reply #3 on: February 06, 2020, 11:59:17 AM »
I just assumed it is best to buy and hold.

I am assuming that even though I am in the hole each month, I am actually ahead because there is still $9k a year towards the mortgage when rented for $2000/month...

I’m assuming rental cost goes up which it has. I think we should be charging $2200/month vs $2000/ month. But without vacancies I would be out $ yes mainly due to the maintenance fee... but wouldn’t that be the same for any property?

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« Last Edit: February 06, 2020, 12:31:28 PM by chicklets123 »

SailingOnASmallSailboat

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Re: Mortgage
« Reply #4 on: February 06, 2020, 12:40:10 PM »
(not a landlord, not going to be a landlord). Quick google says maintenance fees run between 10-12% of rent, plus expenses. Yours are closer to 25% of the rent. Seems insane but maybe that's the going rate where you are. Have you checked around? Do you live close enough that you could take over the management yourself?

I don't understand the comment that you've got $9000 a year going to the mortgage. Your mortgage is $1600 a month. Times 12 that's $19000. Do you mean you're putting $9000 into the principal each year?

The property is costing you money each month, even rented out. I'm with some others in asking why you're holding onto it.

nereo

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Re: Mortgage
« Reply #5 on: February 06, 2020, 12:47:15 PM »
I just assumed it is best to buy and hold.

I am assuming that even though I am in the hole each month, I am actually ahead because there is still $9k a year towards the mortgage when rented for $2000/month...

I’m assuming rental cost goes up which it has. I think we should be charging $2200/month vs $2000/ month. But without vacancies I would be out $ yes mainly due to the maintenance fee... but wouldn’t that be the same for any property?

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When you say “buy and hold” in the context of real estate what you are talking about is appreciation. There are some circumstances when one expects a property to appreciate faster than the typical ~3%. Is that the case here? And if so what makes you think so?

Generally speaking, you don’t want to hold on to a property with a negative cash flow - and certainly not one with a -$600/mo cash flow. That is a sign that this is not a good rental property. Put another way,  the property would have to increase in value by something like $50k *above inflation* in the next five years just for you to break even with no major repairs and only normal vacancies. If inflation going forward is 2.5% that means $85k+, or a value of $425k. Is that a reasonable assumption under your circumstances? Because that is what is likely necessary just to break even here

There are of course reasons to hold onto a  property. One common one is if it’sa specific home you plan on moving (back) into in several years or if your market Is much different from the norm (eg a new Uni veracity is being built nearby).

Hope that helps.


chicklets123

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Mortgage
« Reply #6 on: February 06, 2020, 04:57:29 PM »
Can you guys confirm how you calculate $-600 cash flow? Is that when the property is paid off?



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« Last Edit: February 06, 2020, 05:01:14 PM by chicklets123 »

chicklets123

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Re: Mortgage
« Reply #7 on: February 06, 2020, 04:58:56 PM »
The property was purchased last year for $430k. 2k in Reno’s. The same units are selling for $500-$520k this year. Don’t know how much higher it can go though.


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nereo

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Re: Mortgage
« Reply #8 on: February 06, 2020, 05:27:40 PM »
Can you guys confirm how you calculate $-600 cash flow? Is that when the property is paid off?
No - if the house was paid off you would be cash-flow positive (though even then it still might make sense to sell).

i'm very confused by the numbers you are giving and how you are arriving at the numbers you are.
Quote
Monthly:
Rent is $2000 (could be $2200)
Insurance -$7
Maintenance fee -$478
Mortgage -$1608
Property tax -$140

Not Listed: Vacancies
Extremely Questionable: Insurance @ $84/yr ($7/mo) on a >$430k home.  Average insurance on a home of this value is $1,300-1,500/yr

Rent - Expenses listed = -$233
Including Vacancies (1/12) = -$399
Including Vacancies (2/12) = -$566


Your mortgage of $430k @ 2.3% is ~$1608 (I get $1654 - or alternatively a loan amount of $419k for a $1608 payment).  But that implies no PMI and an insanely low 30y note.  If you are paying PMI that gets added to the expenses; if not your purchase price was likely much higher than stated, and there's opportunity cost.

Looking at it another way, most landlords want their monthly rent to be at least 1% of the purchase price, if not higher (the 'gold standard' is to hold properties that are 2%, though those are often very hard to find in many markets).  With a $2,000/mo rent you are at best earning 0.5%, which is abysmal.

Regardless, you are deeply cash-flow negative.  As I said earlier there are a few reasons when this can still make sense, but you haven't posted enough information to explain this.  on the surface, it seems like this is not a good property to hold on to.

Does that make sense?  Are there numbers here that I've misunderstood?  What are your annual insurance costs, PMI, and vacancies?

chicklets123

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Mortgage
« Reply #9 on: February 06, 2020, 07:46:08 PM »
Mortgage is $340k. We paid the minimum for down payment on the $430k property. 24 term.

Insurance is $7/month as it is a one bedroom condo unit and I have umbrella insurance.
There are no other expenses other than the maintenance fees $478/month and property tax $140/month.

Rent is $2000-$2200.

Do not expect to have any vacancies based on the location.

What is PMI?

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« Last Edit: February 06, 2020, 07:52:15 PM by chicklets123 »

waltworks

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Re: Mortgage
« Reply #10 on: February 06, 2020, 09:30:01 PM »
Jesus Christ sell the place. You made some money on appreciation by being lucky as hell. Now GTFO.

-W

thd7t

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Re: Mortgage
« Reply #11 on: February 07, 2020, 08:38:06 AM »
Are the maintenance fees from the condo association?  If so, you need to figure in maintenance when you change renters or the renter needs a repair that's not part of the association fees.  Additionally, you'll always have vacancy between renters, because you need to paint and clean and take care of other upgrades.  It's just part of being a landlord.

Right now, you have around $190k of equity in this place and you've spent around $120-140k on it.  Every month, you're cutting into that, unless you're hoping it appreciates faster than you're spending to keep it, but you have to take a serious look to determine if that is realistic.  So far, the people who have responded to your post (me included) don't think it is, but maybe some people who deal with more speculative real estate will chime in.

Jon Bon

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Re: Mortgage
« Reply #12 on: February 07, 2020, 11:27:22 AM »
So your plan is to pour money into a failing business for 30 years?

RE is a business, and when it costs more money then it generates you have a major problem.

You got lucky on appreciation it sounds like. Sell this place yesterday while you still can. Business need to be cash flow positive to be viable, your RE business is neither CF positive nor viable.

nereo

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Re: Mortgage
« Reply #13 on: February 07, 2020, 11:52:27 AM »
Mortgage is $340k. We paid the minimum for down payment on the $430k property. 24 term.

Insurance is $7/month as it is a one bedroom condo unit and I have umbrella insurance.
There are no other expenses other than the maintenance fees $478/month and property tax $140/month.

Rent is $2000-$2200.

Do not expect to have any vacancies based on the location.

What is PMI?

Everything you've written so far suggests you are viewing this property through rose-colored glasses and not as a business. I also think you might want to spend some more time learning about real-estate as your assumptions and questions reveal some gaps - gaps that are extermely likely to come bite you in the ass later on.

PMI - Private Mortgage Insurance; typically required on loans with less than 20% down.

re: vacancies.  I have never encountered a rental which had zero vacancies except in one rare situation where it was a 5 year lease upon which the owner re-occupied.  You will need to paint, make repairs and refurbish your unit over time.  Not only is it unusual for one lease to end on the 31st and the new renter to come in on the 1st, it's generally a bad idea as the landlord not to go through your unit after each renter and make minor repairs & paint before little problems become big ones, and before your unit starts fetching below-market rates because you've let it get dingy and dated.
Then of course there's the curse of the bad tenant. Every landlord hopes their screening will prevent it, but sometimes good people lose their jobs and cant pay, and eviction is hard and costly. Planning on zero vacancies over multiple years is frankly not going to happen.

re: insurance.  If you hold an umbrella insurance policy because of your rental this falls under normal expenses.

re: mortgage - what is the PI-TI (Principle & Interest, Taxes and Insurance) for each of your monthly payments?  What was your original amortization period (the length of your loan) and how many payments do you have left?  Do you pay additional PMI.

re: repairs.  You mention maintence fees of $478/mo, which suggests you are going through a property manager or condo association.  What is your long-term liability beyond these payments?  Unless your situation is bizarrely unique you will eventually need to replace items like the roof, windows, water heater as well as upkeep like painting,  refurbishing the kitchen, replacing the flooring, etc.  These may be very infrequent repairs but there are enough of them that you'll have to do one or another every few years.  Will you have to pay for these expenses?  (typically yes).

In general, seasoned landlords count on 50% of their rental price going towards upkeep, vacancies, repairs, insurance and the like. 

Papa bear

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Re: Mortgage
« Reply #14 on: February 07, 2020, 02:11:23 PM »
Jesus Christ sell the place. You made some money on appreciation by being lucky as hell. Now GTFO.

-W
As usual, +1


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Papa bear

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Re: Mortgage
« Reply #15 on: February 07, 2020, 02:12:48 PM »
So your plan is to pour money into a failing business for 30 years?

RE is a business, and when it costs more money then it generates you have a major problem.

You got lucky on appreciation it sounds like. Sell this place yesterday while you still can. Business need to be cash flow positive to be viable, your RE business is neither CF positive nor viable.
And this.

You don’t have a good rental. Congrats on making some money. Get out while you’re ahead and you’re still beating the house.  Don’t let this one ride.  Speculating is a fools game. 


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chicklets123

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Re: Mortgage
« Reply #16 on: February 07, 2020, 02:38:15 PM »
If I charge $2300-$2500 would that become a positive cash flow?


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chicklets123

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Re: Mortgage
« Reply #17 on: February 07, 2020, 02:40:19 PM »

Isn’t the benefit that someone else is paying down the mortgage or most of it?


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Telecaster

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Re: Mortgage
« Reply #18 on: February 07, 2020, 04:06:58 PM »

Isn’t the benefit that someone else is paying down the mortgage or most of it?


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What if this was a car, and someone else was making most of the car payment, but you had to pay all the taxes, insurance and maintenance, AND you didn't get to use the car? 

chicklets123

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Mortgage
« Reply #19 on: February 07, 2020, 04:26:36 PM »
But isn’t a car and property different in the sense that at the end I have a property which can continue to receive rental income which had been paid down by renters or assuming it will increase in value vs a car which is a depreciating asset?



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Papa bear

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Re: Mortgage
« Reply #20 on: February 07, 2020, 04:41:28 PM »

Isn’t the benefit that someone else is paying down the mortgage or most of it?


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No. The point of a rental is to make money.  You have a ton of capital tied up in the place to pay down some principal.  You’d probably be better off in a CD and then be without risk and headaches.


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nereo

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Re: Mortgage
« Reply #21 on: February 08, 2020, 06:10:57 AM »
But isn’t a car and property different in the sense that at the end I have a property which can continue to receive rental income which had been paid down by renters or assuming it will increase in value vs a car which is a depreciating asset?

Both are depreciating assets.  As your house gets older, you will have expensive repair bills.  In order to continue charging competetive rates you will need to do a renovation every decade or so. Problems will crop up.  This is why on average landlords count on 50% of their rent going towards expenses.

Regardless, a good rental property will cash-flow right from the start.

To echo @Papa bear - you could sell your property now and invest it and turn a profit every month.  Your current strategy is to keep spending money month-after-month in the hopes that one day it will turn a profit, and hope that you will avoid all the 'big ticket items' that every landlord deals with a couple tiems each decade.  By then the invested money will be way ahead.

**note:  it's easy to get personal with your properties.  Saying "this is a bad rental property" does not mean it's not a nice place to live.  But rentals are not primary residences, and some are downright poor investments. 

chicklets123

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Mortgage
« Reply #22 on: February 08, 2020, 07:03:38 AM »
Good points and this is a great eye opener to consider. Why do they say to buy and hold? And assume properties will always increase over time?

What is a positive cash flow property from the start? They are hard to find in my area. Do you have an example?

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Papa bear

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Re: Mortgage
« Reply #23 on: February 08, 2020, 08:05:57 AM »
Good points and this is a great eye opener to consider. Why do they say to buy and hold? And assume properties will always increase over time?

What is a positive cash flow property from the start? They are hard to find in my area. Do you have an example?

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“They” say to buy and hold because “they” pander to the masses.  For most people, a house is a forced savings account.  “They” say that houses increase over time because “they” have a vested interest in you buying a house.  Real estate typically does go up over time. But it tracks inflation, or more accurately, wage inflation in your local area.  There are pieces of real estate in Europe with records where this holds true for more than 500 years! 

You can calculate your cash flow with the 50% rule. This is basic, back of napkin type stuff.  Many of us in real estate use our own calculators or factors when evaluating a property.  I use a first year cash on cash return % based on expected up front cash/repairs/remodel, PITI, and an 8.3% management fee. Then if the property has 15% cash on cash, I look at it.  Most of mine have been in the 17-22% range. 

For the 50% rule.
1) calculate your principal and interest payments if you were financing 100% of the property. 
2) take 50% of your rent and that is used for expenses, including taxes, insurance, management, repairs, etc. 
3) if the other 50% of rent is greater than your principal and interest payments at 100% financing, you should have a cash flowing property. 

Here’s an example. PI payments are 1200. Rent is around 2500.  And knowing the area, this house is under rented by about 400.


Check out this home at Realtor.com
$250,000
7 beds · 3 baths
17800 Franklin Ave, Lakewood
https://b1iw.app.link/2DB3LD5IU3




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chicklets123

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Re: Mortgage
« Reply #24 on: February 08, 2020, 02:44:13 PM »
This is really helpful and insightful! Thank you!


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chicklets123

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« Reply #25 on: February 24, 2020, 05:03:14 AM »
Would it have been a better option to use the equity on your primary residence than to use your own cash for the 20% minimums?


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« Last Edit: February 24, 2020, 08:13:02 AM by chicklets123 »

srad

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Re: Mortgage
« Reply #26 on: February 24, 2020, 09:33:11 AM »
s it is a one bedroom condo unit

You bought a 1 bedroom Condo unit for 430K in Reno that you are looking 600 a month on?  In the real estate game this is what we call speculation.   Congrats, it worked for you, your up over 100k.  Now you take your chips off the table. If you are a doctor making 400k a year, sweet, go on and do it again...  If you are like the rest of us, do some research into what make a good rental (hint not losing money each month) and go out and buy one or three of them.