The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: zoochadookdook on July 29, 2019, 06:41:50 AM
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Hey all
I've been interested in getting into real estate for a while. Recently I got a job accross the country and will be relocating for at least a year. I will be traveling back to my current area a few times a year for friends and family. Ideally I would be moving backs some day as the job should allow me to fully remote at some point.
Here's the numbers on the property:
Purchase price: $140,000
mortgage" 115,000@4.25% 30 year
taxes/insurance" $4000 (I'm estimating based on a raise if I rented it)
Est Value: $190,000
Rental amount: $1900 a month
I'm debating between selling and renting it first off. If i rent it the appeal would be I retain somewhere to live if/when I decide to move back to the area at some point/I think the value still has some overhead to grow into (new condos being developed). I have friends and family in the area and they could at least check in on it; but I was considering hiring a management company to deal with vetting tenants/handling legalities and such.
The cap rate looks good on most calculators I've run even with vacancy factors and maintenance and such. I'm posting here to ask if anyone has advice on how to successfully go about this/tips and tricks/advice in general?
Thanks
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mortgage" 115,000@4.25% 30 year
taxes/insurance" $4000 (I'm estimating based on a raise if I rented it)
Est Value: $190,000
Rental amount: $1900 a month
It's not a fantastic rental, but it's not bad, either. Your mortgage payment (with the estimated taxes/insurance) are ~$900. Figuring 50% of your rental income will go towards operating expenses/vacancy you're still good there as long as you can get $1800 or more for it. How big is the pool or renters in your area?
One thing to consider is that if you sell and have lived there in 2/5 most recent years you can avoid capital gains taxes on the ~$75k appreciated.
THe other, less tangible thing to consider is whether you *want* to be a landlord. It takes work and/or money. You could subcontract it to a property manager and still probably make it cashflow.
If it were me I'd probably keep it - though I don't mind the landlord aspect (finding/vetting tenants, replacing/repairing things with little warning, contracting out the bigger jobs when necessary).
ETA: corrected amount property has appreciated (math...)
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Based on information from your other thread (rent prices of smaller 3Br), I think your rental estimate may be high.
Step one to properly evaluate this: Talk to some property managers in the area and get rental comps.
The free capital gains isn't nothing either, which you lose if you rent it out (it starts becoming prorated, then disappearing completely). That's free money that could be into a new investment with better returns.
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Based on information from your other thread (rent prices of smaller 3Br), I think your rental estimate may be high.
Step one to properly evaluate this: Talk to some property managers in the area and get rental comps.
The free capital gains isn't nothing either, which you lose if you rent it out (it starts becoming prorated, then disappearing completely). That's free money that could be into a new investment with better returns.
These are numbers based off calling a few companies this morning. I mean they could be off but it's what I have currently.
True, I'm giving up 70-80k cash option. It's not so easy to just say there's a better investment option. My options are: stick it in the market and expect the 6-7% 30 year average (VTSAX) or....?
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mortgage" 115,000@4.25% 30 year
taxes/insurance" $4000 (I'm estimating based on a raise if I rented it)
Est Value: $190,000
Rental amount: $1900 a month
It's not a fantastic rental, but it's not bad, either. Your mortgage payment (with the estimated taxes/insurance) are ~$900. Figuring 50% of your rental income will go towards operating expenses/vacancy you're still good there as long as you can get $1800 or more for it. How big is the pool or renters in your area?
One thing to consider is that if you sell and have lived there in 2/5 most recent years you can avoid capital gains taxes on the ~$50k appreciated.
THe other, less tangible thing to consider is whether you *want* to be a landlord. It takes work and/or money. You could subcontract it to a property manager and still probably make it cashflow.
If it were me I'd probably keep it - though I don't mind the landlord aspect (finding/vetting tenants, replacing/repairing things with little warning, contracting out the bigger jobs when necessary).
I have owned it/lived in it for 4 so I guess an option would be rent for 1 and see how it does/if it does or doesn't pan out evaluate from there.
Rental pool is deep. Properties are in demand. The next city over has great schools but my house is close enough to offer school of choice there. Right by the fire dept, library, PD, parks etc.
I don't mind the work; I think that's part of the fun-running something and micromanaging the ups and downs. Shoot through my current business I've driven 6 hours on a 5 minute notice, been robbed a few times/just dealt with all kinds of stuff; and I still enjoy the challenge of creating money from direct effort.
That being said balancing the actual management from a distance may or may not be something I'm willing to do right away. I will have time on my hands and could do it. I'm just a bit unsure on how to handle the worst case scenarios that would arise (which I need to expect)
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Education.
Start reading and learning about how to be a landlord.
There's resources in a stickied post in the real estate section.
Most posters in your other thread voted sell (for obvious "cut ties" reasons), and this is a borderline hold or sell, not clear on its face which is better, but you seem to be more looking for opinions to back up what you've already decided. Given that, you should work on educating yourself so you don't get in over your head.
Good luck!
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One thing to consider is that if you sell and have lived there in 2/5 most recent years you can avoid capital gains taxes on the ~$75k appreciated.
+1
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Perhaps rules / equity in makes this different in your jurisdiction: will you have to pay higher taxes or get a new mortgage now that the property will be a rental? Make sure you have the correct costs for comparison.
And, read up on sunk cost fallacy. I think you're trying quite hard to justify this particular place as your first rental. Even if the math is a wash, if this isn't your ideal first rental (when you research more about landlording), perhaps it's better to sell and wait. There will always be another property!
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And, read up on sunk cost fallacy.
This is a great point. When evaluating the 'rent vs. sell' question, your original purchase price does not matter. What matters is what you could sell it for now (or in the near future), vs. what you could rent it for (and associated costs & taxes therein).
You conclusion should be the same if you bought the place years ago for $50k or if you paid $250k.
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To put another spin on the sunk cost fallacy, ask yourself the following question: If I had the $X I could cash out of the place today in my bank account (say, 60kish after selling costs), would I put that down as a down payment on this property?
In other words, not selling is the same as choosing to buy it, after accounting for all costs.
If you had 60k cash , would you be thinking: "I should put this as a down payment on this particular house* and become a long distance landlord"?
*Which is a fairly eh investment.
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If it's small enough you can let it drag you down in a bad time, then it might be the way you try this out.
I've known some people who intentionally buy a lesser first home for the express purpose of making it a rental. Was that your original intention, or did you buy it originally thinking it was a great house?
Some questions:
1. Could you buy a rental if you decided to sell this house, or is this your way in?
2. If you could buy another place, would you keep this one? If no, then get a different one. If no, but you can't get another place, then maybe this is a wealth building opportunity to get you to the next level.
3. Doesn't this list look better with 3 questions?
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If it's small enough you can let it drag you down in a bad time, then it might be the way you try this out.
I've known some people who intentionally buy a lesser first home for the express purpose of making it a rental. Was that your original intention, or did you buy it originally thinking it was a great house?
Some questions:
1. Could you buy a rental if you decided to sell this house, or is this your way in?
2. If you could buy another place, would you keep this one? If no, then get a different one. If no, but you can't get another place, then maybe this is a wealth building opportunity to get you to the next level.
3. Doesn't this list look better with 3 questions?
Originally purchased as it was larger and such for the price and was considered a good deal. It was always another option in my back pocket to rent or sell.
I could buy another place without selling this.
I would keep this one depending on my future timeline (It's central to my family and community here) or as a long term rental.
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If it's small enough you can let it drag you down in a bad time, then it might be the way you try this out.
I've known some people who intentionally buy a lesser first home for the express purpose of making it a rental. Was that your original intention, or did you buy it originally thinking it was a great house?
Some questions:
1. Could you buy a rental if you decided to sell this house, or is this your way in?
2. If you could buy another place, would you keep this one? If no, then get a different one. If no, but you can't get another place, then maybe this is a wealth building opportunity to get you to the next level.
3. Doesn't this list look better with 3 questions?
Originally purchased as it was larger and such for the price and was considered a good deal. It was always another option in my back pocket to rent or sell.
I could buy another place without selling this.
I would keep this one depending on my future timeline (It's central to my family and community here) or as a long term rental.
Cool. This could be the place for you, as a rental. Will you be an active landlord?
I prefer having a management company because I don't want to do things like background/credit checks, 6-month inspections, negotiating with a tenant who wants to offer a Kirby vacuum cleaner as his security deposit (true story; he was a Kirby salesman).
On the other side, I've had some awful management here and there. One had too many rentals, and it was a big surprise to them that nothing was paid on a particular month. They had no idea.
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FYI: Some states require that you have a property management company if you live a certain distance away or out of state. If you pick a crappy management company your house could get destroyed and you'll be nickel and dimed with maintenance charges. I'm a tenant with a crappy management company. They've let leaks go unrepaired for weeks. And they charge the owner tons (purposefully create multiple trip visits) just to do crappy band-aid fixes. I wouldn't rent it if you don't have a trustworthy property manager. You won't know the problems until it's too late.