Author Topic: Rentals for idiots: Please help check our math!  (Read 3470 times)

expectopatronum

  • Stubble
  • **
  • Posts: 225
  • Location: Texas
Rentals for idiots: Please help check our math!
« on: June 04, 2015, 10:37:50 PM »
Husband and I are considering renting out our current house and moving 20mi closer to his workplace this summer. I will commute in (20mi) to town 2x per week for classes that aren't available at the local campus, and I will spend 2 days per week out near the campus at his work. He'll be able to bike in daily. This will take our total miles driven weekly down from 250+mi, and we'll cut out a lot of the time wasted sitting in traffic, which we both hate.

Here are the numbers. We know nothing about taxes or "landlording" and have been googling/reading MMM a bit to get an idea of how it works. Here are the basic figures:

Figuring the post-tax income:
+$36,000 rental income (annual)
-$9,600 interest/property tax
-$12,000 depreciation
Total: $14.4K taxable income --> assume we take home 2/3 of that, for $9.5K. (2015 taxes: married filing jointly $140K, 2016 taxes: married filing jointly $110K)

Therefore, we take home $9.5K + $21.6K = $31.1K....did I do that correctly?

Cash flow:
+$2591/mo rental income (post tax)
-$1300/mo rental expense (our house or apartment)
- $2117/mo mortgage + homeowner's insurance + property tax
-$125/mo HOA fees
-$70/mo storage unit

Total paid by us per month for housing (AND paying the mortgage on the house....which we get to keep): $1021

Considering our current situation is $2242...that's a big improvement, right? I didn't even factor in the savings from cutting out like 150ish miles of commute @$2.50/gal and depreciation.

Is it worth moving? Did we do maths correctly? We want to cut down on the commute, cut back on our living costs, and we would potentially stay in this situation for the next few years (renting out the house - the exact location of where we live could vary).

Thanks real estate gurus for your help.

anbeha5754

  • 5 O'Clock Shadow
  • *
  • Posts: 5
  • Age: 35
Re: Rentals for idiots: Please help check our math!
« Reply #1 on: June 05, 2015, 02:47:56 AM »
If the house rents for 3,000, you're going to have to expect some expenses and possible vacancies. At best you can account 5% for vacancy and 5% for repairs. That's 1800 for repairs and 1800 for vacancies. Your rental income goes into the schedule E portion of your tax return.

Luckily you'll be able to deduct: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, utilities, depreciation - from the total rent received.

Once you calculate your net figure it goes on line 17 of your tax return and is added to your taxable income, and you're taxed on the total amount.

Do you intend on paying the $125 HOA fee or add that to the rent? Also, because you live in an HOA you have to make sure you're allowed to rent your house. I believe your cash flow breakdown may be off because of repairs and vacancies. A house such as yours sounds expensive, so if one or two things come up, its going to cost a pretty penny to repair it. In the end, I still think you will end up ahead with your plan, the numbers may come out a little different though.

Also, depending on the state you're in, you will have to hold the security deposit in a non interest bearing account. no legal advice given.

and high-five for deciding to bike to work.

math-ya

  • Stubble
  • **
  • Posts: 106
  • Location: USA
Re: Rentals for idiots: Please help check our math!
« Reply #2 on: June 05, 2015, 04:32:29 AM »
Are you considering appreciation into your numbers? It's hard to tell exactly what will happen- but if things look positive, and you bought in a down market- This could work and give you more options in the future. There will be some expenses but if you find a great tenant (you only need 1) it should be easy

expectopatronum

  • Stubble
  • **
  • Posts: 225
  • Location: Texas
Re: Rentals for idiots: Please help check our math!
« Reply #3 on: June 05, 2015, 08:00:22 AM »
If the house rents for 3,000, you're going to have to expect some expenses and possible vacancies. At best you can account 5% for vacancy and 5% for repairs. That's 1800 for repairs and 1800 for vacancies. Your rental income goes into the schedule E portion of your tax return.

Luckily you'll be able to deduct: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, utilities, depreciation - from the total rent received.

Once you calculate your net figure it goes on line 17 of your tax return and is added to your taxable income, and you're taxed on the total amount.

Do you intend on paying the $125 HOA fee or add that to the rent? Also, because you live in an HOA you have to make sure you're allowed to rent your house. I believe your cash flow breakdown may be off because of repairs and vacancies. A house such as yours sounds expensive, so if one or two things come up, its going to cost a pretty penny to repair it. In the end, I still think you will end up ahead with your plan, the numbers may come out a little different though.

Also, depending on the state you're in, you will have to hold the security deposit in a non interest bearing account. no legal advice given.

and high-five for deciding to bike to work.

I think we would cover the $125 HOA fee. $3000 was kind of a minimum guess. Zillow prices the rent zestimate at $3100. We live in a really hot (as in popular. but also just hot.) area of town near some of the best parks, restaurants, and <10min away to many of the city's main areas. We checked with the neighbors, and theirs went for $3K and got snatched up immediately (this was in January). Another house here is listed for $3500, but has been listed for two months and I think their price is too high...so I think somewhere between there is the sweet spot. Summertime will be an even better time to list it.

As far as repairs, we're not really sure how to estimate those, though I'll trust the 5% figure for forecasting. Most of the reason for a house like ours being so expensive is because it's in a great location. It was built in 2008, has new appliances and the A/C was repaired last year, so maintenance costs haven't been much for us. Should we expect them to be approximately equal for our renters?

Are you considering appreciation into your numbers? It's hard to tell exactly what will happen- but if things look positive, and you bought in a down market- This could work and give you more options in the future. There will be some expenses but if you find a great tenant (you only need 1) it should be easy

We didn't account for it anywhere, but when we bought the house in a slightly down/flat market (about 10% lower than its peak 5 year price) for around $330K. That was three years ago, and it's now worth $450K.

As for a vacancy, one advantage we have starting out is that we wouldn't have to move out until it was let...I think. But you're right, if we have high turnover (like a tenant leaving every year) there's the potential for gaps. I think, though, priced correctly we should be able to maintain a tenant. Long-term the thinking is that we'll either sell when we know where we should move permanently (I'll be in school and don't know where yet, so that's why we aren't selling now), or move back in ourselves.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3433
Re: Rentals for idiots: Please help check our math!
« Reply #4 on: June 05, 2015, 11:43:45 AM »
If you think you'll move back in at some point, I'd rent it. If not, you need to look at whether selling it to take advantage of the capital gains waiver would make more sense.

But overall, just the moving closer to work and cutting back that commute makes it almost a no-brainer.

-W

Bob W

  • Magnum Stache
  • ******
  • Posts: 2947
  • Age: 61
  • Location: Missouri
  • Live on minimum wage, earn on maximum
Re: Rentals for idiots: Please help check our math!
« Reply #5 on: June 05, 2015, 12:01:16 PM »
Sounds like a plan --- If you are never moving back,  you might consider just selling it and investing the equity.   

You will be making lots of trips back and forth to that place and have headaches to deal with.

It is your call --- works either way, but since your goal was never to be a landlord,  consider a clean sale.   Will probably sell better before it is a rental. 

expectopatronum

  • Stubble
  • **
  • Posts: 225
  • Location: Texas
Re: Rentals for idiots: Please help check our math!
« Reply #6 on: June 05, 2015, 12:33:21 PM »
Yes, we would love to come back to the house when it makes more sense for us. Does making a house a rental for a year make it lose value? Like - renting it out, then moving back in a few years, eventually selling (we hope to transfer overseas someday)...?

We are scared of closing/selling costs for selling our current house and buying a new one, feeling it would really just "cancel out" the benefit of moving to a house out near his work because we may only be there for a year. We have a lot of uncertainty in the next few years because I've applied to graduate programs (to start in mid 2016). One program is quite far (we would split the difference and move to a suburb in between), one program is quite close to the current house. So - we don't quite know where we need to be a year from now.

I'm not very familiar with capital gains waiver - will have to look into that.

Thanks for everyone's input. Really appreciate it!

anbeha5754

  • 5 O'Clock Shadow
  • *
  • Posts: 5
  • Age: 35
Re: Rentals for idiots: Please help check our math!
« Reply #7 on: June 05, 2015, 05:04:30 PM »
Yes, we would love to come back to the house when it makes more sense for us. Does making a house a rental for a year make it lose value? Like - renting it out, then moving back in a few years, eventually selling (we hope to transfer overseas someday)...?

We are scared of closing/selling costs for selling our current house and buying a new one, feeling it would really just "cancel out" the benefit of moving to a house out near his work because we may only be there for a year. We have a lot of uncertainty in the next few years because I've applied to graduate programs (to start in mid 2016). One program is quite far (we would split the difference and move to a suburb in between), one program is quite close to the current house. So - we don't quite know where we need to be a year from now.

I'm not very familiar with capital gains waiver - will have to look into that.

Thanks for everyone's input. Really appreciate it!

My personal opinion based off the information I know about your house is that you should try and hold on to it forever. You bought a house that already had equity, and your estimates of an equity increase of 100k is great. Imagine the equity in 15-20 years from now, the appreciation combined with the mortgage being paid off by a renter will increase your net worth substantially.

I agree that you should be cautious selling your house given that you don't have a viable replacement. Your house sounds like its in a very desirable area and yields top level rent. Make sure the tenant you choose has been well screened. Renting out your house for a number of years will not negatively impact the value of your house as long as you repair all the wear and tear done by the tenants if you decide its in your best interest to sell the home.

If you decide to live overseas down the road, having the passive income from your house is a really good way to supplement the money you live off of.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3628
  • Age: 41
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Rentals for idiots: Please help check our math!
« Reply #8 on: June 06, 2015, 10:04:33 AM »
Yes, we would love to come back to the house when it makes more sense for us. Does making a house a rental for a year make it lose value? Like - renting it out, then moving back in a few years, eventually selling (we hope to transfer overseas someday)...?

We are scared of closing/selling costs for selling our current house and buying a new one, feeling it would really just "cancel out" the benefit of moving to a house out near his work because we may only be there for a year. We have a lot of uncertainty in the next few years because I've applied to graduate programs (to start in mid 2016). One program is quite far (we would split the difference and move to a suburb in between), one program is quite close to the current house. So - we don't quite know where we need to be a year from now.

I'm not very familiar with capital gains waiver - will have to look into that.

Thanks for everyone's input. Really appreciate it!
If you have lived in the house as your primary residence for 2 of the past 5 years, you can exclude $250,000 in capital gains on the sale ($500,000 for married filing joint). This means you can actually rent it out for up to 3 years and still get the exclusion.

As always, I like to direct people to the source for more a comprehensive discussion: http://www.irs.gov/publications/p523/ar02.html

waltworks

  • Magnum Stache
  • ******
  • Posts: 3433
Re: Rentals for idiots: Please help check our math!
« Reply #9 on: June 06, 2015, 02:37:55 PM »
Only sort of true. It's now (as of 2009) prorated by time spent living there vs. rented. So if you rent for 3 years, you lose most of that exemption.

-W

If you have lived in the house as your primary residence for 2 of the past 5 years, you can exclude $250,000 in capital gains on the sale ($500,000 for married filing joint). This means you can actually rent it out for up to 3 years and still get the exclusion.

As always, I like to direct people to the source for more a comprehensive discussion: http://www.irs.gov/publications/p523/ar02.html

expectopatronum

  • Stubble
  • **
  • Posts: 225
  • Location: Texas
Re: Rentals for idiots: Please help check our math!
« Reply #10 on: June 07, 2015, 02:04:50 AM »
Interesting. We were operating on the simplified 2/5 years assumption, will have to look into that more.

I hadn't even thought to make it a rental property while overseas, if we get the chance. That makes TOTAL sense. As long as the house is still pulling down what it is...yeah. The spike in the value is just nuts. I am betting at some point in the next few years...or decade...? that the supply will catch up, BUT it's very well located in a giant metro area.

We're working on, uh, emotionally letting go of the house. It's surprising how sentimentally attached we both are, even tho we know it makes good financial sense (and will save oodles of time and gas...benefits I think my husband underestimates right now). Also daunted by the idea of packing up all our stuff and moving. I read part of The Life Changing Magic of Tidying Up though and made some incredible strides in getting rid of things, but there's still a LOT. What is it about living in a too-big space that makes people want to fill it up?
As a note, a lot of the things we're family belongings that were gifted to him since they've all pretty much moved back home (abroad). When he had roommates the stuff that was actually his took up much less space.