Author Topic: Renting out our owned condo unit - 50% rule / 1% rule still hold?  (Read 3828 times)

Freedom2016

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This is a naive question, perhaps. DH and I will be moving soon and are considering whether to hold on to our existing condo as a rental property.

Bank-appraised value (Mar 2014): $395,000
Mortgage remaining: $289,700
PI: $1885/mo
HOA fee + T + I: $417/mo
Total: $2302/mo

50% rule says we should rent for $3770/mo
1% rule says we should rent for $3950/mo
Market probably supports $3200-3500/mo

This looks like a loser proposition, but here's the reason for my question:

We would only be on the hook for 1/3 the cost of external repairs needed because it's a 3-unit condo; any special assessments for new roof, exterior painting, retaining wall repairs, etc. would be shared. And things like lawn care, winter driveway shoveling, and shared water/electricity are covered by the HOA fee.

As such, is it still important that we meet the 1% or 50% rule for gross rent? If not, how should we account for that in our calculations?

arebelspy

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #1 on: December 09, 2014, 11:15:01 AM »
I wouldn't use a broad rule like that for something like this - run the specific numbers.
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skunkfunk

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #2 on: December 09, 2014, 11:43:28 AM »
Let me qualify by saying I'm totally ignorant - but that is some pretty good cashflow for your investment of $106K. I doubt your repair costs are going to be anywhere near your back-of-the-envelope calc there, but that's just a gut feeling.

arebelspy

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #3 on: December 09, 2014, 12:05:19 PM »
Vacancy and turnover costs will be the biggest expenses ouside of those listed, and then however much deferred maintenance works its way into special assessments.
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waltworks

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #4 on: December 09, 2014, 12:18:04 PM »
Higher end places can do great without meeting those rules of thumb. As Arebelspy said, run the specific numbers.

I'd keep it probably, unless you need the $100k for something.

I can't believe I just said that (throws up a little in back of mouth).

-W

Freedom2016

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #5 on: December 09, 2014, 12:31:53 PM »
If rented @ $3200/mo, monthly cash flow after PITI + HOA, before expenses: ~$900/mo. Annual $10,800

Expenses:
--Vacancy - I have no idea how to estimate this as the property's never been rented before. It's in a good location close to commuter rail, on the best street in the neighborhood. I'd expect pretty high demand. Carrying costs ~$2300/mo. Should I assume 1 mo vacancy/yr?
--Turnover costs (cleaning, fresh paint, minor repairs) - $1000/yr.
--New roof - $10,000 (?) ttl cost divided by 3, every 15 years. Annualized to:$222/yr
--Exterior paint job - $10,000 (?) ttl cost divided by 3, every 10 years. Annualized to $333/yr
--Retaining wall repair - needed at some point, est. $1000 divided by 3, every 20 yrs? Annualized to $20/yr
--Appliance replacement (fridge, w/d, dw, stove, microwave, water heater, furnace) - $3500 every 10 yrs or $350/yr?

Did I miss anything? I've never done the LL thing before so that was a shot in the dark!

The above adds up to $4225, netting annual free cash flow of $6575. Wow - is that possible??





arebelspy

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #6 on: December 09, 2014, 12:35:21 PM »
Higher end places can do great without meeting those rules of thumb. As Arebelspy said, run the specific numbers.

I'd keep it probably, unless you need the $100k for something.

I can't believe I just said that (throws up a little in back of mouth).

-W

Yeah, especially if the rate is sub-4%.

Won't affect cash flow now (that's already figured into the above numbers), but is a great inflation hedge, because the other numbers (T&I, HOA, Rents, etc.) will rise while P&I won't.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Freedom2016

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #7 on: December 09, 2014, 12:38:12 PM »
Our mortgage rate is 4.875% - would probably refi if we decide to keep it!

arebelspy

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #8 on: December 09, 2014, 12:38:18 PM »
If rented @ $3200/mo, monthly cash flow after PITI + HOA, before expenses: ~$900/mo. Annual $10,800

Expenses:
--Vacancy - I have no idea how to estimate this as the property's never been rented before. It's in a good location close to commuter rail, on the best street in the neighborhood. I'd expect pretty high demand. Carrying costs ~$2300/mo. Should I assume 1 mo vacancy/yr?
--Turnover costs (cleaning, fresh paint, minor repairs) - $1000/yr.
--New roof - $10,000 (?) ttl cost divided by 3, every 15 years. Annualized to:$222/yr
--Exterior paint job - $10,000 (?) ttl cost divided by 3, every 10 years. Annualized to $333/yr
--Retaining wall repair - needed at some point, est. $1000 divided by 3, every 20 yrs? Annualized to $20/yr
--Appliance replacement (fridge, w/d, dw, stove, microwave, water heater, furnace) - $3500 every 10 yrs or $350/yr?

Did I miss anything? I've never done the LL thing before so that was a shot in the dark!

The above adds up to $4225, netting annual free cash flow of $6575. Wow - is that possible??

You amortized your costs over the whole lifespan, but is everything brand new this year?  (The roof, retaining wall, etc.)  If not, you need to adjust those annualized numbers.

What about management?  Even if you manage yourself you should take that cost out of the return, so you can compare it to your opportunity cost.  And then it'll be factored in if you do turn it over to a company.  And your return on time/labor won't conflate with a return on investment.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Freedom2016

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #9 on: December 09, 2014, 02:02:13 PM »
No, things aren't brand new this year - so I need to amortize them by remaining life, right? I wasn't sure how to do the calc so will redo.

Should I price mgmt time at something like 10% of gross rent? (I recently got a quote from a mgmt co in the midwest that was 8.5%, though we are in New England)


arebelspy

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #10 on: December 09, 2014, 03:03:50 PM »
Management is typically 8-10%.

Amortize over remaining life to get cash flow to that point, then using the full life afterwards.

This is assuming you're doing a cash flow analysis, not just a single year cash flow snapshot, based on how long you plan to hold it.  If you're just doing the single year, then doing it as you did underestimates it, and doing it as you're suggesting now will overestimate it.  Maybe somewhere in the middle if you're just looking for a rough return approximation, as seems to be the case.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Freedom2016

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Re: Renting out our owned condo unit - 50% rule / 1% rule still hold?
« Reply #11 on: December 09, 2014, 06:10:42 PM »
Did as suggested and it is actually looking good- positive cash flow even with deferred maintenance stuff happening earlier. I even think I could get above $3200 based on listings I'm seeing on craigslist. Wow - this is exciting! We were interested in getting into the rental market but figured we would have to buy out of state to make it happen, and never thought we would be able to make money in the Boston market. Is there anything else we should consider, financially, before deciding to make a go of this?

We may be making an offer on another house this weekend, and if so, we would try to push out closing until Mar/Apr to be able to hit the peak renters market.

In Boston it is not unusual for renters to pay the broker's fee if one is involved. Would it be worth using a broker to market to our ideal tenant: a young professional working downtown with a spouse and kid, who want a bit of a suburban-feel home but with lots of urban amenities nearby? I assumed we would market it ourselves on craigslist but if it costs us nothing and might get us in front of more professional eyes who are not terribly price sensitive...maybe it's worth it?