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Long story short, the house next to my sister-in-law's is up for sale, and we are considering buying it. We'd love to live closer to family (although not sure if that is too close!) and get off the busy county road we now live on. When I say busy, I mean sometimes I wait 3-4 minutes to be able to pull out of my driveway.
It is sort of a blow, as it's a nicer house in a much nicer location selling for less than ours was just 2 years ago!
The change of towns is a small concern to me, as it is a much "nicer" town, almost a little "too" nice for me. Lots of very wealthy (manicured lawns and BMW drivers) families and not much upper middle working class (< $100k incomes), which is what I consider ourselves. I also consider ourselves very "green" and don't see a lot of that (in either town).
If we could rent out our current house for mortgage payment+insurance+taxes (I think this is realistic) and pay mortgage+insurance+taxes on the new house with 20% down, we'd still have an OK nest egg and be able to start putting away about $1500 cash a month, keeping in mind this is stopping all retirement investments due to my feeling the need to have a larger cash nest egg in case something happens with either house, or our rental income.
Are there any sort of guidelines for how much cash you should have around if something happens like, for example the tenant decides to stop paying, and it takes you 3 months to evict the tenant, then another 3 to rent it out, etc. etc.
Last edited by joe moving; 06-03-2009 at 04:07 AM..
Unclear if you are considering renting current home ONLY because you are upside down and want to take advantage of bargain in nicer area. Not the worst idea, but I would triple check rents before I find out that rents are much lower than you think -- in general I would think that your payments would exceed rental unless you put a very large amount down...
If the new house is so low priced that your current debt is not going to impact your borrowing this may work, but again that seems unlikely in the current lending environment. You would probably NOT be allowed to 'anticipate' income from renting your current house...
If those things do work out you are correct that you should have AT LEAST 6 months of PITI in a liquid form.
Personally I would NOT stop all retirement savings EVER. Too many things can go wrong in a situation like yours and you really need to think long term - only having been a homeowner for 2 years you probably have not even experienced the normal things that happen in owner occupied properties, yet alone the "what were they thinking" disaster that tenants can cause. People that stop contributing to retirement find it VERY HARD to start back up when tenants are busting through all their reserves...
If we could rent out our current house for mortgage payment+insurance+taxes
"If" you could rent it out for that amount you would still be losing a lot of money every month and year!
Never look on any investment (forget that it was your house where you were raising your kids) as having the possibility of being "break even".
At the numbers you're looking at (have you actually checked to see that you can get that much?) you are ignoring the following;
1. Allowance for vacancies. Every day it's empty is a day you don't get paid.
2. Allowance for re-rental. Will you pay an agent (typically one month rent) to find a new tenant? Run classified ads? Craiglist (most of my RE investor buddies don't think much of CL for finding renters)? Sign in the yard? Do you have enough casual drive-by traffic for this?
3. Allowance for repairs. Do you have the cash to repair a furnace, A/C, roof or other big $ items without going into further debt?
4. Allowance for upkeep. Who will repaint when tenants change? You? When? Pay someone else? How much will that cost. And trust me on this, having had rentals for 30+ years you will be repainting almost every room almost every year, unless you can keep tenants 4 or more years.
5. Allowance for legals. How much does an eviction cost in your jurisdiction? Can you do it yourself or is an attorney necessary? Remember you won't be collecting rent during this period and you will NOT be able to sue and successfully collect it.
6. Allowance for CPA. Trust me, even if you're currently doing your own taxes, I don't know very many landlords who do their own.
7. Allowance for incease in property taxes. Generally you lose your homestead exemption when the house becomes a rental, taxes go up.
8. Who will draw your lease? Again, legal fees. How will you enforce your lease? What if you don't allow pets and your tenant decides to get a dog after moving in?
Generally, professional landlords look upon "break even" as losing about 40% on their rental. People who do what you do generally lose money for a few years, have some really bad experiences, don't know how to do an eviction (and then claim that "it takes 6 months to evict someone here"-no, it doesn't) and then get out of the business because they thought they were running a hobby, not a business. When they finally do sell the house they do it at a distressed price because they lost the heart and will to maintain the place and just want to get rid of it.
I've bought and sold about 100 houses and several I've bought came from former wannabe landlords.
What GG means is typically around 50% of rent is eaten up in costs alone. Any "true" R.E. investor can confirm this. Thus, renting a home at a break even price will result in financial disaster. You can have a great tenant for many years at a break even price and do fine. When that one lunatic comes in and destroys the place it will eat up all previous earnings.
If X dollars is my mortgage+taxes+insurance, then you're saying I should be getting X/.60 as rent to make any money?
Our mortgage is about $1600, taxes $550 and insurance $50. I do believe we could get $2200 rent,but not much more. $3666 is out of the question.
How much would you put aside for all of these expenses?
Painting... 1000 a year?
Realtor - I think this could be done ourselves - as I said we are on a very busy
CPA - 500-1000 a year?
Attorney - 500-1000 a year?
Stuff breaking - ?????????? a year - Call it $5000.
Lost income due to no tenants - Say 2 months if we are lucky- $4400
Taxes going up $300 a year? I feel like this could be tacked on to rising rent
$12400/12=$1033. We could NEVER get that much on top of the 2200.
Last edited by joe moving; 06-03-2009 at 12:51 PM..
The rental income from a Tri-plex or larger will usually generate a positive cash flow.
A Du-plex might, or might not. If there is a positive cash flow it will be really minimal.
A Single-Family-Residence is a money pit.
After a career in the military, I have seen many folks who owned a Single-Family-Residence, who really liked the area and intended to come back to that area to retire. So when they had orders to move, they would keep the property and rent it out. In every case, they lost money in the process. They usually ended up paying two mortgages out of their pocket [the mortgage on their retirement home and the mortgage on their current home].
The benefit was that they owned property in the area where they wanted to retire. It was not a benefit in terms of finance.
It is not an investment. Renters will tend to tear up a property.
I have owned two Tri-plexes, in both cases my family lived in one unit while we rented out the other two units. In both cases it worked out well for us.
I have also owned a five-plex, it worked out really well for us. Four rental incomes, plus a home for my family to live in. It generated a positive cash flow every month.
Rent in some areas may equal the mortgage payment, or it may not.
The rent of a Single-Family-Residence will never equal the: mortgage, insurance, taxes, water, sewer, and repairs added all up.
You're on the right track in calculating expenses. I'd recommend trying to sell. The people who usually get slammed the hardest are people who aren't professional landlords attempting to rent out property. All it takes is one bad tenant and your whole financial situation will be over.
Plus, there are things you haven't considered that you can't control. In the current housing mess, there is no guarantee that rents in your area won't decline drastically. Rents are declining pretty much nation wide. They aren't something the landlord sets, they are determined by the market. This fact alone would drive me to reconsider.
We will probably just stick it out and live here. It's an OK place, just not perfect. It was our first house, and we didn't realize it'd be worth spending the extra 20k or 50k to move to a nicer location at the time.
We bought the house for 392, it might sell for 375. We have 20k in the house in a kitchen. We put down 90 including closing costs.
So if we have 110k cash in, and sell it for 375, lose another 23K in realtor and other fees... we owe 312. Come out with 40, a 70,000 loss in 2 years.
forest beekeeper is pretty close to correct. Instead of "never" I would say that unless your mortgage is far less than the standard small equity stake that most have OR your purchase price is GREATLY discounted from "fully improved retail" there is little chance that a home purchased to live in will make money as a rental.
In areas that are currently unduly depressed, and prices are more to have strong rebound the choice is tougher...
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