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Our family is planning to relocate from PA and decided to lease a house prior to purchasing. I have been researching rentals and there are alot of nice houses out there to lease, some more expensive than others!
So my question is...why would a homeowner decide to rent their house out?
-Is it because owners are struggling trying to sell their fairly new house and potential buyers would rather purchase a brand new house?
-Are homeowners frustrated with "SLS" (Small Lot Syndrome)
-Do you find that most rentals have some undesirable traits (neighbors, noise, airport traffic, dogs, flood areas, rodent problems, etc?
-I'm just trying to get a feel of the rental market in the North Raleigh area and what to be cautious about. Otherwise, I'm pretty impresssed with the house rentals, and just wondering why the houses are not for sale.
Tough real estate market. Perhaps they tried to sell and instead of keeping it on the market, they decided to rent instead to bring in some kind of income.
I have never rented out a house so my take could be wrong, but I always thought the people who rented out houses were for the most part real estate investors. They would buy a house in the mid to lower price range in the area, then rent it out at a monthly rate that would at the very least cover the monthly mortgage payment. That way they could rent it out and have somebody else pay for the mortgage payments on the house all the while the house appreciates in value along with the rest of the houses in the area. The hope being that eventually the house will have appreciated enough in value that the local market will bear an increase in the rent so it will be above and beyond original mortgage payment due each month, leading to monthly profits to the investor. Eventually if they want to sell it, they will realize all the appreciation as a profit, having never made any of the monthly payments using their own money.
Of course my take on renting includes a lot of assumptions, like the place is always rented and never sits vacant, the tenants are perfect and don’t damage the property, and property values continue to increase. I have read that people getting into the rental market should plan on just breaking even for the first several years of renting out their investment property. I guess that is why many consider it to be a risky venture unless you really know what you are doing!
Although you can find rentals in various ranges, you can find the bulk in homes valued below the $200K range. My neighborhood is populated with homes mainly in the $140K to $175K range and we have several rentals…much to the dismay of many of the HOA and the residents here. Not that renters are bad residents. Just that some of the landlords aren’t as diligent at keeping the places up as the permanent residents. Seems like homes in that price point are very attractive to investors.
I have a question about that situation (buying new house, renting out older one). If one were to do that, how would that affect the mortgage rate on the new property? I know that on a second property, the interest rates would be much higher, perhaps by a point or two than on a first mortgage. But being that the second home purchased is actually the one being used as a primary residence, does that make a difference? I would appreciate any light being shed on this. Thanks!!!
I have never rented out a house so my take could be wrong, but I always thought the people who rented out houses were for the most part real estate investors. They would buy a house in the mid to lower price range in the area, then rent it out at a monthly rate that would at the very least cover the monthly mortgage payment. That way they could rent it out and have somebody else pay for the mortgage payments on the house all the while the house appreciates in value along with the rest of the houses in the area. The hope being that eventually the house will have appreciated enough in value that the local market will bear an increase in the rent so it will be above and beyond original mortgage payment due each month, leading to monthly profits to the investor. Eventually if they want to sell it, they will realize all the appreciation as a profit, having never made any of the monthly payments using their own money.
Yes, that is what our landlord is doing...we have since found out that he owns several properties & waiting for values to go way up.
He bought several near the proposed 540, I guess, gambling that when the rest of the 540 goes in the property value will sky rocket.
I have a question about that situation (buying new house, renting out older one). If one were to do that, how would that affect the mortgage rate on the new property? I know that on a second property, the interest rates would be much higher, perhaps by a point or two than on a first mortgage. But being that the second home purchased is actually the one being used as a primary residence, does that make a difference? I would appreciate any light being shed on this. Thanks!!!
IMO, you don't have an issue.
You should ask your lender, but I believe that you will have no problem getting the best rate you can qualify for as a primary residence on the new house. It is after all your planned Primary.
The tax code is set up to promote acquisition of investment real estate.
Let's say I have a home that I bought 10 years ago for $100,000.
And today it is worth $145,000.
And I'm single and marry a nice lady who has a nicer home, so we live in hers.
Well, if I rent my home, I can reap some benefits.
I can rent it, have tax deductions that probably will give me a loss on the property but actually I may be cash flow positive.
And if I maintain it properly, the place should continue to appreciate.
I can even borrow against the property to take out cash for further investment properties.
So,
Continued appreciation.
Self-amortizing,
A source of deductions through expenses and depreciation,
And a little cash flow.
If you have the strength of will to be a landlord, it is a pretty good deal.
Last edited by MikeJaquish; 02-05-2007 at 12:09 PM..
Reason: Eliminate erroneous taxation input!
My understanding on capital gains on the sale of a primary residence was that you did not pay CG on the first 500k in profit as long as you have lived in the home for 2 of the last 5 years. However, if you choose to move out and rent the property for 5 years, then sell, you WILL get hit with tax implications. (I'm not a cpa, so double check the latest.)
My own family has investment real estate for the above mentioned reasons: the appreciation combined with the tax benefits (most of the "profit" is offset by depreciation, mortgage interest deduction, and maintenance costs) makes it a good long term strategy for us.
For those of you thinking of renting because you're having trouble selling, think hard about it as a long term investment strategy, not a short term fix. Once you have a tenant in place, it is much tougher to sell, because you have to find an investor willing to honor the existing lease, or try to sell after the tenant has moved out, in which case you're back where you are now, possibly making double mortgage payments. Also, unless you're going to have it professionally managed, be prepared for the potential hassles of being a landlord.
If you are considering buying property strictly as an investment, know that the mortgage requirements are very different than those for a primary residence. Typically, you will need a 20% downpayment with "seasoned funds" (with a paper trail showing the money has been in your possession for a certain amount of time), and you will typically pay a higher interest rate. This is why many investors (myself included) buy a home as a primary residence with a more favorable loan, live in it for a few years, then keep it as a rental when it is time to move up.
As a renter, research the area just like you would a home for purchase - look at crime, schools, check the sex offenders website, etc., but I wouldn't be too concerned about someone's motivation for renting.
"My understanding on capital gains on the sale of a primary residence was that you did not pay CG on the first 500k in profit as long as you have lived in the home for 2 of the last 5 years. However, if you choose to move out and rent the property for 5 years, then sell, you WILL get hit with tax implications. (I'm not a cpa, so double check the latest.)"
You're right! I have some editing to do...
I'd fling some Rep on you, but I guess I have to spread it around...
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