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We did not use 30 year mortgages, either on our rental properties or our residence. It proved to be a good choice.
We chose to make zero money for 15 years. We were well employed and did not need the few dollars per month that a 30 year mortgage would deliver.
In my experience, most people who chose a 30 year mortgage for rentals want out in a few years. The time and trouble seem like they will never end and they get discouraged.
We built ours new in 1985. 80K total, for both of them.
Made nothing for 15 years. Rentals covered the payment, taxes, and had a little left over. We just left it in the account to be available for normal expenses.
Since then we have taken in roughly $340,000 in rent and the units have appreciated to $240,000.
Today we net about 15,000/year.
DO NOT buy cheap fixer uppers as rental property. Those are the 2 mistakes I see neophytes make - they buy cheap fixer uppers and they get a 30 year mortgage. That may work for large operations, but not for us.
I could not be convinced - ever! - to use a 30 year mortgage.
We live debt free.
First off I want to thank you for spending the time to read this and for your time responding.
A little background on us:
My wife and I are both 29, I will be 30 in April. No kids and will not be having kids for another two years most likely. We both work with a gross income of $158k last year. Our bases are 105k but we had good bonuses as well as overtime this past year.. This year will most likely be a little less, $130-140k range as they are changing my works bonus structure.
We put 21% each into retirement. 10% Pre tax 11% Roth. My wife has a 6% match while I have a 3% match.
As of now our assets are:
$11k liquid mix of CDs/Cash
46k in my 401k
88k wife's 401k
3k in mutal funds.
59k equity in home
$35k in cars (3, selling one shortly for $26k. Have a company car and no need for so many..my wife works from home etc)
Our only liability is our mortgage. CCs are paid in full each month. We owe $208k on a 20 year note. We are paying an extra $220 towards it so it should be paid off in 16.5 years. Total mortgage including taxes and insurance is $1850 which includes the extra $220 towards principle each month.
The rental:
We are looking at purchasing a 96k townhome in the next 12 months. I want to put 35k down and finance it through our credit union. HOA, P&I, Insurance and taxes will run $577ish/ month on a 30 year mortgage. We have lived in this neighborhood in the past so know the area and know it is a nice place to rent. Rentals like this one are going for $950 a month and rent fairly quickly.
Our plan is to use the cash surplus from the rental back into the property towards principle. We will put an additional amount towards the principle each month to have it paid off within 5-7 years.
Our plan over the next year is to save an additional 30k. Between what we save now and bonuses this should be possible as we did it two years ago to save for our first home.
Does this sound like a wise investment or should we be putting our money somewhere else?
I will recommend against buying a rental right now because you are very low on liquid cash for your income level and shouldn't be tying up more into illiquid assets at this stage. You should have at least 3-6 months of expenses in liquid cash that can be accessed without penalty (a category which does not include CD's and retirement accounts).
Your best game plan is probably to use the proceeds from the car to start your emergency fund and add more to it each month until you reach 3-6 months of expenses. When that is done, then start saving for your down payment on the rental. Realistically that could take 18-36 months, depending on how much you are willing to cut back on lifestyle.
First off I want to thank you for spending the time to read this and for your time responding.
A little background on us:
My wife and I are both 29, I will be 30 in April. No kids and will not be having kids for another two years most likely. We both work with a gross income of $158k last year. Our bases are 105k but we had good bonuses as well as overtime this past year.. This year will most likely be a little less, $130-140k range as they are changing my works bonus structure.
We put 21% each into retirement. 10% Pre tax 11% Roth. My wife has a 6% match while I have a 3% match.
As of now our assets are:
$11k liquid mix of CDs/Cash
46k in my 401k
88k wife's 401k
3k in mutal funds.
59k equity in home
$35k in cars (3, selling one shortly for $26k. Have a company car and no need for so many..my wife works from home etc)
Our only liability is our mortgage. CCs are paid in full each month. We owe $208k on a 20 year note. We are paying an extra $220 towards it so it should be paid off in 16.5 years. Total mortgage including taxes and insurance is $1850 which includes the extra $220 towards principle each month.
The rental:
We are looking at purchasing a 96k townhome in the next 12 months. I want to put 35k down and finance it through our credit union. HOA, P&I, Insurance and taxes will run $577ish/ month on a 30 year mortgage. We have lived in this neighborhood in the past so know the area and know it is a nice place to rent. Rentals like this one are going for $950 a month and rent fairly quickly.
Our plan is to use the cash surplus from the rental back into the property towards principle. We will put an additional amount towards the principle each month to have it paid off within 5-7 years.
Our plan over the next year is to save an additional 30k. Between what we save now and bonuses this should be possible as we did it two years ago to save for our first home.
Does this sound like a wise investment or should we be putting our money somewhere else?
it only makes sense if you expect appreciation or rent increase.
For comparison, one rental we bought for $85K in 2011 rents for $1050 and our total cost of taxes, HOA, insurance is $350/mo. That rental is now worth about $210K. You will also need to factor in repairs and down time.
I will recommend against buying a rental right now because you are very low on liquid cash for your income level and shouldn't be tying up more into illiquid assets at this stage. You should have at least 3-6 months of expenses in liquid cash that can be accessed without penalty (a category which does not include CD's and retirement accounts).
Your best game plan is probably to use the proceeds from the car to start your emergency fund and add more to it each month until you reach 3-6 months of expenses. When that is done, then start saving for your down payment on the rental. Realistically that could take 18-36 months, depending on how much you are willing to cut back on lifestyle.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by Listener2307
We did not use 30 year mortgages, either on our rental properties or our residence. It proved to be a good choice.
We chose to make zero money for 15 years. We were well employed and did not need the few dollars per month that a 30 year mortgage would deliver.
In my experience, most people who chose a 30 year mortgage for rentals want out in a few years. The time and trouble seem like they will never end and they get discouraged.
We built ours new in 1985. 80K total, for both of them.
Made nothing for 15 years. Rentals covered the payment, taxes, and had a little left over. We just left it in the account to be available for normal expenses.
Since then we have taken in roughly $340,000 in rent and the units have appreciated to $240,000.
Today we net about 15,000/year.
DO NOT buy cheap fixer uppers as rental property. Those are the 2 mistakes I see neophytes make - they buy cheap fixer uppers and they get a 30 year mortgage. That may work for large operations, but not for us.
I could not be convinced - ever! - to use a 30 year mortgage.
We live debt free.
As you can see many different ways to approach this
The key was you were well employed as you said , past tense.
In today’s economy I dint know how many people can count on being well employed for their working careers, seems like many will have lapses as the work place can change.
If you do have a lapse, the lower payments might make the difference of keeping the property or losing it.
If you want to have a 15 year payoff, accelerate you payments. At least you have the option. A 15 year willlock you into making the higher payments. In the 30 you can make the lower payments if needed, or make extra to pay off in 15.
I owned 21 rentals free and clear. I chose to cash out refinance on 4 of them with 30 year loans.
Why, because the income still covered the mortgage plus the flexibility on payments as I mentioned above.
Also with the payments on 30 years the profit on those 4 was down to about 10k a year. Because of write offs that 10 k was the max number I could earn and not pay any income tax on that amount. With a 15 year mortgage I would have more income but would pay income tax on the difference. So in my case the 30 year was the sweet spot, not 15 year.
On those 4, I took the cash our and bought 4 more rentals all cash. The money costs 5%, i invest That money And get 13% so I profit 8 percent on it per year. On each one because they were fixed up each one picked up about 40k in value. So on those 4 loans I made 160k in the first few months of buying them then have the cash flow I now have 25 instead of 21 rentals. That why I chose to not have everything paid off and why I chose 30 year mortgages
Btw I went opposite and bought cheaper rentals. More hand holding needed, but profitable.
I will recommend against buying a rental right now because you are very low on liquid cash for your income level and shouldn't be tying up more into illiquid assets at this stage. You should have at least 3-6 months of expenses in liquid cash that can be accessed without penalty (a category which does not include CD's and retirement accounts).
Your best game plan is probably to use the proceeds from the car to start your emergency fund and add more to it each month until you reach 3-6 months of expenses. When that is done, then start saving for your down payment on the rental. Realistically that could take 18-36 months, depending on how much you are willing to cut back on lifestyle.
Hi, thank you for your response. I am poor at explaining my thoughts at times. I mentioned it in the original post but I know I didn't make it clear.
We are selling one car on the next week for $26k. That should put us at 37k in cash/CDs. CDs (2) are both short 6 month terms.
We will be saving up for next year and can save an additional 30k. We did this two years ago and can do it again if we watch our spending. In one year we would buy and put 35k down then have 30-32k in cash reserves/CDs. 6 month expenses for us are $18k so we should be close to a year if we BOTH lost of jobs. Hopefully that wouldn't ever happen but we both tend to be savers just in case.
I would also recommend you check out CD's Rental sub-forum //www.city-data.com/forum/renting/ to get a sense of actual expense landlords really encounter. Example, your vacancy rate should be a yearly figure equally one month's rent as that is more realistic. Is the insurance cost actual landlord insurance or are you using your personal homeowners insurance rate? Being a landlord can reap good financial rewards so long as you're not going into it with rose colored glasses on.
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If you do have a lapse, the lower payments might make the difference of keeping the property or losing it............
It would have to be sort of a perfect storm, wouldn't it?
I mean, (A) I would have to lose my job, (B) the units would have to be empty so they couldn't pay for themselves, (C) I would have no money in savings to see me through, and (D) this would have to go on for several months in order for the bank to foreclose.
Not likely.
At any rate we did suffer the usual ups and downs during the 15years it took to pay them off, but it all turned out alright.
I have never - never in my life, even when I delivered papers for $4.50 a week when I was 10 - spent my entire paycheck before I got the next one. I think I was born that way.
I bought my rental in 2012 for 160 and just sold my rental last Friday for 185 (168 after fees).
Surprisingly made no money in 7 years even though it is located across the street from a 35k student university.
It was also a foreclosure and needed work, vacant times for repairs cost a bit of money.
Rental properties are in no way passive and you'll have to keep a constant eye on it. 10% cap would definitely be the minimum ideal income.
It would have to be sort of a perfect storm, wouldn't it?
I mean, (A) I would have to lose my job, (B) the units would have to be empty so they couldn't pay for themselves, (C) I would have no money in savings to see me through, and (D) this would have to go on for several months in order for the bank to foreclose.
Not likely.
At any rate we did suffer the usual ups and downs during the 15years it took to pay them off, but it all turned out alright.
I have never - never in my life, even when I delivered papers for $4.50 a week when I was 10 - spent my entire paycheck before I got the next one. I think I was born that way.
This. If you're buying correctly, and it appears you are, the rental will pay for itself. Whether you stuff the profit into the loan or put some aside until you have enough to make the biggest logical repair this is a doable deal.
A quick and dirty rule of thumb. Buy below 10X annual rents, Sell above 20X annual rents.
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