Buy or no?

[mamasita99]

My turn to ask the question! I'm debating if I should look into purchasing a home. I've been divorced about 4 years, and I currently live with my roommate and my kids, for the past 3 years. This is a great arrangement for all involved and there is no desire to change this.
Right now I have about $1500/month extra after living expenses, pension, taxes, deferred comp, etc. Insurance and future education of children is covered by exdh.
I was thinking about purchasing a home that is affordable to me, and renting it out since I really like my current living situation. I would break even after paying mortgage with rent, repairs, etc. Is it worth it to purchase a place as a rental, if I'm not going to see a whole lot of cash flow every month? Do tax or long range benefits make up for the PIA of landlording?
I've just always had real estate and feel lsort of "empty" now. I want my money to work hard for me, and don't know if real estate is best for me at this point in my life.

[phil5185]

from 10 years ago -

made enough on first rental house sale that we could have paid off our residence.

Do tax or long range benefits make up for the PIA of landlording?

It sounds like you have enough previous experience to make a rental work - at least you aren't starting out from scratch w/o a clue.

Mine have all made money over the past 35 yrs - each of our houses are worth at least 3X what we paid for them quite a few yrs ago, one is worth 6X. But, we have actually made more money by using the houses as seed money for stock market investments - we refi and keep the houses leveraged.

As you say, you can usually get the cash to balance, that way your renters are actually paying your loan for you. The depreciation tax write-off provides some extra income - and the appreciation of the house is tax deferred until you sell. And when the PIA factor gets to be a drag, you can always get a PM to run it for you.

[Nazgul Girl]

We like being landlords, and have tenatively been looking for a second house to rent out, for all of the reasons that Phil lists....

[mamasita99]

Thanks for the feedback. This would be my first purchase on my own, which is why it feels like such a big step. There wasn't MSN Money to knock sense into me 10 years ago! I vow to do it all smarter this time around.

I'm checking out a place after work today, just to get a feel for what is available in my price range, the neighborhoods, etc.

[HoneyBBQ]

Phil/Nazgul - do you consider the amount after taxes on the rental income to break even? For instance, if I get $1000 month for a rental, I only get to keep ~$700 of that. So my mortgage+tax+etc should be no more than $700?

We are totally green when it comes to rentals, but thinking of "going there" with our extra $ laying around.

[Deleted]

Honey,

Break even means the rental pays all expenses each year (it could vary from month to month) or a little from year to year for the occasional capital replacement e.g. new furnace, et cetera.

With depreciation and a mortgage expense it's unlikely you have to pay income taxes on your rental income, at least in the beginning years. Depending on your AGI you might even be able to use the depreciation against your earned income (under $100k or partial between $100k-$125k).

The real art is pricing your rental so that you are competitive enough to attract the best renters; typically about 5%-10% lower than market value. Turnover and vacancies can really cost you. And don't forget to keep an EF for your rental in addition to your personal EF!

[HoneyBBQ]

bonnap - thanks for the reply.

Depending on your AGI you might even be able to use the depreciation against your earned income (under $100k or partial between $100k-$125k).

My AGI is higher than that, so that probably wouldn't work for me, correct?

I think I need a Rentals 101 book.

My motivation for purchasing a rental is not the same way Phil lays out his strategy, so maybe I'm barking up the wrong tree, but we are looking at purchasing rentals to diversify our investments, not to leverage the equity and put it back into the stock market. My ideal rental would be something that would break even over time and when we sold the property, it would be worth more than what we paid for it (fairly likely in this economy and my area).

[The J]

Jan 7, 2011 9:45:02 GMT -5 HoneyBBQ said:

Phil/Nazgul - do you consider the amount after taxes on the rental income to break even? For instance, if I get $1000 month for a rental, I only get to keep ~$700 of that. So my mortgage+tax+etc should be no more than $700?

We are totally green when it comes to rentals, but thinking of "going there" with our extra $ laying around.

That's not how the taxes work on a rental. Since it's treated like a business, you pay out the expenses before paying tax on the profit. If your rental income is $1000/month, your expenses are $900/month, you're cash-flowing $100/month and therefore will have $70/month left after paying taxes on that $100/month (ignoring the depreciation aspect as well, which lowers the tax liability).

[HoneyBBQ]

Ah, thanks J, so much to learn.

[phil5185]

Phil/Nazgul - do you consider the amount after taxes on the rental income to break even? For instance, if I get $1000 month for a rental, I only get to keep ~$700 of that. So my mortgage+tax+etc should be no more than $700?

The situation that you describe would be nearly true if you have a paid-for rental house - in that case much of the $1000/m would be taxable income.
I tried to avoid extra taxable income with our houses, I was in a high bracket (before I retired) so I converted most of the income into unrealized capital gain. That way most of the cash flow from the houses was deduct able. I did this via leverage - ie, I would not spend $200k on 1 house, instead I would spend $40k each on 5 houses. So the rental income would be largely offset by the interest on 5 mortgages. The profit would be the capital gain on 5 houses when you sell (capped at 15%) - the profit grew tax-deferred.

[Deleted]

Honey,

Sounds like it but you should double-check any tax advice with your CPA to make sure it applies to your situation.

Nothing wrong with holding property for appreciation. We've have never pulled money out of our houses either. My folks were real estate agents and did that with rather disasterous consequences. Phil's strategy CAN work but it takes a combination of fairly secure employment in a field separate from real estate. And nerves of steel when the market corrects and the house values go south for a while!

[zibazinski]

I'm trying to talk DF into building or buying a duplex so we can rent out half. He's isn't TOTALLY opposed as he has rentals himself although his are commercial and mine are residential. I don't think you can ever have enough real estate as long as you have other sources of income.

[2kids10horses]

I have a duplex. I rent out both sides. I prefer my tenants don't know where I live.

They send their rent to a PO Box.

[Peace77]

Mamasita,

Before looking at rental property, do you have at least 9 months worth of living expenses in your emergency fund?

Can you put down at least 25% + pay closing costs? Understand that lending rates and insurance are higher for rental properties than for owner occupied. Additionally, you may need to install new appliances, carpet and paint before a house is tenant ready.

Can you afford to pay the mortgage, insurance, taxes and utilities if you have no tenant for several months? (A home near me was damaged by fire, I can see they are working on it but it will still be a long time before it is ready for new tenants.)

Are you handy enough to do minor repairs yourself? If not, you will either have to be prepared to hire someone or learn how to do them.

If you don't have the funds for all of the above, then save up first.

If you can save and pay cash for a home, you won't have to worry about being able to pay the expenses when you don't have a tenant.

[debtheaven]

My motivation for purchasing a rental is not the same way Phil lays out his strategy, so maybe I'm barking up the wrong tree, but we are looking at purchasing rentals to diversify our investments, not to leverage the equity and put it back into the stock market.

Honey, although Phil has done very well with that strategy, most RE investors here don't do that. So you shouldn't let that deter you.

[debtheaven]

Mamasita, you say you have 1500 "extra" per month and that you are looking at buying a rental where you would break even. Could you wait a little longer, put down a little more and make the purchase be even slightly cash-flow positive? I would want to see some positive cash flow, even if it isn't a huge amount.

With that amount "extra" per month it sounds like you only need to wait another six to 12 months to achieve that.

[Deleted]

I would say go for it! Why waste money when you can invest it!

[mamasita99]

I guess I'll be saving up a bit more. Or getting another realtor. My realtor has been sending me listings in my price range that ARENT short sales or foreclosures, b/c of the small percentage of those homes that actually sell. I can see why she wants to steer me away from those homes, b/c it can take forever to close if at all, but it's not like I'm looking for a place to live. I'm in no hurry to find a deal. I'm thinking the realtor would rather I find a regular home sale that will close quickly, but I'm going to wait for the type of home I have my eye on, and not settle.

[cronewitch]

I wouldn't buy rentals myself because I don't want to do the work or show them or clean between tenants. If I was around 30 and had a handy husband that could do minor things like cleaning gutters and wanted to do it I would.

Management companies hire out even the most minor things that a young couple or willing couple could do to save money but charge enough to make it harder to cash flow.

Rentals don't take a lot of time, I knew a couple with 12-13 and the wife took care of them while going to school and doing other things. Mostly tenants won't be trouble month to month they just pay the rent and don't bother you. But then they move or stop paying and need evicted and you have to spend time cleaning and repairing then showing. If I was handy it might make a good retirement for a few years, I could do some of the work and hire younger people to clean and paint then get professionals to do repairs like plumbing.

I think I might have talked myself into being a landlord. Someone talk me out of it please.

[zibazinski]

Being a landlord enabled me to put 2 kids through college and leave a job that was making me sick so I won't be the one to tell you to not be a landlord.

[debtheaven]

Mamasita
As you say, since you don't want to live in the home, you don't care how long it takes to close. So you need to either get your realtor to work with you, or find another one. Plus if you do go for a short-sale or a foreclosure, you might be able to get a much better deal and get something cash-flow positive. (I say that based what I've seen here, I have no personal experience with that).

Cronewitch
I'm not going to talk you out of it either LOL.

Zib
Just curious (I don't think I've ever seen you mention it) how did you get started with rentals? If you don't mind saying, of course.