nidena
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Post by nidena on Aug 22, 2021 8:36:44 GMT -5
Since this got no traction on the Landlord thread, I'm making it its own:
When you're deciding on a property to buy for a rental, what sort of formula do you use to determine if it's worth it?
I was talking to someone last night who said they take the annual expected rent x 8 years and if that is less than what it costs to buy/mortgage the place, it's worth it.
I did do online searching for this info but I still didn't understand what I was reading.
In any case, the guy was floored when I stated I'm not looking to get into the rental arena to make buckets of money. I just want to provide affordable rentals (and not get myself in a hole that can't be gotten out of i.e. I don't want to be a position like so many landlords were last year where they couldn't pay the rental mortgage because they were relying on the tenants rent to cover that cost (even if that's how it normally should be)).
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jerseygirl
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Post by jerseygirl on Aug 22, 2021 9:58:49 GMT -5
We had a beach house but sold about 20 yrs ago. On vacation last year and not much to do but look at house sales in local newspapers Saw one that interested me and went to realtor. Asked him how much rented for and how much mortgage that would support. We would then put down payment sufficient to take that mortgage. No one in the realty office knew how to give us the answer. Just as well, beach houses take lots of maintenance, high insurance for storm damage (reasons we sold before) and complains from tenants. But I was surprised the realtors couldn’t figure out prices, they’re just interested in selling and commission
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giramomma
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Post by giramomma on Aug 22, 2021 12:37:56 GMT -5
So. I think you need to first define affordable rental. Are you talking no more than 30% of the gross median income for a family of 4 in your city? Does that include utilities (suggested by the interwebz ) or not?
What size house?
What type of housing market? The housing market of 2011 or today's housing market? How much in taxes does rent have to cover? With a rental, I would err toward a 3% home maintence SF a month. The mean HH income in my city is 68K. So, assuming no other debt, the could spend up to 1400 on rent, give or take. Houses in the less desirable neighborhoods right now aree going for almost 200K right now. Taxes on 200K place will run about 4500. We'll say 4800, because that's a an even number. A 3% home maintenance SF on the house is another $500 month. So, between taxes and home maintence fund, you need renters to cover $900.
How much do you want to make? $300 or so month? That's 1200. which means then you'd need to have a mortgage of about $200 a month. At least, if I was planning to be a landlord, those are the numbers I would use. The first place DH I lived in would have been great to rent out. We would have only really turned a decent enough profit after the mortgage was paid off. And at that point, we had a 400-something dollar mortgage. We could have rented our condo out for about 850. The condo association fee put us at 650. Since it is a condo, and we were responsible for much less, in terms of maintenance, $100 month would do. I thought being a LL for $100 a month was not an efficient way of getting extra income for us.
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Knee Deep in Water Chloe
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Post by Knee Deep in Water Chloe on Aug 22, 2021 16:34:59 GMT -5
Here’s how I purchase rentals:
✅Buy house during uptick in market Live in house for a few years Move due to major life change of divorce or job relocation Tell the market to have the worst crash in 80 years, so I cannot sell the house Rent out the house far less than the mortgage payment. Sell house at loss several years later Get tax write off spread out over several years
Anyhoo, I wouldn’t be a landlord again if I were dependent on the rental income. I would have to be able to cash flow the entire liability.
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Lizard Queen
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Post by Lizard Queen on Aug 22, 2021 18:16:51 GMT -5
We had a beach house but sold about 20 yrs ago. On vacation last year and not much to do but look at house sales in local newspapers Saw one that interested me and went to realtor. Asked him how much rented for and how much mortgage that would support. We would then put down payment sufficient to take that mortgage. No one in the realty office knew how to give us the answer. Just as well, beach houses take lots of maintenance, high insurance for storm damage (reasons we sold before) and complains from tenants. But I was surprised the realtors couldn’t figure out prices, they’re just interested in selling and commission Why would you expect a realtor to determine your numbers for a business opportunity?
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raeoflyte
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Post by raeoflyte on Aug 22, 2021 18:49:15 GMT -5
We just kept our homes and turned them into rentals when we moved, so each property was deemed a good rental when we bought it, but didn't convert it right away.
I want to get involved in something that provides affordable housing, or housing for homeless, something... Because affordable housing is a complete joke in our area.
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buystoys
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Post by buystoys on Aug 23, 2021 10:46:48 GMT -5
I'm going to admit that we didn't formally run any numbers or do any real planning when we purchased our rental property. We bought it so a neighbor couldn't. (long story) Once we paid for it, we got estimates to do repairs on it and then started figuring costs out. We realized it would take less than seven years of renting it out to have all our costs reimbursed to us if we rented it out rather than selling it. So we are now landlords. Of course, we still have seven years for all our costs to come back as we've had to replace an air conditioner and do some expensive tree removal. But it doesn't cost us anything out of our pocket. The big repairs have come out of the saved rental funds. We knew/know some big things happen, so we built in a rental slush fund. All the rent goes into it until we reach a certain dollar amount.
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Tiny
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Post by Tiny on Aug 23, 2021 12:55:07 GMT -5
From the Google: So, if your rental property's final cost before you go to rent it is 150K - rent should be 1500 a month.
And then there's this from the Google:
I really don't have the personality/way of thinking to be a good 'landlord' or to be cutting edge on figuring out what properties would make the absolute best rentals purchase/income wise. That said I have 2 rental properties. One works out great - due to my being able to purchase it at the bottom of the market 11 years ago. The other is working ok - because I bought with an eye towards it being a possible retirement home or a 'base' that relatives could use when visiting other relatives when visiting. It's complicated and not really an "income producing" property - although the "rent" does cover the mortgage (PITI). It's complicated. I'm OK with "loosing money" on it... it's complicated.
Here are some things to know: 1st thing to know - mortgage lenders charge higher interest rates and sometimes fees for "rental property loans". You may need to put down more 30% (and the lender might not budge on this). I suspect many rental properties get get purchased with "second home/vacation home" loans - which tend to have interest rates in between primary homes and rental properties. This is a no no. OR the buyer buys the house (primary home mortgage) and then lives in it for a year or two, and then buys the next house with a primary mortgage (turns the first house into a rental) and moves into the new house with the new primary mortgage. The thing about primary home mortgages - the lender MIGHT be able to call the loan on the first house - because the house is no longer a "primary home"... but I think there is a lot of "looking the other way" as long as the mortgage gets paid and the property is insured and the property taxes get paid.
2nd thing to know - insurance is more expensive for a rental property.
3rd thing to know - you don't get any home owners exemptions or other perks for primary home owners on Property Taxes. property taxes may be higher.
4th thing to know - you will need rent to cover any HOA fees and any landlord paid expenses (cable? trash removal? Water? Electric? landscaping? snow removal?) The total is NOT the rent amount to charge - you will be loosing money - and not in a trivial way.
You need to look at expenses in a yearly way... a unit will have some maintenance - each year - maybe the microwave will die or a drain will clog or a window will break or a closet door will break.
You need to consider routine maintenance - stuff wears out just from use - rooms need to be repainted, door sweeps replaced, light switches fail, bulbs burn out, faucets and toilets start to drip/run. You can't use the security deposit for these things. The tenant didn't break or damage this stuff - time/entropy did. You may also need to keep a sizeable emergency fund (enough to pay 3 or 4 months of mortgage (PITI) and other fixed expenses - HOA fees, lawns service, utilities). My rentals aren't generating much in the way of "income" I can spend on anything other than the rentals. But, I am sitting on a heck ton of equity right now. To get my rentals to "pay out" for me - I need to sell them. Which is another 'expense' - selling property isn't cheap and there will be a potential income tax hit depending on how I go about selling them. I guess I'm trying to say - there are a lot of moving parts in owning rentals and getting them to generate income you can spend on something other than the rentals.
I bought the first rental 11 years ago - because I wasn't risking a large amount (it was the bottom of the market) and I saw how having the "loss" or small amount of yearly "income" would effect my income taxes (I'm single no kids with a big income... having the rental pay the mortgage PITI without adding much to my actual income (a loss) was helpful). I WILL most likely pay income taxes when I sell it - but hopefully I will be able to strategically do that sale to minimize the income tax hit. I'm OK with paying taxes - I just want to do it in a smart by the tax code way.
I'm not going at owning rentals so I have an income stream I can live off of. They are mostly all about building equity and my net worth (by paying as little for it out of my day job income as possible).
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Tiny
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Post by Tiny on Aug 23, 2021 13:21:38 GMT -5
And then there's this from the Google: And that kind of frightens me... $1500 for rent, a car payment, insurances, utilities, gas, and groceries - has got to be taking about $2500 a month... that's 30K a year - on a 60K a year income (BEFORE payroll deductions - taxes, health care expenses). I'm gonna guess that payroll tax deductions are between 10K and 15K. And that employer healthcare is about 3K to 6K per year... so at the lower end - 60K - 13K is $47K divided by 12 is 3900 a month - with 2500 of that just get up, eat, go to work. There's no long term savings (say 10% to an IRA/Roth = $500 a month) there's no vacation, no fun money, no short term savings (holiday expenses), no clothes money, no car maintenance, etc... And I'm guessing the landlord might not be making a whole lot for $1500 in rent. Most of the 150K houses in my area are houses flipper buy to turn into $350K and up priced houses. Even if you aren't a flipper - the 150K house needs a lot of work - new HVAC, new roof, new appliances (because there arent' any), the garage maybe falling down, it may need concrete work (new front porch or tuckpointing), the interior will need a fresh coat of paint and new carpeting (maybe other flooring). The bathroom may need repair even if the avocado green tile walls are in good shape. You get the idea. And then you have to think about who your target renter is (when you've got a working avocado green tiled bathroom - if you aren't going to tear it out and redo it.) I personally like dated bathrooms and kitchens when they are in good working order - but I hear current renters aren't fond of dated anything.
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raeoflyte
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Post by raeoflyte on Aug 23, 2021 13:28:04 GMT -5
From the Google: So, if your rental property's final cost before you go to rent it is 150K - rent should be 1500 a month. And then there's this from the Google: I really don't have the personality/way of thinking to be a good 'landlord' or to be cutting edge on figuring out what properties would make the absolute best rentals purchase/income wise. That said I have 2 rental properties. One works out great - due to my being able to purchase it at the bottom of the market 11 years ago. The other is working ok - because I bought with an eye towards it being a possible retirement home or a 'base' that relatives could use when visiting other relatives when visiting. It's complicated and not really an "income producing" property - although the "rent" does cover the mortgage (PITI). It's complicated. I'm OK with "loosing money" on it... it's complicated. Here are some things to know: 1st thing to know - mortgage lenders charge higher interest rates and sometimes fees for "rental property loans". You may need to put down more 30% (and the lender might not budge on this). I suspect many rental properties get get purchased with "second home/vacation home" loans - which tend to have interest rates in between primary homes and rental properties. This is a no no. OR the buyer buys the house (primary home mortgage) and then lives in it for a year or two, and then buys the next house with a primary mortgage (turns the first house into a rental) and moves into the new house with the new primary mortgage. The thing about primary home mortgages - the lender MIGHT be able to call the loan on the first house - because the house is no longer a "primary home"... but I think there is a lot of "looking the other way" as long as the mortgage gets paid and the property is insured and the property taxes get paid. 2nd thing to know - insurance is more expensive for a rental property. 3rd thing to know - you don't get any home owners exemptions or other perks for primary home owners on Property Taxes. property taxes may be higher. 4th thing to know - you will need rent to cover any HOA fees and any landlord paid expenses (cable? trash removal? Water? Electric? landscaping? snow removal?) The total is NOT the rent amount to charge - you will be loosing money - and not in a trivial way. You need to look at expenses in a yearly way... a unit will have some maintenance - each year - maybe the microwave will die or a drain will clog or a window will break or a closet door will break. You need to consider routine maintenance - stuff wears out just from use - rooms need to be repainted, door sweeps replaced, light switches fail, bulbs burn out, faucets and toilets start to drip/run. You can't use the security deposit for these things. The tenant didn't break or damage this stuff - time/entropy did. You may also need to keep a sizeable emergency fund (enough to pay 3 or 4 months of mortgage (PITI) and other fixed expenses - HOA fees, lawns service, utilities). My rentals aren't generating much in the way of "income" I can spend on anything other than the rentals. But, I am sitting on a heck ton of equity right now. To get my rentals to "pay out" for me - I need to sell them. Which is another 'expense' - selling property isn't cheap and there will be a potential income tax hit depending on how I go about selling them. I guess I'm trying to say - there are a lot of moving parts in owning rentals and getting them to generate income you can spend on something other than the rentals. I bought the first rental 11 years ago - because I wasn't risking a large amount (it was the bottom of the market) and I saw how having the "loss" or small amount of yearly "income" would effect my income taxes (I'm single no kids with a big income... having the rental pay the mortgage PITI without adding much to my actual income (a loss) was helpful). I WILL most likely pay income taxes when I sell it - but hopefully I will be able to strategically do that sale to minimize the income tax hit. I'm OK with paying taxes - I just want to do it in a smart by the tax code way. I'm not going at owning rentals so I have an income stream I can live off of. They are mostly all about building equity and my net worth (by paying as little for it out of my day job income as possible). Getting a first mortgage loan doesn't require that you live in that house for the term of the mortgage (or pay it off or refi it to an investment property the moment you move out). Most common documents state you intend to live there for at least the next 12 months. It isn't fraud or even sketchy to live in a home for a few years and then convert it to an investment property. If you do that every 366 days with a new home then lenders will start asking questions, but thats a very different scenario. There are also a lot of loan programs available with less than 30% down for investment properties these days. The rates differ, and products change with the market, and different lenders offer different programs. It's been several years since those kinds of restrictions were normal.
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raeoflyte
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Post by raeoflyte on Aug 23, 2021 13:40:44 GMT -5
If I were going to buy rental properties now, I'd go for a duplex or triplex. More like a single family home in regards to upkeep, but you almost always have income coming in.
I own a triplex with my parents (that we lived in 1 unit for 5 years when we bought it - my sister lived in another unit). It has had several long term tenants. We take section 8 and have had good luck with tenants.
My property manager disagrees a bit with @tiny and doesn't feel like kitchens and baths need to be renovated often. Admittedly none of ours are pink or green at this point, but clean and functioning has been good enough. He replaced a fridge in the house we're selling with a white one, when everything else is black and the tenants didn't mind. I can't figure out how he found a cheaper white fridge when they're all stainless steel or black in the stores. I know my realtor won't like that for listing.
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nidena
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Post by nidena on Aug 23, 2021 19:55:29 GMT -5
It would definitely be a few years before I even think about getting into the arena, that's for sure. Home prices are so wonky right now. I bought my house--3bd / 1ba 978sq ft + a full footprint basement plus shed and 2-car garage--for $110,000 13 months ago. There's a house nearly the same, just two blocks over, that is going for $165,000. My next-door neighbors are renting a house that is identical to mine minus the finished basement for $800+ and they don't even have a garage.
I like to gather the info to see if I even want to pursue it.
Especially when I consider that a friend of mine is paying $450/mo rent for a house that was likely paid off 20 years ago. I consider it a win to have a rental house that is completely paid off but still providing a revenue stream.
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raeoflyte
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Post by raeoflyte on Aug 23, 2021 20:35:05 GMT -5
I'm so jealous of your house prices.
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Tiny
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Post by Tiny on Aug 24, 2021 9:47:40 GMT -5
I agree with everything you've said. In real life - I've heard people talk about buying rentals based on the assumption they would use a primary home (or a second home/vacation home) mortgage - and who planned to rent it out from day one. So, there is some "fibbing" on the part of the buyer during the loan process. FWIW: I'm not morally against this... because I think for the majority of mom and pop small time property investors (as in they will likely have fewer than 5 rental properties) it is a way to get started.
I was trying to point out that there might be some nuances to financing a rental property more than are talked about when people talk about buying rentals. (kind of like how someone might tell you they paid $30K for a vehicle but never mentions the 7K in taxes and other purchase expenses they also paid (and maybe had to finance).... and if YOU aren't aware of the omission you might have an unrealistic idea of how much a vehicle might cost you once the dust settles on the purchase.)
I also agree with this. But I think making use of these kinds of programs is "time consuming" and they require "more" as in requirements for the type of property and the state it's in -- of the property being purchased. Nothing wrong with that... but sometimes a buyer needs to move quickly to get a property (as in the seller doesn't want contingencies or a long wait/lots of hoops to jump thru to get to closing.) I also think doing this means you need to "learn the ropes" and do more of the leg work or find the right people to help you down the path to make use of these programs works. It's not like a "conventional mortgage" where everyone involved knows what they are doing - it's old hat and you pretty much just follow the trodden path and don't really need to "know" or "understand" the whole process. You just trust your real estate agent, lawyer, lender, who ever and do what they say.
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Tiny
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Post by Tiny on Aug 24, 2021 10:03:06 GMT -5
My property manager disagrees a bit with @tiny and doesn't feel like kitchens and baths need to be renovated often. Admittedly none of ours are pink or green at this point, but clean and functioning has been good enough. He replaced a fridge in the house we're selling with a white one, when everything else is black and the tenants didn't mind. I can't figure out how he found a cheaper white fridge when they're all stainless steel or black in the stores. I know my realtor won't like that for listing. I like this! It highlights that real estate (and rentals) are local. And it highlights that it's important to know your local area. And it highligts that "advice" and antidotes and personal experience from others on line is generally about their "local". It also highlights that there might be different levels of "housing" available to purchase as a potential rental - from properties in need of updating from 50 or 60 year old kitchens/bathrooms and need painting and carpeting and general repairs (or that will need a roof/HVAC sooner rather than later) to properties in dated and mostly working order but which are relatively easy to bring up to good working, ready to rent condition, to properties in "move in" condition. There are lots of decisions to be made about a property when deciding if it's good for a rental.
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bean29
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Post by bean29 on Aug 24, 2021 11:38:21 GMT -5
My son just bought a duplex from his Grandparents. I want to say the purchase price was $165,000 but I think it may have been 155,000. It was in fairly good condition, but needs new flooring and DH is painting. It needs something done in the windows in the Bathtubs, but DH seems to think they are better off leaving well enough alone.
DS was a first time home buyer, single income and he had a new truck payment on his record and a student loan. He got a WHEDA loan, he has to live there 7 years or Refinance to a conventional mortgage. He says they verify it is owner occupied by reviewing the tax bill. (in WI owner occupied units get a lottery tax credit, I don't know if that is how they verify or what).
I was kind of pissed about it, but he was far enough into the loan, that I figured it just needed to close. He did not want to live with us, and he needed to get into a place where he could park his $7,000 worth of weight lifting equipment.
He put down about $28,000 and it appraised at over $200,000. If he was not going to live there, I would not recommend a duplex.
Our rentals are not "investments" they just suck money out of our budget.
If you take the same $$ and invest in the stock market you get compounded growth, and it is more flexible than property which you can not easily liquidate.
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