Rental Property Investor · Atlantic Beach, FL · Member since 2014 · 15 posts · 2 votes
Hello,
I'm new to the investor world and I want to get started on the right foot. I've lived in my 2BR/1.5B town home near the beach for 5 years. I owe 135K and my mortgage is 1100.00 per month. Through some research I've determind that it would rent between 1200-1400. However, the real estate market in my area has really heated up and it's become a sellers market. As I stated above I owe approx 135K and the Zillow value is $181(although I believe it would sell for more based off other recent sales in my area) I believe the area will continue to go up in value so I'M considering renting the property for lower cash flow or break even to realize more gains in the future. My long term goal is to create a passive income that could eventually supplement my primary income.
Should I sell the current property and use the gains to invest elsewhere (less expensive rentals) or hold on for potentially greater gains down the road?
Investor · Plano, TX · Member since 2014 · 145 posts · 102 votes
11y
I use a formula to determine if I should sell it or rent it. I won't get into the weeds on the formula but I'll give some basic tips so you don't get burned:
First, account for water/sewer, insurance, and taxes if they aren't escrowed as part of your mortgage payment. Lets assume your insurance and taxes are escrowed and your water/sewer is 50/month for demonstration purposes (so 1150 total). I also will assume your rent will be 1400 because it should be better than any other house on the market,
Add your vacancy rate which you can find through researching your local rental market. I use 5%.
Make assumptions on what you need for big ticket maintenance items (roof, siding, water heater etc) over the life of the home. Let's assume 3% of rents per year to go toward a savings for these items.
Make more assumptions about any month-month maintenance you may need to do such as lawn maintenance, snow removal, fixing lights and faucets etc. I might assume 2-5% depending on the age of the house and condition.
Take the yearly rent (1400*12=16800) and subtract your maintenance and vacancy costs of 10-13% (16800*.90 = 15120/yr). Now subtract your debt (1150*12 = 13800) so 15120-13800 = 1320/yr.
The calculations go on, but in short you are going through all your effort to earn 1320/yr. I don't know about you, but wouldn't want to work for so little. Plus, an eviction is costly so your cash flow needs to be able to absorb this risk.
Thank you for your comment. Question - in your calculations, you included utilities in the figures. Whenever I have rented in the past, I was responsible for paying these expenses as a tenant. That does change the numbers a bit. However, your point is well taken. What is worth the head aches of renting from an annual income perspective? I have heard that if you can charge 1.5 -2% of the total purchase price of the property in monthly rent then it's a good rental. This just doesn't seem realistic in my area.
Investor · Plano, TX · Member since 2014 · 145 posts · 102 votes
11y
I only rent multi's which generally have some sort of utility payment to go with them. As you pointed out, the point is the same.
Honestly, I can't comment on the 2% question. I've heard this concept thrown around, but single family properties in central MA will never cash-flow unless you find a very very lucky deal. Even then, I'd rather take the same cash and spend it on a multi with a much higher rate of return. 30k down payment for 12-1400/month or a 50k down payment for 25-3500/month.
I do recognize that MA is a very expensive market and what works here may not work the same elsewhere.