Just starting out...turning primary residence into rental?

13 Replies

First off, I'm a newbie at this, and this is my first post.  I've enjoyed reading a lot on this site, and I'm learning a ton.  My wife and I own a single family home in a suburb of Nashville, TN.  We've been toying around with renting it out and moving into an apartment to save money for a downpayment on a new home for us to live in.  I have some questions about whether or not this is a good idea.

The house is 3br/2.5ba and 1850 sq ft. Our PITI on this house is $1400 and I'm hoping to get PMI removed, which will knock it down to $1200.

I've found about 10 comparable rental properties in the area, and they are listed (not necessarily rented) for an average of $2300.  I think I could reasonably rent this property for anywhere from $1900 to $2100.  (Zillow says $1900, but I'm not sure how accurate Zillow's rent estimate is).

To me it seems like a no-brainer to rent it out. Even on the conservative end of the rent spectrum with PMI still intact, we could net $500 / month, not counting any expenses or vacancies.

Here are my questions:

1) I'm assuming an 1800 sq. ft. house would take a little longer to find tenants for than a smaller house or apartment.  I know it probably varies a lot, but how long should I expect it to take to find renters?  Are we talking days, weeks, or months?  This might be impossible to answer, and if so, I apologize.

2) We have probably somewhere in the neighborhood of $40K of equity in the house.  Would it be a bad decision to pull out $20K of it to use as part of a down payment for another house for us, or are we better off just getting an apartment and saving up?  My wife is somewhat nervous about pulling equity out, and the last thing I want to do is sell her on something and then it turn out to be a bad idea.  Plus her dad is a former CPA and CFO, and is really conservative in his investments, and she respects him a lot, so it's important that I get this right.

3) What other key considerations am I not thinking about, or am I way off base in my rent analysis?

Thank you all for reading my long post, and for any help you can provide!

So you and your wife are going to rent a place for $500?

Your strategy can work

1 you assumption is wrong a bigger house will not rent slowly   As for how fast it will rent, that is a local sub-market question that I cant answer.  To pull rental comps, you can go to rentometer.com  they are pretty accurate.

2 you can pull your equity out but I would rather work a little bit to find a flexible seller, who would woner finance the house to me with zero down.  The trick in my house is keeping my wife from seeing properties that she would want to move into.  That is how I make my living.  You can learn how to do that on BP

3 if you are looking at this as a long term idea, then you need to consider vacancy rate in your calculation. If you lose a renter every year, and it takes you 3 months to get a new one after you turn the property over, then you have a problem. So try to get a feel for vacancy rate. Talk to other investors in your area. Visit your local REIA club and network.

To your success

Josh

We have twor sfr in Franklin about that size at that price. They rent very easy to well qualified tenants. One thing that really helps us is the elementary school.  I suggest you call the rentals in your neighborhood.  Ask how long they have been for rent. If they are owner landlords ask how their experience has been. Most people love talking real estate and don't mind sharing. 

@Jon Mason I'm struggling to understand your numbers here. You say it will rent for $2100 and your payment will potentially be $1200. That's a $900 net difference that you are looking at which isn't bad, you just need to make sure your numbers are accurate.

You say you want to find a place to rent so that you can save up for a downpayment. How much will rent cost you per month? How much of that $900 will be remaining to actually save? **Edit: How much of the $1400 payment you no longer have will you be able to save?** It's very hard for people to downgrade, so keep that in mind.

Additionally, has the property seen any appreciation since you've owned it? If so, you will want to factor the section 121 capital gains exclusion into your decision making.

Originally posted by @Steven Picker :

So you and your wife are going to rent a place for $500?

 No, maybe I wasn't clear on that.  We would probably just rent an apartment around here for a while.  All the money made on the rental would be stashed away.  We're not in the position of needing to do this to make extra money, this is more of a long-term wealth building thing.  Our personal monthly expenses are well under our income, we just don't have a down-payment saved up.  We could pay both the mortgage on this house and rent on an apartment if we had to.

Originally posted by @Josh Caldwell :

Your strategy can work

1 you assumption is wrong a bigger house will not rent slowly   As for how fast it will rent, that is a local sub-market question that I cant answer.  To pull rental comps, you can go to rentometer.com  they are pretty accurate.

2 you can pull your equity out but I would rather work a little bit to find a flexible seller, who would woner finance the house to me with zero down.  The trick in my house is keeping my wife from seeing properties that she would want to move into.  That is how I make my living.  You can learn how to do that on BP

3 if you are looking at this as a long term idea, then you need to consider vacancy rate in your calculation. If you lose a renter every year, and it takes you 3 months to get a new one after you turn the property over, then you have a problem. So try to get a feel for vacancy rate. Talk to other investors in your area. Visit your local REIA club and network.

To your success

Josh

2) We'd like to purchase a new home (not really for investment purposes) and using some of our equity in our current house is the quickest way to make that happen, just not sure if it's a good idea or not.  We're both very happy in our careers, so not trying to do real estate investing full-time (at least not right now), but just wanting to build wealth.

3) When doing my calculations, I've factored in 2 months rent per year for vacancies and maintenance.

I personally would not move you would only be saving about $400 bucks a month As mentioned  a vacancy ,bad tenant etc would wipe out your small profit you are building equity in your home and would be better off taking a heloc or refinance you better off cutting your budget at home and sacrifice that way or you can take in a roommate for $500 a month and save that money for a downpayment

Originally posted by @Brandon Hall :

Jon Mason I'm struggling to understand your numbers here. You say it will rent for $2100 and your payment will potentially be $1200. That's a $900 net difference that you are looking at which isn't bad, you just need to make sure your numbers are accurate.

You say you want to find a place to rent so that you can save up for a downpayment. How much will rent cost you per month? How much of that $900 will be remaining to actually save? **Edit: How much of the $1400 payment you no longer have will you be able to save?** It's very hard for people to downgrade, so keep that in mind.

Additionally, has the property seen any appreciation since you've owned it? If so, you will want to factor the section 121 capital gains exclusion into your decision making.

My $500 figure was assuming I couldn't get PMI removed, so $1400 mortgage payment, and assuming the conservative end of the rent figures I mentioned, so $1900 rent. If that were the case, it would be $500 per month left over. You are correct though, if I could get PMI removed, and rent it for $2100, there would $900 left over.

All of the money we'd make on the rental would be saved, at least for the time being.  Of course later we may want to put some of that into another property or something.  Rent on an apartment would be like, $1000 probably (haven't looked around a lot yet).  I failed to mention that the the primary goal of this wouldn't be for immediate cashflow (although I hope it makes money, obviously), but for long-term wealth building.  As it currently stands, we could pay the mortgage on this house and rent an apartment in addition to that on our current income and still be fine.  It wouldn't be ideal, but it wouldn't ruin us by any stretch.  

As far as appreciation, we bought the house for $234K about 2 years ago and we owe $212.  Zillow's estimate says it's worth $265, but again, I don't know how accurate that is.

Originally posted by @Sterling Britt :

We have twor sfr in Franklin about that size at that price. They rent very easy to well qualified tenants. One thing that really helps us is the elementary school.  I suggest you call the rentals in your neighborhood.  Ask how long they have been for rent. If they are owner landlords ask how their experience has been. Most people love talking real estate and don't mind sharing. 

 So, the rent figures I've mentioned are pretty reasonable then.  

We're zoned for Liberty Elementary, which is a great school from what I've heard (we don't have any kids).

How would I find rentals in my neighborhood?  I know I could go look for "for rent" signs, but if the house is currently rented, they won't have a sign out, right?

Honestly I think its a great idea. My wife and I lived in an apartment for the first couple years while we invested. We actually owned 5 rental houses before I bought a house that she convinced me to move in to so as long as you have enough income to support any problems that come up like vacancies and maintenance I would go for it.  Good luck

@Jon Mason I like your plan. You will find many opinions on any question you ask here. Surely some of the others who have chimed in have more experience than I do but you are doing what I did essentially. My first house is a rental I would not buy now because it has appreciated but I refinanced out some cash later to invest more. If you refi now you will likely be back in PMI. E. Also, my bank looked on rental income more favorably after two years of having a rental so you could start that clock ticking sooner if you start renting your house out now.

     How long to rent is local but if it is slow you have room to lower your rent to speed it up. Be selective - don't just take first applicant to get it rented. Screening tenants is the most important part of this to me. It can make this process much more enjoyable. 

     If you decide to refi soon, do it while you live there for better rates. Add about a point when it is non-owner occupied. Maybe you can qualify for a low down loan on your next residence too?  Just stash some reserves away before you take on your next mortgage. You will enjoy watching someone else pay off your house. I am hooked. Looking for our third one now. Feel free to message me if I can be of assistance. 

Good luck!

Will

@Jon Mason

 I personally agree with @Josh Caldwell

 and @Steven Picker

"To me it seems like a no-brainer to rent it out. Even on the conservative end of the rent spectrum with PMI still intact, we could net $500 / month, not counting any expenses or vacancies."

 As a former property manager of several apartment buildings in NYC, In my opinion & please correct me if I'm wrong guys, you just can't eliminate a variable of the equation & think you're making a well informed decision.  You have to COUNT on expenses & vacancies or that house will become your financial nightmare.

Otherwise, I think it's a good idea, just know your numbers.

If you PM me your property or just cross streets address I can give you an Investment report and highlight some strategies. Free of course. I can estimate the vacancy in that block, and other aspects. Don't make a decision only based on how numbers pan out in Excel. That's on paper, reality might be brutally different.

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