Should I consider renting my home as my first investment?

Question

My wife and I are looking to relocate back to a town we really enjoyed 10 miles from where we currently live now that our son is off in college. We currently have a home in a decent golf course community in an Atlanta suburb that would produce around 330.00 per month in cash flow if we rented it out. Would this be a smart move to get started in rental property?

Nnabuenyi Anigbogu · Answer

@Lane Pate

when you say 330 a month in cash flow what does that mean? Is that the rental income - PITI?

I ask this because most people who start out thing that cash flow is whatever you have left after you pay your mortgage and that is not true. That is a good way to lose money. If you are calculating it right then you can ignore everything i just said.

Larry Turowski · Answer

While it is convenient to rent out your previous residence (financing is already in place, no out of pocket, you are familiar with the house and neighborhood) you should always think of it as buying the house from yourself.  You didn't buy the house to be a rental and you likely wouldn't buy for $250K or whatever it is worth now in order to at best cash flow about $4K/yr.   That would only be a 1.6% return un-leveraged.

Sell.

Nnabuenyi Anigbogu · Answer

@Lane Pate

Given that info i would tend to agree with @Jacob Sampson in that you will not have any cash flow. It will either be very low or negative.

I understand you dont expect any major repairs, however minor maintenance stuff adds up. Vacancy of one month can easily put you in the negative for the year. Also turnover costs can add up if for some reason you get high turnover. Given all that there is a very good chance you will be negative for the year and we haven't even touched putting away money for capital expenditures. I personally would sell unless i was fairly certain that some significant appreciation would be on the horizon.

Lane Pate · Answer

Thanks to all for responding.

My goal is to hold long term as a retirement investment but I have some decision making to do. Thanks again!

Lane

Rob K. · Answer

25 years ago, my wife and I made the decision to hang on to our two condos when we got married and moved up to a larger SFH.

At the time, they were cash flowing break even to slightly negative. We had other incomes, so we did not worry about it.

We still have those condos today, and they cash flow quite well as rents have increased steadily over the years, and there is very little debt remaining. One of them is owned free and clear.

I think hanging on to your former primary as a rental is a great way to get started in investing, especially if you are locking in owner occupied fixed term financing and you have a long term hold horizon. You know the property already, and if it turns out you are not cut out to be landlords, it is likely the least risky way to find out. Just be aware that if you don't sell within three years, you could lose the owner occupied capital gains exclusion.

Jacob Sampson · Answer

rent - PITI is not cash flow.  At a minimum you will burn through 20% of rent on vacancy and maintenance, even when self managing.  You most definitely have negative cash flow so to me that is one strike against renting it out.  The other would be if you are going to be upset when your home gets trashed.  If that is a problem for you I would say sell and look for a different investment.

Lane Pate · Answer

Nnabuenyi,

Thanks for responding. The 330 is only the dif in rent and mortgage payment including taxes and insurance. I purchased the home for 228,000 with many updates including. New roof, hvac, furnace, and much more so I don't anticipate any big expenses soon. Have not figured vacancy, repairs,etc. I do not plan on using a property manager as I will be close to this home.Given this info what do you think?

Thanks

Lane

Sergio Veskovic · Answer

I have a question. You mentioned that when you re-finance you get money out of the property. How does that work? I am new at this. And you mentioned that its tax-free. Could you pls elaborate. Thanks.

Lane Pate · Answer

Dustin

Really appreciate the advice. It all makes good sense.

Lane

Dustin Heiner · Answer

Hi @Lane Pate!

In my opinion, the hard part with investing is finding and acquiring a home that will make you money. If you decide to flip a property or rent it out, you need to get the property first before you can do anything.

Since you have the property already, and you know it will cash flow, it would be a great idea to rent it out and make passive income each month from it.  Also, the tenants are paying off the mortgage and you will hopefully get some appreciation after many years of profitable rents.

I plan to move from my residence in a year or two and will rent it out. I could sell it and cash in on the appreciation but then I would lose the cash flow.  With renting it, you can also refinance the property after a few years, take money out to buy an investment, and have your tenants pay off that mortgage.

Best thing about refinancing is that money you pull out is TAX FREE!  When you sell your home, you pay taxes on the sale.  When you refi, the IRS sees it as a loan that you pay back so no taxation there.  Good thing for you your tenants are paying off the loan!

There are many other great things about rentals. Send me a PM if you would like to chat about it.

Hope it goes well for you!Dustin

Should I consider renting my home as my first investment?

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