Does this rental make sense?

Question

Hi BP Members,

I'm new to real estate investing and am looking to see if I can convert my current home into a rental. I'm moving out of state (in Los Angeles currently) and instead of selling would prefer to rent it.  I've been reviewing the numbers and wanted to see if there is anything I am missing?

If I look at PITI as it seems some investors just focus on that, I would have a slight cash flow of $62 a month. So not very high at all but something.  However if I factor in property management cost and gardener fee, I am in the hole closer to $300 a month.  For me to rent it I would also need to do some repairs which can be up to $10-12k.  At this point, I wonder if it's worth it. As we're at the top of the market and it seems like we wouldn't even be breaking even. Curious on thoughts from those who have been in this business much longer.

Thank in advance!

Kevin Moules · Answer

@Barbara Teel, I totally agree with Cassi on this one. The way that the CA market is in right now I would cash out and run with it! Since this is your primary residence there are no taxes on the sale up to 250K I believe. Not sure where you are moving out of state but If I were in your shoes I would take your sale money and do a house hack ad Brandon calls it. Buy a multifamily unit, live in one and rent the others. Does not make sense to hold a property that is going to cost you money every month especially at the high market we are in.

Some folks are willing to take the risk in the gamble for appreciation, especially here in CA, they are typically purchasing when the market is down, not high as it is now. Good luck on your journey!

Cassi Justiz · Answer

Think of it this way. What is your purpose of having a rental? For most people, it is extra income, or to accelerate your path to financial independence. Does it make sense for you to SPEND $300/month (without repairs) to allow someone else to live in and mess up your property? Even best case scenario your tenant is super clean, there is still wear and tear on everything that you will have to pay to keep up with. If this is your dream house and you want to keep it forever, then maybe it makes sense for you to spend that money. But if you are looking at it from a pure financial position, probably not.

Assuming you have any equity in your house, it would probably make more sense to sell at the current point in the market and re-invest that into a solid cash flowing property or portfolio.

Assuming you have any equity in your house, it would probably make more sense to sell at the current point in the market and re-invest that into a solid cash flowing property or portfolio.

Dave Foster · Answer

@Barbara Teel, the day you turn that into a rental (and a crappy rental it will be) you lose 35% of your profit.  Right now you have the opportunity if you've lived in it for 2 out of the previous 5 years to sell and take the first $250K ($500K if married) of profit tax free.  Since it's a 5 year look back you actually could rent it for 3 more years as long as you sell while you can still claim the 2/5 residency.  But if you go beyond that you are now in California claw back territory.  If you sell you pay tax on the gain.  If you 1031 out of state and later sell and do not do a 1031 you will have to pay CA for the gain while it was in CA.

And while converting it for a couple of years might seem attractive unless it continues to appreciate you will lose money by the time you take your monthly NOI and do a rehab from rental to make it ready for the next purchaser.

Primary residences rarely convert best and highest into rentals (the opposite is true though).  So take the money now while tax free.

John Thedford · Answer

Sell

Rhonda Wilson · Answer

I wouldn't advise turning your home into a rental based on what you've said. In addition to the loss of $300 per month, there are risks to being a landlord. You hope not, but there is always the possibility of a bad tenant that could cost you a lot of money in lost rent, legal fees and damage. I would suggest selling and putting the equity to better use elsewhere.

Charlie MacPherson · Answer

@Barbara Teel  To start familiarizing yourself with the Boston market, look at the map.  There are two "circumferential highways - Route 128 (aka I-95) that's about 12-ish miles from downtown and I-495, about 15 miles further out than that.

Within 128, prices are very high and the closer you get to Boston the higher prices go.  There are some rougher areas that are exceptions like Chelsea.

Within 495, there are some areas that are more affordable, primarily to the south.  Plymouth and Bristol counties are prime areas for more affordable pricing.

There are a few towns to look at for properties that are reasonable; Brockton, Taunton, Fall River, New Bedford, Attleboro, Plymouth, Wareham and Middleboro.

Barbara Teel · Answer

Thanks for the feedback everyone! I like the area but at the end of the day do want to be making and not losing money monthly.  I'll see what profit I can make and hopefully can reinvest somewhere on the east coast. I'm relocating to Boston now which as far as I know is not more of an affordable market than LA but will see what I can find! A multi-unit house hack is definitely the way I would like to go.

Eric Adobo · Answer

It's an appreciation play.

Bad bad rental.

Does this rental make sense?

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