Is this a smart thing to do

9 Replies

Im looking at doing a refi on my primary to do down payment and up dating on a rental...once updates complete on rental should rent for 800 leaving  400 a month cashflow...my thoughts are to build up 6 months of rent for problems arising on the rental..then pay myself back putting the extra dollars to paying off my primary home quicker 

Yes this sounds like a good plan. However keep in mind if you have a loan on your rental your cashflow will not be $400. Typically 50% of rent goes to expenses Other Than your financing costs. So if rent is $800 subtract $400 a month in expenses, any you have $400 left to over your financing.  Only then any left over cash  goes in your pocket as net cash flow. 

While the 50% rule is a crude rule of thumb it is a good starting point and keeps new investors from underestimating the true costs of holding rentals.

Ned Cary..ok payment on the loan with insurance and taxes figured in is 416$ a month. Rent would be 800 so remaining would go into the bank for repairs ..Im thinking I need to have enough in bank for big tickets repairs such as AC unit replacement....5000 at the least to replace unit if it went out. So the 385 let it build however long it takes to reach 5000...then take the 396 and pay on primary home...does that sound good?

Expenses on a SFH will be 50% on a ongoing bases long term. You will, in theory, never have positive cash flow with debt repayment at $416 and expenses at $400. Maintenance costs will be such that you will be continually spending and topping up your reserve maintenance funds.

You will have no positive cash flow to put on your primary home.  

Without positive cash flow it is a bad deal. Your monthly rent payment needs to be a minimum 1% (2% is your target) of your property value to hope to achieve a good investment (cash flow).

@Michelle Dunlap

Rent would be 800 so remaining would go into the bank for repairs

yes that is a good plan. 

So the 385 let it build

You missed the point of my last post. It will not be $395 most months. You will have lots of expenses, most of which will come at irregular intervals. It is much better to calculate this on an annual basis because many of your expenses will be annual.  But you started with monthly numbers so I will keep it that way.

  • $800    rent
  • - 400   all expenses other than you loan payments (50%)  *
  • =400   Net Operating income
  • -310    Mortgage payment, principal and interest only.   **
  •   $90    Net bottom line monthly cash flow in your pocket.

*Over time over a portfolio of rentals expenses other than financing expense will tend to be about 50% of rent.

** the mortgage payment you gave of $416 included taxes and insurance.  While you pay them to the lender they are not a financing expense. They are an operating expense.  The principal and interest are not part of the 50% expenses. Taxes and Insurance are part of the 50% expenses.   The $310 payment I estimated is just for principal and interest. You should plug in your actual number for principal and interest.

@Thomas S. point is valid but he missed the fact that your loan payment was PITI not just PI. Basically this is a positive cash flow deal but just barely. Since the 50% rule is a crude rule of thumb you might make out much better or do a little worse.