New to REI, Turning my home into a Rental

Starting Out
13yFollow

New to REI, Turning my home into a Rental

Kelly Williams
Riverdale , GA · Member since 2013 · 42 posts · 2 votes

Hello
I am new here. I have read through the forums for some time and finally decided to sign up. I have some questions. I understand this topic may have been covered but I was hoping to start a discussion on my specific situation.
I have been wanting to enter the REI field for quite some time and I may have come across a way to do this. I bought a home for $215,000 2 years ago with an FHA loan and paid no closing costs. I got a great deal on the place, along with a great mortgage rate. Due to my current family situation, we are planning on moving across the country next year. I am debating turning my house into a rental as apposed to selling when we move. Here are my reasons for wanting to do this. I bought at a great time for my part of the city. Home values are skyrocketing. The neighborhood began going through gentrification when we bought. Homes on my block are all being fixed up, and younger wealthier families are moving in. My realtor says we could list our home today for $260,000. Speculation looks like this will continue to increase. I would hate to leave the market before the home has reached its full potential. So here are the numbers.

Paid $215,000
Value $260,000
Mortgage $ 1400 (this includes PMI, taxes, etc.)
Rent Price $1600

I realize the number do not look great, but I am looking more for the investment, not cash flow. The rental price has been difficult to calculate due to the lack of rentals in my area. Rental vacancies are at an all time low in Denver. Also keep in mind, my PMI will go away about 2 years after I move decreasing the monthly payments by $200. Also, I do not need to sell to be able to buy a new house when we move. We have the opportunity to get a private loan from a family member for $0 down and the minimum rate at about 2.6%.

Thanks in advance for any input you may have.

K

0Reply
40 views

13 Replies

Jump to latestLatest
  • Matthew RutledgePro Member
    Investor · Golden, CO · Member since 2011 · 80 posts · 23 votes
    13y

    Off hand, it doesn't look like the numbers work.

    Plan for vacancies (1 month per year is decent planning), utilities while vacant, clean out and repair costs at move out, tenant locator costs, stuff that WILL break or wear out...

    Don't forget property management fees. Those are typically 10% of rent monthly. In your case, that pretty much negates any cash flow potential. I really can't imagine being able to go without a property management firm living on the other side of the country.

    Off hand, it looks like you will be losing money for the first two years until that PMI is gone. After PMI, a wild guess at your cash flow would be as much as $100/month, and even that may be optimistic.

    Can you refinance now and drop the PMI?

    The Denver market is going gang busters right now for sellers. If your place is move in ready it really might be best to sell it (probably in a week at this rate...) and take the proceeds to your new home and see if you can get into an investment property there.

    I have a rental in one of the Northern suburbs that is currently only cash flowing about $25/month after expenses and proper budgeting. But I consider that a "loss" property. It is a very special case. My wife is emotionally attached to the place and we are renting it at a discount to some friends.

    The point is, you can do it, just don't expect to make a lot of money doing it. And I would expect the first two years to cost you roughly $3k until you can get rid of that PMI.

    Run your own numbers. Figure out your own appetite for risk. Do it, but have realistic expectations.

    Good luck.
    -Matt

    0Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    13y
    Originally posted by Kelly Williams:
    Hello
    I would hate to leave the market before the home has reached its full potential.

    The issue with that is right now you know you can sell for a profit. If you wait for the full upswing the question becomes; are we there yet? Will you be there or as close to there as you can really get next year when you move?

    A mis timing on answering that question could lead to a lower sales price. Some people believe we are in a mini bubble that will pop, some don't, either way things will at least slow down eventually.

    Also figure in your rehab costs when you go to sell. If you rent you will have some repairs to make for it to command top dollar when you sell. Those repairs might amount to just paint and carpet but could be much more, especially with tenants.

    Those costs will likely be lower when you leave as an owner that cares for the property better.

    0Reply
  • Grant P.
    Denver, CO · Member since 2012 · 218 posts · 48 votes
    13y

    Hello from another Denver investor.

    What is your current interest rate? can you refinance and get a lower rate? If you refinance is your 260k estimate accurate? If you think the appraiser will come up with that number you are right on the cusp of being able to get rid of the PMI now, interest rates are at an all time low so I can't imagine getting a worse rate than you have.

    Is their potential for increasing the rent with renovations? I would explore all of you options to maximize the cash flow potential, but also don't just focus on that. Denver is projected to appreciate 6% in the conservative forecasts, thats 15k in gains in the next 12 months. Even if you are "breaking even", you numbers include your total mortgage. How much is going to principal reduction? You don't want include this in your expenses.

    If its me in a market like this, I find a way to make this place cash flow and bank on the hot market that economists much smarter than myself are forecasting. The only way I would suggest against it is if you were going to take your profits and plug it right back into a new RE investment of equal value or greater.

    0Reply
  • Scott W.
    Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
    13y

    I rented out my primary residence this time last year. All the BP posters said not to do it cuz my rent - PITA was only $150.00.

    After a year, it is now worth $7k more & I had $5k in principal reduction. My cash flow as -$11/month or $132 for the year (including vacancy).

    So my net worth went up $12k.

    If you've got the reserves, do it for 3 years. You can then sell it still tax free. The appreciation looks promising out there IMO.

    0Reply
  • Kelly Williams
    OP
    Riverdale , GA · Member since 2013 · 42 posts · 2 votes
    13y

    Thanks for all of the responses. @Grant P, my interst rate is 4%. I could maybe get a lower rate, but probably nothing low enough to drastically change my payments. As far as the PMI, I believe with my FHA loan, I have to pay PMI for 5 years, no matter the value or if I refinance. There really isn't anything I could do as far as renovations besides additions which I am not willing to undergone. Everything is completely updated. I could be underestimating the rental potential.

    What would be a rental price that would make it a profitable property with my $1400 mortgage?

    Thanks @Scott W for the encouragement. I really want to make this happen.

    0Reply
  • Grant P.
    Denver, CO · Member since 2012 · 218 posts · 48 votes
    13y

    Kelly Williams
    Do you know the breakdown of your mortgage? What neighborhood is this in Denver, specs on the house(bedrooms, bathrooms, etc.)? I think you can be profitable with this.

    I also wouldn't plan for 1 month or 8.3% vacancy when the data I saw last week for the metro area was 1.7%. It will go up at some point, but address that when it happens.

    0Reply
  • Matthew RutledgePro Member
    Investor · Golden, CO · Member since 2011 · 80 posts · 23 votes
    13y

    I just re-read my post, and I sound more like a nay-sayer than intended.

    @Grant P. seems to have a few things in mind.

    In my rather amateur opinion squeezing another hundred in rent should be right at the break even point. And that's especially true if the vacancies stay down.

    0Reply
  • Kelly Williams
    OP
    Riverdale , GA · Member since 2013 · 42 posts · 2 votes
    13y

    Grant P.
    Here is the break down.

    Principal and interest: $1,000.42
    Escrow payment: $407.76 (MIP roughly $200)
    Total monthly payment: $1,408.18

    The house is in Sunnyside, 2 blocks from LOHI. It is a 1600 square foot 3 bed 1 bath. The 3rd bedroom is non conventional but about 400 square feet. There is a small office as well. It has a one car garage and a backyard. Like I said in a previous post, it is completely updated as far as appliances, kitchen and bathroom, and has central AC as well.

    0Reply
  • Daniel Wesdyk
    Highlands Ranch, CO · Member since 2013 · 5 posts · 0 votes
    13y

    Kelly Williams - would it be possible for you to pay your PMI as a single premium? I was able to do that on my current residence and it brought down my monthly payment and also was a bit cheaper than paying it out every month.

    0Reply
  • Grant P.
    Denver, CO · Member since 2012 · 218 posts · 48 votes
    13y

    Kelly Williams
    I was looking for what portion of the payment is interest, and what portion is principal. The portion that is principal is an out of pocket expense, but it is not an expense. You are essentially banking that every month.

    Also LoHi is where i concentrate. I just rented a 650 sq foot 1bd 1ba row home in lohi for 1350 a month, my guess is you are underestimating the rents in this area.

    Also I would talk to a lender and see if you can get the PMI off of there. FHA PMI automatically drops off in 5 years, but if you refinance to a conventional loan they underwrite it themselves. Unless you have a loan that states that you can't refinance(which is highly unlikely 3 years after the loan was written) assuming you have 20% equity based on the new appraisal you will have no PMI, and potentially a better rate with a lower payment.

    0Reply
  • Kelly Williams
    OP
    Riverdale , GA · Member since 2013 · 42 posts · 2 votes
    13y

    Grant P.
    I didnt realize I could refinance the FHA loan. It looks as though I can. Thanks for all the input. Just what I was looking for. It looks like I could lower my monthly payments by about $300 with a lower rate and no PMI. That would be HUGE, especially if I could rent the place for more than what I was thinking. Thanks again.

    0Reply
  • Kelly Williams
    OP
    Riverdale , GA · Member since 2013 · 42 posts · 2 votes
    13y

    So I thought I would just bring my old thread up to ask another question. If I refinance this home as my primary residence, can I turn it into a rental in a year? I know there are stipulations with this. Thanks for any input.

    0Reply
  • Grant P.
    Denver, CO · Member since 2012 · 218 posts · 48 votes
    13y

    Check the rules with your lender, but as long as you plan to refi as your primary residence you should have no problem getting a new loan for your new property. You are welcome to give me a call, as I don't respond as quickly on BP sometimes, but if you need the names of some great local lenders I am happy to help.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free