Is this house a bust?

30 Replies

I’m looking at renting this property and I’m having trouble with the number crunching. I can’t seem to make it work great. I question how there are deals out there.

Purchase $145,000. 3 bed 2.5 bath


$1700-$1800 per month rent

$20,400-$21,600 per year

-Mortgage A-D ($13740)

A) Prop Tax $4590

B) Insurance $850 est

C) Interest $4900

D) Principal $3040

-Management 8% per month ($2,482-$2628)

-Vacancy (5%) ($1020-$1080)

-Repairs (10%) ($2040-$2160)

-Income tax (fed/state/local) after deductions of Mgmt cost/property tax/interest ($1976-$2251)

———-

Net ($858)-($259) per year

If I can deduct depreciation

-Net $134-$733 per year

Property is mostly remodeled. All major components replaced within 5 years expect windows. What am I missing? Is this worth renting out? 

Is property tax escrow included in the loan ?  That could be one thing . Principal ?  what is that ? Management ?  i self manage I cant say if that is high or low . Vacancy and repairs All you can do is guess .  

In my market a $145K house that rents for $1800 would be a home run . i would drop 40% down , self manage , do my own repairs , taxes would be about $2K , insurance $ 800 . All included in loan . Payment would be $1000 or less .  cash flow like crazy .

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Is that purchase price in line for the area? Rents seem  great....

Also if the house is a good find, then sometimes you have to wait for the cash flow to catch up....you're just in it for the equity build......

@Brian Wise

Income tax isn't included in the evaluation of a home, plus you'd only pay if you had positive free cash flow after deprecation. 

Your repair budget won't survive one modestly poor tenant turn, but your vacancy is a bit high so that could come out in the wash. You are missing a budget for CapEx too, which lowers the cash flow.

However, this all comes down to your goal. What do you want to get out of this? Do you want/need the extra $100/month this provides or are you happy that its basically cash flow neutral and you can do a long term hold and make your return from appreciation and mortgage pay down? 

Originally posted by @Matthew Paul :

Is property tax escrow included in the loan ?  That could be one thing . Principal ?  what is that ? Management ?  i self manage I cant say if that is high or low . Vacancy and repairs All you can do is guess .  

In my market a $145K house that rents for $1800 would be a home run . i would drop 40% down , self manage , do my own repairs , taxes would be about $2K , insurance $ 800 . All included in loan . Payment would be $1000 or less .  cash flow like crazy .

 The mortgage includes interest/principal/insurance/property tax escrow. 

I was hoping to use management company to be a little more hands off on a lot of it. 

Originally posted by @Bill F. :

@Brian Wise

Income tax isn't included in the evaluation of a home, plus you'd only pay if you had positive free cash flow after deprecation. 

Your repair budget won't survive one modestly poor tenant turn, but your vacancy is a bit high so that could come out in the wash. You are missing a budget for CapEx too, which lowers the cash flow.

However, this all comes down to your goal. What do you want to get out of this? Do you want/need the extra $100/month this provides or are you happy that its basically cash flow neutral and you can do a long term hold and make your return from appreciation and mortgage pay down? 

I was hoping to cash flow some but the goal  would be long run. 

A bad turn over would hurt for sure. I would hope to not see any major repairs in the distant future. A majority of the house has been updated. 

The depreciation is something I need to look into more. It would turn it into positive cash for in my mind. Why would the cost of income tax not be considered?   

@Brian Wise your income will likely be offset by your expenses and depreciation. So you may net a few bucks every month in reality, but on paper you are losing money once you account for the whole picture. So there is no income to tax.

Originally posted by @Brian Wise :
Originally posted by @Theresa Harris:

Why are you including income tax?

 Why would you not if it could cause a negative cash flow?

 You only pay taxes if you make money. You can depreciate your house and lessen any tax implications.

For tax depreciation how is the fair market value determined? Current market valve plus repairs made? Purchase price plus repairs? Or just purchase price?

I know you subtract land valve and divide by 27.5.

Maybe I’m underestimating what I can deduct for depreciation.

Originally posted by @Brian Wise :
Originally posted by @Bill F.:

@Brian Wise

Income tax isn't included in the evaluation of a home, plus you'd only pay if you had positive free cash flow after deprecation. 

Your repair budget won't survive one modestly poor tenant turn, but your vacancy is a bit high so that could come out in the wash. You are missing a budget for CapEx too, which lowers the cash flow.

However, this all comes down to your goal. What do you want to get out of this? Do you want/need the extra $100/month this provides or are you happy that its basically cash flow neutral and you can do a long term hold and make your return from appreciation and mortgage pay down? 

I was hoping to cash flow some but the goal  would be long run. 

A bad turn over would hurt for sure. I would hope to not see any major repairs in the distant future. A majority of the house has been updated. 

The depreciation is something I need to look into more. It would turn it into positive cash for in my mind. Why would the cost of income tax not be considered?   

 For a deal this size the impacts from taxes will be minor compared to the impacts of cash flow, appreciation, and debt pay down. Getting to focused on them will take your eye off the important things. 

Additionally since you aren't buying this asset in its own legal entity that pays its own taxes, the earnings will flow through to your taxes. However, deprecation can't offset your W2 earnings, thus using your personal marginal tax rate become in inaccurate means of calculating total returns because generating a tax rate becomes difficult. 

As for major repairs, hope isn't a viable plan. Things shouldn't go out, but faulty HVAC condensers are made every day.  If you want to hope that something doesn't go wrong, good luck with that, but that's one of the major failure modes of small investors. Being undercapitalized, not having money to make needed time sensitive repairs, so they have to take drastic action to meet habitability requirements. 

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I adjusted some of the numbers. 

$1700-$1800 per month rent

$20,400-$21,600 per year

-Mortgage A-D ($13740)

-Management (8%) per month ($2,482-$2628)

-Vacancy (3%) ($612-$648)

-Repairs (10%) ($2040-$2160)

-Capex (10%) ($2040-$2160)

Net-(514)-264

I didn’t account for depreciation being fair market value at time of rental vs time of purchase. We bought this house few years ago and I have about $57500 of  upgrades/updating into it. Comps around 245-250k currently. 

The option is to keep this and rent it or sell it. 

Originally posted by @Nikhil Gandhi :

@Brian Wise is this before or after a refi? Looking at your market price, you could pay yourself back a little (or not) and look to cash flow a good chunk more.

 Mortgage is original. The equity is available. Cash out refi would lower cash flow more by an increased mortgage? 

@Brian Wise you can do a few things - do a partial cash out refi, where you pay your invested amount + cost of refi and still have extra equity to recalculate your monthly payments and increase cashflow.

Or you don't do a cash out and do just a refi where you'd cashflow more than the first option thru a recalculation of your new equity over the next 30 years, but not pay yourself for the investment you already put in.

Refi will also help you on your taxes since it's starting off the calculation like you've just bought this house with interest (tax deductible) taking up most of each monthly payment.

@Brian Wise I think you are making this too hard.

Once you turn this into a rental, the fixes/upgrades you make from an primary residence perspective versus as a rental are going to shift. I assume you upgraded things because you live there. Most renters don't care that much about the house, it just is, they are not owners. You can incentivise them to keep it up, but still not the same. My goal would screen for a good renter, then let them be if they pay rent on time. It is in their best interest to contact you when something breaks. You might check in once a year to see how it is going on the property and what needs to be fixed. But I don't make upgrades here. I.e. tenants have big dogs, house smells like piss, but they haven't complained- it's from their dogs! Lol. Will I have to replace floors when I get a new tenant? 100%. It just is.

So the first year might be a break even. Then each additional year it gets better, and maybe for no other reason than the depreciation. But cost of repairs is a line item before calculation of taxes. I have a friend that doesn't charge enough rent in their rentals, no increases in years! I couldn't figure it out until I saw the tax return. Then the light bulb went on!

Originally posted by @Steve Milford :

@Brian Wise I think you are making this too hard.

Once you turn this into a rental, the fixes/upgrades you make from an primary residence perspective versus as a rental are going to shift. I assume you upgraded things because you live there. Most renters don't care that much about the house, it just is, they are not owners. You can incentivise them to keep it up, but still not the same. My goal would screen for a good renter, then let them be if they pay rent on time. It is in their best interest to contact you when something breaks. You might check in once a year to see how it is going on the property and what needs to be fixed. But I don't make upgrades here. I.e. tenants have big dogs, house smells like piss, but they haven't complained- it's from their dogs! Lol. Will I have to replace floors when I get a new tenant? 100%. It just is.

So the first year might be a break even. Then each additional year it gets better, and maybe for no other reason than the depreciation. But cost of repairs is a line item before calculation of taxes. I have a friend that doesn't charge enough rent in their rentals, no increases in years! I couldn't figure it out until I saw the tax return. Then the light bulb went on!

 The original plan was fix to sell. I have been wanting to start building a rental portfolio. With struggling to find good properties to cash flow I was hoping to make this house work. 

@Brian Wise Then go with that plan. Sometimes it makes sense to sell and sometimes not. Maybe you cash out on this house and buy the next as a rental. The key is how does the next step pencil out? If the next houses return such even worse than this, then it doesn't make sense to sell. Everyone wants returns today/right now, but think 1 year from now. It all depends on what you want. I used to want mostly appreciation and didn't want to be a landlord. 3 years ago I put up my house for sale at a crazy price and for rent at a crazy price, at the same time. It just happened to rent first. Maybe you do like I did and just see what happens? Let's say tenant is in for a year, then out. Fix what needs to be fixed and then do it again, offering both ways again? In hindsight, I am glad I rented as the value of it has doubled in 4 years along with providing a little cash flow. Now I am saving my pennies, nickels, and dimes, looking for the next dirty old house that I can fix up and then rent or sell for a crazy price and see what happens first lol.

@Steve Milford Another key is not to fix the house nicer than the neighborhood. Make it functional, clean, and go for it again. If you put quartz in it. Is that going to pencil out? What's the ROI?