Rental Property Investor · Spanish Fork, UT · Member since 2015 · 40 posts · 18 votes
We purchased our current home almost 6 years ago. The market here has appreciated quite a lot during that time. Our home's value has appreciated over 50% while my salary is twice what I was making when we purchased it. I also expect the market here to appreciate a good deal more over the next decade. It's very difficult to find cash flowing properties in our state so I've bought one property out of state and have another under contract in a market not expected to appreciate a great deal but cash flows well.
The question I've been grappling with is whether to purchase a new primary residence now and rent out our current home that could cash flow quite nicely. We would have to pay a higher mortgage so we wouldn't be able to save as much for out-of-state investing but we would have another rental property and primary residence in an appreciating market.
How would I go about doing the math to determine what the best choice would be?
Rental Property Investor · Spanish Fork, UT · Member since 2015 · 40 posts · 18 votes
7y
@Jaysen Medhurst purchased it at $220k. Zillow estimates it at $375k now and estimates the rent to be around $1,600/month but I've seen smaller homes nearby listed for more than that. My mortgage payment is just under $1,000.
I'm curious why you would say it's unlikely to make a good rental after a lot of appreciation?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Jeff Mills, I don't trust Zillow estimates, get a broker's opinion or spring for a full appraisal. All the appreciation you've seen is exactly why it doesn't make a good investment
Let's look at the numbers more closely: $1600 : GSR -$128: Vacancy (8%) -$120: Repairs (7.5%) -$120: CapEx (7.5%) -$160: Management (10%) -$75 : Insurance -$190: Property Taxes -$1000: Debt Service =$-193/month in cash flow
That being said, let's say your place is actually worth $350k, in order to meet the 1% rule, you'll have to rent it for $3500/month for it to even begin to look like a good investment. You probably won't get half that.
We haven't even started to look at your Return on Equity (ROE), with will also be horrible...since you're not making any money.
If I were in your shoes, I'd do one of two things:
Tap into your home's equity using a HELOC and use that cash to purchase/down payment on a MRF.
Sell your place, you'll probably clear ~$150k, right? Split that money between a DP on your new personal property and a DP on an investment property.
There is no point in renting your present home as it will not cash flow. Assuming you want to hold it to further speculate on appreciation you could do that if you are prepared to contribute monthly to your tennats rent out of your own pocket. If yu have no reason to move your best option is to stay where you are and pull out yur equity to invest in something that will cash flow.
Rental Property Investor · Spanish Fork, UT · Member since 2015 · 40 posts · 18 votes
7y
@Jaysen Medhurst thanks for your detailed post. I actually should have mentioned that the mortgage payment I mentioned already includes insurance and property taxes. And to be more exact the actual mortgage payment (with taxes and insurance) is $970. According to Rentometer, which I know is far from perfect but I tend to think it's more accurate than Zillow, $1,925 is the average rent in the area for my specs with most of the listings being less sqft than my home.
Does that affect your suggestion at all?
Also, I wouldn't expect the 1% rule to apply to the current home value but what you purchased for. Is that not correct?
By the way, I am currently following your first suggestion and using a HELOC to buy rentals.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Jeff Mills, no, it doesn't change my suggestion. Taking into account what you wrote above, you'll be lucky to cash flow $100/month. That's an ROE of 0.8% (assuming $150k of equity). Even if you can get $1925/month rent, that's a cash flow of ~$290/month and an ROE of 1.5%...terrible.
I expect to hit the 1% rule when the property becomes a rental. So, in your case, that's looking at the FMV, not the purchase price. Having a ton of equity is like putting down a huge down payment, just to make your property cash flow. You're not actually earning cash flow, you've bought it with the down payment/equity.
Unless you really want to move for personal reasons, I suggest you stay put and keep using the equity to build your rental portfolio.
Rental Property Investor · Spanish Fork, UT · Member since 2015 · 40 posts · 18 votes
7y
@Jaysen Medhurst Ok, I see, so your point is that it's a bad ROE. Correct me if I'm wrong but turning this home into a rental wouldn't stop me from making use of the equity through a HELOC right? In other words, they are not mutually exclusive?
If I can use the equity AND make it a cash-flowing rental would that not be a good idea? Than my ROE would also take into account the properties I have and will purchase with the equity.
Sorry for so many questions, I'm really wanting to make sure I understand this.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Jeff Mills, HELOCs on investment properties are hard to come by. Not a lot of banks do them. Pen Fed Credit Union is one.
I like that you’re trying to use your equity, but still don’t see the point of holding on to the current property. Is there an emotional attachment here? That’s fine, I understand.
Rental Property Investor · Spanish Fork, UT · Member since 2015 · 40 posts · 18 votes
7y
Makes sense. I already have a HELOC on it but I don't know if living in the home is a condition of it.
My main reasons for considering making it a rental is I'd like to own a local rental and I haven't been able to find anything local that cash flows except my own home. Also all things being equal (income, expenses) I assume owning a rental in an apprecating market will give you a better return over time than one that doesn't appreciate much.
But most likely my new home mortgage would be a decent amount more than my current one so it may end up cancelling out the benefit.