So my current primary home is in a nice neighborhood with homes that would rent from 2200 to 2400. We have only live in this home for just over a year and when we bought it we knew this would not be our forever home. We have been looking to get into the rental business and thought why not buy another primary and rent the current house. Our current mortgage is 1400 with taxes and insurance, so it would cash flow. Our goal was to just buy a rental since our mortgage broker said he could lend with only 15% down on a rental. So not sure which way to go with this.
Assuming it is a sfh it will not cash flow with rent at 2400. Expenses will be 50% leaving you with negative cash flow.
What is the market value of the home. If above $250,000 K it is not a investment property.
It's part lifestyle choice and part investment decision. Could putting 15% down on a rental and staying in your primary give you better cash flow? If you really like where you live now and you'd have to pay a bunch more to get the same house, staying may be the better option. But if you've been wanting to move for a while, your current home seems like it would be a good rental. I wouldn't agree with Thomas that just because a property has an arbitrary value that it isn't an investment property.
I am making an assumption that $2400/month in Georgia is a Class A property. Do your investigation regarding renting Class A properties. From what I have heard , Class A tenants expect perfection, and so turnover costs can be very high. Vacancies can last longer as you have a smaller tenant pool. (I rent Class B apartments, Allure floors, laminate countertops and white appliances -- so what to do I know? My rentals are fairly tenant proof.) Also, rentals take a beating, and it can be very emotionally draining to see what tenants do to a house you love.
I would look for 2 Class B rentals that I purchased with the intent of having them be investments. Better cash flow, easier to rent, less heartbreak if they get trashed.
Thanks for the advice. I do not think the expenses would be that high to begin with since this is a brand new home. Things have not had time to wear out yet. Also, to note the 50% expenses, in Canada yes it maybe that way but here no it is a lot cheaper. Yes I would consider this to be Class A and the home values in this area would be about 235k. Only thing I would be worried about is if it does get trashed it would costs more to get back to a rentable state or sale. The thing is I could yes purchase a 100k home with 15k down or rent my current and cash flow $500 to 700$ and purchase another 235K with only 11k down. It would get our feet wet with a house that needs no work and should get a good solid tenant. Then keep saving to purchase that 100k home later down the road.
I do not think the expenses would be that high to begin with since this is a brand new home. Things have not had time to wear out yet.
You put tenants in there and they are going to break things. Take a good look right before you sign that first lease because it will NEVER look that good again. Further, just because a furnace or whatever is brand new doesn't mean it won't need servicing. Even further, things WILL wear out down the road, so you need to be budgeting money for those future repairs right now.
Also, to note the 50% expenses, in Canada yes it maybe that way but here no it is a lot cheaper.
Ahh the hopes and dreams of new landlords everywhere. No, its not a lot cheaper here in the US. You might have a really good year where your expense are limited to the taxes and insurance. Or, you might have a horrible year where your expenses are greater than the rent. I've had both. And a chunk of that 50% rule of thumb is for a property manager and if you self manage you earn that portion. But you WILL have ongoing expenses in addition to taxes and insurance that eat into the rent. Be aware that you will need a new insurance policy when you rent it out, and that policy will be significantly more expensive than your current homeowners policy.
Only thing I would be worried about is if it does get trashed it would costs more to get back to a rentable state or sale.
The "if" in this sentence is the wrong word. The correct word is "when". If you rent then and then decide to sell, you will have significant expense to get it back to a sellable state. Every time you turn over the property you WILL have make ready expense to get it ready for the next tenant. Most tenants don't "trash" a house and cause tens of thousands of dollars of damages. That is a real possibility, though, and you must accept that if you want to be a landlord. But things you think might last 10 years or more if it was your residence, flooring in particular, will last only a few years in a rental. The IRS considers flooring a five year depreciation item. Judges around here will disallow any deduction from security deposits for carpets over three years old. So, you need to just plan on replacing flooring on a 3-5 year schedule unless you have a really great tenant who stays a long time.
If you go into the landlord business with realistic expectations and enough cash to cover a hiccup (i.e., six months rent in cash reserves) you will do OK. If you go in with a highly optimistic view, like you write in the post I'm quoting, you'll be back here in a few years saying "help, my tenant is a month late on the rent, the place is a mess, the mortgage payment is past due and I don't have money for an eviction."
Thanks for being straight about everything. It is good to hear the negative parts of what could happen and of course when it will because it will at some point. I would have reserves put aside for any property I own including my primary. This is a must have for my family. Yes I am maybe optimistic but I have learned over the years to deal with problems as they come and have a plan B when it comes to things like investment. You can never plan for every problem that life will throw at you and life will do its best to push you back down but it is how you respond to the problems and solve them that makes all the difference. So we do have a big choice to make buy the 100k property with 15% down or rent our current and buy new primary with 5% down. Pros and Cons with both.
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