I have an exiting single family home (currently live in) that I am considering converting into my first rental (plan to purchase new home for me and my family to live in). These are the facts:
- My neighborhood has average rents of $1,400 - $1,450 (using $1,400 to be conservative). SAN ANTONIO, TX AREA
- Current mortgage payment = $1,150 ($111,000 left for 22 more years - 5% rate. County assessed value = $170K)
- Monthly Expenses calculated: HOA $30; $210 for repairs, cap ex, and vacancy (using 5% of gross rents for each or $70 each); Property Management $140 (10% of gross rents estimated); and Current mortgage payment of $1,150 which INCLUDES taxes and insurance). TOTAL EXPENSES = $1,530 (Plan to have tenant pay for utilities).
- Monthly Cash Flow = -$130
With an estimated negative cash flow, should I not be considering this home as my first rental? I know I could refinance this current note back to a 30 year mortgage to reduce the monthly PITI payment, but considering that I have almost $60K in equity, is this a wise move?
Any thoughts on the above situation? Or anything I may have made an error on regarding the above information?
I would definitely explore the option to refinance especially if you are able to eliminate your mortgage insurance which is a good chunk of your current mortgage payment, and based on the numbers you shared you should qualify.
I agree with Jaime. You have a few options. You could refinance to get rid of MI and lower your payment. That should improve your numbers quite a bit. What's your appreciation rate per year for your property? That should also be included in your numbers for long term hold. You could also HELOC to tap into the equity in the future.
Hope this helps! Let me know if you have any other questions.
@David Luna you have to refi to a 30yr you just have to get rid of your PMI.
In the conditions your house is in right now, will it rent for the $1400?
@Jaime Sepulveda , @Brooke Noth , @Jonatan Barbera ..... Thank you all for your input. Seems refi is the way to go (wish I would have done it a few months ago before rates started rising - oh well). Off the top of my head, not sure of annual property appreciation rate Brooke. Jonatan, home was built in 2009 and similar in condition to other neary homes renting for that much so I do believe it can rent for that much.
If any of you are aware of any San Antonio REI clubs or groups that would benefit a new investor, id appreciate any info you may have. Once again, Thank you for yalls input. Have a great evening : )
I personally would not hold it as a rental. Expenses on SFHs usually result in very poor cash flow. The numbers on this one are far too thin to make it worth purchasing as a rental. Just because you own a property does not make it a good investment to turn it into a rental. This one does not have the numbers, for that reason holding it is not a worth while investment.
I doubt many, if any, on here would buy it as a investment. Sell it, you can do much better.
@David Luna don’t do a cash out refi because they might hit you with higher interest rates. Instead do a refi and remove your pmi. You’re also being conservative with a lot of your numbers so I believe after all said and done you will have a good rental on your hands. If you need further help on running more accurate numbers PM me. You’re property management is a little high also.
If you plan to rent it, then I personally would only rent it out for 2 years and then sell it to take capital gains nearly tax free. Of course, this is assuming that you've lived in it for last two years. I'm not a CPA, but my understanding is that you would have to recapture the depreciation on those two years of renting it out. You must have lived in the home at least 2 out of the last 5 years to take the capital gains tax free.
That would bring down your current balance, therefore, having more equity later on. Like I said, I'm not a CPA but that's how I understand it. Other BP members may know it a lot better than me. Just trying to help.
I agree with @Ruben Galindo - Depending on what the fair market value of the home is now - you may want to consider selling the property to be eligible to exclude a portion of the gains.
If the property increased by $50,000 - you are excluding $50,000 of gain which if taxed at 15% would be $7,500.
$7500 is likely better than the cash-flow you would be getting it as a rental.
When factoring in the tax savings you get - you should also net it with any closing costs that you have at closing. ex if tax savings is $7500 but closing costs are 3,000 - your true savings is like $4,500
Sounds like you've got a good house in a good area. If it's in Cibolo or that corner of San Antonio, your long term appraisal rates are going to be solid. If you plan to hold onto the property for a long time, the refinance could make sense to improve your cash flow. But remember, your wealth is built on holding real estate. I'll take skinny cash flow for a strong appreciation play any day of the week, assuming you have other means of paying your bills. Sure, you may be able to sell and take advantage of some tax exclusions, but if you have the ability to hold onto the house and continue to build your portfolio, ten years down the road you'll be happy you still have that house.
@David Luna I am a Lifestyles Unlimited member and they have helped me purchase all 8 of our rental properties. They have an office in San Antonio and Austin. You should definitely check them out.
Here's a very simple test. If the home were on the market today, would you buy it as a rental?
Probably not. Don't bother with refinancing and trying to force it to cash-flow. Sell the property, cash out the equity, and find yourself a good investment.
Wondering what you decided to do. I did the same thing with my property in La Vernia.. it was my primary residence, then I moved and kept it as a negative cash flow rental for three years until rents caught up. The area has experienced phenomenal growth, and I’m so glad I held it- the appreciation over the past several years has been unbelievable. SA will continue to be a solid market, and as long as the numbers in both options make sense, your decision really just depends on whether you’re playing the short or long game.
By the way, I re-fied that same property back to 30 years at 8 years in, and if I’d only known then what I know now, I’d have kept the equity.
You also asked about investing groups; check out Alamo City REIA or SAREIA. :)
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