What to do with rental income?

Question

My wife and I bought our home a little over a year ago and due to me being in the military, we are moving. We decided to rent out our home as the market doesn’t indicate a profit if we sell. Our plan is to rent it out for 5 years and look to sell then. After our mortgage HOAs, maintenance etc., we are looking at about $240 in cash flow. My question is, do I put that in a high interest savings (currently 2.05%) or re apply it to principle? My experience with all of this is brand new so be gentle! Thank you all in advance.

Chris Levarek · Answer

@Justin Heminger As mentioned above, priority will be building a reserve for any issues that will come up. Typically, a landlord will want to put aside some money for a possible vacancy(no tenants) and large capital expenditures (think roof, a/c, large appliance breaks, ). If you haven't accounted for any small maintenance as well in reserves, its good to put aside a bit for plumber calls, pest sprays, electrical fixes, painting/patching, etc. By building a reserve, you ensure that you get no surprises and the $250 cashflow is actually a profit at some point no matter what happens.

As your property is fairly new, you can reasonably put aside less for large capital expenditures at least for the next 5 years or so. Additionally, maintenance costs could be less as well. A good rule of thumb is 3-5% of the rental income in each category. If the vacancy is really high in the area, as in a small town which has harder to fill rentals, then 7-10% might be wise. All it takes is two month of vacancy to wipe out profits for the year at $1500 rental monthly income, or a $3000(2 months *$1500) loss, equating to total cashflow to cover, $250 *12 = $3000.

So, I recommend at a minimum put 9%(3,3,3) aside of the rental income per month, if not 15%(5,5,5). Each market is different, so perhaps see what others are doing with similar sized and type of properties in the area. Ask an agent on vacancy rates.

Hope that helps!

Nathan Gesner · Answer

First and foremost, you need to build up a reserve. You could experience a major expense like roof replacement, a tenant that fails to pay rent and trashes the place, or just a long vacancy. Make sure you have a healthy reserve to cover those unexpected issues.

Once that's established, save up for your next investment!

Theresa Harris · Answer

@Justin Heminger  As others mentioned, put it aside for the unexpected.  Even though the home is new, you can still have vacancies arise.

Steve Vaughan · Answer

I'd  put it in savings at least until $5k.  Depending on if you'll have a PM or are screening your own tenant , bad tenant experiences have costed me over $6k in lost rent and legal fees alone.  Adding in repairs, more like $10k.

Paying a low interest fixed mortgage down will limit your options considerably.   Save the $!

Justin Heminger · Answer

@Steve Vaughan

We are going the PM route. We are actually moving to your neck of the woods. We’ll be in Spokane in over two months! We’re excited about the potential there.

Thanks for the advice!

Parker Eberhard · Answer

@Justin Heminger I like how 2% is considered a great return on a savings account these days

Justin Heminger · Answer

@Holly Birchall

We are ready for the booming market there!!

Holly McDowell · Answer

@Justin Heminger

Big early welcome to Spokane!

Steve Vaughan · Answer

Sure thing and a pre-welcome to WA! Spokane is a great market.

Justin Heminger · Answer

@Parker Eberhard

😂 right?!?

What to do with rental income?

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