Homeowner looking to turn primary home into rental

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Homeowner looking to turn primary home into rental

Matthew Pham
Member since 2020 · 7 posts · 3 votes

I purchased this Houston area home back in 2018, and we are now looking to upgrade. Rather than selling the home, I have been weighing my options as to whether or not it would be a good idea to turn it into a rental. I am completely new to this and have never had a rental property so looking for some advice.

My current mortgage payment is $1850, but if I were to refinance, my payment would lower to just under $1600. Similar homes in my area have been renting for around $1800 a month. I understand that I have to factor in expenses and maintenance (home is relatively new though, 2012). Is the cashflow or lack thereof, worth the hassle of making this an investment property?

Tips and advice are much appreciated.

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Bonnie LowPro Member
Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
5y

Well, it depends on your goals. Some people invest for appreciation more so than cash flow. How has the market performed in your area? Are houses appreciating? If so, it could make sense to rent it out at low to no cash flow so long as your tenants are covering the expenses. But what are you going to use for a down payment on your next house? If you don't need to pull equity out of the current house to use as a down payment, that would be another reason to go ahead and keep it and purchase another home. Either way, sounds like refinancing would make sense to lower your payment. You can do the math to figure out how long you need to hold the property for the refinance expenses to pay for themselves. 

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  • Bonnie LowPro Member
    Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    Well, it depends on your goals. Some people invest for appreciation more so than cash flow. How has the market performed in your area? Are houses appreciating? If so, it could make sense to rent it out at low to no cash flow so long as your tenants are covering the expenses. But what are you going to use for a down payment on your next house? If you don't need to pull equity out of the current house to use as a down payment, that would be another reason to go ahead and keep it and purchase another home. Either way, sounds like refinancing would make sense to lower your payment. You can do the math to figure out how long you need to hold the property for the refinance expenses to pay for themselves. 

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  • Brendon Brooks
    Rental Property Investor · Houston, TX · Member since 2017 · 50 posts · 39 votes
    5y

    @Matthew Pham

    Hi Matthew,

    Are you in a part of the city that could make it a great AirBnB? This could get you well over that $1850 and actually could be a cash flow cow. However, it would need to be fully furnished and does come with some management. If managed properly it can less management intensive as one might think.

    Other option could be renting by the room depending on your location, where you can get a solid rent and limit some vacancy risk. Once you get it fully occupied and you have only one tenant at time potentially vacate which can limit your overall vacany expense. However, this will be more management intensive than a traditional rental. Turnover can be a bit higher than traditional rentals.

    Otherwise, hang on with it as traditional rental and you can manage it yourself, however I would I highly recommend you learn everything you can about self management before you get a tenant nightmare. You could also have a property management company manage it for, however be sure to do your homework on them before you contract with them.

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  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Bonnie Low

    The house is located in an area that has been growing very quickly and there has been some appreciation. Since 2018 my home has appreciated nearly 10% based on estimations. I took out an FHA loan to buy the house and plan on refinancing to conventional. My next home I plan on doing the FHA 3.5% down also.

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  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Brendon Brooks

    The house is located in a quiet suburban neighborhood so I don’t believe it will be ideal for airbnb.

    I appreciate the feedback and I lean towards making it a traditional rental. I will probably manage this first one myself so that I can gain the experience. I have heard a ton of terrible tenant stories so definitely going to do my best to avoid at all costs!

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  • Nam Trang
    Investor · Seattle, WA · Member since 2020 · 106 posts · 89 votes
    5y

    Don’t forget maintenance and depreciation! To keep everything running well you’re going to have to put at least 1% of your home’s value back into annual maintenance.

    Additionally, at some point you’re going to have to spend $4k to $10k replacing your roof, $4k to $10k replacing your HVAC, $500 on a fridge, $900 on a new water heater, and much much more.

    I’d say renting it is still a good investment with about the same metrics as one of my own. However there is a lot more you’ll have to spend on than you’re considering.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y
    Originally posted by @Matthew Pham:

    I purchased this Houston area home back in 2018, and we are now looking to upgrade. Rather than selling the home, I have been weighing my options as to whether or not it would be a good idea to turn it into a rental. I am completely new to this and have never had a rental property so looking for some advice.

    My current mortgage payment is $1850, but if I were to refinance, my payment would lower to just under $1600. Similar homes in my area have been renting for around $1800 a month. I understand that I have to factor in expenses and maintenance (home is relatively new though, 2012). Is the cashflow or lack thereof, worth the hassle of making this an investment property?

    Tips and advice are much appreciated.

    You really need to read up on how to calculate cash flow. You're assuming anything above the mortgage payment is cash flow, but that's not even close. You have to pay the mortgage, taxes, and insurance. Then you can expect to spend an estimated 10% of the rent on maintenance. Another 10% should be set aside for capital expenditures (roof, driveway, or other large expenses). An estimated 10% for vacancies. Another 10% for property management.

    If you calculate this correctly, you'll probably find it with a NEGATIVE cash flow of around $800 per month.

    Here's one method of evaluating a property.

     https://www.biggerpockets.com/...

    Educate yourself before you dig yourself into a hole.

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  • Kevin Hunter
    Rental Property Investor · Carlisle, PA · Member since 2013 · 1k+ posts · 543 votes
    5y

    @Matthew Pham

    +rent                                                          1800

    -principal, interest, tax, insurance              -1600    (I assume tax and insurance are escrowed)(post refinance)

    -repairs(leaky toilet, garbage disposal, etc)  -180    (10% of rent)

    Capital expenses                                          -180    (10% of rent)    

    (you wont have to replace window, roof, HVACs now, but you will eventually)

    Vacancy (it will not be rented 100%)            -150    (for a single family home I budget one month a year vacancy or 1/12 of rent)

    Lawn Care, Property Management, etc...      XX      (even if you don't hire a PM now, you should plan to hire one eventually)

    Cash flow                                                    -$310 per month (if you don't refinance it will be $-560)

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  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Nam Trang thanks for the feedback!

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  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Nathan G.

    Hey Nathan, thank you for your feedback. The $1600 would include taxes and insurance but even with that included after the vacancies, expenses and maintenance I would be negative cashflow. Definitely opened my eyes here

    0Reply
  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Kevin Hunter

    Thanks for taking the time to break this down for me Kevin. This was extremely helpful. I need to look at how I can close that gap of negative cashflow. Would you suggest I try or would this be a sell for you?

    0Reply
  • Kevin Hunter
    Rental Property Investor · Carlisle, PA · Member since 2013 · 1k+ posts · 543 votes
    5y

    @Matthew Pham, what are your long term goals?  Before I can recommend something, I need to understand what your goals are...

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  • Matthew Pham
    OP
    Member since 2020 · 7 posts · 3 votes
    5y

    @Kevin Hunter

    Currently, I invest primarily into the stock market but I know some of the benefits of investing in real estate. Tenant pays down principle for you, properties appreciate, tax benefits, etc. So although cashflow would be nice and in future deals I would probably try to buy a home under market value, the other benefits are enough for me. I would love to have someone between 5-10 rental properties by the age of 40. I am 26 now.

    I would say that if I could break even after expenses, I would be ok with it. But not sure of the negative cashflow. Again, thanks for your help

    1Reply
  • Kevin Hunter
    Rental Property Investor · Carlisle, PA · Member since 2013 · 1k+ posts · 543 votes
    5y

    @Matthew Pham, good.  Based on that, no mention of a need for cash flow makes me believe you have a steady W2 job.  With only 10% equity, you are likely going to write a check to sell it.  5-7% for realtor fees, closing costs 1-2%, etc... Again things to consider.  

    Private message me and I will walk through it with you so you have all the information you need to make an informed decision.

    0Reply
  • Matthew Rolf
    Insurance Agent · TX · Member since 2018 · 362 posts · 175 votes
    5y

    @Matthew Pham sounds like you've gotten some good advice.  Just my thoughts...if you are financially strong enough to weather possible negative cash flow it might not be bad to hold on to.  As far as net worth, your principal paydown would exceed your negative cash flow.  Obviously once thinking about future appreciation and loan paydown that home could serve to be a saving vehicle to leverage buying more properties in the future.  Another assumption, but the longer your hold that property the less it should bleed as rent rates rise.  If you were to sell and rebuy another primary residence, it sounds like you might be stuck there for a while?  Like everyone else said, some of the advice is hard to know not knowing all the specifics of your situation.

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  • Zachary Ray
    Investor · Tampa, FL · Member since 2017 · 589 posts · 251 votes
    5y

    To be honest not every home that was lived in can be converted into a rental. If you purchase too much home the market might not support the higher rents and you won't cashflow. It can be a lot of risk the higher you go up in rent. If tenant misses payment you would have to cover it, are you financially sound to do so if it is at 1600 plus your bills as well? Now if your in a crazy area like California than those rents are not unheard of. Check around for accurate rates and see if that would work for you. 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Matthew Pham

    You may want to consider selling it as you may be able to exclude the gain. You have 3 years from the time that you move out to exclude up to $250,000/$500,000(non-MFJ / MFJ) of capital gain. Tax on depreciation unrecapture will apply.

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