Intro and q: To Rent to rent or...?
Hi all!
I’m new here and new to considering RE investing opportunities. So grateful for this learning community!
My wife and I live in Albuquerque, NM and own our house (it's the only property we have) and want to eventually live in Santa Fe (to be closer to family, friends/our workplaces/etc). The housing market is much more expensive and competitive there and we don't have much money to put down. Currently we could only do 4-5% cash down on the kind of property we'd like to live in, unless we sold our house which seems like a bad deal at this point (to sell our place for a larger loan w. much higher interest in SFe). We have equity in our house (numbers below) but I'm cautious to use that as it seems that could decrease and I don't think our current cash flow can handle floating 3 mortgages at this time, esp considering current high interest rates. Our AGI is approx. $90k. DTI is good. Have v. little revolving debt. We have some long-term investments (401k, stocks, etc.) but don't want to withdrawal from those currently w. the current low point. I'm thinking we downsize and get a reasonable rental for 1 yr in SFe while renting out our house in ABQ. I wish we could buy in SFe now but it seems we need to work up to that possibility. Renting would allow us to be in SFe and learn from managing a single-family home as a rental.
We’re looking at renting our house as a furnished short-term rental (30-90 days) to travel nurses and other temp workers or professors on sabbatical. Or other markets, if you have an idea to share! We live close to major hospitals and a university. We’ve never managed a rental before so are learning the local landlord and tenant rights and getting things in order now to potentially rent starting Jan 2023.
Our current home:
Outstanding mortgage - $198k
Purchased for - $226k
Zillow is currently showing house value - $343k (not sure how much stock we should put into this and if this includes the improvements like installing heating/cooling mini-splits and solar -I’ve updated our Zillow profile)
We re-fi’ed during the pandemic at 2.75% and mortgage is $1,150/mo.
Comparable long-term rentals in the area are going for $1900-$2000/mo.
For furnished it seems reasonable that we could do $2300-2600/mo
We plan to manage the rental ourselves, to learn from that process and one of us has time to do that. I just read a 50% rule of thumb saying, ½ of generated income from property goes to operating expenses. Is that the case for this small scale of renting a single property? If so, if we rent furnished, profit would cover our monthly mortgage looks like from math below and allow us to hold on to our house as value continues to appreciate (even if more slowly).
$2,300 (monthly rental income) / 2 = $1,150
This seems like a good starting point as we would be covering our mortgage expense on the property. We're aiming for a rental in SFe between $1400-$1800/mo.
Long term, I’m interested in a having a few single-family homes and/or units to help bring in more income. Is there anything you would suggest that we consider at this stage? Thanks in advance for any insight and tips!
I don't put a lot of faith into the 50% rule. My personal experience is that is way to high for expenses. I looked back at my rental properties and found my expenses were no where near 50%.
I prefer to evaluate the estimated costs/expenses for each property. Newer properties will have much lower expense ratios. This rule does not take into account any tax benefits also.
Being a landlord in Santa Fe for a house is Albuquerque is a little bit of a challenge. There was a great thread regarding how to show rentals to avoid no shows. I recommend you read it, lots of great ideas in that thread.
Screen the heck out of your tenants. Good tenants = good life. Bad tenants = life sucks.
Smaller homes in Albuquerque are renting for $1 to $1.50 per square foot based on location and condition. Your estimate for furnished may be low, could be higher.
Thanks, John!
Our house is in good shape and I don't expect any major expenses. We have a newly installed HVAC system and all appliances are in good working order. Sounds like rather than a percntage, a better approach may be to estimate to fixed expenses that I know of for the property and add on to that to be conservative with the estimate. And I had not been thinking about the tax deductions so thank you for that reminder.
I've wondered how difficult it might be to be a landlord in a different city. It doesn't seem worth it to me at this time to pay for a property manager for 1 SFH rental. Another idea we have on the table is to sell our house now, use the proceeds from the sale to purchase a place in SFe and perhaps still have some to invest in a second property down the road (maybe we would look into OOS as purchasing in Santa Fe to have cash flow rentals seems more challenging in the short term). All of my recent learning about REI and the current market is compelling me to hold on to the current property. I'm leaning to trying it out as a landlord for a year, seeing how the management goes (an hour away) and we could opt to sell down the line.
I'll try to find the thread you mention.
