Rent out Paid Off Home or Finance a House to Rent?

11 Replies

So I have decided that I want to invest in real estate. But in order to get my wife on board she does not want to use any equity out of our Paid Off 1976 4-Bedroom 2-Bath 2100sqft Home in Kingwood, Tx. She likes the secure feeling of having it paid off. So I guess my options are to Rent out our Paid Off home and use an FHA or 203k loan to buy our next home(for a hell of a deal of course) or should I just take a loan out to buy a rental home and stay put?
The House is valued at $183,000 according just to the app. Houses in the immediate area with the same square footage are renting for $1700 min. the taxes are $4000 & insurance is a little less than $2000

if you have the option to use FHA, I would. I can understand your wife's stand point, but one of the advantages of real estate investing is that you can leverage. For instance, if you invest in a house that is $100k, and your monthly rent income from it is $1000. If you buy it all straight cash, your gross return is 12% (then you obviously expenses like taxes, insurance, etc.). If you finance it 75% then your initial investment is only $25k. Your mortgage on $75K at 6%/30yr loan is $450/month. So your "Gross income net of mortgage" is $550/month which is 26.4% gross income over your $25k investment. so you can clearly see there's a benefit in leverage, NOT to mention you also get tax advantage because you get to reduce your income by interest expense so in the first year you are probably reducing your taxable income by $5000 or so... Food for thought.

sorry posted before i saw your second post. your example - Net income annually (no vacancy/maintenance/capex/PM included) = $14,400.

Cash purchase = $183,000.  Net Return = 7.8%

25% down 30 yr mortgage at 6% - Initial investment = $45,750.  Monthly mortgage at 6% 30years = $822.  Net income = $4,525. Net Return = 9.9%.

Note you can probably get better rate than 6%, and you need to include other considerations like vacancy, capex, closing cost. I personally would not invest in that $183k house, but every house has a price that would make it a great deal. 2% difference per year is like extra $3700 in your pocket every year! hope that helps.

@John Fitch sure! I look at your return on equity, because it is paid off. You are, essentially, "investing" $183k, to gross $1700/mo. Take away taxes, insurance, and reserves and your net is probably around $800/mo. That works out to just over 5% return. If that property were for sale at those numbers, I would not buy it as an investment.

@John Fitch understood but it's the same thing, because you can cash-out refi and end up with 75% finance property.  Same point Jason made above.  It's the same as $183K out of pocket.  you can cashout refi and use the $140K you pull out to invest in other properties!  Hope that help.

@Jason D. I agree with you. I would definitely not buy the 183,000 dollar home and rent it out for that much. But like I said in the original post a Refi is out of the question due to the wife's stipulation. So does that effect the equation. Luckily I only spent 90,000 on it

John it doesn't change the equation. like i said it still doesn't change the fact that you have 180K of dead equity in your primary resident. it's great that you got it for half the price, but you have value in the house that is just sitting there and you can't utilize until you either sell the house or refinance it. essentially, its the same as you spent 90k and got nothing back (other than place to stay of course, and that alone is worth 90k!) in return. Like i said, i speak from a very investment oriented perspective. I understand that many people are not willing to take risk as much as I do to highest return as possible. I'm just giving you my perspective that you do have additional $120k or so of equity that you can pull out immediately and invest.