Rent 1st home to enter REI?

Real Estate Deal Analysis & Advice
9yFollow

Rent 1st home to enter REI?

Kevin Jorgensen
Beaverton, OR · Member since 2016 · 55 posts · 10 votes

Hello,

I'm quiet new here, am interested in REI, but am at a crossroads and am ready for advice.

Classic question: Do I rent my home, or sell it? 

Based on the allpropertymanagement.com rentVSsell calculator, it falls on the "Rent" side of the fence.

I'm in the 97007 area code, with a house that's 11% above the median in a 'cool' market (according to Zillow - but it's nearly December, who buys houses in December? I digress). 

I foolishly bought in in June of 06' on an 80/20 100% finance loan for the 345k price.

As far as now:

- Loan at 4.25%, with remainder of $178,000

- zEstimate is $424,000

- Taxes suck at $4,400/year

- Monthly Rent zEstimate = $2,100

- zEstimate appreciation of 5.6%

I'm not keen on being a landlord, so would be interested in having PM done.

Between my wife and I, we have an income well over 200k, so either one of us could float the costs on this home if it were to go unrented.

(There happens to be a much more new home in the neighborhood also up for rent, but seems to have been this way for some time now, which concerns me, but I've yet to look at what they are charging rent)

Any good direction/advice on this I'd be keenly interested in.

Regards,

Kevin

0Reply
135 views

Most Popular Reply

Scott Radetich
Investor · Portland, OR · Member since 2016 · 47 posts · 36 votes
9y

Not sure Foolishly bought is the correct term here. You put how much down? that's right $0, and you are now up 79k (based on Zillow which we all know isn't always accurate). Can someone calculate that ROI for me? You needed a place to live, got some tax breaks now you have the chance to pull a few hundy out and do some real damage. Man do I miss those zero down loans!

After reading this post it sounds like you aren't really looking to do much real work when it comes to owning properties.  Have you looked into Turn Key providers?  Jason Hartman, has some pretty interesting products.  Listen to a few of his podcasts, it will get you thinking (he'd say sell).

as a side note, I've been pondering trading in my Portland properties. I've been told by a few real, real estate investors I need to sell all of them. But I can't pull the trigger, i'm just too conservative of an investor (and I also have a real job like yours so there's the my time factor as well). But recently, I pulled out some equity on one of them and purchased some additional properties. My goal hasn't been to be 100% into REI, I like my job and am in no rush to get out of it. But in 10 years... I'll be able to choose which direction I want to go.

 If you want a conservative suggestion that will go against a lot of investors opinions on this site, I'd cashout refi that home now as owner occupied, buy a single family rental in Portland, then with the money left over buy a new primary for you and turn your 1st home into a rental too.  Keep in mind, both of those rentals you will make very little cash flow (couple of hundred at best) but your income is high enough to where I'm assuming you don't need it.  Now you'll have three homes in Portland with potential for appreciation over the next 10-20 years and have someone else paying down the mortgages for two of them. Its a solid plan, but won't get you rich quick.  If you want to get there quicker, you're best to sell and you're going to have to buy something that requires a lot more work....

2Reply
See this reply in the discussion

31 Replies

Jump to latestLatest
  • Stan K.
    Investor · Seattle, WA · Member since 2016 · 73 posts · 37 votes
    9y

    @Kevin Jorgensen A good question to ask is what would you do with proceeds if you sell the house? It sounds to me like you don't need the cash and want to get into real estate - here's a great way for you to get into REI.

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y

    @Stan K. Thank you for the reply. If we sold is the next natural question.

    My instinct is to begin in rental properties that aren't nearly as expensive as my current home. I've read a fair deal on what makes a good property(s) to target.

    My pie in the sky goal would be in ten years to work half as much as I do now, and replace/outpace my current income and that means being aggressive with REI or jumping into some other form of personal business.

    My Wife on the other hand, wants nothing more than the big house, with the wrap around porch. But I see that large mortgage as limiting to my investment diversity to one major asset. 

    0Reply
  • Stan K.
    Investor · Seattle, WA · Member since 2016 · 73 posts · 37 votes
    9y

    @Kevin Jorgensen Every time you sell, you pay commissions; every time you buy, you pay acquisition costs (finance charges, inspection, appraisal, ..) as well as the costs to get the new place to rentable condition. So in this case, you'll lose about $30k out of your $245k equity. 

    Do the math and, most importantly, talk to your wife - you both need to be in agreement on what to do next :)

    1Reply
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y
    Zestimate is virtually meaningless. I wouldn't use that in any conversation except to say that it's meaningless... If you want to know the value of your home you need to find 3-4 comparative homes that were recently sold: same style, similar size, sold within last 3 months, within 1 mile, same zip code, same school district, similar condition. Same part of town if in a named subdivision/hamlet. Same part of town if divided by a highway or other major structure and you noticed marked differences in prices. Try not to go past 6 months if you can help it. An example: 3 bedroom 2 bath colonial with attached garage similar lot size similar amenities like pool or deck. If you can't find exact number of rooms and baths then you have to make adjustments in value to make comparison, which is where most of the work is at. Adjustments in comps is a bit of an art. You take the comparison and adjust value up or down to make it comparable to the target home. So a 4 bedroom would have to be adjusted down. A 1 bath would have to be adjusted up. Same thing with lot size, no deck, garages... A simple Example: $400,000 house 4 bedrooms 1 bath. Everything else the same. You adjust it down $28,000 to $372,000. But add up 1 bathroom $9,000 to $381,000. Now it is comparable. Adjustments are area related. They depend on the differences between two similar homes and within similar price range. So you have to look at sold homes in the area and see what a difference gets you. Condition is a big question mark. You need to visit the other listings or at least view the photos of the other listings. Sometimes those are removed after a sale. If the house was on the MLS, the photos are still in the archive and a local Realtor can get those for you. They can also help you refine your analysis. Do the same thing with rents. Search for homes for rent in your area. Rents can vary depending on part of town you are located in, so try to get as close to your home as possible if you see a lot of variation. Taxes are relative. I would kill (virtually speaking) to have your taxes.
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    I don't know how the "allpropertymanagement.com rentVSsell calculator" works, but I reckon, at less than 0.5% gross rent-to-value per month, the figures do NOT favor "rent". ie. SELL!

    Problem is: how is NOW much different than June of '06 regarding your NEXT "big house"?

    Time will tell if you've really learned the lesson you (both?) say you have. But all the best...

    0Reply
  • Travis Darden
    Rental Property Investor · Indianapolis, IN · Member since 2015 · 46 posts · 16 votes
    9y

    I have a very similar situation.  I have a home in the DMV area that we are renting out that was my first home.  We built it 10 years ago and it's in a great area (Fairfax County).  I want to sell it, but my wife wants to keep it.  She inherited the land from her father and it has sentimental value to her.  Doesn't mean as much to me.  We do have it rented out and the tenants have been great.  They renewed the lease and I'm excited about that.  My concern is that if and when it's not rented out, we will be paying a 3k mortgage a month for a house we don't live in.  We currently live in Indianapolis in another house we own so we are not local anymore... I will admit, it keeps me up at night.  The only saving grace is that the house has 125k of equity in it and I need to use that to buy some investment properties out here in the midwest so that I can start making some other cash flow.  So good luck!  I understand what you are thinking b/c I'm in the middle of that too.  Working so far!  #cautiouslyoptimistic :-)  

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Sell, regardless of what the rent verses sell calculator says the property is a turkey as a rental. The rent to value ratio is way off, rent is far too low for a property worth $424,000. In addition you have far too much equity lying dead in the property ($246,000) to make positive cash flow even close to possible. At a opportunity value of 10% $246,000 of equity is costing you $2050/month in lost income. Your rent will only cover a return on your equity leaving nothing for any other expenses. Your deep into  negative cash flow on this property.

    Sell, Sell, Sell.

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y

    Thanks all.

    @Brent Coombs I agree that we are in 2006 all over again with subprime loans and inflated prices. Is it more wise to wait for home prices to flatten out or drop but have a higher rate? If so, does now equate to a bad time in general to do REI?

    I agree that the rent margin is silly thin. But all that is based on Zillow data which, as was pointed out, is funny money. So I'll be double checking that. 

    So I suppose if selling/buying is a poor option, I could wait it out until tubes are better and perhaps join a local REI club to get into my first properties....

    0Reply
  • Stan K.
    Investor · Seattle, WA · Member since 2016 · 73 posts · 37 votes
    9y

    @Kevin Jorgensen Here's a recent blog post from @Brandon Turner on the subject. He must've known you were going to ask this question :)

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Kevin Jorgensen, I'm not saying "selling/buying is a poor option" (especially the selling part), but just that you both owe it to yourselves to be WISE with your (huge) income.

    Between you, I reckon you should be WELL ahead in the game already, but, I don't see that you are. And the way your tastes run, I don't have confidence that you'll make the right INVESTMENT buying decisions - with all that lovely cash just waiting to be spent - and, a "we deserve to indulge in a luxury lifestyle" philosophy wooing you all the time.

    Am I being harsh? Or, will having come to BIGGERpockets actually help you? You tell me...

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y
    Stan K. Thanks for the link! Brent Coombs well coming here is indeed for the help. I think the only luxury we do is nice vacations. If we hadn't been doing that we'd be ahead much more. As to how to proceed here forward that's where I'm looking for the best option.
    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y
    Greg S. perhaps I need a better understanding of cash flow. I had never considered the theoretical value of what an investment would return if I pulled equity out of house.
    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Kevin Jorgensen, I'm not against you taking holidays, but I am agreeing with your "foolishly bought in in June of 06'" comment. You "got away" with it (so far) because of your income's ability to ride out the storm, but I do sense that you believe you will still be able to ride out any future storm too, even after buying (at a TOP price, in a heated market) your next "big house, with the wrap around porch"! (I can't prove you won't be able to, but wouldn't it be better to keep your emotions out of a new primary at THIS time? ie. Look through VALUE-driven investing eyes)!

    So to answer your earlier question: should I "wait it out until tubes are better and perhaps join a local REI club to get into my first properties", I lean towards YES. Do you? All the best...

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y
    Brent Coombs thanks. You hit on something I was trying to figure out. The market I live in (Portland OR) is still projected to remain strong for awhile. So what I was trying to see what the combination of rates and price were to determine the right 'value' time to buy. Low rates and high price better/worse than higher rates and low prices. I'm new to the prediction and trend models for REI. I can see that we are nearing the end of up-cycle, but have read that the down cycle and recovery are predicted to not be as severe as the 2006 crash. So leads me to two questions: 1: if it's a bad time to buy a primary residence; why would it be a good time to invest in REI - aside from possibly following a DVA approach to REI like I would stocks for example. 2: waiting feels like I'm going to 'guess the market' - I'm not certain that housing prices will fall all that much, perhaps they just flatten out to match inflation (as I've read for my market due to strength) and I'm fairly confident that rates will creep up. I would not purchase a home that has a monthly greater than 25% of our net (and this is after maxing 401s). So perhaps you're under the impression that I'm pulling out the stops and shooting for a million dollar property? I very much appreciate your feedback. It helps me clarify my thinking.
    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Kevin Jorgensen, I'm coming from the premise: there ARE bargains to be had in ANY market (even this one, at this time) - but, it means: looking below the surface, seeing potential where others might not, finding the highly motivated Seller - ie. paying a lot less than it's ALREADY worth.

    Why do you think the "We buy ugly houses" business does so well? Would YOU buy one?...

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y

    @Brent Coombs that's a fair premise. I'd agree with an experienced eye you can find bargains in any market. I did not know it was a model that did well, but I can see it plausible.

    I would consider buying an ugly home, but would need to investigate it further to see how or if it appeals.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Kevin Jorgensen, yep. You owe it to yourselves to develop the same sort of eye for value-adding potential as you'll see on any of those Flipping shows on TV. (And avoiding their mistakes, too)!

    Many are the times they do such a good job that they say "I want to live here now", but there's nothing stopping YOU from having that mindset from the beginning!...

    0Reply
  • Christopher Peterson
    Portland, OR · Member since 2016 · 20 posts · 4 votes
    9y

    @Kevin Jorgensen you're in an enviable position with such a large income and lots of equity in your current home. Lots of options at your disposal.

    As others have already said, renting this property out doesn't make a ton of sense but why the need to sell it? You could tap the equity with a cash out refinance or HELOC and use that for investments without incurring all the fees from selling.

    Find out what the newer home near you is renting for. Don't guess. Maybe it would make sense to sell your current place so you can use that money for investments and rent while you wait out the crash you think is coming?

    Finally, we can't predict what the market will do. Its just as likely to crash as it is to go up or go sideways. If you wait for the "perfect" time to buy you will probably never do it.

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y

    @Brent Coombs While I'm 'developing that eye"....Would you recommend REITs or Crowdsourcing (like RealtyShares.com) as a place to get my feet wet....then going to an REI Club for first bigger investments.....then get into a niche?

    @Christopher Peterson We have an interest in selling the place as we have 3 kids under 6 years old, and our home is getting a little small and I'm not certain the schools are as good as I'd like to have. The space issue could be solved with having less stuff (which I'm currently working with my family on). But the schools I'd like to have resolved sooner than later. 

    I like the idea of cash out refi....My initial instinct would be to put it into an REI Club investment as I'm yet familiar enough with choosing a niche, property, and wouldn't make a good PM myself. In that scenario, I'm presuming that my REI investment will be significantly better than the ~4.5% I might see in my property increasing.

    Rent is pretty high, and I personally think our market (I see you're in Portland) is going to be solid for awhile longer. Plus I don't like the idea of moving my kids to a rental, then another new home, whenever it comes up. 

    Correct about waiting, plus this is a buy and hold approach. I know, as of right now I can get a great rate. I can't be certain that house prices will come down, or that rates will stay low or return to low at the right time.

    0Reply
  • Scott Radetich
    Investor · Portland, OR · Member since 2016 · 47 posts · 36 votes
    9y

    Not sure Foolishly bought is the correct term here. You put how much down? that's right $0, and you are now up 79k (based on Zillow which we all know isn't always accurate). Can someone calculate that ROI for me? You needed a place to live, got some tax breaks now you have the chance to pull a few hundy out and do some real damage. Man do I miss those zero down loans!

    After reading this post it sounds like you aren't really looking to do much real work when it comes to owning properties.  Have you looked into Turn Key providers?  Jason Hartman, has some pretty interesting products.  Listen to a few of his podcasts, it will get you thinking (he'd say sell).

    as a side note, I've been pondering trading in my Portland properties. I've been told by a few real, real estate investors I need to sell all of them. But I can't pull the trigger, i'm just too conservative of an investor (and I also have a real job like yours so there's the my time factor as well). But recently, I pulled out some equity on one of them and purchased some additional properties. My goal hasn't been to be 100% into REI, I like my job and am in no rush to get out of it. But in 10 years... I'll be able to choose which direction I want to go.

     If you want a conservative suggestion that will go against a lot of investors opinions on this site, I'd cashout refi that home now as owner occupied, buy a single family rental in Portland, then with the money left over buy a new primary for you and turn your 1st home into a rental too.  Keep in mind, both of those rentals you will make very little cash flow (couple of hundred at best) but your income is high enough to where I'm assuming you don't need it.  Now you'll have three homes in Portland with potential for appreciation over the next 10-20 years and have someone else paying down the mortgages for two of them. Its a solid plan, but won't get you rich quick.  If you want to get there quicker, you're best to sell and you're going to have to buy something that requires a lot more work....

    2Reply
  • Jason Hartman
    Rental Property Investor · Scottsdale, AZ · Member since 2012 · 314 posts · 146 votes
    9y

    I've been interviewing several economists and institutional real estate investors since the election in an effort to understand the rather significant impact a Trump administration will have on real estate and the economy, in general. I still love conservative linear markets where properties rent for around 1% of the value per month. :-)

    0Reply
  • Kevin Jorgensen
    OP
    Beaverton, OR · Member since 2016 · 55 posts · 10 votes
    9y

    @Jason Hartman Hi Jason, by your rule I'd need to rent out my place for 4,500, which isn't anywhere close to the rent here. I think at highest would be 2,500. Though I surmise that lower cost homes would be closer to your 1% rule. I'll have to refer to your blog to understand your position further.

    @Scott Radetich I suppose I see my mortgage this way. Was a 345 dollar liability that only had a per year ROI average of ~2%. Had I bought during the recession, odds are my overall net worth would look better now.

    Right now with three young kids, and a FT job I don't see how I could do rehab/flip/Rental-PM. I believe as the kids get older, and independent this is certainly a possibility for me.

    I recently discovered turnkey properties. I have it in my notes to investigate turnkey-reviews.com by Jay Hinrichs. I have yet to have the time to investigate yet. 

    I would also like to be able to decide if I should stay in my job in ten years. I'll be bored by then I'm certain, and the higher levels of the organization that I could get into are less appealing as they become more time intensive. Finding ways to create more time in my life is important.

    That's an interesting plan that you pitch with obtaining two new properties, and renting two of the three out. We indeed are not in need of extra cash flow at the moment. I'll need to compare that against ROI I might see in an REI club approach (or this Turnkey thing). Is good to see another Portlander chiming in.

    0Reply
  • Jason Hartman
    Rental Property Investor · Scottsdale, AZ · Member since 2012 · 314 posts · 146 votes
    9y

    Hi @Kevin Jorgensen,

    There are many ways to profit with real estate but my favorite is the tried and true $120,000 single family house that rents for around $1,200 per month. There's a lot more to it that I discuss on my podcast but, with that as a guide, it's hard to go wrong. Happy investing! 

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Kevin Jorgensen, do I "recommend REITs or Crowdsourcing (like RealtyShares.com) as a place to get my feet wet"? No. (That's just me. I want to own/paint/control what I buy).

    I do recommend: going to REI Meetings for your first big (or small) investment discussions....."then get into a niche".

    You wrote to Jason: "by your rule I'd need to rent out my place for 4,500, which isn't anywhere close to the rent here. I think at highest would be 2,500" - which of course was exactly Jason's point ie. YOUR home (or market) WON'T give you the cash returns you could be getting, which is at least 1% gross return per month.

    Aah, you HAVE worked out that "lower cost homes would be closer to your 1% rule"!

    You also wrote: "Right now with three young kids, and a FT job I don't see how I could do rehab/flip/Rental-PM". Sorry, but that sounds like a poor excuse to me! 

    No-one is saying you need to devote lots of time into rehabbing or flipping or property managing. (That's what other people can be paid to do if and when needed). 

    That's enough from me - for today...

    1Reply
  • Scott Radetich
    Investor · Portland, OR · Member since 2016 · 47 posts · 36 votes
    9y

    Ha, well of course your net would be better if you bought during the recession.  I bought a property in 2006 for zero down as well, and its doing just fine now.  But I also bought one in 2010 and that one is crushing it.  I got into this for a true buy and hold, so I didn't care if my 2006 purchase wasn't going up 10% each year.   My original plan was to have 3 paid off rentals by the time I was 50. (which I was on track to hit)  Then I found Bigger pockets and Jason Hartman...  and hello leverage.

    You are right in Portland the rent to value is closer to .5, a 500k home will rent for around 2500.  And one last thing, if you do go the single family rental route in Portland, I strongly recommend you to manage the property yourself.  It really does not take much time, I go months without a call.  But do make sure you swing by every couple of months. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free