Should I turn my house into a rental?

Question

Hi fellow BPers, my wife and I are considering upgrading houses and keeping our 2/1 house as a rental property? Question for those w/knowledge & EXPERIENCE: is this a good idea, why/why not?

The house is a 1924 property in good condition (roof, HCAV, foundation,etc). Our monthly mortgage is $974 (so ideally rent would be >$1,125/month). I’m not sure we’ll get the desired rent since rentometer says ave is $885?

Considering adding a 1/2 bath in our kitchen pantry which has ample space, in order to add equity (1 bath is a hard sell)

I’d appreciate your input and hard questions, .i.e

What am I not considering?

Thanks!

Daniel Haberkost · Answer

Hi Ryan, with a mortgage of $974 and a (best case scenario) rent of $1,125 the property would not cash flow.

Even assuming the tenant will pay all utilities/landscaping/etc, when you budget it vacancy, capital expenditures and repairs & maintenance you will certainly be negative each month, especially on a house that is almost 100 years old!

Depending on the numbers, it may make sense to add the bathroom before selling it but I have no idea how much value that would add vs the cost in your market. Regardless, I would not keep it as a rental.

Hope that helps!

-Dan

JD Martin · Answer

On paper this house does not sound like a good rental candidate. But there might be wrinkles:

1. How long have you been paying on the mortgage? Can the payment be reduced by lowering interest?

2. Have you actually checked your local market to see what houses similar to yours in similar areas rent for? Forget about rentometer or any other "estimator". You have to use your own knowledge of neighborhoods and houses and maybe go put eyes on the competition.

3. How strong is appreciation in your market and is it likely to continue? If you are realizing some California-esque appreciation rates, it *might* make sense to keep it even just breaking even. If not, you will probably lose your shirt based on the numbers you posted.

Ryan Garvey · Answer

Thanks each of you for your input!

@Daniel Haberkost - thanks for your input! I agree we'd likely barely get by (would need at least $1,175/rent to get $200). But yes, with those other expenditures it's unlikely we'd be in the green.

@JD Martin great questions: we've lived there less than 1 year. I have checked our market (Zillow, Craigslist) and not many rental houses in our area (2/1) are asking for $1,200 or more, and the ones that are appear newer and in great locations. As far as appreciation, I can't say - the neighborhood is older, just north of the University, with some houses in rough shape, but others getting fixed up.

Overall i feel like I'd be willing this more than is realistic, so I won't say at this time that I feel confident keeping the house as a rental. I know 2/1 houses are going to have some regular turn over, which increases my vacancy.

Thanks guys!

James Snedaker · Answer

I decided to keep my house as a rental. Was caught without savings and had to replace the roof and add central air. Both financed, costing me about $600 monthly cash. After adding central AC, I could have increased rent by $600 but only increased by $250 because I cannot afford a vacancy at this time. End result is negative $250 cashflow per month, but $450 principal is being paid per month. I'm hoping to be +750 cash flow by mid 2021.

If you decide to keep, make sure that you have ($$$) flexibility to find the most affordable services and be selective with tenants.

Joe P. · Answer

Went through this myself, ignored the numbers and found out my unit was barely breaking even. Eventually sold the property and got a check for a smidgen of equity, which I then turned into a duplex.

If you have the equity and think you can sell at a reasonable price, usually the equity is a good thing and can fund a true investment. But even if you don't have equity, most of your rent is paying your mortgage here. There's no cash flow.

Account Closed · Answer

That all depends on whether or not your market is viable. If so then there's nothing to lose in trying. This is how a lot of people get started. You may also want to look into short term rentals. STR's are not just for vacation rather many people who travel for work use them all the time (nurses, contractors, etc.) I travel all the time and my preferred method of lodging is Airbnb for 1-3 months at a time.

Good luck!

Hai Loc · Answer

Numbers are tight. If you are confident you can bump up rents with those improvements its worth a shot.

Also demand for rentals in your area should also factor in your decision..

For example in Toronto landlords are willing to accept negative cash flow similar to @James Snedaker as long as the rental market is sizzling hot.. slowly increase rents and creep to even

Should I turn my house into a rental?

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