Keep my first home as a rental?

Question

I'm looking to get into buy-and-hold real estate investing. My wife and I close on a new house next month, and I thought that we would keep our first house and use it as our first rental property. Now I'm wondering if we should sell it and find another property to reinvest the proceeds in.

Here's the situation. We're in the Kansas City market, and we bought our house for $140k five years ago. We went FHA, putting 3.5% down at 3.75% interest. Our total payment (P&I, MIP, property tax, insurance) is $1015, and we still owe nearly $123k because less than $250 per month is going to principal. I think that we could probably sell the house for $170k with just minor repairs and updates. I think that it might be possible to rent for $1500 per month, or $1400 easily.

Putting somewhat optimistic numbers into the BP calculator ($1500 rent, no utilities, 5/10/10% vacancy/CapEx/management) gives me only $22.26 cashflow, 4.09% CoC ROI.

The other thing is, as I understand it, once I only owe 78% of the house's value, we can drop the $117 per month MIP (FHA mortgage was before June 2013 and we are about to make the 60th payment this spring).

Would that extra $117 in cash flow each month make this deal workable? Should we try to get the ~$30k of equity out of this house and look for a better deal?

Other possibly-important details:I work 50 hours a week making over $100k per year, but don't have a lot of cash on hand, especially after putting a down-payment on the house we're moving into. Between my work schedule and lack of handy skills, property management and maintenance would probably all have to be hired.

Any advice is appreciated.

Andrew Syrios · Answer

In my opinion, owning real estate is the key to long term wealth, not just making good profits on flips. And if you can add a rental here and a rental there over the years, appreciation and principal paydown will eventually conspire to grant you a lot of wealth. I don't think your current home will cash flow great (at least until you've gotten rid of the MIP), but there are a lot of transaction costs with real estate and you have great financing on it. The question to me is what else would you do with that money? Perhaps it would make sense to buy properties that would cash flow better. But I would probably lean toward holding it as a rental.

Michelle Krupa · Answer

Hi @Corey Schneider,

You can request to have PMI dropped when you hit 80% equity. It will automatically drop off at 78%. So if you believe the home is worth 170k, you could have it appraised to confirm, and then request the bank drop the PMI if you now have 80% equity. You might want to look into refinancing it and pulling out any extra equity to put towards a new investment. Just look up the BRRR strategy here on BP. That way you keep the property and get to take advantage of the equity you've built into it. I wouldn't get hung up on PMI as long as the numbers work but if you can get it dropped off, I definitely would; it's worth the cost of a new appraisal. It might not be a huge cash flow for your first home, but it's still positively cash flowing, you're still building equity, and someone else is paying for it. Lee's Summit is a great area. However, some do recommend selling a home you've lived in because of personal attachment and how that might create issues with tenants. Just something to think about. I hope this helps and best of luck!

Gordon Cuffe · Answer

I say as soon as you get rid of the pmi , turn your house into a rental and buy another primary residence with 5% down . you will be on your way to be a real estate investor .

Arpan Patel · Answer

@Corey Schneider: I agree with @Donnie Patel in that I'd try to hang on to it if the numbers make sense. How much more would you need to put towards the principal to get rid of the MIIP? By my math, you should already be across that threshold of 78% so you should be able to melt that extra 117 a month off. Call you lender and see what you can do. Furthermore, see if you can get some type of HELOC to pull out some of that money and turn that rental into a credit line that you can use to acquire other deals. I hope this helps!!

Donnie Patel · Answer

I would hold onto the house if its possible for a little bit more. Later on take a equity loan equal to the amount of appraised value -30k. Take that and put it as a down payment on another home?  Based on the numbers you shared if you make a little over equity you should keep it. The gurus of this forum say if you make atleast 200$ you should rent it. i wouldnt worry about maintenance so much unless the house is in real bad shape. only the repairs required by law are necessary.

hope this helps.

Hernan Dobal · Answer

Corey, I would keep the property long term as you can learn the ropes of landlording as others have mentioned. With this being said if your current note is $1015 and you could rent it for $1450 fairly easy you could cash flow around $350-400.

Although it's important to put aside capex for repairs/vacancy/prop. Management, if the property is in good shape I wouldn't be concern about this, however It's important that you due diligence when selecting your tenant though and have future tenants in the pipeline. From here let the tenant pay down your debt and collect this cash flow into another account until you achieve 70% LTV or less then you can save up for a bigger down for another property.

Adam Christopher Zaleski · Answer

Would it be a great rental? No. Would I still rent it out for a couple years. Probably. It would be a good way to learn the ropes of landlording. You should be very familiar with the house, so it should be easy to deal with repairs.

Not all lenders will let you get rid of PMI with a simple appraisal. I need to get to 80% on the original loan before they drop it. I put 5% down when I bought it. I bought it for 95K and it's worth about 225K. I owe 78K and need to get down to 76K before they drop PMI. I'm getting close.

Ryan Scott Isacksen · Answer

A complete refinance would probably be better.  You would lock in a fixed rate and would allow you to drop the PMI most likely.You may not be able to still get that 3.75% interest rate you have now, but a HELOC will have a more variable interest rate (and those are starting to go up).

Corey Schneider · Answer

Thank you all very much for your advice. Carrie Cavins, I will have to look into that. Right now, I'm only at about 90% compared to the original loan amount. I was counting on the percentage being compared with the original purchase price plus appreciation. That may change my decision. If I can get MIP dropped, then I think I will definitely go ahead with keeping the house as a rental.

With regards to BRRR: Let's say in a few months I owe about $120k and the house appraises at a more conservative $160k. How much of that equity can you pull out for your next deal? Do you do this through a HELOC or complete refinance?

Keep my first home as a rental?

Most Popular Reply