Will My House Make A good Rental?

Question

Hi All,Quick summary, my wife and I are considering the possibility of moving in the next few years and are trying to figure out if our house would make a decent rental or if we should just sell and invest the profits.Our house, 3 bedrooms 1100 St ft (plus finished basement) raised bungalow, with a giant backyard. In a very established neighborhood that has both similar houses to ours, much bigger houses on one end and multi-family rentals on the other end. House is worth anywhere between $500-$520 we owe $330 and would be down to about $290 on the mortgage by the time we would consider moving. My wife is concerned that our finishes on the inside of the house are "too nice" to be a rental. I'm split between that making it hard to rent or that being a good thing to price us in a range with higher quality tenants.Would love to hear from you all on what you would do?Thanks,Ben

Jason D. · Answer

@Ben Le Fort what you're doing is "investing" $200k in equity, and It "making" a couple hundred a month. The question to ask yourself is this.... If I had $200k, would I use that as a down payment on a rental that cash flows $200/mo? I hope the answer is no, and that means you should sell the property and not rent it. It's a terrible use of equity.

Steve B. · Answer

@Ben Le Fort obviously a house worth 500k that rents for 2.5k is a bad idea just as @Jim K. Has explained. You’re making a bad decision based on convIenance and emotional attachment. Whenever this question is raised the poster always seems to rationalize the argument based on the outstanding mortgage balance instead of the ARV; this is the wrong metric.

Jim K. · Answer

Once again, here we have a perfect example in the forums of someone thinking about renting out his old house, "with nice finishes," to move into his next, even larger and nicer, house. If I'm assuming wrong, Ben, please correct me, but that's one way a lot of people want to get into landlording. It's almost always a bad idea.Here's the biggest problem, Ben -- you made it YOUR house in the time you lived there. You probably have emotional attachments to it, and clearly you put in some of the "nicer" finishes. You and your wife will have some difficulties seeing it as a tool to make money, and when the tenants damage the place, it'll be like giving up part of your soul.You don't know where you're going to be living next. That's a critical part of knowing if a property is going to be a good rental FOR YOU. Are you going to live far enough away to need a property manager? What amount of the maintenance, if any, are you going to handle? Are you going to be able to visit and verify that something needs a certain amount of work or are you just going to have to take your property manager's word for it?How much are you going to charge in rent? Have you established that you'll be able to cash-flow positive on the thing, with property management?Are you willing to be a landlord? Casual landlording is, sooner or later, going to get you in trouble, because sooner or later you'll run into problems that will make you want to give the whole thing up in total disgust. Of course, if you're very, very lucky, it will happen much, much later, but that's not how the world works, in my experience. The trial-by-fire will most likely start the minute you hand over the keys to "higher-quality tenants" and will only end when you hand over the deed to someone else.And here's the kicker, if you want to make this a way of life, with multiple properties, then even if you take a bath on this property, you should start. Anything's better than waiting to learn how to landlord properties eventually when you have an opportunity to start building the skill set immediately.So the answer really is that it's going to depend both on you and on the market. If this is what you want, don't hesitate. But this is likely going to be an ugly way to figure out what you want, if you're not sure. Good luck whatever you decide.

Account Closed · Answer

@Ben Le Fort Take the free money and sell it. You get <500K in Capital Gains for your primary residence. Find another home that you could repeat that every two years. Maybe even be adventuresome and do a 4 plex house hack FHA203K 4-plex. And most likely have enough money to go 75% LTV at 5% APR on 30 year fixed on a couple of other rental units that cashflow. My 2 cents.

Charles Simon McEntee · Answer

Please help me analyze my first rental. Loan $68k @ 5.8% conventional with 20% down. Rehab around $10k closing $5k. I wonder if I need to add inspection and holding cost for the first 2 months the property take to Reno and place a tenant. Rents $800 mortgage insurance and tax $505 Vacancy 7% $56. Maintenance 7% $56. Management 10% $80. Cap ex 10% $80. That means I'm left with $26 a month. That's 1.03% net ROI from the $30,150 out of pocket. I don't understand. Pls help me analyze this deal.

Matt Nusbaum · Answer

@Ben Le Fort I had a similar situation myself. We ended up selling the home since it wasn't purchased to be a rental. Although, it sounds like yours would cashflow better than mine would have. That said, I would still take the 200k you have in equity and invest it else where.

Ryan E. · Answer

@Ben Le Fort I’m going to offer somewhat of a counter point to the cash flow argument. You mentioned that you feel confident in the possibility of appreciation. Most people would be pretty happy with, let’s say, $600 per month in cash flow, right? If you are confident your rents and values will go up over the long term then I think that changes things. Let’s just say your property goes up by 12% over the next four years for an increase of $60k in value. If you calculate that out it would be an increase of $1,250 a month over those four years. Double the number that most would be happy with on cash flow alone. I don’t think you should discard all of the solid advice given so far but I also don’t think you should decide not to rent based on a cash flow calculation only. Again, if you are very confident in continued rent/value growth I think that’s a big consideration. Plus someone will be paying it off for you. For example, the house I live in (a house hack) would probably have rented for $2700 ish when I bought it. Now, I think it would rent for close to $3700. It has increased in value by about $100k over the last four years. My market is growing a ton...jobs, population, limited land etc. If you do decide to keep and rent based on the possibility of value Increase I would make sure you have plenty of cash reserves for vacancy and repairs and the possibility of rent decreases or higher vacancy in a down market. It really depends on your goals though and there are some very experienced people on here advising you to sell. My point is just that there’s more to it than only cash flow.

Chingju Hu · Answer

With 200k equity and only a couple hundred cash flow, it's not a great rental unless you really want to keep this house (tons memory and personal feeling attached to it), don't mind a low cashflow, and don't need equity right now.but for most ppl on this forum, they can get at least $2000/month and more cashflow with $200k equity

Jonathan Soto · Answer

How is the rent market in the area? If You can cash flow a good amount while including mortgage payments, Vacancy, Cap Ex and maintenance repairs then I will go for it. it's all a numbers game, if that passes then that answers your question. Best of luck.

Jiri B. · Answer

@Ben Le Fort I would agree with the general theme of those answers. Probably not a good rental. Would sell it.Assuming your home appreciated in value over the years, and sounds like you have lived there for a while, by selling it, you shouldn't have to pay capital gains or at least here in USA so you would make 200k tax fee money. Then use it to purchase 3 or 4 rental properties (not super nice, just OK) and make $300/mo cashflow on each of them..Doing it this way, you can get 4 x higher cash flow and 2 x the asset value - instead of owning rental real estate worth of 500k, you should have it worth of 1MM. (assuming 4 properties, 50k down payment each, 80% LTV)