Should I rent my house out? Check my numbers?

Question

So my wife and I originally bought our house with the intent to rent it out after living in it for 2 years. We are around that 2 year mark and trying to look for another house to move into but want to make sure that our house will be a safe rent before we make the commitment of another house which we are wanting to finance for the full amount (already have financing lined up through a bank loan which we will convert to a long term conventional loan).

Since I have never rented before any advice is welcome. Also, under expenses, I'm not sure what to put as far as maintenance and vacancy. I do know that when house go up for rent in our area it's quickly filled but I'm not sure what to put for maintenance.

House bio: 3 bedroom/2 bath house in a mostly owner occupied neighborhood. 1500sq ft, with 2 car garage, larger lot than most in our neighborhood with privacy fence. Built in 2003.

Here is my current house numbers:

Income:

$1200 a month (very comparable to other houses in the area)

Expenses:

$779.33 a month mortgage (this amount includes our mortgage PandI of 491.42, taxes of 60.65, insurance of $100.67,  Mortgage Insurance 112.20, and an escrow shortage of 14.39)(This is an FHA loan, is there anything I need to be aware of renting a house that is financed with an FHA loan?)

$120 property management (10% of rent price, we will be the property managers but want to build it into the analysis if we ever get tired of doing it ourselves)

$120 maintenance (10% of rent price)

$96 vacancy rate (8% assuming house will be vacant 1 month of the year)

Total: 1115.33

Total income ($1200) - Total expenses ($1115.33) = $84.67

Is this worth doing?

So my wife and I make more that enough to live comfortably but want to fast track our residual income. Is our house worth renting out? Or should we focus on paying it off?

Thanks in advance for any and all advice!

Tom

Josh Birrell · Answer

I think the answer is, " it depends".   Meaning, it depends on what your current and long term goals are.   If you are happy with minimal cash flow and amoritization in exchange for some land lording and property management experience then renting your current home makes sense.   But if you are looking to fast track your residual/passive income then you might want to consider selling,  using the homeowner capital gains exemption, and using the money to purchase a small multi family or single family with better cash flow.   Again, I think a lot of it depends on your goals, risk tolerance and investment strategy.    I would recommend taking the time to determine what type of real estate investors you want to be and what strategy will take you to your goals.

Nicholas Jasmine · Answer

I have just started in the real estate investing, but learning what I have I would not invest in something that doesn't bring a cash flow of 200-300 a door.  Things happen unexpectedly and the 86$ dollars you would be receiving is not going to go very far.

Tom Castilaw · Answer

So for everyone who has been following this I found out today from the mortgage company that my loan is with that if I want to have the mortgage insurance removed (which would free up another $112 a month) I need to get the loan to to 78% loan to value which would mean I would have to pay the loan down to $89,700 from the current principal balance of $108000.

So the question is do I try to pay this loan down $18,300 and then start looking for another place to move into. Or should I just go ahead and rent it out now and acquire my next property?

I'm leaning toward go ahead and rent since all of my bases are covered and I can use the $84 of cash flow to save as a reserve and also since I won't be using a property manager I can use that money that is accounted for in expenses to save as a reserve or to pay the house down faster.

Thanks again for all the helpful responses.

OH and I checked rentometer.com and the $1200 a month rent is about 3/4 on the dial and I have talked to other renters and tenants in the area they are all paying anywhere from $1200-$1350

Account Closed · Answer

@Tom Castilaw

I would speak to 2 property managers in the area, and ask what it will rent for. Also, how much appreciation is that area growing each year?

Short answer is 'maybe'....but I would factor in what it will actually rent for and appreciation.

Tom Castilaw · Answer

That's true Elizabeth. Our rate is 3.25% so I hate to refinance it. And that seems like a great point that newer houses require less maintenance. I mean we are definitely going to rent it. Now I just hope we can find a great deal for our next house so we can move!

Elizabeth Colegrove · Answer

We have 5 houses with those numbers that we have acquire in the past 3 year. I write about it in our blog/website.  It has added up for us. The newer houses you don't have as many expenses. We manage the house ourselves saving that amount. Since you have had the house for 2 years you can probably still get the pmi to fall off without the refinancing. Call and figure out what the rules are to get it removed. You might just want to through your extra cash-flow to getting the pmi removed. Depending on your rate. You get lose a great rate.

Tom Castilaw · Answer

Thanks everyone. This has been extremely helpful. Let me ask this question to get some opinions on it.

If you like at the numbers above I pay $112.20 a month in  mortgage insurance, with that being said would it be worth refinancing and paying any closing costs (probably $1000-$2000) to have it refinanced in hopes of getting the mortgage insurance removed? Would something like that be worth the time and the money to free up another $112 in cash flow?

Nathan Brooks · Answer

Tom ... I think you are asking the right question ... and that is important. Because as you go to buy your next deal, and deal after, you will be more and more critical on what you buy, how you buy it, and what the deal looks like.  This sounds like an okay deal to rent, learn the process of renting it out and being the property manager.

For me personally, I don't like buying the personal residence with FHA because I am so close on my LTV ... I prefer to be in more like 10 or 20% down, more room if something goes bad, and lower payments for cash flow.

With that said, I would rent it.  Let it be a lesson that you want to have X per month in cash flow, and don't buy your next house that YOU live in unless it meets that criteria.

Also ... and this is VERY, very important ... make sure you start out like a business with it.  Have reserves in place, screen your tenants like crazy, and talk to your accountant.  You will be ready for that next deal.

Bryan N. · Answer

@Tom Castilaw

Let's see... You accounted for  the PITI, property management, maintenance, and vacancy if correct for your area.   It's not negative $100 a month so rent it!!!   The renters will pay down the debt, give you a tax write off, and if no maintenance or capital expenses are required, a little extra money in your pocket.  For budgeting purposes, I would stock 6 months worth of rent into a savings account to protect yourself.  Also, Verify your rental amount to be safe with rentometer.com or some other similar source.

Should I rent my house out? Check my numbers?

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