All Forum Posts by: Michael Ashe

I agree with the items @David Liu mentioned but add insurance, vacancy, property management (even if self managing because it is work), misc (mostly items divided across all units (bookkeeper, LLC, umbrella coverage, tax man, office expenses, etc) as well as one off items such as utilities due to slab leak. A rough rule (very rough?) is expenses other than P&i is 50% of rent.

In addition, 5% to 8% each for maintenance and cap ex would be way too low in virtually every market but possibly not in high rent San Francisco.  In all markets, basing these expenses as a percentage of rent is not logical. 

What has higher maintenance/cap ex: a 3/2/2 1100’ in class A- that rents for $5k or a 4/2.5/2 1700’ in class c that rents for $2k?   The rent price has less relationship to maintenance and cap ex than size, class of tenant, number of units, bathrooms, etc.  

to determine maintenance/cap ex budget create a spreadsheet of all item costs and expected lifetime in months.  Example water heater in my market installed by reasonably priced licensed plumber is $1600.  Lifespan ~120 months.  Cap ex/maintenance on water heater in my market is $13.33/month.   All items have a lifetime and replacement cost.

Good luck

@Michael Ashe I'll just add that "...property taxes increase when the home is converted to a rental..." is a very location specific event.  Anything specific in your plan or locality that would force this?

Are you moving out of your primary and renting it out?  Basically a regular rental?

Or, are you staying and renting out a room or something?  i.e. house hacking?

As far as "cash flow," one MIGHT consider that just your income (i.e. the rent) minus the fixed expenses.  Yes, it would be good to figure out what those expenses will be.  Shouldn't be too bad since you are already living there.  Some will be passed on to the tenant.

You can include non-recurring expenses such as capital expenses, repairs, etc.  In my opinion, how you handle your reserves is up to your financial preference.  Setting aside a percentage of the rent for capex and repairs sounds like a good idea, and for some it is a good idea.  I personally wouldn't know what do to with a small pot of money just sitting there.  That's why you need reserves (don't care if you call it the rainy day fund, the oh crap fund, the long term savings, whatever).  The extra cash would go into that reserve..

Good luck.

@Michael Ashe I was asking the same questions when I started out BUT I asked them before I owned any real estate. I encourage you to read and research how to run the numbers. You can create your own spreadsheet or use the BP calculators they provide. Without actual market numbers (market rent, property tax, vacancy, capex, repairs, insurance, etc.) you can't make educated decisions about moving and renting your property. Cheers.  

Slow and steady wins the race. I'd vote for moving out of and renting your current house, getting another 5% down conventional loan, and then start saving up for the 3rd one. It's a whole lot easier to pile up 5% than to do 20% on an investment loan. If you want to go crazy, try to find a duplex for the next one, so then you have 2 rental units (current home and the other side of the duplex). 

Rinse and repeat until your soon to be wife tells you that she can't take it anymore. And by the way, if you own property together, you're already married. If it takes an attorney to break up, you're married.

@Michael Ashe "Is there a benefit to purchasing a property specifically for rental purposes versus purchasing it as your new home and converting your current account into a rental?" - YES there is a big difference. For starters how did you calculate the $700-900 per month cash-flow? Odds are this amount is incorrect. 

Do you have an emergency fund? Do you have cash for reserves? The equity you speak of doesn't count. That's your safety net, your wealth, and protection from loosing that 3.75% rate. In my opinion you shouldn't risk what you have to buy another property. You have to sacrifice and save for it, get creative (sub2, OPM, HM, etc.), or do a combination of those things to get a deal done in today's market. 

 Hey Michael, 

If you are using a HELOC to finance the DP you might find it difficult to find a deal that can cover both your first mortgage and your HELOC payment.

If the goal is to minimize your down payment, have you considered leaving your current primary as a rental and buying another? 

It's worth noting that a HELOC rate is always going to be substantially higher than a conventional loan. With an investment property, you can put as little as 5% down. If you are able to handle that + closing costs without the need for a HELOC, you forego the higher rate on a portion of you equity. If you absolutely must use the HELOC to access the needed liquidity, it is still a viable option.