I have been considering becoming a landlord. I live in a new (~7 years old) condo building on the north side of Chicago in a popular neighborhood. I bought my unit in April of 2014 at a very good price since it was bank owned. Similar units in my building have recently sold for 12+% more than I paid.
Some units have recently come for sale in my building, and I've been thinking of buying one of them and renting my unit out. If I were to rent my unit out, my conservative "cash on cash" return would be 7% (cash flow return on my total money invested). This excludes any principal paydown and value appreciation. I feel, though, that the 7% return is really more than 7% because it is technically "after-tax" so it is higher than a comparable 7% return in an equity holding.
The unit I am considering buying is a little nicer, and more expense than my unit was. Of course, I like it because it is nicer, but I am also looking at this from an investment standpoint.
I am considering purchasing the unit (say at $250K).
If I were to put 20% down or $50k down, my net monthly increase in monthly payments (over my current place) would be about $300/month. If I were to put 5% down and pay PMI, my net monthly increase over my current place would be about $400/month (with PMI quoted at about $100/month from my mortgage broker).
My *very conservative* estimate on what I would positive cash flow from renting my current place each month is $300, which is roughly a 7% cash on cash return.
I am considering pursuing this but am curious to hear your thoughts:
1) Is it wise to pay the $100 PMI per month so I can only put down $12,500 instead of $50,000? Assuming I could earn 7% on the additional $37,500 ($2,625), I would still come ahead $1,425.
2) Put down 20% ($50k) and avoid PMI and essentially the additional $300 in extra monthly living costs would come from my rental unit's cash flow.
I honestly think #1 is a good move if I can keep the PMI fixed at $100/month, but it really is dependent on how RE values pan out in the future. #1 and #2 are really only "good moves" if values continue to increase slowly but surely. Of course, no one will no the answer, but if values tank then neither idea is good. I also could eventually move out of this second unit one day and rent that one out as well.
I am also attracted to this whole thing because of the idea of becoming a landlord, and a condo unit presents an "easy way" to become a landlord, because I am not handy and it would require little maintenance vs. owning a house or a duplex.
Thanks in advance for your thoughts!