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Old 04-29-2009, 10:18 PM   #1
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Rental Property

I joined back in August of 2007 and in my very first post I asked about the benefits/pitfalls of owning rental property. Nearly 2 years later, my wife and I have just bought our first single family home and have decided to put our townhome up for sale and rent at the same time. If we rent our townhome, we won't be able to generate enough income to cover the entire mortgage and association fees. We'll need to put out around $2-300/month depending on what we end up renting it for. Our DTI is less than 30% including both morgages without any rental income so the monthly output shouldn't be an issue but I can't help but feel nervous about shelling out a couple hundred dollars per month because I can't rent the house for enought to cover all costs. Would I be better off selling or is beind "upside down" a few hundred dollars per month not a big deal? Also, even with the real estate market stabilizing, I'd rather not sell right now.
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Old 04-30-2009, 10:57 AM   #2
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Quote:
Originally Posted by Eyerishgold View Post
Nearly 2 years later, my wife and I have just bought our first single family home and have decided to put our townhome up for sale and rent at the same time.
Renting at the same time your trying to sell is not such a great idea. If you use a real estate agent, you may be placing the agent in a conflicting position. His job is to sell the property. He makes his money selling, so most of his efforts are sell oriented. If you use him to rent the place, he makes very little doing this, so it is a secondary activity. Thus, he will not really try to find a renter until the listing is just about to expire, and then the renter may not be someone you really want. I just made this mistake on a San Diego property. It worked out for me, he found an acceptable renter in the last 3 weeks before the listing agreement was to expire. But during the prior 5 months he could not find a buyer. So I'd advise you to not to try and sell in this market, at least in Ca.

Quote:
Originally Posted by Eyerishgold View Post
Our DTI is less than 30% including both morgages without any rental income so the monthly output shouldn't be an issue but I can't help but feel nervous about shelling out a couple hundred dollars per month because I can't rent the house for enought to cover all costs.
Have you considered a refi while it is still considered owner occupied and the rates are near historic lows. Perhaps a lower mortgage rate will bring you closer to break even. I'm in the process of getting a 4.5% on my owner occupied SFH.

While the up to 3600/yr doesn't seem like a lot, a few months without a renter and repairs will make this a real alligator. You'll find your self doing the easy maintenance and repairs to keep costs down. This will impact your family time. I spent about 3 years doing painting, yard repairs, yard maintenance, light interior repairs etc between renters when I first started out.

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Originally Posted by Eyerishgold View Post
Would I be better off selling or is beind "upside down" a few hundred dollars per month not a big deal? Also, even with the real estate market stabilizing, I'd rather not sell right now.
I don't know your market, but if you’re not desperate and forced to compete with bank foreclosure prices, I would wait. It will not repeatedly show well while the renter is living there. You'll probably need a very low rent to find someone to rent knowing they may potentially move in 6 months and have to allow strangers to wander through at almost any time. The other side is that if you just sell, you get to pay the PITI all yourself for the entire listing period, the place will show good all the time, you don't have to worry about personal property being missing and no stranger intrusion occuring. But you will be under financial pressure, due to the money you've risked, if an offer comes in. Only you can make this call.

I just went thru a sell hold analysis. I found the net rent profit (after accounting for everything, except taxes) would be about 3X what I could make with the net sales profit (after accounting for everything, except taxes) if invested in 5% T bonds. Assuming you could now find them.

Good luck.

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Old 05-02-2009, 06:13 PM   #3
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Originally Posted by Eyerishgold View Post
... and have decided to put our townhome up for sale and rent at the same time.
So all the reading you did here had no educational value? Just kidding. I think.

Your approach works way better as a FSBO/FRBO on Craigslist. There are also MLS services that will list you for a ~$300 fee. And if you're near a military base then you may want to try AHRN.com for rentals.

As for the cash flow issue, spreadsheet your fears with a fairly realistic scenario. Let's say that the market goes into 10-year real estate slump, where home values decline by nearly 40% in the first five years and stay there for the next five. (They'll double in the subsequent seven years, but for now let's just focus on the first decade.) About halfway through that slump, your prospective tenants start comparing rents and jack you up for a 10% rental reduction. Faced with yet another two-month vacancy if they move (for many other landlord's incentives), you reluctantly acquiesce.

You get to depreciate the house on Schedule E because the IRS will tax depreciation recapture on the eventual sale, even if you never depreciated. And of course you get all those great landlord deductions. Don't forget to add in a few months' vacancy every other year or so, and assume that you'll replace every major appliance during the next decade. Add in a roof if it's already 10 years old. Annual carpet cleanings. Annual or bi-ennial tenant moveout cleanings & paintings. Maybe a frozen water pipe or overflowing toilet casualty.

That $200-$300/month negative cashflow doesn't seem like much, but you could also be facing annual losses of $2400-$3600/year for a decade.

If that doesn't seem like a problem then you're ready to landlord.

The above scenario represents the Hawaii real estate market from 1990-2007, including many of our own landlord experiences.
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Old 05-02-2009, 07:19 PM   #4
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I would anticipate the realtor will want the townhouse vacant during the listing period. Price it right and it will sell. Problem is : pricing it right will cost you dearly (heck, it's at negative cashflow as a RENTAL ... but - selling!?!).

Forget about selling. Rent it out and plan to do everthing yourself to get your costs down. As Hono says "suck it up". Not my idea of successful renting ... but it happens alot these days.
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Old 05-03-2009, 03:59 PM   #5
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How close do you live to your townhome?
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Old 05-03-2009, 06:00 PM   #6
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Well.. Me thinks you owe too much on the place to Rent it then..and best bail and sale..

I owned and Rented some of my Townhomes, but Not before crunching the # to Make $100/mo profit to pay for the maintenance etc..

The market is Saturated with Rentals and going very cheap and not the time to get into the Rental Property business if you don't have the $ to Put down to reduce the cost per Month/yr and can wait 5- 15 yrs to sell it and get that DwnP. $ back

Possibly? Do and Exhange into a better neighborhood? with more potential for higher growth in vallues down the road..

and if you aren't prepared to Go out at all hours of the day/nite and wknds to fix things at the place? and have a Good cleaning Service after each renter is thrown out? and they have too many righrts now and can stay in the place for Months without paying you..? then diffinetely don't rent it..
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