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Should we try to rent
Old 03-08-2007, 06:16 PM   #1
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Should we try to rent

My wife and I are discussing whether or not to rent our condo when we buy a house in 4-5 years. To make the numbers close enough to work, we would have to pay off the second mortgage ($52K) before moving. Currently, similar units in our complex are renting for $1800 (furnished).

If we can pay off the 2nd, here’s what the numbers look like:

Monthly costs
$1795 1st mort
$411 2nd mort
$302 Property tax
$154 HOA
$20 Condo insurance
$2271 Total

Monthly rent (estimated)
$1900 furnished

This leaves us with a $371 delta that would mostly be covered by the tax benefits of owning the condo. We would also need to save cash reserves to cover the months between renters. Maintenance shouldn’t be too expensive because the condos were stripped down to the frame 2 years ago (before we bought) and completely redone. We would manage and repair the condo ourselves. We’re ˝ mile from a UC school, which should help ensure many renters to choose from.

Over time, I imagine that we will be able to turn this condo into a passive income generator, while gaining equity. I realize a lot can change in the next 4-5 years - I just want to bounce this around a bit.

-iwannaretire
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Re: Should we try to rent
Old 03-08-2007, 07:18 PM   #2
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Re: Should we try to rent

Personally I'd sell the condo and invest the proceeds. I'd run away from the hassle factor (possible bad tenants, extra tax considerations). Doesn't pass the KISS test for me, even if it were making money each month rather than losing it.

How much could you sell it for?
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Re: Should we try to rent
Old 03-08-2007, 07:47 PM   #3
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Re: Should we try to rent

I'm renting my home right now and I'm in So Cal and I've been doing this for about 2 yrs now. I'm losing about similar amount as well.
If you haven't done property management before, think long and hard before doing it.

Check out this board and read all the headache stuff that's happening.
http://www.mrlandlord.com/

Personally, if I were to do it again, I probably wouldn't do it. It's not as easy as finding someone and renting it out. You have to do read up on landlord/tenant law, make sure you're doing everything legally, have sufficient cash reserves to prepare for the worst, etc etc. If you're in rent control area, tenant has a lot of power so make sure you read up on it.

For tax purposes, if you or your combined income is over $150k, you can't take any deductions on your tax return. You have to rollforward your deductions until selling the home.

Anyway, just know what you're getting into before doing it. If you do it and hold onto the condo for 10+ yrs, it's probably a good investment though especially in So Cal.

Good luck
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Re: Should we try to rent
Old 03-09-2007, 10:16 AM   #4
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Re: Should we try to rent

Quote:
Originally Posted by iwannaretire
My wife and I are discussing whether or not to rent our condo when we buy a house in 4-5 years. To make the numbers close enough to work, we would have to pay off the second mortgage ($52K) before moving.
Over time, I imagine that we will be able to turn this condo into a passive income generator, while gaining equity. I realize a lot can change in the next 4-5 years - I just want to bounce this around a bit.
This question has three aspects: financial, vocational, and emotional. You should make the decision on any one of those aspects and not be bullied into choosing another aspect just because it "makes more sense". In other words, it's not just a financial decision and you have to be able to sleep at night.

Let's look at the finances first. Say that the bank calls you on the phone to offer you a CD. If you give them $52K, which you may or may not be able to get back someday, they'll pay you $371/month. Except for months that have "unexpected vacancies" or "repair costs" or "student vandalizing". You get to pay the taxes and all the other expenses associated with keeping the CD. You can redeem it any time by paying the bank about 6% of its face value, which fluctuates with market conditions but might appreciate at the rate of inflation over the long term.

I've tortured the analogy enough-- would you sign up for the CD?

Landlords used to look for properties that returned 10% cash-on-cash (after properly accounting for depreciation, repairs, vacancies, taxes, and a host of other unexpected expenses that many gurus forget to mention!). Maybe that works for thefed in his part of the Rust Belt, but my impression is that today's average is more like 6-7% and in Hawaii it's 3-4%. You're not just able to beat rental income with a CD, you're able to beat it in some parts of the country with a good dividend-paying stock or mutual fund. None of those investments will call you at 3 AM about a burst water pipe, either.

Vocational: do you enjoy rehabbing & redecorating? I know the place is in good shape now, but tenants will never take care of a house as well as you will. I'm not talking the kind of fun rehabbing like putting in a whirlpool tub or adding corner moldings. I'm talking about unbelievable kitchen depreciation (including shabby treatment of every horizontal surface with cutlery) and patching the holes in every wall. OK, you enjoyed it five years ago the first time you did it. How many more times would you like to do it? Oh, you're going to hire someone to do it for you... now we're back to the financial analogy.

Emotional: will you derive great pleasure & comfort from having a piece of the land to call your own? Will you feel good about taking care of your tenants? Will your kids or aging parents want to move into it someday? These are all great reasons for owning rental real estate, and I'm guilty on all counts, but don't confuse these with the financial aspect.

If you've read this far, then go read some more:
(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and
(2) Landlording by Leigh Robinson (7th edition or later).

Eldred has specific examples about marketing & renting to college students. It's not as easy as it looks. The occupation of landlording (and it is a job!) also gives your tenants specific legal rights, not necessarily a bad thing, but which can make some landlords wonder if we really do live in a representational democratic republic. After you read the books, get a copy of your local "Renter's Rights & Landlord's Duties" legislation and read it while watching the movie "Pacific Heights".

That's as objective as I can be this month, but let me take you through our subjective thought process. We're rehabbing our 28-year-old 4BR 2BA 1875 sq ft rental (on a 5400 sq ft lot) after five years of what's best described as benign neglect by well-meaning but fiercely independent family tenants. I've already had three four-hour mornings hacking back the tropical jungle that used to be a beautiful yard and we have to reassess the landscape plan in terms of easy maintenance instead of attractiveness. We have about six of those four-hour mornings left (along with a big bottle of ibuprofen) while simultaneously riding herd on three batches of contractors inside the house. We have enough green waste to fill trash cans at two different locations for a month. Sure, we could hire more contractors for the yard, but it's not the kind of decisions they can make and it's not the kind of work they want to do.

We're also stripping & resurfacing the popcorn ceilings (contractors x2!), putting in a couple new light fixtures, dealing with some nasty rot caused by bad sprinklers, recarpeting (150 sq yards, contractor again), fixing all the walls, filling in the atrium pond (for tenants with small kids), cleaning the whirlpool tub, exterminating the ants once and for all and this time I really mean it, installing 150 sq ft of vinyl flooring, grooming all the sprinklers that no one told me were broken, and finishing a full hand-written page of "Oh, yeah, we need to..." items. Then next year we're going to replace a 50-foot privacy fence with a wall (hope the incumbent lasts that long). Thank goodness we did the kitchen three years ago and the bathrooms will be good for another 5-10 years. We have a great neighborhood with a decent HOA and reasonable expenses. We should probably repaint the exterior by 2010.

I'm in pretty good physical shape and I'm still surprised at how sore I am-- definitely a different use of my muscles. Meanwhile I have home-improvement projects of my own to catch up on, we're way behind on our own yardwork (with a comparable volume of green waste), our xeriscaping plans keep slipping every month, I'm way too surfing deficient, I haven't started the tax returns yet, and I have way many other things I'd rather be doing than hacking raphis & schmoozing contractors.

The good news is that this work would be required anyway to sell the house, and we're raising the rent to $2800/month in a market full of military tenants with comparable housing allowances. Cash-on-cash return will be about 4% but I need to update my spreadsheet to verify that I've correctly separated all our owner occupancies from our rental periods. The property has appreciated at about the rate of inflation over our 18 years of ownership. I think this is about as good as it gets and the house has served us well over our years of building our ER portfolio-- it owes us nothing. Spouse and I have gone over all of the above factors and we'll probably decide to rent it for a year before revisiting the issues.

Our kid doesn't want the house due to some of her deeply-ingrained childhood phobias memories. We don't need it for any other family members. We could live there ourselves someday, but I'd rather have our current home or (in my 90s) a smaller condo.

It's too late for me. But you can still save yourself!
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Re: Should we try to rent
Old 03-09-2007, 10:50 AM   #5
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Re: Should we try to rent

Quote:
Let's look at the finances first. Say that the bank calls you on the phone to offer you a CD. If you give them $52K, which you may or may not be able to get back someday, they'll pay you $371/month.
If I read the OP correctly, you have to pay the bank $371 per month.
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Re: Should we try to rent
Old 03-09-2007, 11:02 AM   #6
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Re: Should we try to rent

As I've said ... If I want to subsidize someone's housing, I'll donate to a homeless shelter.

Renting into a negative cashflow is a loosers game (lost of: time and $$).

Take the same $371 and DCA into a no load index fund every month .... you'll be WAY BETTER off.
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Re: Should we try to rent
Old 03-09-2007, 11:14 AM   #7
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Re: Should we try to rent

Add in $100/month for a maintenance/repair reserve, and adjust the rent to reflect 95% occupancy, and you're losing $566/month, or $6800/yr.

Only in So Cal does this "investment" make sense...
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Re: Should we try to rent
Old 03-09-2007, 12:15 PM   #8
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Re: Should we try to rent

And the "tax benefits" have to be paid back as "depreciation recapture" when you sell the thing.
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Re: Should we try to rent
Old 03-09-2007, 04:06 PM   #9
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Re: Should we try to rent

Quote:
Originally Posted by TromboneAl
If I read the OP correctly, you have to pay the bank $371 per month.
You're right, and I'll add to my previous comments: "Ouch."

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Re: Should we try to rent
Old 03-11-2007, 12:27 PM   #10
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Re: Should we try to rent

Thanks for the feedback, everyone. That's what I was looking for, some real world examples of whether or not this makes sense.

We live in So Cal - 3 miles from the beach. We bought at the peak so we don't have any equity yet. I think there is a good chance of this condo appreciating substantially in future years, but it sounds like we would be shelling out a lot of money/heartache each month for this investment.

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Re: Should we try to rent
Old 03-11-2007, 03:15 PM   #11
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Re: Should we try to rent

Personally, I would not rent it, I would sell it.

My father bought an apartment house when I was young. He did most of the maintenance himself. It was a headache. I do not believe he made enough money out of the deal to be worthwhile.

Bottom line: your property is an investment. Consider the net gain after expenses. Will you better-off renting the property or liquidating it and investing the money in something else.


It seems to me that making money from renting requires scale (i.e., many rental units).
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Re: Should we try to rent
Old 03-14-2007, 09:03 AM   #12
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Re: Should we try to rent


Quote:
It seems to me that making money from renting requires scale (i.e., many rental units).
... and the 'scale' can work AGAINST you as easily as it can work FOR you.

As this dude will gladly tell you ....

http://iamfacingforeclosure.com/
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Re: Should we try to rent
Old 03-30-2007, 07:22 PM   #13
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Re: Should we try to rent

Where does the money come from to pay off the second loan ?
I dont think I would bother paying it off. Maybe refinace into one loan instead.

The way people talk it sounds like CA is not a great place to be a landlord.

The investing in real estate book is a good choice.
If you have a long time horizion and the money holding it might not be the worst thing that happens to you. Over time your mortgage will pay down and hopefully the rent will go up.
Just think about how many people spend that same amount on cars every month.

Again I dont think you can compare running a business to a cd. Landlording is a business.

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Re: Should we try to rent
Old 03-31-2007, 02:06 PM   #14
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Re: Should we try to rent

You are talking 4-5 years? Hard to say what the real estate market will be like. Sounds like you need to stay put (esp as you bought at the top) and build some equity. Don't when your "top" was, but in Oregon it was last summer.



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Re: Should we try to rent
Old 04-01-2007, 09:02 PM   #15
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Re: Should we try to rent

Hi Scrapr,

Agreed. We bought at the top of the market in (coastal) Southern California. We can't do anything until the market turns around.

-iwannaretire
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Re: Should we try to rent
Old 04-02-2007, 09:55 AM   #16
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Re: Should we try to rent

Nationally the cycle is 14 years from one top to the next with the dip happening around year 7. If you want to speculate in real estate, I would recommend you sell, take your loss, then get a little liquidity in 5 years and look for bargains for the next ride upward. SOCAL will have a different pattern but I am sure you can find it.
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Re: Should we try to rent
Old 04-02-2007, 03:49 PM   #17
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Re: Should we try to rent

Yeah the last peak to peak cycle in Boston was 1989 - 2005 with a bottom in 1994.

We've got A LONG ways to go.
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Re: Should we try to rent
Old 04-02-2007, 03:57 PM   #18
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Re: Should we try to rent

Quote:
Originally Posted by tryan
Yeah the last peak to peak cycle in Boston was 1989 - 2005 with a bottom in 1994.

We've got A LONG ways to go.
That would equate to anther 3 years until you hit bottom again, since 2 years have already passed since 2005. Then again, that assumes the same pattern will follow, and we all know about the person who assumes...
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Re: Should we try to rent
Old 04-02-2007, 04:01 PM   #19
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Re: Should we try to rent

... that's a good point (2 years to go) ... always said it took/takes half as long to hit bottom as it took to peak.

I think the real driver is the economy ... the bottom will come during a recession. If that takes 2 years or 5 years, remains to be seen.
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Re: Should we try to rent
Old 04-03-2007, 08:41 PM   #20
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Re: Should we try to rent

I was a landlord for 13 years renting out a previous residence. The first and last tenants were relatively easy. The ones in between were my definition of hell on earth. The first ones kept me thinking there really were good tenants out there. I sold after the last good ones because I was sure the next ones would be setting up a meth lab (not a stretch in Sacto).

Landlording is a full time job. If you have any choice in the situation, don't do it. The phone will never be your friend again because when it rings you know something has gone very wrong that involves lots of money and aggravation. The www.mrlandlord.com site should cure you of wanting to be a landlord as they discuss the real life trials and tribulations of being a landlord. It's not pretty.

I cleared about $70K after 16 years on an initial $4500 investment after paying off the mortgage, spending about $30,000 in repairs over the years (including roof and windows) and $35,000 in federal and state taxes due upon sale. Virtually all the profit (appreciation) came in the last 3 years of ownership. I would have broken even or lost a little if I had sold in year 13. The added risk of a condo is that fees could dramatically rise at any time.
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