Help with renting calculation

[tzukulika]

Long time lurker here ( 2001 ?).
I have to move closer to my w*rk (for the past 9 years I had 70 min commutes one way, now close to 90 min ). I'm planning to RENT my current house which has a great deal of sweat and bubble equity in.
I need advice regarding renting vs. selling my current residence. I'm trying to figure out what the minimum renting amount should be in order to break even (i.e. the monthly cash flow be 0)
Here are the numbers (maybe not be close to reality, but for illustration purposes)

Property value (excluding land) $270k. For simplicity, let's assume the 27.5 year depreciation is 10 k/year.
Outflows :

• Mortgage $2000
• Taxes $400
• Insurance $100

Total $2500

My understanding is that the depreciation and rental income is taxed at your income level. Let's assume income is >100K and tax level is 20%. So 10kyear(depreciation) @ 20% will yield a tax benefit of 2k. => 2000/12 = 166. I'm not sure if there are also other tax advantages as well.

Rental income = Total outflows - tax write-off = 2500 - 166 = 2334/month

Are my calculations off ? I'm looking at suggestions of where to look to get input or what books should I might read -


PS Having a new mortgage will delay my FIRE ! but had to do to spend more time with my two toddlers !


Thank you in advance !
Tzukulika. 15 years to go to FIRE !

 

[Buckeye]

Are you deciding whether to rent or have you decided you are renting? Your post is unclear to me.

If you are going to rent -

Do some checking on what local properties are renting for. If houses like yours are renting for less than your preliminary calculations, it may be time to put up the "for sale" sign. The local rental market doesn't care what your payments are.

 

[tzukulika]

The current thinking is that we want to keep the house in the city and use it for retirement. I can figure out what the rental market is. My question is with regard to the what is the minimum rent I can ask and break even on my monthly cash flow (ignoring previous history, just considering the mortgage as it is!). Of course if we find out the rent will not be break even we will sell.
The preliminary search turned out that equivalent houses are renting between $2000-2200 ; hence my conundrum. Is there any tax advantages I did miss in my estimation ?

 

[RetireeRobert]

I'm trying to figure out what the minimum renting amount should be in order to break even (i.e. the monthly cash flow be 0)
Here are the numbers (maybe not be close to reality, but for illustration purposes)

Property value (excluding land) $270k. For simplicity, let's assume the 27.5 year depreciation is 10 k/year.
Outflows :

• Mortgage $2000
• Taxes $400
• Insurance $100

Total $2500

My understanding is that the depreciation and rental income is taxed at your income level. Let's assume income is >100K and tax level is 20%. So 10kyear(depreciation) @ 20% will yield a tax benefit of 2k. => 2000/12 = 166. I'm not sure if there are also other tax advantages as well.

Rental income = Total outflows - tax write-off = 2500 - 166 = 2334/month

Are my calculations off ? I'm looking at suggestions of where to look to get input or what books should I might read -........

One thing to clear up---your allowable depreciation expense you can claim on tax return is based on your PURCHASE price of the house (land excluded). It is NOT based on the property "value". So if you purchased this house a few or more years ago, and have subtantial equity in that $270,000 "value", your allowable depreciation will be less. If you paid say $200,000 (land excluded), then using the 27.5 year period for depreciation, that is $7273 a year.

That aside, you need to be able to rent the house for at least your *cash* outlays each month. If you mortgage payment, property taxes, insurance, and maintenance expense total to $2700 a month, then you should get rental income of $2700 month. Your tax benefit from depreciation allowable (given my example assumptions ieach month is 20% of $606 or $121.

If you can wait till tax time each year for that benefit, then you could lower the rental you charge to $2579 a month, and you pay the cash alligator (negative cash flow) all during the year till you file your tax return.

If the rental market is only supporting rents of $2200 month for similar houses, and you need to get $2579 or more to cover expenses, it seems time to sell.

 

[Buckeye]

On top of everything else, you'll want to allocate some money every month to repairs. Things break and there is wear and tear even with the best tenants. Until you actually see it for yourself, you also won't believe what people (and their unauthorized pets) can/will do to your home. The repairs/refurbishment can be significant when re-renting. IMO, the damage will be emotionally draining as well as financially draining because the property will still be your "home" and not just a business asset.

Been there, done that.

 

[tzukulika]

Thx for the feedback.
The property was purchased in 2001 for 327k. The home value of the purchase price is ~ 270k , give or take a few k, if I recalled that properly. The main reason we are looking to rent is to still have a house in the city if my job goes belly up. So now the question is how much are we willing to pay for this future convenience. The other reason we would to keep the house and the mortgage is that we have only 11 years left on that note and the rate is 4.625% . Tough decision to make...

 

[RetireeRobert]

Thx for the feedback.
The property was purchased in 2001 for 327k. The home value of the purchase price is ~ 270k , give or take a few k, if I recalled that properly. The main reason we are looking to rent is to still have a house in the city if my job goes belly up. So now the question is how much are we willing to pay for this future convenience. The other reason we would to keep the house and the mortgage is that we have only 11 years left on that note and the rate is 4.625% . Tough decision to make...

OK, so your cash flow expenditure is $2500 plus say $200/month for maintenance, minus depreciation benefit say $166 = $2534 month outflow.

Top rent income looks to be $2200.

Given those factors, you will be in negative cash flow position of at least $334 a month for as long as you rent it out, all other thing being equal. That is $4008 a year outflow.

Only you can decide if it is worth it.

If you have funds to pay off the mortgage, that eliminates the monthly outgo for that, thus improving cash flow overtime to a net positive, and saving all the future interest you would pay----but it requires the huge cashflow outgo right now to pay it off. Don't know if that would make any sense or not.

 

[meridiver]

Another thing to consider in the renting equation is that your house will not necessarily be rented 12 months out of the year. Usually, when the banks appraise rental property, they assume it will be rented 75% of the time, not 100%. Even if you live in a high demand area, you have to figure at least one month of no rent anytime your house is vacant.

Regarding your mortgage, unfortunately, it doesn't really do you any good to have a great mortgage if you can't cover it with your rental income. Have you considered refinancing into a new 15 year note with (potentially) lower monthly payments so that you can break even with the current rents in your area?

Finally, consider whether rents are likely to increase in your area. If so, you may only be negative for a few years, not for the whole time you continue to own it. That may make a difference to you, although you also have to consider the effects of inflation on your property taxes, insurance, maintenance expense, etc. and this may eat up any additional rent.

 

[tightasadrum]

Great input for Tzukulika. I wish I'd had you guys around when I started in investment real estate.

One other thing you ought to consider, Tzukulika: things breakdown and leak and etc. at very inconvenient times. I only have to drive 13.5 miles to furthest property, but at times I'd rather take a beating than get up and drive over to check out a problem. If I had to drive for over an hour one way, I'd shoot myself, or maybe just sell the stupid thing. If you don't do the maintenance yourself, maybe you can deal with it with very good plumbers, electricians, hvac techs, painters, house cleaners etc, but it's going to be expensive, if you can find dependable help.

Be very careful with this. If I was making the decision for me, I wouldn't do it as a rental. How about a travel trailer you could stay in three days a week?

 

[meridiver]

One other thing you ought to consider, Tzukulika: things breakdown and leak and etc. at very inconvenient times. I only have to drive 13.5 miles to furthest property, but at times I'd rather take a beating than get up and drive over to check out a problem. If I had to drive for over an hour one way, I'd shoot myself, or maybe just sell the stupid thing. If you don't do the maintenance yourself, maybe you can deal with it with very good plumbers, electricians, hvac techs, painters, house cleaners etc, but it's going to be expensive, if you can find dependable help.

Yeah, this is one of the things that everyone forgets about being a landlord. If the water heater in your elderly tenant's apt. is going to break, it's ALWAYS at 3AM on a holiday weekend. If you then have to drive 60 miles (each way) just to check it out, you will get very unhappy with being a landlord, very quickly. You also have to figure out how to find the time to do the repairs if you are working full-time. And if you aren't going to do them yourself, kiss another big chunk of that rental income goodbye. Being a landlord is not for everyone. If it's a good deal, you can make some nice bucks, but most people way underestimate the amount of hassle involved.

 

[tzukulika]

Thank you for your inputs folks!

For wear and tear : House is relatively new (build 2001) and I have maintained it properly during the years. I have decided to KEEP the house, even if the rent will not cover the cost. I figure I will be out about 40K in 11 years, but then I will be owning free and clear. With the additional 130K already paid , I will get a decent house in the middle of the city (Seattle), where I can move when retire If I chose to, while paying about 170K out of my pocket.
Repairs : I'm somewhat handy with tools etc, but I was never afraid to pay for professionals . Time will be a constraint, but somewhat has to give. If it was to be easy and free, like someone has said, it was not worth it .

15 (short) years to gooooooooooo!

 

[msbearkeley]

Tzukulika - congrats on the decision! We continually evaluate our situation with our rentals against liquidating and focusing our strategy on diversified investments and have just favored real estate more because we just liked owning houses more than stocks. As we move closer to our RE date, however, we realize that our best strategy soon will be to start liquidating and have finally decided to start in 2008 with selling off one property. The one good thing we learned over the years about real estate and working full-time, however, is that we've been able to make the decision to keep a property despite negative cash flow and not loose too much sleep over it. As they say...if you can afford to hang on to a rental, then in the end, it will pay off!

Just a couple of other things to consider that might help you with managing your property: Hold out for the best tenant (low maintenance, good history, etc) -- even if it takes you an extra month to find someone, it will really help you in the end; Consider a home warranty if you expect that an appliance and an HVAC unit could go out in the next year...many landlords don't like it, but it could be worth it depending on the expected repairs you will have; if you need to get a property manager (ie. you decide landloring personally doesn't work as well for you in the future), re-evaluate your strategy and see if selling at the time is your best solution.

Good luck!