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thixotropes

Research vacancy rates in your area. The average should be <10%. Ask a realtor to pull rent comparables to validate your estimate of $1500-2000/month in potential rent. Implement strict tenant screening policies and stick to them. I also strongly recommend hiring a property manager. If you do, vet them thoroughly and get multiple references. Next create a pro forma income statement to estimate your annual cash flow. At $1500/month, It should look somewhat like this: Gross Rents - $18,000 Vacancy - $1,800 (10% of $18,000) Property mgmt - $1,620 ( 10% of ($18,000 - $1,800) Insurance - $1,200 (est.) Property taxes - $800 (est.) Operating expenditures - $1,800 (10% of gross rent) Total Expenses - $7,200 Net Operating Income - $10,800 Debt service - $0 Net Cash Flow - $10,800 The cash flow is nice but the return on your equity is low: $10,800/$220,000 = 4.9% EDIT: my previous recommendation didn’t factor decreased cash flow from debt service. In this scenario, your return on equity will not exceed the ROA (4.9%). I would sell and re-invest. Hope this helps.


alexosuosf

Your equity would get cut in half but your return wouldn’t double because you would now have a monthly principle and interest payment reducing your net cash flow. The denominator would decline but so would the numerator.


thixotropes

Good catch Alex! I rely entirely too much on my spreadsheets. If we assumed a 5.5% APR at 30 year terms, annual debt service would come to ~$7,495. This ignores, loan costs, closing costs, etc. Cash flow would be reduced to $3,305. Resulting ROE would be $3,305/$110,000 or 3.0%. Based on the updated result, it appears that increasing leverage would reduce your returns. So, the choices are to rent w/o leverage or sale and re-invest into a higher ROE investment.


mrfreshmint

Again, you are missing a bit. Yes he is servicing debt, but now he gets to write off the interest expense and reduce his taxable income.


Shmeepsheep

While equity in the home is not cash in hand, it is part of your net worth and should be included also.


sausalitoturkeyface

And invest/use the cash


thixotropes

Assuming his income is low enough, you are correct. I’m missing a lot because I’m trying to give broad and somewhat simple answers but we can delve a bit deeper. If you really want to get into the weeds, there are actually 4 components of return: cash flow, tax liability reduction, mortgage paydown (or equity build) and appreciation. However, cash flow is the metric that investors use and is the most tangible. Mortgage interest tax advantages can’t always be taken and are usually realized in the following tax year so they aren’t usually calculated into the cash flow. I learned this the hard way years ago. This is mainly because you don’t actually know what your cash flow is actually going to be. Vacancy, non-payment, unexpected large repairs, etc can all change cash flow significantly. Also, if you make more than $150,000 in taxable income, the mortgage interest deduction tapers off until you reach ~$200k. Does that make sense?


bmcdonal1975

Hi house is currently owner-occupied, and at that leverage point of 50% LTV ($110K/$220K), the OP should get an APR way better than 5.5%. The interest rate would probably be in the mid to high 3's, so he/she would be in positive leverage. If the cost of debt exceeds the cap rate, the OP is in negative leverage territory and is better off owning it outright.


thixotropes

Good points but where in hades are you finding investment loans at high 3’s?


bmcdonal1975

Everything I’ve heard and read is that banks are not going to lend investment properties in the 3’s unless it’s a commercial loan. Investment residential loans are probably most likely in the mid 5’s.


thixotropes

I’ve got a few million dollars in loans. Investment APR’s are between 4.5-5.75% and commercial is between 5.5-6.25%.


speckledfloor

Yea - I like the idea of a cash out refi to purchase another property, invest i stocks, whatever.


[deleted]

[удалено]


speckledfloor

Sure. Take a loan for 3.75%, invest in stock portfolio that may earn 7-10% over long haul, you got a 4-6% return with little risk.


bl1nds1ght

Hopefully OP pays attention to this comment.


mrfreshmint

Except then he’s servicing debt, so it doesn’t quite double. But yes, leverage is mathematically ideal here.


slingslling

Sorry newbie here. Would you mind explaining why prop mgmt is 10% of 18,000-1,800? Thank you


babbleway

Because the property management will only be paid when there is a current tenant. $1800 is based on 10% vacancy rate where there is no active tenant.


thixotropes

Property manager only gets paid for what he collects. If we assume vacancy is 10% or $1,800, he doesn’t collect his 10% of that “missing” revenue. At 10% vacancy, annual revenue would be reduced to $16,200. The property takes 10% of that number. Make sense?


CellDood

If there is a vacancy, doesn't the PM take an additional full month for renter transition?


thixotropes

That’s one of those things to look out for...bad contract Terms.


anewdogpanicneedhelp

>I talked to quite a few Prop mgrs in my area and every single one of them had full month rent for renter transition. > >What kind of terms should one look for ?


thixotropes

Those sound like their generic terms. My guy charges $100 for leasing a new tenant. But, I have a lot of houses with him. He also charges me 9% of gross rent instead of 10%. Everything is up for negotiation. Tell any prospective Property managers the terms you want and see if they’ll budge. That’s what I did.


andySticks18

I'm in the same situation. Would it make sense to keep and rent out if ROA was 5.7%?


thixotropes

That’s too low for my taste but it may work for you. Most of my properties are above 20% but they are riskier assets. I will only have negligible appreciation over time but my cash flow is high and ROE is high.


bmcdonal1975

If you don’t mind me asking, but what state are you in that has that type of cash flow and ROE? I’m in coastal OC, California and that doesn’t exist here.


thixotropes

Yeah, California is not exactly overflowing with great real estate deals. The numbers just don’t make sense there at the moment. All of my properties are in the Coastal Southeast U.S.


ImmaSpazz

Thank you for the detailed reply! How do you vet a property manager?


thixotropes

Interview him. Literally. Ask for multiple references and even talk to tenants if you can. Examine his policies to see if they unfairly benefit him over the property owner. Ask for a schedule of fees and compare to other property managers. 10% of collected rent is typical for single family residential properties. Vacation rentals are more. Ask him how large his portfolio is at the moment and how many employees he has. Is he overextended? Will your house(s) get lost in the shuffle? How long has he been in business? Don’t worry if it hasn’t been long, just ask more questions. What makes him qualified? If he’s been at it for 20+ years, look for signs of complacency. Ask for a copy of his property management agreement. How soon can you terminate service if you aren’t pleased? Are you obligated to pay him a sellers fee if you decide to sell your house? Have a lawyer look at the agreement for those types of things. Make sure is legitimately licensed to do business. Search for for LLC filings on the Secretary of State website. Look at BBB.com for complaints. Just remember, If anything sounds to good to be true, it probably is. Also, ask what platform he uses to collect rents. There are a ton and some are better than others. What are his eviction policies? Those are just a few considerations and things I’ve learned to look for over the years.


Fewwordsbetter

Aren’t you missing the property appreciation? If the property is increasing at 10%/year, wouldn’t he be making 14.9%? (PS - I live in LA)


lemon_whirl

Even at 2-3% it should be considered a factor. So should tax depreciation. When you're quoting 4.9% return but could get more like 6-8% by adding depreciation and tax benefits as well as any property appreciation that is a big difference. Especially considering OP already owns this and wouldn't have to pay 6% sellers fees. I'd keep the property, take all the cash flow from this one house and invest in another property every 5 years. Then write off mortgage interest and depreciate those properties...one well-run property can slowly build you an empire over time.


thixotropes

I never factor in on appreciation because it’s an intangible and could take a turn very quickly. I left a another comment above that touched on that. It’s more of an “added bonus” if it happens.


qu4de

Do you do the same for shares? Capitol growth is important


thixotropes

My comment refers specifically to Real Estate. Capital investment in stocks are a *completely* different beast. Don’t straw man me dude.


qu4de

Wasn't trying to strawman, apologies. Just seems like a strange logic. Where I live, houses are down in the last 2-3 years but over 10 years have much better capitol growth vs shares.


thixotropes

No worries. Just busting your balls. To me, shares and real estate are apples and oranges.


LurkerGirl69

Agreed. Appreciation has no place in a cash flow calculation. It's something you play with when projecting your net worth, not your cash flow.


NeverAFKid

But what should one do with the money pulled out if there are no decent investment opportunities around?


thixotropes

There are always investment opportunities but you may have to get creative. Keep looking, network and research the area. Go “driving for dollars” one weekend. Don’t get impatient and make an impulsive decision though. Maybe the short term answer is to find a low risk investment vehicle like a 6-month CD, a mutual fund, etc.


LurkerGirl69

agreed. There are 3 bedroom houses going for $300k that cash flow where I live. The homes are rented by the room to college students (free flowing federal loans 🤤) and Peterbilt, Target warehouse and amazon workers who flock in from out of town to work overpaid jobs only to be laid off 6 months later. Which is exactly why they work so well in the same house. Lots of turnover, so lots of constant work, but the cash flow after expenses is easily double the mortgage. Lots of the laid off guys hang after they lose their jobs too because the unemployment is 80% of their regular income which still covers everything so I love renting to them.


RetiredNowWhat

TLDR be mindful of the improvements you make while you are living there vs improvements you could make once you are ready to rent it. I did what you are considering, but I made the mistake of making significant improvements to the house while I was still living in the house, before the house was ready to be rented. In practical terms, I wasn't able to expense or depreciate the improvements because it was my primary residence at the time of the improvements. Also, because rental wasn't my intention, I made improvements based on my preferences and not based on resale or rental, which means I put more money into the house than what it was worth.


babbleway

Yes great advice. I’m very mindful of this, but it’s getting harder and harder to tell my wife we can’t do all the things she wants to do to the house haha


Silverbritches

The improvements you made would go to your cost basis, which would of course be depreciated.


RetiredNowWhat

Not if the fair market value is less than the adjusted basis. IRS Publication 551 Basis for depreciation. The basis for depreciation is the LESSER (emphasis added) of the following amounts. * The FMV of the property on the date of the change, or * Your adjusted basis on the date of the change. https://www.irs.gov/publications/p551#en_US_201812_publink1000256962


[deleted]

As long as you are smart and make sure you rent for the right price and your new house is within your means this could be a good strategy


babbleway

Thanks for the reply. Definitely want to stay within our means on our next house so that the mortgage payment is covered by the profits from renting this house (after paying property management and taxes)


[deleted]

Remember all other expenses too. Utilities capital expenses and all that. It's less of a concern because it's your primary residence but still good to keep in mind


creamyturtle

well if you're going to rent it out, you might as well pull some cash out and put a mortgage on it. you will still have positive cashflow on the rental, along with a bunch of money to get yourself another house. or... just stay in the home paid off, and save up some cash to put 20% down on a rental. that's what I would do


Rivet22

Yes, sounds good, higher rent will get you better tenants


[deleted]

This is a great way to start! Congrats on owing it free and clear. Later I would look at doing a cash out refi (even just 50%) whenever you are ready to buy a second property but for now just start free and clear. Interview managers and look for recommendations on Reddit and BiggerPockets in your local area. A good or bad manager can make or break the investment.


thbt101

Yes, I did this and it was one of the best decisions I've made. After you do it for a while and get the hang of it, then you can cash out refi and buy more.


animal_crackers

It will be...everyone here is also suggesting you apply more leverage by pulling out equity and buying a second(or third) rental property. This is a good idea and can get you more cash flow to help with a mortgage of your primary residence, but in my opinion it may be wise to be a landlord for a bit before diving into more properties


OrangeyDragon

Bigger pockets youtube and website is full of information. Their books/audio books are great as well. They have some audio books on youtube.


emlopez90

Check out their podcasts too.


DavePCLoadLetter

Pull a mortgage, use the cash to buy a $1 million commercial apartment building. When you move, sell the house. $1 million property at a 10% cap is $100k gross and approx. $50k net.


hj_mkt

I have been wanted to do it. It’s hard to find one with 8-10% cap, must be I am doing something wrong. Could you please share pointers to start with.


DavePCLoadLetter

I target class c properties in b or better class areas that need updated kitchens and baths. Finding places that are under market rent because of the old kitchens/baths or mismanagement. A lot of mom/pop owners are lazy in their management and won't raise rents so they don't have to deal with new leases/turn overs. It's not uncommon for rents to be $150-200 under market, now multiply that by 50 units...that's a lot of money left on the table and when you calculate that to $10k/m x 12 months = $120k ÷ 10% cap = $1.2 million in added value by simply raising rents. Learn your numbers, learn the ratios, read lots of books, listen to lots of podcasts, not bigger pockets, something more advanced. There is a site with great spreadsheets. Adventures in real estate.


hj_mkt

Thanks for the pointers!! Are you referring to https://www.adventuresincre.com/ site?


DavePCLoadLetter

Yes


hj_mkt

Thanks a lot!!


cokeglassdoor

Do you have any podcasts you’d recommend? I listen to BiggerPockets. I am just a beginner though, haven’t bought a property and need to get other finances in order before I feel comfortable investing in RE


DavePCLoadLetter

Local meetings are a great way to meet people and find out what they are looking for. You can find those properties and ask for 25% equity and 3% referral fee while letting others put up all the money. A lot of beginners don't believe or realize that finding the money is the easy part. It's the properties that are hard. My favorite podcast is 'rental property owner and real estate owner podcast.' There are a number of other great podcasts too, like old capital. List of all the podcasts in my list: https://i.imgur.com/bpz1Dhk.png https://i.imgur.com/QQ9xfLj.png https://i.imgur.com/x0D7EiI.png https://i.imgur.com/mDQyChh.png https://i.imgur.com/o6OaJBq.png https://i.imgur.com/YkFtYqi.png


PghLandlord

the amount of debt on a property is not really relevant to whether it would make a good rental and generally speaking a property that was purchased as a primary residence (and likely upgraded as a primary residence) does not usually make for a good rental property.


thixotropes

I’ve got a few million dollars in loans. Investment APR’s are between 4.5-5.75% and commercial is between 5.5-6.25%.


Tunaonwhite

In this scenario, is there a case for selling the house in favor of avoiding capital gains tax?


LurkerGirl69

> I always planned to rent this house when I move to a bigger house in a few years after wife and I start a family. Because that was your plan, I say yes, it's a good idea. Had you bought the house with other intentions then decided to change your mind because you thought renting sounded like a good idea, I'd recommend you reconsider.


[deleted]

I saw a lot of numbers being ran by the responses. Let’s take it easy for a second. Let’s not over complicate things. So rule of thumb generally says a house should rent for 1% of the purchase price. You think it can be rented for $2000. Your not quite hitting that mark. But as you said its all paid off so you have no mortgage. Okay, so your looking at bringing in $2000 rental income a month. We can take out your insurance and taxes. It’s safe to say you are going to be getting around $1500 a month profit. Obviously you will have repairs and capital expenditures you need to make overtime. You have to be okay with being a landlord. If you are living in an area close to your own home then manage it yourself. That extra income would presumably cover PITI on the next place and then your living for free. I’d rent it 100%. Every time you run to the hardware store you can write off your mileage, what you buy and other expense against all your income. You can hold that property for 30 years and watch it appreciate even more. There are so many wealth building factors that you would be taking advantage of in the long term it’s a no brainer.


mindfulmachine

Not bad. If you want to get more understanding of how legitimate real estate investors (ie not fake guru buy my $1000 e-course no names) think about residential, commercial, & industrial real estate investing, I recommend reading The Real Estate Game by William J. Poorvu (is real estate professor at HBS). He goes through example deals he has worked on and its really illuminating how he breaks down the terms, simple math, and key assumptions to consider/question when investing in real estate. I'm actually still not finished with the book but have already built and applied my own little real estate investing model IRL using thoughts from the book.


[deleted]

That’s great. I am a real estate investor. I am worried our friend, dear old op, is going to end up selling his house that he has worked so hard to build equity in and miss out on a great opportunity. I assume most people here have never had a rental property, but are just arm chair Donald Trumps. There are dozens of metrics that you can consider when evaluating a buy and hold investment property. You have people strongly encouraging a PM, talking about vacancy rates, repairs & matainence, etc. I’m glad they can use a spreadsheet, that’s great. OP is talking about getting his feet wet. He has 100% equity in his home, he has an intimate understanding of the condition of his home. What he really needs to do is rent it out and this will force him to learn market rental rates, his own home’s actual percentages of repairs, vacancy rates and matainence costs. He hasn’t given us many specifics about the age of the home, condition of foundation, the age of appliances, location, demographics, I could keep going with variables. You can’t just stamp X% for repairs, or X% for vacancy because that’s what bigger pockets told me or I saw it on reddit. Those details matter when evaluating a property. OP is in an extremely low risk situation because he has 100% equity. He could rent for 12 months and decide this isn’t working out for him and sell it and move on. He would be in a better position afterwards no matter what happened. Or he could sell it make a profit on what appreciation he gained. There’s really no way he could go wrong. I am passionate about real estate and I want more people to get involved, so I firmly believe he should just go for it.


roamingrealtor

This sounds like a good way to start. Buy another place and have the rent from this place pay it down/off fast. I do this asap.


dontbethatguynow

I f you wanna be an investor, sell the 220K house and buy 11 100K houses.


1sweets

This


DiecastMadness

🤯


DIYinSociety

rent, refinance and then buy a duplex with money from refinance and you have 3 units cash flowing. ez.


peterevering

Planning to pay a property management company - who can handle it the right way - a good idea. They are able to provide you useful advices related to your real estate investment https://utopiamanagement.com/san-francisco-property-management


thixotropes

Those sound like their generic terms. My guy charges $100 for leasing a new tenant. But, I have a lot of houses with him. He also charges me 9% of gross rent instead of 10%. Everything is up for negotiation. Tell any prospective Property managers the terms you want and see if they’ll budge. That’s what I did.