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Message
Rental Property Input Needed
Posted on 10/21/12 at 12:40 am
Posted on 10/21/12 at 12:40 am
My family and I are rapidly outgrowing our home. It's a 2bd, 2bth, small sq ft home that we've put in a lot of time opening up the floorplan of. We are thinking about buying a nearby house that has a lot more sq.ft, and I was thinking of not selling our current house when we do so. What do you guys who have extra homes as rental properties suggest?
My finances are not where I'd like them to be (I know, who's are?), but after looking at the basic numbers without knowing to many specifics, my wife and I make enough where without a renter, we make enough each month to pay both mortgages. With a renter, we'd have the same amount, from what I can tell, of money for saving each month, until seven years are past, and we'd own our current home.
My questions are..... Which pitfalls should I look at that you guys have been through? Any percents of debt and income advice? Asking price of the next home, do you guys often bid below the appraisal, and what are some reasons you would do it? Seller was a great neighbor, and I hate to see them go, but business is business, you know? And I just want advice in general. I know income properties can be a great source of extra income, but I've ventured into enough new areas in life that I know asking others is the best way to start, so what do you guys think?
My finances are not where I'd like them to be (I know, who's are?), but after looking at the basic numbers without knowing to many specifics, my wife and I make enough where without a renter, we make enough each month to pay both mortgages. With a renter, we'd have the same amount, from what I can tell, of money for saving each month, until seven years are past, and we'd own our current home.
My questions are..... Which pitfalls should I look at that you guys have been through? Any percents of debt and income advice? Asking price of the next home, do you guys often bid below the appraisal, and what are some reasons you would do it? Seller was a great neighbor, and I hate to see them go, but business is business, you know? And I just want advice in general. I know income properties can be a great source of extra income, but I've ventured into enough new areas in life that I know asking others is the best way to start, so what do you guys think?
2
Posted on 10/21/12 at 10:42 am to bojabu
I recently did this, like you said your families income was enough to pay both mortgages, but before you apply for a new mortgage make sure you figure in the cost of maintaining that property. Also be prepared to have a renter "lined up" when you apply for the mortgage on your new home.
If you have never been a landlord before make sure you properly screen your prospective tenants. This will save you time and money in the long run. Make sure they are employed, get a criminal record, and ask that they give you the information to their previous landlord, if they had one. Trust me I had to learn the hard way.
If you have never been a landlord before make sure you properly screen your prospective tenants. This will save you time and money in the long run. Make sure they are employed, get a criminal record, and ask that they give you the information to their previous landlord, if they had one. Trust me I had to learn the hard way.
Posted on 10/21/12 at 3:40 pm to BIGDAB
Sounds good to me. Anything you suggest I read? I have some night shifts this week and will have some time.
Posted on 10/22/12 at 3:54 am to bojabu
(no message)
This post was edited on 4/6/13 at 1:23 pm
Posted on 10/22/12 at 9:37 am to bigblake
quote:
Also, the rent is usually only counted at 75%.
his debt to income should be a wash. if done correctly of course.
Posted on 10/22/12 at 12:09 pm to Fat Bastard
(no message)
This post was edited on 4/6/13 at 1:23 pm
Posted on 10/22/12 at 12:20 pm to bigblake
IF he gets way more in rent than PITI(which he should) he should be ok because the banks will only consider 75% of the rent as INCOME. That 75% should equal the PITI or be greater IF DONE CORRECTLY. If not then throw this out the window and it will hurt his debt to income then as you stated. That is all i am saying.
Posted on 10/22/12 at 1:07 pm to Fat Bastard
75% is the magic number lenders look at when calculating rental income. also you have to have the rental income claimed on your tax returns if not on the tax returns you cant use the rental income...
Posted on 10/22/12 at 1:52 pm to hawkeye007
quote:
75% is the magic number lenders look at when calculating rental income. also you have to have the rental income claimed on your tax returns if not on the tax returns you cant use the rental income...
Thank you. That is what I thought.
Posted on 10/22/12 at 2:05 pm to hawkeye007
quote:
75% is the magic number lenders look at when calculating rental income. also you have to have the rental income claimed on your tax returns if not on the tax returns you cant use the rental income...
Slight thread hijack, I am a slightly related situation, I want to refinance an existing rental property I have rented to others for 6+ years (all income/expenses claimed on Schedule E every year). I haven't made a formal application yet, but am curious about qualifications and lending ratios. Talking to my banker, he said he can offer a 5% rate, 20 year amortization period (as it is a commercial loan, not an owner occupied dwelling) and will finance up to 80% of the appraised value.
The property rents for $2100 per month, valued at ~$330,000+. Cash flow has always been positive, about $300+ per month, $3600+ net cash flow per year.
Refinancing $240,000 @ 5% is ~$1,585 per month mortgage, total PITI would be ~$2,260, slightly negative cash flow of $(160)/month, or ($1,920)/year. I would get $34,000 in cash out from the refinance, as I only owe $206,000. I am sure I can get 6% investing the cash proceeds in a portfolio of bond funds to offset the negative cash flow for a year and will raise the rent another $100 at year end, as I have done every 2 years in the past.
I am looking for some guidance on the 75% rule, does the bank count $18,900 as rental income, plus my earned income too? The rental property should continue to sustain itself monthly and I can absorb the shortfall temporarily. Any advice on what to expect is appreciated.
This post was edited on 10/22/12 at 2:07 pm
Posted on 10/22/12 at 5:48 pm to Fat Bastard
(no message)
This post was edited on 4/6/13 at 1:22 pm
Posted on 10/22/12 at 6:01 pm to GoIrish02
(no message)
This post was edited on 4/6/13 at 1:22 pm
Posted on 10/22/12 at 7:28 pm to bigblake
Thank you guys. I'm getting feedback that the home should be rented in the $1,000-$1,200 range. PITI is $720 right now, but once I adjust the insurance (cancel contents coverage) it'll be $700ish. That's 63.6%, a little under the 75% rule.
Assuming $100 in maintenance per month, which I haven't needed to actually spend in a while, that'd be $8k per year in equity in the home, since cashflow isn't needed. ($4,250 from the 15 yr note, and $3,600 cash paid from rental income). That's at $1,100 per month. Then sometime during the end of year 7 if things go steadily, it'd be $12k extra per year. That sounds so enticing.
How do I go about finding the right renter?
Assuming $100 in maintenance per month, which I haven't needed to actually spend in a while, that'd be $8k per year in equity in the home, since cashflow isn't needed. ($4,250 from the 15 yr note, and $3,600 cash paid from rental income). That's at $1,100 per month. Then sometime during the end of year 7 if things go steadily, it'd be $12k extra per year. That sounds so enticing.
How do I go about finding the right renter?
Posted on 10/22/12 at 8:14 pm to bigblake
bigblake,
Thanks for the advice.
I only count depreciation on Schedule E to get a tax loss. I have not had a cash flow loss ever in 6 years, with consistent increases ($1,900 in 06-07, $2,000 in 07-08 to $2,100 in 2009 to today). Warehouse districts rents are still increasing, so I will push my tenant for another $100 in February at renewal.
Maintenance is very low and paid from current profits as needed, which has averaged just a few hundred per year, not very significant. All major renovations were done from the studs out when I bought the condo in 2006, so I don't have long term upgrades in the future.
Appreciation has been significant, from $229,000 in 2006 to $330,000+ today, averaging out to about 16% annual appreciation. My mortgage is for the original amount from 2006 and I need to get some cash out, as equity is fools gold.
'Earned income' means my income from my W-2 and self employment incomes, i.e. not rental income.
Where does one get a commercial loan for less than 5% these days? My banker (at Whitney/Hancock) has told me this is their new minimum rate on commercial loans, as they cannot make money lending at prime or prime + 1% anymore. My sister just started at Iberia so I will see what she
says.
I own the condo personally, so there is no corporate entity. What else would you call a non-owner occupied investment property mortgage, besides a commercial mortgage?
Thanks for the advice.
I only count depreciation on Schedule E to get a tax loss. I have not had a cash flow loss ever in 6 years, with consistent increases ($1,900 in 06-07, $2,000 in 07-08 to $2,100 in 2009 to today). Warehouse districts rents are still increasing, so I will push my tenant for another $100 in February at renewal.
Maintenance is very low and paid from current profits as needed, which has averaged just a few hundred per year, not very significant. All major renovations were done from the studs out when I bought the condo in 2006, so I don't have long term upgrades in the future.
Appreciation has been significant, from $229,000 in 2006 to $330,000+ today, averaging out to about 16% annual appreciation. My mortgage is for the original amount from 2006 and I need to get some cash out, as equity is fools gold.
'Earned income' means my income from my W-2 and self employment incomes, i.e. not rental income.
Where does one get a commercial loan for less than 5% these days? My banker (at Whitney/Hancock) has told me this is their new minimum rate on commercial loans, as they cannot make money lending at prime or prime + 1% anymore. My sister just started at Iberia so I will see what she
says.
I own the condo personally, so there is no corporate entity. What else would you call a non-owner occupied investment property mortgage, besides a commercial mortgage?
This post was edited on 10/22/12 at 8:22 pm
Posted on 10/23/12 at 2:57 am to GoIrish02
(no message)
This post was edited on 4/6/13 at 1:22 pm
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