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    What would you do with this 1.2M rental unit? Real Estate

    September 07, 2018

    What would you do with this 1.2M rental unit? Real Estate

    What would you do with this 1.2M rental unit?

    Posted: 07 Sep 2018 03:17 AM PDT

    I own a condo in a high cost of living area (edit: San Francisco) that is currently rented out. I have mixed feelings about the unit's future and am very interested in the advice of experienced land lords on what they would do.

    Financials:

    • Current value: ~1.2M
    • Mortgage balance: 500k (700k-ish equity)
    • 3.75%, 24 years left
    • Secured revolving line of credit for 100k at libor+0, no balance, interest-only for 5 more years

    Monthly:

    • Rental income: 5000
    • Mortgage: 2650
    • HOA: 450
    • Property tax: 800
    • Property manager: 150

    So it nets roughly $950 per month, not including misc maintenance costs (the building is only 20 years old, so maintenance isn't a lot). This is my only rental.

    Thinking primarily about long term wealth appreciation, what would you do with this unit?

    Some options:

    • keep as is

    • leverage up and buy more rentals

    • refinance and invest in X

    • sell and invest in X

    • ???

    Edit: formatting

    submitted by /u/overdude
    [link] [comments]

    So, you want to be a landlord...

    Posted: 06 Sep 2018 08:40 AM PDT

    I'm an active member of this sub, but grabbed a new account to post this, as there's a few too many personal details. This was originally written for r/airforce, so it's from a military perspective, but I figured you guys would might like to read it, too. PCS/PCSing = permanent change of station, or when we move from one base to another. BAH = basic allowance for housing.

    TL;DR: Rental real estate is a pain, but can be very lucrative if done right. Here's a whole bunch of things you might need to consider.

    EDIT: Alrighty, I'm wrong about depreciation. Depreciation is still a thing, still affects your personal income taxes, but I'm heading right back to google to correct my own information. Guys, I wrote this whole thing off the top of my head based on what I have personally learned, and I sincerely apologize, I don't mean to be handing out bad advice. Looks like I personally need to learn a whole bunch more about how depreciation recapture works.

    EDIT 2: The VA and FHA loans can be good options. However, YOU need to shop all of your options. Do not just assume that the VA is the best way to go. If it is the best option for you, go for it. If not, go with other financing.

    Edit 3: I'm pretty risk averse when it comes to over-leveraging. I'm never going to suggest that someone buy a house with nothing down, especially not while in the military and subject to a short notice relocation. If you do your own research and choose to buy with nothing down, that's on you. I'm still not comfortable with it.

    Alright... wall of text coming in. Take what you can and leave what's not useful. Everything written here is what I've personally learned. I'm not a realtor or a professional property manager, but have been a landlord for 6+ years and have learned a lot. Most of those lessons learned had huge price tags on them, too. I purchased my first home in 2011, our second in 2014, and our third just last year. The first two are rented out. Not everything will apply to you, but here's what I've learned along the way. Topics are written in the order that I thought of them, my apologies if it's not 100% cohesive. As of right now, I have awesome tenants in both properties, but that hasn't always been the case. My approach to real estate is to 1, protect my own investment and 2, to provide a good home to my tenants. I've made some more generous financial decisions to both of those extents, and while those decisions cut into my profits a bit, I have no regrets.

    Purchasing your first home

    Should I rent or purchase?

    Don't over buy on your first purchase.

    I say again, don't over buy.

    If the market is white hot, it's going to cool off. And you don't want to be holding the chips when that happens. You really don't have the time to sit on the house and let it recover, unless you've got money somewhere you're not talking about. 2008 took about 10 years to fully recover from and to gain back the lost appreciation (most markets, at least) and you don't have 10 years. ​ If you do a zero down VA loan and roll the closing costs into the loan, it takes, on average, the first 18 months just to pay off the closing costs. Takes about 3 more years to get down to a break-even point with seller's closing costs included, and about 5 years before you'll make money. Yes, it seems like a lot of BAH to be "throwing away", but look at the actual makeup of a newly amortized mortgage - most of your payment is going towards things other than principle.

    If you bring a down payment to the table, you've mitigated that part of your risk, but you're still exposed to lose money at the sale of the house. You've still got your purchase closing costs, which, on a $190k house are probably between $6000 and $9000, depending on your financing. Most of that is money that just evaporates.

    If you can rent for LESS than the interest/insurance/taxes part of the payment and just dump the principal part into savings/mutual funds/TSP/IRA, you'll come out ahead. Granted, that normally means renting a smaller apartment instead of living in a nice house, but it's the sacrifice we make to be financially responsible.

    Money in real estate is made 3 ways:

    1, getting a good deal on the purchase.

    2, holding the property for forever and getting the appreciation.

    3, renting it out and making a profit off of someone else.

    Normally, you want a good mix of all 3. The first takes PATIENCE when you're looking to purchase, and from what you've told me, a good deal just isn't available to purchase in Vegas right now. Strike one. Are you going to live in it long enough to ride out the bubble you see and make money when you sell? Meh, maybe not. Strike two. Do you want to landlord? If you've thought about it, scroll up and re-read again. If you're still on board, then its a consideration ​

    Renting is buying patience. Seems like in your area, patience is what you need. There's always a house to buy in the future.

    Rents do rise and fall, but they don't rise and fall nearly as fast as real estate does in a white-hot market. Hence the 1% per month rental price as an approximation. If there's a $200,000 house that's renting for $1500 a month, and the house next door sells for $220,000, the first house likely went up 10% in value. However, your landlord isn't going to jack your rent 10% in the middle of the lease just because Zillow thinks his house is now worth what the one next door sold for. If you rent, you're protected from the competitive spikes in purchasing, and are more exposed to the long-term appreciation of pricing. Your landlord's costs of ownership are fixed (unless he's on an interest only loan, and then he's stupid), so he can offer you rent at a fixed or gradually increasing rate. He's not trying to compete with other buyers to purchase a first home like you are.

    VA Loan

    The VA loan... not my favorite topic. First off, you're almost always better off going with conventional financing if you've got a down payment, and no one should ever purchase a home if they don't have one. The VA loan brags about not having PMI, but the funding fee is essentially pre-paid PMI. On a conventional loan, you can request that PMI be removed once you hit 78% LTV, but there's no option to un-do the prepayment of the funding fee.

    The first time the VA loan is used, the funding fee is 2.15% of the loan. After that, it's 3.3% of the loan unless the borrower brings 5% down. (https://www.veteransunited.com/education/library/va-funding-fee/)

    The max amount of loan that the VA will insure is $453,000. You can have more than one VA loan at a time, but the two can NOT total more than that amount. With the median home price today, you're likely going to be going with conventional financing on the next house, anyway. The other option is to refinance the soon to be rental with conventional financing and re-use the VA entitlement on the new purchase, but again, I tend to shy away from VA loans all together.

    When I purchased my last home, my loan officer just assumed that I'd go with VA financing. I asked her to pull a quote for conventional and give me the break-even point. She didn't want to, but I made her do it anyway. She was shocked that, wow, I was right about my financing options. Not to brag, but she's used to checking boxes on paperwork, while I'm used to scrimping to make that precious SSgt pay last as far as possible.

    I'm buying near a military base, it's a good market, right?

    Ah, but buying close to base is BAD for appreciation. Because of the high turnover of military personal, there's always someone trying to sell their house. Always a lot of people, actually. This leads to high inventory and low demand. When there's high inventory, people start dropping prices to sell faster. You've seen the opposite right now in Vegas - low inventory and high demand cause a price spike. Same math, different side of the equation.

    With values depressed because of high inventory, sellers in a heavily military area will likely sell for their break-even point. If sales prices don't go up, neither does value. Neither does rents, and so BAH remains flat. BAH remains flat, and the next guy can't afford to buy your house for any more than you bought it for. It's a vicious cycle and it's common near bases. In this equation, the only people making any money are the real estate agents who have an unlimited supply of customers.

    The plus side is that you can usually get a lot of house for the money near a base. The only real way to break that cycle is to have an outside economic influence bleeding off the extra inventory. This happens when a small(ish) base is located in an area with other good paying jobs. If the only places to work in a 20 minute radius are the base and retail, tread carefully.

    Working with a realtor

    Realtors are real estate professionals, and I always recommend a first time buyer work with a good agent. However, keep in mind that the realtor has a vested interest in you purchasing just as much home as you can. Same thing with the bank, they WANT you to borrow as much as they can reasonably let you have. Most people will make a decision about choosing a realtor based on personality and how well they "jive" with the person, but that's the wrong answer. You want someone who no-kidding knows the local market and who can educate you.

    It's like working with a military recruiter. It's their JOB to put you in the military and that's the direction they're going to steer you. And of course the recruiter is gonna tell you all the awesome things about the military - they've reenlisted and stuck around a while. Doesn't mean it's for every applicant, and it's still the applicant's job to do their own research. Same thing with the realtor.

    Anyone can show you homes and point out how awesome a kitchen is. Anyone can give you a listing from the MLS. That's not what you want. You need someone who can no kidding educate you and be your advocate.

    Now you're faced with the decision to sell or rent after your PCS. Here's some thoughts:

    Selling expenses

    Look at your HUD/Closing statement from when you purchased the house, but look at the seller's side of the page. Assuming you sell the house for a similar amount as you purchased (within 10% or so), you can assume that selling closing costs will also be within about 10% of those listed on the closing statement. Normally, you can assume that 10-15% of the value of the sale will be eaten up in closing costs and realtor fees. This could vary based on the terms of your sales contract, but most buyers push the seller to pay as much as possible. So, if your home is worth $200,000, you can expect to take home $170,000 - $180,000 after closing costs. If you owe more than that, then YOU will have to write a check to the bank for the difference at closing. It you owed $185,000 on the $200,000 home, and your net was $180,000, then you pay the bank the extra $5000 to close. Decide if it's worth it to "feed" the home (more details later) month to month as a rental or if it's better to take the lump sum hit now. If you rolled your purchase closing costs into the loan, did a zero-down VA, or have not owned the home very long, look at the numbers closely. The home may have appreciated enough to cover everything, it may not have.

    Fair rental value

    Industry standard is 1% of the property's value each month as rent. This should (should) give you a pre-expense rate of return of 12% on your money before appreciation. However, that estimate is not accurate in every market. Work with your realtor or property manager to figure out a good price point to start at. I started a little bit high, then negotiated down to my bottom line. Price too high and you won't attract a tenant. Price too low and you'll attract the wrong kind of tenant. Factor in your own expenses, but if your expenses are high, you may have to "feed" the property (more on that later). Find out what houses near you are currently renting for, and get a good guestimate for what you could get for your home. Factor in any perks - like if the washer/dryer are included, if there's a pool, if you allow pets, etc.

    1% monthly works, sorta. In a high-rental but low-ownership neighborhood, rents may be more like 1.5% of the sale-able value. In a high value neighborhood, you're likely not going to get quite 1% as anyone who can afford $5000 a month rent on a half million dollar home will just buy the thing themselves.

    Rental expenses

    Here's what you need to factor in when estimating your monthly expenses: Mortgage payment Property tax increase (more below) Landlord's insurance (more below) Vacancies Turnover cost Repairs HOA fees Extras like lawn care or pool maintenance

    Vacancies

    Industry standard is 8-10% time vacant, or about one month a year. Factor this into the price of your rent to maintain year-round profitability. You may have a year with 20% vacancy, and then your next tenant stays for 4 years. No telling what will happen. 1 vacant month each year is a generic estimate.

    Turnover cost

    Regardless of how awesome your tenants are, there's going to be standard wear and tear on your property. Each turnover will require a deep clean New carpet and new paint will be required every 3-5 years, more often with kids/pets/smokers. If you're not physically able to do this work, you'll be paying out-of-pocket for a contractor to do this work, and it adds up fast (mine was $40 an hour). The longer this work takes, the longer your property is empty, and it's hard to show a house that's not in good condition. Some of the more egregious turnover problems can be taken out of the security deposit, but that could also be contested by the departing tenant.

    Utilities during turnover

    The property owner is responsible for turning on the utilities while the home is vacant. It's very difficult to do turnover repairs without water or electricity, and almost impossible to show a home without electricity. Usually a phone call to the local utility company to re-open the utilities in your name is all it takes, but the utility company may require you leave a deposit with them. This is something your property manager can take care of for you if you're no longer in the local area. Factor this into your cost of turnover.

    Repairs

    Industry standard is about 10% of the rent set aside for repairs - this number combines turnover repairs AND the day-to-day issues. This could vary widely, based on the condition of the home, price of the rent, standard of tenant, etc. The more expensive rent price attracts a more financially responsible tenant, who will either take better care of the home or be pickier about you repairing every little thing. Finding a responsible tenant who treats the property well and who does the little things themselves (I had a tenant who thought I owed him lightbulbs) will go a long way.

    Listing fees

    The typical realtor who's listing your property for rent will take half the first month's rent as the listing fee. Half of that remains with the listing agent, and half goes to the tenant's agent. Factor this into your price of rent. Half the first month's rent, paid once a year (estimate, with 1-year leases turning over once a year), is about 4% of the annual rent cost. This is normally in addition to monthly management fees.

    Management fees

    Usually 10% of the monthly rent in addition to the listing fees. Make sure you're getting your money's worth with this. If you've got a good tenant and can manage repair issues long-distance, you may only need to pay for listing fees. However, that leaves your property without an eyes-on look from someone other than a tenant, and that's not wise. Either way, find a good handyman in the area and keep them on speed dial.

    HOAs

    Read your HOA docs and find out exactly what you need to do to rent the property. Your HOA may require board approval of your tenant. Get that process started early. If there's strict lawn care or other appearance standards, it may be beneficial to hire a lawn care company and just include it in the price of the rent. Be sure to list HOA standards in your rental contract and leave the tenant responsible for adhering to them. HOA fees are normally included in the rent so that you guarantee that they're paid.

    In a condo situation, FHA financing regulations require a certain percentage of the complex to be owner-occupied or the complex will not be eligible for typical financing. Without the ability to get FHA financing, the units will be less sell-able, and therefore will drop in value. In an effort to preserve the sale-ability and value of the entire complex, condo HOAs will deny requests to turn an owner-occupied unit into a rental IF the complex is close to that percentage. When purchasing a condo with the intent to rent in the future, ask the HOA about this. HOAs are also responsible for the maintenance of the parking lot, exterior structure, etc, and if the finances are poorly managed, it could result in an assessment against each unit. This is yet another financial contingency you must be ready for.

    In a typical single family home neighborhood, the management of the HOA can still make-or-break the rental situation. Do your research and talk to the board.

    Pool

    A pool is easily $40,000+ worth of value in the home, and it's likely to your financial advantage to properly maintain it. Tenants may or may not care for it the way you would, you have to make the risk management decision. Consider hiring a pool maintenance company and include it in the price of the rent. One less thing for the tenant to worry about, and you've got the asset covered. Similar consideration should be made to AC system maintenance - just have the AC guy come once a year for a tune-up and add it to the pile of expenses.

    Pets

    Your call on pets. Once pets live in the house, it's going to be hard to rent to non-pet owners unless you replace all the carpet. Pets can also kill the lawn and/or landscaping. I personally have pets and have had my own pets in my homes, so I've allowed my tenants to also have pets. You can attract a tenant who's willing to pay a bit more to have a good house with a good yard for their dogs. I always charge a non-refundable pet deposit, usually $250. That money will go towards cleaning or replacing the carpets or other damages directly from the pets.

    Landlord's insurance

    You will need a new insurance policy on the property. A typical homeowners policy covers the home AND the contents, whereas a landlord's policy covers just the home. As the landlord's policy covers less, it's generally cheaper than the homeowners policy. However, if you had any challenges underwriting your home (pool, trampoline, closeness to the water, unpermitted work, etc) you'll have those same challenges underwriting a landlord's policy.

    Property taxes

    Many states have a homestead exemption for a first home that's occupied by the owner. Once you rent out your home, you will lose the homestead exemption the following tax year. You will have an escrow deficiency that year (make it up in cash) and then a higher payment after that year's escrow analysis. Homestead exemption is typically $50,000 off the assessed value, so you can guestimate by adding that much to your value and then figuring out what the new taxes should be. For my house, it's about $1100 extra a year, or just shy of $100 a month. Make sure you include this in your rent pricing, and do careful research into the property tax laws of your county.

    Cash flow break-even rent pricing

    Mortgage payment (including increased property taxes) , +10% management fee, +4% annual turnover, +10% expected repairs, +8% vacancy, +HOA fees, + extras (pool, lawn). I'm not factoring in pool or lawn expenses, as those are usually considered perks and added in afterwards.

    With a property manager: payment + 32%. Without a property manager: payment + 22%. Without a property manager and self-listing: payment + 18%

    Now, take that number, and compare it to the typical market rents of houses near you. Can you cover your expenses? Break even? Come out ahead? Will you have to "feed" your home? If so, how much?

    Feeding the home

    Feeding the home is when you're spending more in expenses monthly/yearly than you're making in rent. Sometimes this is due to a catastrophic repair event, sometimes this is due to market fluctuation. Sometimes this is due to over-leveraging in your financing (zero down loan) and a high interest cost. Whatever the reason, you need to make a risk calculation to decide to continue feeding the property extra money or to just cut your losses and sell the house. Here's a few ways to look at it.

    First, calculate your expected net loss at closing if you were to sell the property. Next, calculate how much you'd have to "feed" it monthly. Compare the two and find out your break even point. If you're looking at a $5,000 loss at closing, but only feeding the house $200 a month, your break even point is 25 months, or 2 years. In that 2 years, your property values can go up, your cost of ownership can go down (mostly your monthly interest cost), and market rents may increase. So, 2 years from now, calculate if it's worth it to continue keeping the property and move on from there. If you're feeding it $100 a month in contrast to a potential $20,000 loss, feeding it is likely the way to go. If you're feeding it $500 monthly while looking at a $2000 closing loss, you're probably better off to just sell it and move on.

    As you pay down the house, your equity increases and the cost of ownership decreases. Your return rates will therefore increase. If your monthly mortgage pay-off amount is around $450, but your feeding the house $200, your cash flow will show that you're losing $200 monthly, but your network has an overall gain of $250 monthly. This can be a fantastic long-term strategy, if you've got the finances and budget to sustain it in the short term.

    Catastrophic repair events happen, too, but these can increase the value of the property. For example, a new AC system may be $7000, but you'll get that money back when you sell it. Its a factor in planning, but not really a month to month expense. More on that later.

    Granted, all of these numbers are looked at before the emotional factor of personal finance is considered. If it's worth it to you to spend $200 a month to keep your dream home for 2 more years until retirement, then that's an emotional decision. A perfectly reasonable one to make, if that's what you want to do. Just factor everything in together when looking at the big picture.

    Tenant screening

    Obviously, selecting good tenants is key to maintaining a good rental relationship. I had tenants who ended up growing pot in my house and cost me a significant amount of money. Renting to military families is also hit or miss, I've had fantastic military families in my homes and challenging military families in my homes. Even if you list the property yourself, run a full background check and look at their financial ability to pay you. I don't pay too much attention to their credit score (unless there's a glaring problem), but do look at their ability to PAY their rent on time.

    Managing the tenant relationship

    There's another person living in my largest financial asset. I try my best to be open and accessible, without getting too buddy-buddy. If there's an issue with the house that falls on the landlord's responsiblity, I've tried to err on the side of the tenant. For example, the month that my tenants had to heat their house with their stove while we installed a replacement HVAC system, I covered their natural gas bill. With good tenants, the good will generally pays off quite well.

    Income Taxes

    You will pay income taxes on your rental profit. That's after deducting your expenses. Rental property expenses are not deducted in the same way as your primary mortgage interest - that's the difference between taking the standard deduction and itemizing. I normally take the standard deduction, as I don't have personal expenses worth itemizing. However, your rental property is treated like a small business and rental expenses will count against your rental income to get the bottom line.

    The following expenses are deductible: Insurance, interest, property taxes, utilities, listing fees, management fees, HOA fees, repairs. You can also take depreciation (more later on that.) Upgrades and capital improvements are not deductible, but can be straight-line depreciated (I've never done this myself.) If, say, the roof goes bad and you spend $10,000 on a new roof, that's deductible. If you ADD on a deck, that's considered an improvement.

    The main out-of-pocket expense that you can't deduct is the principle part of your mortgage payment, as that's not an actual expense. That money still go towards increasing your net worth by increasing your equity in the property.

    I do my own taxes every year with the $79.99 version of TurboTax and a few hours worth of research. Good record keeping during the year is essential, especially when adding up all of those Lowes receipts for repairs.

    Depreciation

    Oh, boy... Depreciation is the idea that an asset has a limited lifespan, and after a certain amount of time, the asset will be worth zero. The IRS allows you to take a fraction of that every year, and consider it an expense against your income. (https://www.investopedia.com/articles/investing/060815/how-rental-property-depreciation-works.asp) Taking depreciation will reduce your income taxes, however, you will pay capital gains taxes on the depreciated amount when you go to sell the property.

    With long term capital gains set at 15% (for most people), chances are that you're better off taking the depreciation if your current marginal (not effective) tax rate is above 15%. There's no telling what tax rates will do in the future, though. If/when you sell the property, hopefully you'll have the cash available to pay the taxes at that time.

    Depreciation can be compared to the tax advantages of a retirement account. It's is more like the Traditional instead of the Roth, where you take the tax break now but pay for it later.

    When you sell the property (either because you wanted to or because you're dead and the estate is selling it), the capital gains taxes are paid as follows: Net of sale (market rate minus selling expenses), minus original purchase price, plus depreciation taken.

    If the house purchased for $100,000, depreciation will be around $3000 a year. Letssay, 4 years in, you've depreciated the house by $12,000. Your basis in the home is now $88,000, NOT the original $100,000. You sell it for $150,000, net $127,500 (15% of $150,000). $127,500 - $88,000 = taxable gains of $39,500 x 15% = taxes of $5925. Without depreciation, the taxable gains would have been $27,500 and taxes of $3300.

    The emotional factor of landlording

    My husband and I rented out our first home after we upgraded to a larger one. A few months later, he was at the home fixing a minor issue and saw how our tenant was taking care of the property. The place was dirty, smelled bad, and overall not well kept (bad tenant screening on my end). This was OUR home, the home we brought out daughter home from the hospital to, the home that we shared our wedding night in. Seeing it treated poorly by a stranger was a punch in the gut. No amount of money was worth seeing our memories misstreated like that.

    Or is it? You're going to have to decide what your emotional investment into the property is and if you can allow it to become someone else's home. This isn't a financial decision as much as it is a personal one. The personal influence can cause you to make a less than optimal financial decision concerning the property, so just keep that awareness as you make those critical decisions.

    Internal financial management

    Per most states' state law, rental security deposits must not be commingled with other monies. I keep a separate savings account with the security deposit and just don't touch it. Any interest that the deposit accrues is owed back to the tenant at the time that they move out.

    I have a separate checking account for my property. Rents are paid in, expenses paid out. That way, everything is in ONE location and it's easy to figure out exactly what our profit/loss is. If you're managing a property locally, get a debit card on that account for Lowes purchases. I also keep a savings account for each property for escrow and repairs. (one property is paid for, so I maintain a manual escrow account, the other is a straight emergency fund.)

    I structure my personal budget to pay my mortgages and rental expenses out of our base pay, and then use the rents to put money into retirement, savings, and my daughter's college fund. That way, if (when) there's a vacancy or a problem, I'm not coming out in the red during those months. We can at least cover our expenses on our base pay, even if there's a month or two where we don't quite get to retirement contributions.

    In addition to emergency funds set aside directly for the property, make sure you can handle the one-off catastrophic emergency.

    Catastrophic emergency

    Last year, I lost $22,000 in rental real estate, between rehabbing my first home, fixing up the second, recovering from crappy tenants in the second, and worse. The city hit my sewer main, said it was my fault, and I was out $10,000 in a single month. 3 years ago, the heater in my first house went out in December, and I wrote a check for $7000. I currently have $16,000 invested in 3 different sewer main re-builds under two different houses. (never, EVER again buying anything with cast iron pipes.) These things happen, and we dealt with all of this on SSgt pay. Thankfully, most of those losses have been made up over the next 1-2 years' worth of rent, but you NEED to have the cash on hand to be able to cover these types of emergencies. Good credit is also helpful - I had to borrow $10,000 once to cover turnover and repairs, but ended up coming out on top in the end. Ultimately, your rental property is likely a significant chunk of your net worth, and while it may hurt to spend ten grand on a repair issue, that's only 5% of the value of a $200,000 home. Not worth losing a whole asset over 5%.

    The hassle factor

    Landlording is not easy. Dealing with people, finances, local real estate markets, construction type repairs, etc. It's a package deal. Some months I spend 30 minutes on it and make a decent amount of money. Some months it's 30 hours a week and I lose money. Overall, I've done pretty well, but it's the law of averages.

    Purchasing the next home with a rental

    SOOOO... you're on the brink, ready to rent out your current house and go buy another one. Here's some things to think about:

    Financing considerations

    So, you've PCSed and now want to buy a new house at your next duty station. That's great, now you need to convince a loan officer to give you another mortgage for another property.

    First, you're going to have to be able to afford a second mortgage with your current debt to income ratio. If your rental mortgage is all the debt you have, you're probably in a good spot. Add in some vehicle or student loan debt, and now it doesnt look too good.

    You can use you rental income to compensate for the rental mortgage, but the bank will want to see 2 years tax returns with the income. Depending on when you converted it to a rental and what time a year you want to buy, 2 years tax returns can take closer to parts of 4 years to document.

    Purchase conservatively

    The bank will do all they can to max out your DTI (debt to income ratio) to earn just as much interest off of you as they can. By choosing a smaller/cheaper home for your initial or second purchases, you can reign in the budget. Think of who you're going to rent to when you PCS, and make sure you can afford to rent within BAH rates. Just because the bank says you can borrow a half million dollars on a mortgage doesn't mean you should. And if you do, you will have zero room to finance the next property. Scroll back to the top where we talked about not over-buying.

    Leverage ratios

    Alright, heading into the weeds here... The more you've borrowed against a property, the higher the leverage ratio. This isn't generally a problem if you're living in your own home and plan to remain there for quite some time, but it does become a factor when the bank starts looking at your suitability for the next purchase. (https://www.thebalancesmb.com/top-don-ts-in-using-real-estate-leverage-2867098)

    If you owe $90,000 on a home worth $100,000, your leverage ratio is .90, that's very high. If you owe $90,000 on a home worth $400,000, your leverage ratio is now 0.225. That's very conservative. With the same debt to income ratio, the real estate owner with the lower leverage ratio is going to be a much safer customer to the bank. You can better your leverage ratios by 1, paying down the house or 2, letting it appreciate. The first is within your control, the second is not.

    Interest expense

    The single greatest expense in the first year of home ownership is the purchaser's closing costs. Beyond the first year, the greatest expense on a financed property (barring an enormous catastrophic event) is the interest expense. The lower your interest expense, the higher your profit. You can lower your interest expense by 1, getting a better rate and 2, borrowing less. You can borrow less by either putting more down on the home, or by paying it down early.

    Paying off a house early

    So, this one is highly controversial in the landlord business. Some folks will say to borrow as much as possible against a rental property because the interest is completely tax deductible and you can leverage your cash to purchase multiple properties. It's also possible (some years) to make a better rate of return in the stock market. While both of these schools of thought have validity, it's overlooking the factor of RISK. I've personally paid off a rental property and it was one of the greatest feelings in the world. Sure, I'm not making quite as much on that money as I could, but the risk on a paid for property is much lower than with a financed property. It also doesn't count towards my DTI any more, and isn't much of a hassle factor in future property financing decisions. At a minimum, paying off the house will give you a return equal to the interest rate, minus the marginal taxes you would have paid if you had taken the deduction. However, if you achieved a greater rate of return elsewhere, you'd also owe taxes on that, at either capital gains rates or your personal marginal tax rate.

    If your goal is to churn and burn and just buy as many properties as possible, you're likely going to finance all of them as much as you can. If your goal is to retire from the military with one or two investment properties, then work towards paying them off at a reasonable rate.

    Conventional VS creative financing

    Creative financing is an option, but not one that most of us use. This would be something like, say, getting a loan from your uncle's IRA to buy the house, and then you pay your uncle the interest. This is do-able if you've got rich friends/family who are willing to invest in your mortgage. However, loans like this require much more documentation when you're looking at the next deal. Because banks are used to dealing with conforming loans (the fancy term for loans that fit all the rules), they may balk at a lender with a creatively financed asset in their portfolio. You'll have a greater burden of paperwork and proof to demonstrate your continued creditworthiness.

    Rental VS Owner occupied financing

    You can borrow money to purchase a rental, but the interest rates are usually a full or two full percentage points higher. On $100,000 borrowed, each full interest rate percentage is $1000 a year or $83 a month. Obviously, that amortizes, but that's the starting expense at month 1.

    Refinancing a rental as a rental

    Once the home is no longer owner occupied, it doesn't fit the criteria for owner occupied financing. A re-finance at that point (to pull cash out, clear the VA entitlement, or re-structure of payments) will likely cost that $83 per month per $100,000 borrowed. If you live in a home that will be a rental and you need to update your financing, do it before you move out.

    Larger down payment

    You can always entice a bank with a larger down payment. The more money you put down on the next deal, the lower their risk is. Borrowing less also raises your DTI by a smaller amount, and that can help get you approved. Coming up with a larger down payment while turning your current property AND PCSing can be challenging, so plan ahead.

    Here's another thing to think about with the down payment: Your down payment is your buffer between you and the real estate market fluctuating. If you have 5% equity in your house, and the market drops by 5%, you're basically imobile. If you have 25% equity and the market drops 5%, you're still down by that much of your net worth, but the remaining 20% equity gives you the ability to cover closing costs if you choose to sell, cover a dip in rents, etc. Better to lose money you have than money you don't.

    Let me say that again - Better to lose money you have, than money you don't.

    Balanced portfolio

    Guys, rental real estate isn't the whole thing. For the average homeowner, our home makes up the largest asset in our portfolio. If the house is paid for, it's probably the most significant portion of our net worth. As soon as it's rented, you now have one single asset worth a LOT of money, and all of your net worth is in the same asset class.

    Don't forget to contribute to retirement through tax advantaged accounts (IRAs, TSP, 401Ks, etc). There's been seasons in our life where we had to stop retirement contributions to get over a hump, but that should be the exception, not the norm. Do your own research if your rental property income changes the equation for you while deciding between Roth and Traditional contributions, but chances are, it shouldn't make that big of a difference.

    Liquidity

    This is a problem, too. $100,000 worth of home may be worth $100,000, but it's very difficult to convert a house that another family is living in, into cash. Borrowing against the property is an option, but only if your DTI can support it. Selling the property, at a minimum, will take 60 days. Maintain the amount of liquidity in your overall net worth (mine is in my emergency fund) to balance the amount that's non-liquid. Your personal liquidity needs are dependent on your financial situation and your risk tolerance, but it is a factor to consider.

    If I missed anything... ask, and I'll find an answer. Hope this is helpful to someone here.

    submitted by /u/HauntingArmadillo5
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    Would appreciate thoughts on buying a manufactured home and replacing it with a new one!

    Posted: 06 Sep 2018 10:14 PM PDT

    Hello, this is my first time posting here. Feel free to redirect me if I am not in the right subreddit.

    ​

    I live near San Jose, California where COL is high. I saw a manufactured home listing on Zillow that was really cheap (the est. mortgage is ~5% of the space rent). The location is great but the home itself was built before 1976 and quite old. A new manufactured home looks pretty cheap (e.g. https://www.claytonhomes.com/homes/91FPT24403AH for ~$80k, which is less than a third the price of a ~20-year-old manufactured home currently selling in the same park.)

    ​

    I am considering buying the home and replacing it with a new one. I know very little about real estate (have been renting all of my short, adult life).

    ​

    1. Do I have to continue paying mortgage on the existing manufactured home after I destroy it?

    (Edit: I realized after posting this is a really dumb question. I'm really out of my element here :( )

    1. Is there anything I need to be concerned about money-wise? e.g. taxes etc. (let's assume that the park will allow construction and anything else like that. I'm more concerned about whether the money part actually adds up).

    ​

    Thanks in advance! And please feel free to just link to any existing articles or blog posts. I didn't even know how to start searching with a question like this.

    submitted by /u/withouttheotto
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    2 year "live in flip" - Tossing the idea around

    Posted: 06 Sep 2018 12:37 PM PDT

    My wife and I are late 20's / early 30's. We own our house. The prospect of "live in flipping" sounds appealing to me. The basic principle of live in flipping is that you buy undervalued property (probably the hardest part of the scenario), live in it for 2 years (crucial to avoid capital gains tax), and while living in the residence, you fix it up. After 2 years, you examine the market and contemplate selling based on market conditions and rate of return.

    ​

    This concept sounds very appealing to me. (Another way to look at this concept is "home improvements to cover the cost of living"). I like the fact that this is low risk. This will not be a second home that we're paying a mortgage on; it'll be our primary residence. I've owned my current house for 11 years. I bought a complete fixer upper and over the 11 years of ownership, I've gutted and upgraded the entire home.

    ​

    We now have enough equity in our current house that if we sold today, we could pay cash for a "very basic starter" home in poor condition. What we'd like to do is pay cash for that starter home and begin the "live in flip". Ultimately, the end goal is to keep doing this and purchase a nicer house each time; hopefully without a mortgage.

    ​

    I'd love to hear from anyone that's done a "live in flip" and if it's a decent long-term supplemental plan. I appreciate any input, but I'm looking solely for input from "live in flippers". I'm not really looking for cons about "living in a construction zone" because I'm aware of them as I've already lived through an 11 year home improvement which included demolition, drywall, plumbing, sanding/staining hardwood floors, electrical work, tiling projects, etc., but I will gladly hear any other con not related to living in a construction zone.

    ​

    Thanks for any input!

    ​

    ​

    submitted by /u/Brok3Design
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    Home inspection report: "The crawlspace is a disaster."

    Posted: 06 Sep 2018 06:41 AM PDT

    This is a major setback to our hopes for a home on which we had an offer accepted. The house was built in the '40s, so we expected lots of updates to be needed and minor repairs. But the inspector yesterday was unable to complete the inspection of the crawlspace at all due to insulation having fallen down, standing water and signs of flooding halfway up the HVAC ducts, visible mold, and boards, trash and debris blocking entries into other portions of the crawl.

    The inspector recommended hiring a remediation expert to come and give a quote for cleaning the entire crawl and laying a new vapor barrier as well as evaluating the mold (is there black mold) and removing. It's a 3,000 sqft ranch home, so the crawl is huge. I expect the quote to be very high and doubt the seller will take care of the expense, but we'll present them with our findings and be prepared to walk away if need be. That being said, our previous home had black mold in the crawlspace and the seller had it remediated prior to us moving in.

    Does anyone have any suggestions/experiences when it comes to crawls failing inspection?

    ​

    Indianapolis, IN

    submitted by /u/i_just_have_no_idea
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    UK/US - Landlords, what do you want out of your property manager?

    Posted: 07 Sep 2018 03:39 AM PDT

    Hi all,

    I hate using a property manager (agent), when I consider the ridiculous fees I get charged. I'm looking to build something that solves this problem.

    It may be a bit cheeky but I would be incredibly grateful if you could tell me a bit about what you struggle with / dislike about your current property manager (UK or US) using this survey:

    https://docs.google.com/forms/d/e/1FAIpQLSdcLJERNr8xNfuPofMeVeKQ_iBPhaH2SJxNuB52-pai77vkOA/viewform?usp=sf_link

    There's a £100 Amazon voucher up for grabs.

    submitted by /u/turing_finance
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    How often do you use a credit score when screening tenants?

    Posted: 06 Sep 2018 02:13 PM PDT

    I ask this not as a potential landlord, but as a potential tenant. I'm a Dave Ramsey acolyte, so I don't have a credit card. I don't have any bad financial habits or cashflow issues, though, so I'm open to the idea of one. I budget every month, have no debt, and live well below my means.

    When I was applying for my current apartment I just filled out the lease application and submitted a couple months of pay stubs, which was sufficient.

    But I don't like the idea of being denied an apartment I could easily afford (my current rent is 16% of my take home pay, 12% of my gross pay) because of a lack of credit score. If/when I move someplace else, I'd be awfully annoyed if I was denied because of no credit score.

    Then again, from the perspective of a busy landlord, I'm sure it's easier to just look at a number and make a decision that way, as opposed to really getting to know the potential tenant, his/her income, debt to income ratio, etc.

    So how often do you all use the credit score to decide on tenants?

    submitted by /u/Birdmeistr
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    Found a fixer-upper far below market cost, looking for input and advice.

    Posted: 06 Sep 2018 08:59 PM PDT

    Looking for input and counter-points etc. so i can make a better decision. Am i crazy for even considering a fixer-upper that needs at least 4-5 months of renovating work?

    I live CA and the realtor showed a listing for a 2B, 1Bath fixer-upper for 200k. This is well below the average prices within 200 miles (avg 400k to 1 mill). Plus it's exactly how i want my home to be, with a decent sized backyard and a garage workshop.

    That being said it is almost 90 years old and from the pictures it needs at some major updates to the interior but have had the same owner for 50 years.

    Problem areas at a glance: -Part of the ceiling in living room and bathroom needs to be replaced or repair

    -60% of walls need an overhaul/replacement -Bathroom needs overhaul and has paint damage but otherwise looks clean -floors are worn and ugly but functional -definitely need to replace some cabinets and shelves etc etc. -no tax liens, owner is just old and wants to sell

    It would definitely be 5-6 Months of work but some key things i have on my side is:

    *My parents live ~5-10 minutes away and i've recently moved back in with them so can comfortably renovate while i stay at home. *I plan to handle a lot of the cosmetic needs and have experience renovating two of my sister's homes before. Replaced her floors, cabinets, and repainted all the walls. Also completely renovated her bathrooms by removing old tile work and features and installing new tile, sink, shower, toilet etc. Demo's backyards including overgrowth and rundown sheds. *Bro-in-law used to do contracting work and still have plenty of industrial tools i can borrow. Also knows people who can handle plumbing and electrical he can recommend *i use to pay almost 1k to live in a rundown piece of shit as it is so mentally and emotionally i don't even care that its not shiny and new.

    Financially *i bring in around 80k after taxes and have a skill set that is in demand. Even if i lose my job, i can quickly get employed again and based on rough estimates the mortgage would only be $900 or so a month. *worse comes to worse, i can also just work for my dad at his landscaping business or drive or do retail (i also have experience in these areas so no worries there) *recently paid off all student loans and debt is only 1k left on cc. And have around 10k right now to put towards a 3.5% down payment. But now recently started putting around 1500-2k a month towards savings and etc. *Extremely frugal and don't have the same desires for a fancy place with new furniture or things etc. *Single no kids, no wife to worry about.

    With all that in mind, i'm wondering what my next steps are? I've never bought a house before and my sister only has experience buying ready to move in houses.

    How do i go about getting a loans or getting information on what the house needs done such as if it needs new pipes or new electrical.

    submitted by /u/Solsavage
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    [AU] Getting a loan for a property with a 3 year no resale clause.

    Posted: 07 Sep 2018 12:19 AM PDT

    Hi, Me and my wife are currently in the process of purchasing a house and land package which has certain criteria (maximum income, first home etc). Our solicitor has raised a concern with the terms of the crown lease being that the property cannot be sold within the first 3 years. His concerns are that we wont be able to secure a home loan as a bank could not recover the property if we defaulted. The developers have said that a bank they have spoken to (their bank) has said the conditions will not be an issue for a home loan but that is hardly comforting.

    We are going to go see a mortage broker and discuss their opinion on the matter, however I was wondering if anyone had any experience with such a clause and issues securing a home loan. We have a currently have a 10% deposit and the settlement will be around 14 months away, making us comfortable to have 20% by then.

    Thanks!

    submitted by /u/Rowskee
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    If my dad owns a house and rents it out, I want to own it eventually. What do I want to do “lease to own”?

    Posted: 06 Sep 2018 11:17 PM PDT

    If so how do i approach him and ask? If not let me know what you think. I am not the most knowledgeable in this matter FYI.

    Future thank you here

    submitted by /u/futuredraftdodger
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    What are the down sides to wholesaling?

    Posted: 06 Sep 2018 07:15 PM PDT

    The videos I've seen online make the process look too easy and profitable so what's the catch? Has anyone tried this?

    submitted by /u/uq42
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    Question [CA] - I received a letter from a real estate agent saying that he has a client interested in purchasing our home. Is this a form of advertising for the agent or possibly a true intent to buy our home?

    Posted: 06 Sep 2018 10:37 PM PDT

    I’m in UT, Just getting started as a realtor. Just looking for any tips, pointers, suggestions or out of the box ideas for getting leads? Thanks!!

    Posted: 06 Sep 2018 08:22 PM PDT

    Do hotel operators handle the marketing function as well?

    Posted: 06 Sep 2018 07:57 PM PDT

    So it sounds like a hotel mangement company gets roughly 3% of revenues... and they of course pass on the costs of the employees they hire and manage to the hotel. I am wondering whether they handle marketing as part of that fee... and to what degree they handle it in house vs. hire a full time marketing manager for the hotel and pass on that cost vs. finding third party marketing firms who's fees they also pass on... I.e. what is the cost for operations and marketing management?

    ​

    Texas

    submitted by /u/jamesldavis1
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    Approached for an "as is" sale of our house

    Posted: 06 Sep 2018 04:03 PM PDT

    We have a person who approached us wanting to buy our house "as-is". He is friends with the tenant who is moving out. When she gave 2 months notice we decided to list it (landlording is getting old). He approached us asking if we would be interested in a no real estate agent sale to him "as is". We are intrigued.

    We met with our realtor just the other day. He said if the guy was serious we stand to make more money selling it to him as he proposed. He gave us some advice to ask for a signed offer letter and earnest money by a specific date - say a month out. Ok great we think - good advice. If this falls through, we will move forward with listing the house with this realtor the traditional route. We even determined a listing price for that time if it comes to it.

    I think the potential buyer wants the house because he knows the tenants dogs ripped up the carpet and chewed some doors. We've also had a lot of things break which we've promptly fixed - new HVAC, new plumbing, new electrical. So I think he perceives (probably from our tenants complaining) that the house has issues. Which yeah, it did, but we paid pro's to come out and fix them because we dont want to be dead bead landlords. To that, we will be using her security deposit (+) to replace carpeting and fix doggie damage. After that, the house seems fine when we saw it the other month. It's a handsome house on some acres.

    Anyways, how do you negotiate as-is? We know our listing price we would first start out with - a price that our realtor said he would be very comfortable defending. Do we go down for an allowance on flooring and doggie door damage? If so I've already estimated that out. I assume we come to an agreed sale price based on the knowns and an offer letter is signed for an as-is sale at $X and earnest money is given. But what about the inspection? What if something major comes up? I'm assuming that either we fix or the sale price is re-negotiated, right? And if it's as-is he should not ask to be nickle-and-diming, right? I just don't want to set a low price based on the perception of an as-is sale and then have to renegotiate down further after an inspection. We have owned the house for 4 years and our inspection list (4 years ago) had a few dozen small items that 1k and a handyman could knock out easy - we just never did it. Lost a job and couldn't afford mortgage so put someone in there who could, and then some.

    ​

    I guess if all else fails we just list it the old fashioned way! But just curious on how this works - its not our idea but if we can come to terms without pulling out our hair our bottom line is much nicer even if we do come down lower that we would normally want since we dont have the agent commission. Would appreciate thoughts and advice on this scenario!

    ​

    Edit: we are in Oklahoma

    submitted by /u/bamstrup
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    [TX]Bought a fixer upper with a different foundation issue

    Posted: 06 Sep 2018 06:45 PM PDT

    So I bought a fixer upper house for a flip with extensive foundation damage. Foundation issues are pretty common here in north Texas so I thought no big deal but once I got my contractor and foundation guy out, they both confirmed that the house had not sunk like the norm but rather, there were massive trees really close to the house that had roots under the house but instead of sucking the water out and sinking the house, the lifted the center of the house up a good few inches making all the corners of the house sort of falling out. The foundation guy wants to put over 50 piers to lift the whole house up to the level of the center where the roots have lifted it up but the contractor wants to put only a few piers where there is actual sinking and then level the floor on the inside and repair the cracks on the outside and inside. Since the trees are cut already, he claims there isn't going to be anymore movement and putting piers to lift the house above its natural height will just cause more issues with plumbing etc.

    I'm not sure what the best approach for moving forward is or if anyone has had a similar experience and what did you end up doing? Is there a 3rd approach I'm not seeing? Since it's a flip, I want the most cost effective and quick solution that will pass any inspections at selling time from potential buyers. Any input is greatly appreciated.

    submitted by /u/theTexans
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    Private Beneficiary Payoff

    Posted: 06 Sep 2018 05:33 PM PDT

    Does a private beneficiary payoff demand have to match the original note?

    submitted by /u/Tumadreee
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    Fair Market Value for Property Tax

    Posted: 06 Sep 2018 05:32 PM PDT

    I just received my property tax bill for the year and saw that my house is valued at $50K less than what I got appraised and bought it for back in February of this month. Does this mean I have to send an appeal of assessment and get the property value corrected? Am I just shooting myself in the foot by increasing the amount of taxes I have to pay?

    ​

    Location: Georgia, USA

    submitted by /u/goingrogueatwork
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    What would be the home value depreciation of converting a formal dining room to a 4th bedroom?

    Posted: 06 Sep 2018 05:19 PM PDT

    We currently have a 3/2, 2000 sq ft single family home that was built in 2010. We have a formal dining, great room, study-type space, and a breakfast nook, which is very small.

    We really need a 4th bedroom and our dining room is a perfect spot to convert to make into the extra room due to its proximity to the existing bedrooms.

    What would it do to our home value to convert the formal dining room into a 4th bedroom?

    Eta: we are in north central Florida, USA

    submitted by /u/bionicmichster
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    Hi everyone. Newly licensed real estate agent here. Could someone recommend a local Association of Realtors to join?

    Posted: 06 Sep 2018 05:13 PM PDT

    I've heard joining the Phoenix Association was the cheapest and that they offer free CE classes. Any suggestions? Thank you!

    submitted by /u/Golddustwomanstusk
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    (WY) Parents offering to buy house while I wait for the ability to get mortgage

    Posted: 06 Sep 2018 04:17 PM PDT

    I am waiting for my name to be removed from my mortgage with my ex. This can take a few months, from what I understand.

    In the meantime, I am moving to a small town with almost no rental opportunities. I'd like to buy and found a great house. My parents have offered to buy the house with a mortgage, while I would supply the down payment and all subsequent monthly payments to them to cover the mortgage. As soon as I can get a mortgage on my own, I will do so and buy the house from them for the remainder of what we owe. I would cover all realtor fees, inspection, and all costs associated, parents would only have the actual mortgage on the property until I can get one.

    How does this work exactly? How do I start this process? Is this a bad idea?

    submitted by /u/llaollaobruja
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    Inspection issues

    Posted: 06 Sep 2018 04:13 PM PDT

    So as I continue with buying a house in southern Delaware, inspection was done today, and it Ned's a new roof, updated electric, and other things that would generally amount to a 20 - 25k in repairs. I haven't talked to my realtor yet because want advice first on how to proceed. I wanted a turn key house. This isn't it.

    submitted by /u/Patticakepop66
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    Foreclosure - no inspection

    Posted: 06 Sep 2018 03:41 PM PDT

    I am under contract on a foreclosure for $140k. My contract has 5 days for inspection. I am having trouble getting the power turned on for an inspection and I am considering waiving the inspection and buying it as is. The house is 10 years old so I assume there are not major electrical problem. My concern is mainly not being able to turn on the AC and the pool equipment to verify it's conditions. I am hoping to sell the house for $195K. The work it needs is mainly cosmetic and will cost me around $20k. I am looking for advice since this is my first flip. I am located in Louisiana.

    submitted by /u/walerlarry
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    High end 4 plex for sale

    Posted: 06 Sep 2018 03:36 PM PDT

    I am considering purchasing a class a quad plex and living in one of them. The list price is 2,090,000. Monthly gross is 13000 for the 4 units. Cap rate is listed at 4.54 and NOI is 96,000. Is this a deal worth considering? What price range would make it worthwhile? How would guy guys finance it?

    submitted by /u/chi_gan
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