For those moving up and buying bigger - will you rent out your current place?

[panda]

Acf,
What does your numbers look like for your condo?

Rent, mortgage, HOA, taxes, vacancy, repairs, etc ? I can put together a cash flow proforma analysis for you which should clearly show you your opportunity costs when making this big decision.

If you want me to put this together for you, I will also need your purchase price, square footage (I think you already provided that) and down payment information.

 

[Bullsback]

ACF, part of why I have been slower to buy (outside of being picky and not in a rush given current market) is I plan on keeping my current place...3 BR, 3BA with decent size yard and rent it out.  My place should rent for between 2800-3000 (a few in the general neighborhood rent out without any property manager and when tenants switch, they seem to get rented again real quick to young families, plus quite a few seem to stay longer term, which I'd be fine with as a landlord).

Mortgage, taxes, HOA, insurance, etc plus a bit for maintenance is essentially $2600/month and of course does not reflect actual principal reduction that would be covered on the $2600.  I have other investments within the market so I like having the alternative asset class and figure, as another poster mentioned, despite some of the short-term pain, I presume it will long-term be worth it when I have a property that ultimately gets paid off by someone else and generates solid free cash flow. 

My expectation is any future investment properties would probably be out of the area (so I'm not concentrated in a particular geographic region).

 

[Laguna21]

If breaking even, I would rent it out - especially if you're going to hang onto it for awhile, the equity you'll have in that place 10/20 years from now will be incredible. Not to say there are any guarantees at ALL in the real estate market, but things always trend up even with recessions or bubbles.

Also, rentals aren't as daunting as some people make them sound - we have great tenants in two of ours, and even when one  moved out, another tenant had already reserved the place before the first one's scheduled move-out date. We've never had vacancies in both of our rentals as we always had a new tenant before the first one moved out.

I say if the numbers look good, go for it!

Additionally, if you decide that you want to move up or do a 1031 exchange from that property into another rental,  you can also do that to avoid capital gains in the future

 

[Perspective]

If you had the net profit from the prospective sale of this house lying in a savings account, would you use that cash to buy this house as an investment property?

If you had x amount invested in bonds that pays you monthly dividends in the form of increasing your x over time, and it costs you anywhere between 6-12% (based on LTV) to cashout, would you?

I would cash out because I don't buy bonds. Maybe some day...

 

[Bullsback]

If you had the net profit from the prospective sale of this house lying in a savings account, would you use that cash to buy this house as an investment property?

If you had x amount invested in bonds that pays you monthly dividends in the form of increasing your x over time, and it costs you anywhere between 6-12% (based on LTV) to cashout, would you?

I would cash out because I don't buy bonds. Maybe some day...

I'm guessing somewhere in this "bond" point, he was making a point about the transactional costs of exiting the real estate? That said, those transactional costs exist at some point (whether you exit now or 50 years from now). 

 

[Perspective]

I know quite a few people who own investment properties ("rental houses"). Every one of them is over-levered, the majority severely over-leveraged. But hey, there are many worse things you could do with your money.

 

[Bullsback]

I know quite a few people who own investment properties ("rental houses"). Every one of them is over-levered, the majority severely over-leveraged. But hey, there are many worse things you could do with your money.

Did they qualify recently or are they coming from the pre-crash era where you could qualify no problem. You could claim rental income without having property rented, etc. In my case, my rental would have plenty of equity, cash flow, and the new property would be 30% down with me qualifying while carrying both properties (with no rental income). 

That said, part of the benefit of real estate is leverage (including the reduced risk of your equity position if you were to walk away) but I'm damn conservative.  Loan on the rental property is dirt cheap too (3.4% fixed).

I should point out, part of the sacrifice to ensure you aren't overleveraged (keeping a rental) means a combination of waiting a little longer to buy (so you can accumulate more of a down-payment given you aren't leveraging proceeds from your house) and the fact that you also have a bit more uncertainty regarding a second place, which you are responsible for the mortgage, and thus, need to add some additional conservatism into what you ultimately can buy (so you can survive a job loss, downturn in the economy, etc).  My view is that the long-term gain will be beneficial when I have that income producing property, but I can just as well see plenty of reasons on the flip side not to bother with the hassle. 

I also look at my current property as a place I could retire in (if I ever wanted to downsize) or could become my vacation house if I were ever to move out of the area (say my kids get jobs elsewhere 20+ years from now and my wife and I follow them).  Or if the kids stay, it could be a place that after college they could stay in so they could focus money on saving up for a place of there own, etc.  Or it just generates me some stable passive income. 

 

[acf]

Thanks for the good responses all.

There is an exact comp of my place that rents out for $2100 a month. My place is in amazing condition in a very quiet location with much nicer upgrades, shutters and hardwood floors throughout.

My mortgage is $1105, HOA's are $208, Property tax is $618 a month. Home insurance is about $60/month.

As previously stated, it's a 1 bed, 1.5 bath, 2 floor detatched condo with an attached garage in Woodbury.

I heard that a 1 bed 531 sq ft apt in Los Olivos is already $1900.

I may be able to find a potential tenant through my work. Always lots of new hires.

 

[Perspective]

Hardwood? Hmm. Now picture yourself after the first tenant leaves in a year, and there are scratches everywhere, including the smell of cat urine even though your lease prohibits pets. How annoyed will you be?

 

[Cornflakes]

If you had the net profit from the prospective sale of this house lying in a savings account, would you use that cash to buy this house as an investment property?

If you had x amount invested in bonds that pays you monthly dividends in the form of increasing your x over time, and it costs you anywhere between 6-12% (based on LTV) to cashout, would you?

I would cash out because I don't buy bonds. Maybe some day...

I'm guessing somewhere in this "bond" point, he was making a point about the transnational costs of exiting the real estate? That said, those transnational costs exist at some point (whether you exit now or 50 years from now).

Right on. I was pointing to transaction costs.

Money spent selling today is higher % of your equity. Money spent selling in 5 or 10 years would be smaller % of your equity. And, in the process the selling costs you saved today potentially appreciated over that period.

I am eagerly waiting for Uberization of real estate transactions. It does not make any sense to me that it costs so much to sell in this day and age of computerization. We can already see that Redfin is putting downward pressure on selling costs.

 

[cheetos]

What is the demographic of 1 bed renters in the suburbs? As somone under 30 (which I assume is a good representation of people looking for 1bed leases), I'd choose Los Olivos over a condo in Woodbury. Closer to companies/work, freeways, whole foods, Spectrum, I don't have to drag out my own trash bins, less space to furnish, etc.

 

[AW]

Does a 1 bedroom in Los Olivos apt come with a covered garage?
Sometimes that's a deal breaker for renters as well. You know, crazy weather in SoCal makes car ports a pain, ha

 

[acf]

If I do decide to rent my place out, one stipulation will be no pets. The good news is my new place is only 5 minutes away, so I can check on the tenant from time to time.

Hardwood? Hmm. Now picture yourself after the first tenant leaves in a year, and there are scratches everywhere, including the smell of cat urine even though your lease prohibits pets. How annoyed will you be?

 

[acf]

I lived in an apt complex for 5 years before moving to my one bed detached. I can't speak for everyone but living in this one bed detached has been far superior to the apt complex. Not having to carry groceries far, double the space, privacy, etc. There are many positives. Woodbury town center is a 6 minute walk from my place. It takes me 7 minutes to get to work (around the spectrum).

 

[Irvinecommuter]

I lived in an apt complex for 5 years before moving to my one bed detached. I can't speak for everyone but living in this one bed detached has been far superior to the apt complex. Not having to carry groceries far, double the space, privacy, etc. There are many positives. Woodbury town center is a 6 minute walk from my place. It takes me 7 minutes to get to work (around the spectrum).

The big benefit of an apartment is the lack of maintenance.  Convenience does take a hit but it depends.  For example, the apartments at Stonegate are across the street from Woodbury Town Center so you can just walk cross the street to get there.

 

[bones]

1 bed condoss within a community like Woodbury can also attract grandmas and grandpas with kids nearby. You may also get someone who just wants an Irvine address for the schools so there may not be anyone to scratch up your floors daily

 

[acf]

I wouldn't be surprised if 50% of my units are rented out at this point. I know my surrounding neighbors, single adults seem to like renting them as well.

 

[Perspective]

1 bed condoss within a community like Woodbury can also attract grandmas and grandpas with kids nearby. You may also get someone who just wants an Irvine address for the schools so there may not be anyone to scratch up your floors daily

In Irvine, don't all grandparents live with their kids? 

 

[bones]

1 bed condoss within a community like Woodbury can also attract grandmas and grandpas with kids nearby. You may also get someone who just wants an Irvine address for the schools so there may not be anyone to scratch up your floors daily

In Irvine, don't all grandparents live with their kids? 

Well some have cold hearted and cruel kids

 

[acf]

Does anyone have a nice grandma that would like to move in?