Actually my parents are, but here is the scoop: Monthly gross income is $11K 2nd home purchase w/ asking price of $550K Current property is valued around $347K, would rent out to cover a little bit less than mortgage would take out HELOC on current property (“boatload” of equity according to pops) to put down on the 2nd home. Thinking of offering 15% below asking… What are some concerns or other things to consider? Thanks!
1.) Interest rate on 2nd property. If the property isn’t your primary residence, you can’t get 6.1% interest rate (going rate on Wednesday last I looked). You’ll likely have to pay the investment interest rate, which could be well into the 7 or 8% range (maybe even 9% range today). Although I’m sure some lenders can figure out ways to scam the system–you can still get 0% down loans. 2.) HELOC is amortized interest-only (so no principal is paid) and is always adjustable. Interest rate risk. 3.) 15% below asking? Depends how long the place has been on the market and how desperate the seller is–I’d recommend attempting to find out what the seller owes on the property (a good mortgage banker should have the tools to find this out–if you don’t have a good broker or banker, I can hook you up with one of the best in America–vt2007@hotmail.com–a well capitalized correspondent and direct lender with 65 loan officers and the best pricing in America. It’s not me, btw–I work at a GSE). If the seller owes $575,000 on his mortgage, he simply won’t take an offer of $467,000. Many Realtors and sellers won’t consider offers in bad faith. Unless the place is drastically mis-priced (and it could very well be), coming in at $83,000 under the asking price is pretty audacious.
What KKent said, plus good luck trying to take out a HELOC as lending has tigtened. If I were your parents if they are looking at this for an “investment” then I would sit on the sideliens for now…
Your parents think this is 2003 or something?
> would rent out to cover a little bit less than mortgage that’s *insane*. Rent always has to be more than mortgage simply to cover additional expenses incurred by the property owner. On another thread yesterday someone posted a link to some charts plotting historical house-price / rents – typically 8-10x, in some markets they have been pushing 30x recently. That kind of misalignment has to correct itself over time – if renting is that much cheaper than owning then no one will buy any more. Look up those charts and have a very clear-eyed discussion with your folks – they’re trying to do this at exactly the wrong time. (The appropriate trade today is sell & lease-back their current house.)
DarienHacker Wrote: ------------------------------------------------------- > > (The appropriate trade today is sell & lease-back > their current house.) Not without talking to someone about their circumstances (so don’t go recommending this). There is lots of legal and tax risk in a trade like this (not to mention eviction risk from their own house). There are plenty of reasons in the world for having illiquid capital instead of liquid capital.
DarienHacker Wrote: ------------------------------------------------------- > > would rent out to cover a little bit less than > mortgage > > that’s *insane*. Rent always has to be more than > mortgage simply to cover additional expenses > incurred by the property owner. > Not necessarily true. Rent is whatever you can get for it. You will be competing with other landlords who purchased their rental properties at different costs and may have lower mortgage rates. Your mortgage payment is basically an ongoing sunk cost unless you plan on selling.
juventurd Wrote: > Not necessarily true. Rent is whatever you can > get for it. You will be competing with other > landlords who purchased their rental properties at > different costs and may have lower mortgage rates. > Your mortgage payment is basically an ongoing > sunk cost unless you plan on selling. Not sure what you’re recommending here – that fxguy’s folks undertake a -ve NPV project? Or that they move out of their current house and rent it? > Not without talking to someone about their circumstances Virtually all threads on AF are predicated on this? Is anyone here acting as a fiduciary for the OP? If so – I retract all my posts! My point wasn’t to be taken too literally btw – simply to point out that buying a house to rent it is exactly the wrong move in the current market (if you believe the price/rent ratio is unsustainably high). I think the spirit is akin to your ‘2003’ remark, but I’d place it more like mid-1990s.
DarienHacker Wrote: ------------------------------------------------------- > juventurd Wrote: > > Not necessarily true. Rent is whatever you can > > get for it. You will be competing with other > > landlords who purchased their rental properties > at > > different costs and may have lower mortgage > rates. > > Your mortgage payment is basically an ongoing > > sunk cost unless you plan on selling. > > Not sure what you’re recommending here – that > fxguy’s folks undertake a -ve NPV project? Or > that they move out of their current house and rent > it? > Rent collection being lower than mortgage payment doesnt necessarily mean neg. NPV if there is expected appreciation on the house. But whether that is a good idea is arguable.
DarienHacker Wrote: ------------------------------------------------------- > juventurd Wrote: > > Not necessarily true. Rent is whatever you can > > get for it. You will be competing with other > > landlords who purchased their rental properties > at > > different costs and may have lower mortgage > rates. > > Your mortgage payment is basically an ongoing > > sunk cost unless you plan on selling. > > Not sure what you’re recommending here – that > fxguy’s folks undertake a -ve NPV project? Or > that they move out of their current house and rent > it? > > > Not without talking to someone about their > circumstances > > Virtually all threads on AF are predicated on > this? Of course not. Most threads on AF have nothing to do with recommending trades or any financial action. In this case, the OP is asking for advice and the sale/lease-back on a house is a radicaal thing to do that only a few people should contemplate. > Is anyone here acting as a fiduciary for > the OP? If so – I retract all my posts! > There’s giving advice and then there’s acting as a fiduciary and there is a monster gulf between them. > My point wasn’t to be taken too literally btw – > simply to point out that buying a house to rent it > is exactly the wrong move in the current market > (if you believe the price/rent ratio is > unsustainably high). I think the spirit is akin > to your ‘2003’ remark, but I’d place it more like > mid-1990s. I know that, but I’m not sure everyone knows that.
I’m starting to get a little speculative here, but I think rents typically need to be perhaps 25% greater than mrtg payment (assuming this includes RE tax & insurance) just to cover expenses – and then you’d need to add profit margin on top of this. My gut feeling is that unless you assume some pretty optimistic house price value increases over the next few years, the project will be a money loser. Certainly the expected case and downside cases will show a loss. But fxguy gets to sweat these details…
Sorry, one more point – I think I misread the original post. Your parents want to rent their current house? As kkent points out – they are probably obligated to notify their lender that they are moving out, and their mortage rate on the current ppty will rise a few hundred bps. (And I’m not sure if you can take a heloc on an investment property – but under the forced refinance they could pull out up to the maximum LTV for the first lien anyway. But note that LTV limits are lower for investment ppty loans in addition to costing more.) (The new purchase would qualify for primary residence rates.) But to repeat the fundamental economic point here – if price & rental rates in their area are as you describe, why don’t they sell the current house and rent the new (bigger) one?
I think the reason for renting the house is that it’s tough to sell a home now. Seems like every other house in Darien is for sale.
DarienHacker Wrote: ------------------------------------------------------- > I’m starting to get a little speculative here, but > I think rents typically need to be perhaps 25% > greater than mrtg payment I believe that’s an extremely unlikely scenario (at least in Boston where I live) and people in real estate regularly make money with a much lower (or negative) spread.
Hey guys thanks for all the input… I dont know too much about real estate and everybody’s comments are a HUGE help The region is northern California just fyi… Darien - Yes parents would be renting out the current property and moving into this new place just to clarify. What is LTV? Also dont think it is possible to rent the new house as it is for sale. JDV yes my dad has always thought of home as an “investment” while I tend to disagree he seems pretty serious about this. I basically want to be able to tell them the pros and cons in a simplistic manner of doing this in this “non 2003” environment. Thanks again everyone
Darien - How could I show my pops the “expected case” and the “downside case” as you have mentioned? Thanx
From what I know in the US you can move out and maintain the current mortgage while renting it out- you can also purchase a new home as primary residence. Also, if you lived in the home for (I think) 2 years, you can rent it out for the next (I think) 2 years and still claim the 200k exemption on capital gains tax. I have been looking at investment income properties and have yet to see one in Texas or Cali where rent is > than P&I+tax+ins. ITs possible here in Dallas but only in marginal neighborhoods. I think the reason is the capital appreciation possibilities, tax advantages, and cheap leverage involved in these sorts of transaction. You need to do a lot more research cb there are a ton of details that effect the profitability. All in all, I think if you can come close to break even you might make more in 2 years when you sell than you loose for the next XX months covering the mortgage. Its a big risk though- bottom line… want to be a landlord?.. in california?? I wouldn’t do it unless you can cover a 100% just in case you end up in a worst case scenario.
capital gains? I am misunderstanding? They aren’t going to be selling the house, just renting it out. What is P&I+tax+ins?
At this point I’d say you should pick up a couple of how-to-be-a-landlord-for-dummies books – particularly if your parents know less about this than you. We can’t begin to do this topic justice with this medium.
fxguy1234 Wrote: ------------------------------------------------------- > capital gains? I am misunderstanding? They aren’t > going to be selling the house, just renting it > out. What is P&I+tax+ins? They just want to rent it perpetually? That makes no sense if they cannot turn a profit- I don’t understand why they would do that unless they expect to be able to raise rents at a rate where they will be making decent soon. I assumed they want to make and considering the housing px’s are depressed now would like someone to help pay the expenses so they can wait X years and sell it for X more then than they could now. The reason it might make sense is… say the home is worth 100k and the monthly P&I+tax+ins (Principal/Interest/RE Tax/ Insurance) is 600 bucks but you can only rent for 550 so you’re loosing 50 per month. Add another 50 for unforeseen expenses and your 100 under the water every month… or 1200 per year. Now if you sit on the house for 3 years, you will have lost 3600, but the home may have appreciated @ 2.5% per year for 5 years- so ~7500. You’re ahead. Obviously I’ve really simplified here, you have to consider opportunity cost, how much capital you already have tied into the home, tax benefits, and very importantly the fact that you will be a landlord.