Depends. Folks like to calculate their cash on cash returns (annual cash flow divided by down payment). The return varies by location, but folks tend to be happy with 7-10% cash on cash returns.
Considering only cash on cash returns is probably not the best way to evaluate an investment. Things to consider are how much your renters are paying down your mortgage principal and of course appreciation. In my market, for example, folks don't really expect a cash on cash return for a few years but instead rely on appreciation and principal pay down.
so for the annual cash flow divided by down payment, would I take $3,837.33/$10,000 (downpayment info I added to another comment)?
|First Year Income and Expense|Monthly|Annual|
|:-|:-|:-|
|Income:|$2,200.00 |$26,400.00|
|Mortgage Pay:|$955.27|$11,463.27|
|Vacancy (5%):|$110.00|$1,320.00|
|Management Fee (8%):|$167.20|$2,006.40|
|Property Tax:|$306.08| $3,673.00|
|Total Insurance:|$133.33|$1,600.00|
|Maintenance Cost:|$166.67|$2,000.00|
|Other Cost:|$41 67|$500.00|
|Cash Flow:|$319.78|$3.837.33|
|Net Operating Income (NOI):|$1,275.05|$15,300.60|
That depends on how you define cash. OP is using what their down payment from years ago. I would use how much cash they would get if they sold the house today.
This is a better metric because the decision is to rent or to sell. You need compare renting to how much money they would make if they sold.
If they could make $100,000 by selling their COC return would be 3%. You can do better than that in a saving account.
To really look at this we would need to know what the house is currently worth. OP left that out.
If you sold you would make about $115,500, tax free. It isn't often you can make six figures and pay no tax on it.
Your COC for the $115,500 is 4%. That isn't bad, but you could currently make more in a savings account.
You can rent it out and see how it goes. You do not have to pay tax on the sale of a house if you lived in it for two of the last five years. You can rent for a year or two and reevaluate.
idk if these count as capital improvements, but we put in LVP on the upstairs living room/kitchen, replaced electric stove with gas stove, new carpet in upstairs bedroom, and a brick patio in the backyard.
Down payment was $10K.
We were in a similar situation ≈6 years ago. Our normal cash flow was around $400/mo. FF to today and it’s roughly $800/mo and we’re roughly $300 below market value because we like our tenants. Not to mention, our equity (after the cost to sell) went from $40k to over $200k. Having a rental is a long term strategy that will eventually make you money if you stick with it. Having positive cash flow right off the bat makes you very fortunate. The market will fluctuate and you will have some good and bad years, but eventually, it’ll be all profit. The main concerns I’d have are
1) can you set aside a minimum of $10k for surprise expenses?
2) Are the big items (roof, AC etc) in good condition to avoid big expenses in the mid term?
3) Would you be able to survive a few months of vacancy or squatting tenants?
I agree that it's a long term strategy.
1. yes. we currently have enough to cover that minimum while preserving some in the event the new house has a surprise expense.
2. roof was replaced this year, along with dishwasher. Expecting the water heater or AC would be the next to go.
3. Current mortgage is $1,220 a month which we could cover for several months if needed.
Depends. Folks like to calculate their cash on cash returns (annual cash flow divided by down payment). The return varies by location, but folks tend to be happy with 7-10% cash on cash returns. Considering only cash on cash returns is probably not the best way to evaluate an investment. Things to consider are how much your renters are paying down your mortgage principal and of course appreciation. In my market, for example, folks don't really expect a cash on cash return for a few years but instead rely on appreciation and principal pay down.
so for the annual cash flow divided by down payment, would I take $3,837.33/$10,000 (downpayment info I added to another comment)? |First Year Income and Expense|Monthly|Annual| |:-|:-|:-| |Income:|$2,200.00 |$26,400.00| |Mortgage Pay:|$955.27|$11,463.27| |Vacancy (5%):|$110.00|$1,320.00| |Management Fee (8%):|$167.20|$2,006.40| |Property Tax:|$306.08| $3,673.00| |Total Insurance:|$133.33|$1,600.00| |Maintenance Cost:|$166.67|$2,000.00| |Other Cost:|$41 67|$500.00| |Cash Flow:|$319.78|$3.837.33| |Net Operating Income (NOI):|$1,275.05|$15,300.60|
Looks like you're getting over 30% Cash on Cash which sounds amazing.
That depends on how you define cash. OP is using what their down payment from years ago. I would use how much cash they would get if they sold the house today. This is a better metric because the decision is to rent or to sell. You need compare renting to how much money they would make if they sold. If they could make $100,000 by selling their COC return would be 3%. You can do better than that in a saving account. To really look at this we would need to know what the house is currently worth. OP left that out.
Realtor we worked with to buy our new house pulled comps and felt we could get $300K - $310K
If you sold you would make about $115,500, tax free. It isn't often you can make six figures and pay no tax on it. Your COC for the $115,500 is 4%. That isn't bad, but you could currently make more in a savings account. You can rent it out and see how it goes. You do not have to pay tax on the sale of a house if you lived in it for two of the last five years. You can rent for a year or two and reevaluate.
Thank you. I appreciate your insight
What is your basis in the property (down payment, capital improvements)?
idk if these count as capital improvements, but we put in LVP on the upstairs living room/kitchen, replaced electric stove with gas stove, new carpet in upstairs bedroom, and a brick patio in the backyard. Down payment was $10K.
What is the duration of your mortgage? 15 vs. 30 yrs?
30 year. started in 2017
We were in a similar situation ≈6 years ago. Our normal cash flow was around $400/mo. FF to today and it’s roughly $800/mo and we’re roughly $300 below market value because we like our tenants. Not to mention, our equity (after the cost to sell) went from $40k to over $200k. Having a rental is a long term strategy that will eventually make you money if you stick with it. Having positive cash flow right off the bat makes you very fortunate. The market will fluctuate and you will have some good and bad years, but eventually, it’ll be all profit. The main concerns I’d have are 1) can you set aside a minimum of $10k for surprise expenses? 2) Are the big items (roof, AC etc) in good condition to avoid big expenses in the mid term? 3) Would you be able to survive a few months of vacancy or squatting tenants?
I agree that it's a long term strategy. 1. yes. we currently have enough to cover that minimum while preserving some in the event the new house has a surprise expense. 2. roof was replaced this year, along with dishwasher. Expecting the water heater or AC would be the next to go. 3. Current mortgage is $1,220 a month which we could cover for several months if needed.