As I’ve mentioned before, we are fixing up the house we inherited in April to rent it out.
We already have renters lined up starting in February. My wife has known the couple for several years, so we’re not worried about strangers wrecking the place. We will be doing a lease, because skipping that is dumb, even if you know the tenants. They will be paying $1200 per month, plus electric, water, and garbage. We’ll be covering gas and–of course–property taxes. We’re paying the gas bill because we’re going to have most of the appliances on the repair plan through the gas company so we won’t have to worry about appliances breaking.
Those expenses will run about $325 per month, leaving $875 as profit. We’ll probably save another $200 of that to cover future vacancies and for property issues that I’m not foreseeing, leaving $675 to save and invest.
Over the summer, we have spent quite a bit of money fixing the place up.
- Dumpsters x3, $1200. Did I mention my mother-in-law was a hoarder?
- New boiler, $4500.
- Electrical repair, including running power to the garage, $1400.
- Plumbing & gas repair, $900.
- New stove & refrigerator, $1000.
- Landscaping, $2500.
- Other repairs, $8000.
So far, we have spent about $19,500 fixing this place up. There is still a bit of work left to do.
Are we done?
Crap, no.
- We have two rooms of stuff that we need to research and price individually before we sell. This includes some old cameras, typewriters, and collectibles.
- We need to buff and polish the hardwood floors that are in surprisingly good shape.
- We have to scrub the entire house. Cobwebs and mouse crap show up in interesting places when 90% of your house is buried for most of 30 years.
- We have to clean the last of the debris out of the basement. This, and some other stuff, will mean yet another dumpster.
- We have to paint walls and ceilings all over the house and the basement floor.
The to-do list will come with a price tag somewhere between $1000 and $1500.
That comes out to about $21,000 spent to make $675 per month. In just 3 years, the property will be turning a profit, then it becomes an actual profit center for us, hopefully forever. The expenses are all tax deductible, but only as depreciation, which means the cost has to get deducted a bit at a time over the course of the next 5 to 30 years.
On the other hand, we could probably sell the place for $200,000. It’s going to take 25 years of renting to make up that difference.
Considering the large amount of money you could make selling the place, do you ever consider that option? That would make a great chunk to invest. Just curious.
You also have to look at the appreciation that you’ll likely get as the property increases in value. If the property goes up 5% per year that could rival or beat investing elsewhere. So, saying that it will take 25 years of rent to make up that potential income is a bit misleading, because after 25 years you will certainly be able to sell it for a lot more than $200,000.
You’d also have to take inflation into account here. There is always something else to account for 🙂
If it would take 25 years to get in rent what you could get in a sale right now, SELL IT! 🙂 Even our current house, which is only worth $110,000-$120,000 will get $1200 a month in rent. If you can’t receive something significant that will take 10 years or less to cover the price of the house, I think your best bet really is to sell and invest the proceeds. Way less work too. It’s a win-win. Or invest the proceeds in a rental property that will bring in more regularly…then you can be a landlord and hopefully it makes more sense…
I’m curious about the thought process…25 years of landlord headaches for a future income stream versus a lump sum now that could later produce a similar income stream minus the headaches?
The math looks off, but the house is in a relatively weak housing market, but a strong rental market.
Average rents for a 2 bdr in this city are from 1000-1500.
And, we always have to option of selling later.
You have certainly put in a lot of work. Congrats on getting down to the final pieces, judging on your past posts that must have been quite a feat. Oh yeah and it may take you 25 years to make up 200k but dont forget, if you sold it at that time for 200k(with a unlikely assumption that the price would not go up) you will have then doubled your profit potential.
You can write off a lot of expenses tied to rental properties so definitely keep that in mind when completing your taxes. If you aren’t aware of the laws hire someone the first year to help you file them.
As for renting the place it depends on where your heart lies. My husband and I own a rental home in a beach community. It’s a place that we fix up and rent, but it’s also a place where we vacation. It’s a little different from your set up because we get to enjoy the place.
My advice is to try your hand at renting out the place and if you decide it’s not for you then go ahead and sell it. There is nothing wrong with putting your money in the bank and letting it grow there. It’s a hell of a lot easier than trying to make money in the rental market.
Good luck with whichever path you take!
Looking good! Have you considered selling the property and using it towards a more stable (e.g. corporate bonds) type of investment?
Wow, what a project! But totally worth it. Good luck being a landlord — it’ll be great to cash in on the rental income for a while before you sell!
I can’t help but agree with those who would suggest to sell it. And I would question the strength of your rental market. You should be shooting for a cap rate of 8%, but with the numbers you are stating, you are closer to 4%. You might as well get a few dividend stocks for the headaches you will get.