Let’s take that a step further. What do you think that ratio is? I have never been a landlord, but I have contemplated the idea of buying a multi-unit building ( 4 or 6 units) as an investment and I was kinda caught up on the idea that the rent that I could charge was 1/130 times the unit price that I paid. That seems to be an implied ratio in my area.
I have always tried to figure out if investing in a rental property could provide cash flow, or is return more or less only tied up in the (deferred) capital appreciation. Then I get caught up in the inexact science of trying to estimate the long term costs of maintenance, which I really have no clue about.
I own a rental unit. it’s an older 2bd, 2ba condo. The rent I charge is less than 1/130 of the value, probably closer to 1/160. It’s a little tough determining an accurate valuation due to the past few years. I might be undercharging, but I like the tenant and I’m happy keeping the rent at a level that keeps a good tenant.
I’ve been a landlord for over 15 years. I’ve had tenants skip out in the middle of the night, I’ve had to evict tenants, I’ve had tenants stay for 12 months, I’ve had tenants stay for 7 years. I like the ones who stay a long while, pay their rent on time and don’t cause problems.
I’ll gladly charge a below market rate to keep one of them.
Agree with this. I charge enough to cover the mortgage and taxes but don’t feel the need to squeeze tenants for extra $. I’ve been pretty lucky I guess. Only 3 tenants in the 10ish years we’ve owned it, and never any major hassles.
We’ll likely inherit 2-3 properties in the next 10-15 years. We’ve contemplated if it’s better to just sell them or rent them out (wife is of the mindset she’d rather just sell and be done with it), and I’ve already done some analysis on it.
Obviously, there are several assumptions involved: first, assume the current rental rates, property value, and mortgage rates are known factors. I assume both rental rates and real estate inflation will climb in tandem at 2.5% (this is clearly not a great assumption, so it might be better to see what happens if they diverge over the next 20-30 years). I assume 7.5% nominal returns on investments outside of real estate.
If putting less than 20% down, I assume 0.5% annual PMI. I assume 1% annual property tax (my area of the country is closer to 1.5%-2%). I assume 1% annual maintenance cost. I assume 0.6% annual home insurance on single family dwellings. I don’t know what a multi unit building would cost.
In general, if investing, I don’t think it makes sense to purchase a property that has negative cash flow (even if equity building/real estate inflation makes it a solid investment). E.g. looking at a $300k property with $1400 monthly rent (at a price to annual rent ratio of ~17.9 (1/214 monthly rent to property value), with my assumptions, you’d spend $1,662 a month (after $60k down) and only get $1400 a month in rent for a negative $262 cash flow. With all of my assumptions, I have the property worth $635k after 30 years. If instead you just invested the down payment and $262 negative cash flow for 30 years, you’d have $648k (at 7.5% return assumption). It’s certainly a net wash, but that’s a negative cash flow for 30 years for a property you’re not using.
You’d need a ratio of under 15 (1/180) to “guarantee” positive cash flow (obviously some years may have maintenance costs that lead to negative cash flow), I think.
Also, from my understanding of ‘professional landlords’, they generally don’t put 20% down, and instead use equity in one property to fund down payments on additional properties. I don’t think I’d ever be able to play that game.
Nationally, it seems the rent to price ratio is about at the breakeven point I solved for with my assumptions, but there are areas of the country where it’s much better to own and areas it’s MUCH better to rent.
I’m confused. If you’re inheriting the properties - why are you doing calculations with 20% down? Are you planning on becoming a full-time landlord and picking up additional properties? Aren’t you just going to be collecting some sweet, sweet cashflow off these inherited properties?
In my experience, the biggest and best way to reduce maintenance costs is become handy with plumbing issues (clogged sinks, replacing leaky toilet valves). These are the most frequent issues. If you can do it yourself rather than calling a plumber for $75 service fee and then an hour or two of time, you’ll come out ahead. If it sounds like something you don’t want to touch, you either need a real high rent/price ratio or just sell the places.
I generalized the analysis for looking at buying additional properties. There are still tradeoffs (investing the value of the properties (after closing costs) vs. rent minus expenses minus property management company cut (if we went that route) that will drive any future decisions).
I’m not handy, at all. Likely never will be. Definitely willing to pay professionals.
If you’re inheriting properties, then just about everything is gravy. I wouldn’t worry about fixing a leaky toilet. call a plumber. Plumbers need income too.
Is that enough? 1% might be enough for the ordinary annual maintenance needs for small stuff like fixing the toilet, lawncare & exterior maintenance, paint, an occasional appliance replacement, etc. But I don’t think that is enough to also fund the infrequent but eventual big ticket costs like roof replacement, kitchen remodel, and bath remodel. If we are talking about long term real estate investment, we have to accrue for these eventual certainties.
Also, do you build in anything into your revenue estimates for periods of vacancies between renters, the cost of finding renters, or the potential that renters do not live up to the payments stipulated in their leases?
Ok median annual rent vs median house price is two different things, isn’t it? Most renters aren’t renting something whose cost is the same as the median house, are they?
My 1% assumption is an expected average over 30 years. Some big ticket items (roof replacement, foundation repair, new water heater, etc.) but some years with nothing big. If I were a landlord, I’d absolutely be socking money away from the monthly rent check to pre-fund some of the big ticket items.
I’ve lived in my condo for 15 years and there’s no way my landlord (cough, my father in law) has spent 15% of the condo value on repairs.
But maybe 15 years is still “short term”. I mean, if you move out would your landlord reasonably need to do a 60,000 reno for new bathrooms, new kitchen, and new carpeting. If so, and your condo is resellable for 300,000, then that is a 20% long term cost over 15 years on top of whatever you figured he has spent over the prior years. (I am just making up numbers here, of course, and I am trying to learn what reasonable costs are)
Maybe I am being overly conservative, but I think a 1% maintenance assumption is inadequate, mostly because of the need to accrue for the big ticket, once in a generation renovations.
Just looked Zillow and based on the estimated value it looks like I’m at 1/250. Not sure I trust their # tho. Realistically probably more like 1/225, which is about in line with their suggested rent #
I’m in a very high COL area so maybe those ratios vary depending on where you live.
I could certainly get more but not worth the hassle imo since my current tenants are great.
We have neighbors in an identical condo in another building, and in the time we’ve lived here, there have been 4 owners, who have each redone the interior each time it’s changed hands. No way that was $60k per refresh.
This varies by region, right? Take a house in Kansas that’s worth $200k, that same house in California could be $1M. But roofing, or a kitchen remodel, or whatever, won’t cost 5x as much in CA. Labor costs are higher but not 5x, materials costs are reasonably close in price.
So 1%/year may not be adequate in low-COL areas, and more than adequate in high-COL areas. I think.
