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This is something that I've been wondering for a while, and might be coming up in the next few years. I own an apartment worth roughly $500k. The current mortgage payments are $2k/month. By the time this situation crops up, I will have about $200k left to pay off, so I will have $300k in equity (with about $100k in "retirement savings" - I use this term loosely as I have both a government and work pension as well as my "retirement savings"). At this point in time, if I wanted to buy an apartment worth $900k, I have a few options: 1) Sell apartment, I now need to take out a loan for $600k: this is roughly $3k/month mortgage. 2) Keep apartment (and rent it out, rent of $2k/month roughly covering mortgage), I now need to take out a loan for $900k: this is roughly $4.5k/month mortgage. 3) Keep apartment (rent it out for $2k/month), transfer equity to new apartment (via taking out a second mortgage on the first apartment). I now need to take out a loan for $600k: this is roughly $3k/month mortgage. As far as I can see it, the following money flows will happen: 1) I pay $3k/month 2) I pay $4.5k/month, but I "earn" $1k/month in equity in my first apartment, plus it gains $1k/month in value (if it increases by 2.5%/year) 3) I pay $3k/month, and I "earn" $1k/month in equity in my first apartment, plus it gains $1k/month in value (if it increases by 2.5%/year) Net cash flow: 1) -$3k/month 2) -$2.5k/month 3) -$1k/month Now I understand that scenarios 2 and 3 don't account for the inherent risks and costs of renting out, but I can't see those costs being more than $1k/month, so lets say that adjusted for costs and risks: Net cash flow adjusted for costs and risks: 1) - $3k/month 2) -$3.5k/month 3) -$2k/month It seems to me that option 3 is the best of the lot. The inherent downfall to option 3 is that I wouldn't see any profits until the mortgage is paid off, so all of the profits would go entirely into equity instead of receiving cash. But I get the feeling as though I'm missing something. If this is such a "great idea" then why isn't everyone doing it?
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Apr 2, 2015 11:01
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| # ? May 5, 2024 18:01 |
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Shouldn't a $500k apartment rent for more than $2,000 a month? Also are you calculating the payment on the equity loan for option 3? Obviously the big question is the risk of either forgoing the 2.5% appreciation and the risk that that estimate is subject to change. You also run the risk of not getting the tax free capital gains by waiting to sell your current apartment without the required occupancy time, assuming you are under the thumb of the US tax code and you expect a gain.
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Apr 2, 2015 16:28
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Your math is wrong on #3, because you forget the cost of your new mortgage on your old apartment. You need a loan for 600k + a loan for 300k in that situation, not a single 600k loan.
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Apr 2, 2015 16:32
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Yeah, $2000 a month is nowhere near the amount of rent you would need on a property you could sell for $500,000. You would need like $5,000 per month or more to make it worth it. And as someone else said, you would (I think) lose your ability to exclude capital gains taxes on the appreciated value of the home, which could put you tens of thousands of dollars behind in eventual tax you will have to pay.
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Apr 2, 2015 17:42
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Droo posted:Yeah, $2000 a month is nowhere near the amount of rent you would need on a property you could sell for $500,000. You would need like $5,000 per month or more to make it worth it. Yeah OP you are radically underestimating the long term costs involved in having property. The ongoing maintenance affects the second and third options, and as noted the third option involves three separate payments. Rent covers first, and you have the other two. A lot of people do actually do this, and generally it's probably not great in terms of investment, at least in the short to medium term. In the long term it's maybe Ok from the perspective of rents continuing to rise over time while your mortgage payment may stay fixed. A huge factor here would be your income and overall financial situation. If you go 3 months without renters is that going to wreck your poo poo, if you have to pay 10k for something are you hosed? If you can comfortably make the payments, and you can have reserves available to cover the surprises then it may be something that could work out.
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Apr 2, 2015 18:04
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I asked this about my house and the overwhelming consensus was to sell. Very similar number to yours - $500k house, $300k in equity, but having that money tied up in a house isn't the best way to go. If you rent it for $24k/year, that's essentially the same return as investing $300k in the stock market and getting a 8% return. Except... - you have to pay for everything that breaks in a house - if you can't find a renter, there go your returns - if your renter fucks up your poo poo, there go your returns - if you need the money, you can't get to it easily at all. Like Dazzle said, it will get better as rents rise, but if you're considering starting out with such a low ROI, I don't think it's worth it. For reference, I was going to rent my house out for $2500/month and decided it wasn't worth it. Just not a big enough buffer. I decided that if I wanted to buy a rental property, I need to go in with the mindset of it being a rental from the beginning. A $500k apartment that rents for $2000/month is just a nightmare waiting to happen.
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Apr 2, 2015 20:17
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Thanks for the input! Let me clarify a few things: On #3, I think my maths is correct. I would have a ~400k loan on apartment #1 ($2k/month mortgage repayments, which are covered by the renters, of which 1k goes to equity and 1k goes to interest repayments, so I would earn $1k/month here directly via equity and $1k/month indirectly via prices rising), I would also have a 600k loan on apartment #2 (3.5k/month mortgage repayment). Moana: I think you are talking about my scenario #2. In that scenario, I have 300k locked up in apartment 1, which I agree is not an optimal use of money. In scenario #3, I am transferring the equity to apartment #2 and essentially being extremely highly leveraged in apartment #1 (as I now have pretty much $0 in equity in apartment #1). To me, this is why it is a reasonably attractive proposition. If I keep (say) 100k equity in apartment 1, and take in 2k/month rent (1k goes to interest payments), then I'm taking in 12% a year plus whatever increases happen to the housing prices. So to summarise the thread: quote:It *might* be worth it, if (and only if) I can drain the majority my equity from apartment #1, as then I will be making a much higher ROI on my equity, but it is very much putting all of my eggs in one basket and quite high risk. And I need to make sure that apartment 1 can pay for itself. Would people say that's a reasonable assessment of the situation? And yes, it is a little unfortunate that a 500k apartment rents for $2k/month. I just checked the rentals in my area, and all the apartments around the size of mine are going for $2k/month, so it seems like a fairly reasonable estimation. Although seeing as though I'm in Norway and the petrokroner has sunk like a stone, it's currently a $310k apartment renting for $1200/month, but I'm just using a 5:1 exchange rate for simplicity's sake.
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Apr 2, 2015 23:06
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Yeah, except your second mortgage will likely have a higher interest rate due to it being a rental property. Have you looked into what you'll actually be able to get as a home equity loan on a rental? Also, 12% return on property isn't great. Most landlords shoot for 30% or higher, from everything I've read about, since there's just so much risk involved in other ways.
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Apr 2, 2015 23:13
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| # ? May 5, 2024 18:01 |
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I would look at it like this, If you had $300K sitting in your bank account right now would you: 1) Buy a $500K condo with a $500K mortgage and buy a $900K house and put $300K down and get a $600K mortgage? 2) Buy a $900K house and put $300K down? I would go with option #2 every time. Renting a house can be a pain in the rear end and very costly, especially when you start losing a ton of money due to repairs and vacancy. I would suggest saving yourself the time and hassle and just sell it and buy the new home. If you really want to become a landlord I'd wait until you can pay for it cash or afford to cash-flow two mortgage payments for months without issue.
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Apr 5, 2015 00:13
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