Does it make financial sense for me to own and rent out these homes of mine?

Question

I bought a house for 1.1 mil.

Monthly payments including property tax, mortgages, insurance etc. come to about 8,000/month.

I rent it out for 5,000/month.

I'm hoping in a few years time with inflation I could rent it out for more to at least come close to breaking even.

I have 2 other properties that I am out about 1,400/month on each of them, with the same idea that in time I will break even and hopefully as I get older will start making income and have a nest egg should I sell the properties. In the meantime I feel like I am out a lot each month and don't know if I am doing the right thing to be out now to invest in the future. Any thoughts?? Pleae help!!! Thanks.

Answer 1

Boy, it sounds like these three properties are making you hemorrage money.  I would talk to a mortgage broker and see if there is any way you can refinance so you can reduce your mortgage payments.  

I'd also see if you can raise the rent or find a way to make more money from these properties - subdivide them so that you get two rents rather than one, etc.

If you're maxed out on rent and you can't refinance, I'd think about putting them on the market.  You're losing almost $6,000 a month and that's a lot of money to lose while hoping the economy improves.

Good luck - Julie

Answer 2

I am glad you explained the 20 year mortgage, I was wondering why the payments were so high.   They are high because you are paying down the principle.

With that in mind, that you are literally buying the property you are going to be OK long term.    20 years from now you will be laughing all the way to the bank if you sell them.  I strongly, very very strongly advise you to live in them for 2 years before you sell them.   Otherwise capital gains will be killer.   Of course in 20 years the tax situation may be very different.

Answer 3

No. It makes no sense whatsoever.

You've got a horrendous negative cash flow. Sure, some will be offset by tax deductions. But $3,000 (actually more, once you calculate vacancies, repairs, maintenance, etc.) on one property and $2,800 on the other two. That's well over $6,000 a month negative. That's $72,000 a year. You have to earn over $100,000 a year just to cover your losses.

Look at it another way. The house you're renting out for $5,000: Home prices (based on the ratios you've described, and those across the country generally) would have to nearly double for the rent to come close to breaking even. It's difficult to predict the future, but in that price range I'd guess it'll take 7-8 years, at least, for prices to rise to the point where you'll be breaking even on the cash flow. And that's just breaking even. At that point, best case scenario, you'll have about $800,000 in equity. And in 8 years you'll be getting 0% return on equity...and 0% return on investment. That's after 8 years of severe negative cash flow.

And, fine, in 8 years you decide to sell. Transaction costs on a $1.9 million property will be about $200,000. That means you might have $600,000 in equity. Now, subtract from that your years of negative cash flow--at least $500,000. So, if you're lucky, at the end of 8 years, you might show a profit of $100,000 on the property. Now subtract capital gains and you're at $70,000. If you're lucky.

Those are dogs. Get rid of them. There are plenty of good investment opportunities out there. These aren't them.