or get off the pot
Posted on December 12, 2006 - Filed Under Housing |
Remember this?
Ask and ye shall receive.
I got a hit from my ad on craigslist. A couple is moving into town and they want to rent the front house. Their time table is tight. They need to move in on the 22nd.
We negotiated a price on the rent; providing a year lease was signed. They actually want to go 18 months but I insisted a year lease would be plenty. We can always renew after.
We went through the dance: credit history, rental application, references. Everything looked good.
As I sat down to start going over the numbers, I realized this situation may not work out.
Let me explain.
With both houses rented out, I’ll be in a negative cashflow position. It’s a few hundred dollars, no big deal. But now I’ve incurred another expense: Where am I going to live?
Since both houses are being rented out, I’ll be homeless. A bum. SDF. An one bedroom apartment costs too much for me to rent. "Rooms for Rent" average about $500 per month.
If the "room for rent" figure plus the negative cashflow come into account, it’s a good size number. If I rent both houses out, I’ll come out ahead $150 per month versus if I live in the back unit.
But there’s another consideration to be made.
When the refi goes through again, they will look at income versus debt. If I am renting a room, they don’t figure that into the new loan. So on paper, it will look like I have increased my income by 32%. That’s a lot of leverage for a new loan.
So this is where the decision has to be made.
- I rent both houses out and pay the negative cashflow. The refi goes through and the amount of money I can borrow will increase. I can move onto my next project(s).
- I sit tight, let the refi go through now then see what everything looks like next January. I can always increase my HELOC later on if the numbers make sense. But this will only work if I can find a tenant at that time.
Question questions questions . . .
Anyone want to give their two cents?
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**NOTE** I'll be taking a hiatus Monday and Tuesday.
Comments
5 Responses to “or get off the pot”
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You always provide just enough information to keep us guessing. Am I to understand that you’ve already agreed to rent out the front house? That’s what it sounds like. If so, then the decision is made and you’d better find one of them $500 rooms. If not, then I think you ought to sit tight for a while before biting off another project.
There are some cheap places to live in LA…. but may need more of a commute…. As I doubt there is going to be any appreciation in the next few years in LA, negative cashflow doesn’t make a whole lot of sense to me, but you decided not to sell…
Engineer, no I haven’t signed any lease agreement with the tenants.
Moom, you’re right. This is the fundamental flaw in my real estate agents plan which depends heavily on market conditions.
There’s another dollar figure to consider…. If you were to rent out both houses, how much per month would you be making in equity (gross rents minus expenses minus mortgage interest, but you knew that)? It wouldn’t be money you’d see right now, but isn’t it additional profit nonetheless?
Trisha, I’ve been told that we’ve see 6% appreciation from last year to this year. But since this is the course of action I’m taking, I have to hold these houses now for 3 to 5 years for this to make sense.