renting for 1/100th the purchase price of home....

mldollins · #1 01/03/09, 05:29 PM

Question, my understanding is that if you charge 1/100th of the purchase price, you will pay the home off in 8 years. Is this a correct assessment? I am currently renting my former home that I purchased 10 years ago. I bought the house for 38,000 and currently owe 28,000. We are renting the place soon for 450 a month. Is there a way to determine from this how many more years are left on this?
thanks.....

RedneckPete · #2 01/03/09, 05:38 PM

I aimed to bring in 1% of the purchase price of the home for each month rent.

It was tough to find properties that would provide that kind of return, but they were out there. I looked for properties that had factors that would detract from ownership, but not for renters. Homeowners consider things like nearby power lines, railways and unconventional lot arrangements. Renters don't seem to care.

I did very well on rentals, but I sold them when I started my own business and I had all my equity tied up in properties.

I do miss the game, and hope to get back in soon.

Pete

Iddee · #3 01/03/09, 05:39 PM

You can use an amortization program and find what you want to know. For one of us to do it, we would have to know the interest rate you are paying on the 28,000. Also, if you are going to pay the full 450. each month on the mortgage, or a different amount.

edcopp · #4 01/03/09, 05:51 PM

1/100th only works if you have no other expenses. Things like Taxes, Insurance, maintenance, Repairs. Vacancy, as well as the cost of management are not figured into this equation.

Old Vet · #5 01/03/09, 05:54 PM

Quote:

Originally Posted by mldollins

Question, my understanding is that if you charge 1/100th of the purchase price, you will pay the home off in 8 years. Is this a correct assessment? I am currently renting my former home that I purchased 10 years ago. I bought the house for 38,000 and currently owe 28,000. We are renting the place soon for 450 a month. Is there a way to determine from this how many more years are left on this?
thanks.....

You need more information like the interest and insurance taxes down payment. All of these are in the mortgage. Most mortgages (in Arkansas) have all this and when you will be payed up in them. What you have is probity a 30 year mortgage. It doesn't matter what you rent it for.

haypoint · #6 01/03/09, 06:53 PM

Sounds like edcopp has actually owned a rental house.
I bought a one bedroom house with garage on 2 acres for $15,000. I fixed it up, furnished it and rented it. When I added up the interest on the house, the interest on the money I put into it, insurance, taxes and normal upkeep, I made about $50 a year towards the principal. That is if I ddon't put any value on my labor. As time went along, I put vinyl siding on the house and garage, new shingles on the house and garage, a new furnace and replaced most of the furnature and carpet. Seems every time a renter moved out, they were broke, out of a job, left more damage than the security deposit could cover and I could plan on the last month's rent check bouncing.

After the renter failed to leave the water run a bit in the sink (prevents frozen pipes) and I was on my back in a flooded crawl space with a hacksaw repairing plumbing on Christmas Day, while my renters played video games right above me, it dawned on me. Those that make money in the rental business generally own apartments and renting is often a better deal for many people.

Do you have the cash reserves to be in this business? Roofing a house or replacing a well and pump or any number of repairs that come with home ownership. If it sits empty, what does that do to your bottom line?

I bought the property because I didn't want to risk getting jerks for neighbors. If I had it to do over, I'd just tear the house down and save myself the agony.

From my experiences, I'd say there can not be any 1/100th rule of thumb on rental property.

The Paw · #7 01/03/09, 07:24 PM

Quote:

Originally Posted by mldollins

Question, my understanding is that if you charge 1/100th of the purchase price, you will pay the home off in 8 years. Is this a correct assessment? I am currently renting my former home that I purchased 10 years ago. I bought the house for 38,000 and currently owe 28,000. We are renting the place soon for 450 a month. Is there a way to determine from this how many more years are left on this?
thanks.....

If you make 12 payments a year for 8 years, that is 96 payments. So that 1% formula only applies to principal.

In other words, you should work backwards. If you want to pay $28,000 off in 8 years, $280 of the rent payment has to be applied against principal. The other $170 has to go towards mortgage interest, insurance, taxes and maintenance. (this is a rough rule-of-thumb calculation. In reality, in the first few years more of your payment goes to interest and less to principal, with the reverse happening in the later years).

Looking further at the situation, 6% interest on $28,000 would run the equivalent of $140 per month in the first year, which doesn't leave much for taxes and the rest.

I would say you are looking at a longer pay-off period. I can't do the figures without knowing those other costs, but I would guess 12-15 years is more realistic.

PezzoNovante · #8 01/07/09, 08:47 PM

Why would you want to pay off the mortgage on a rental property? Tying up equity that way is very illiquid.

On a 30 year note the payment is fixed over the term. However rent is dependent on the market so it can rise or fall based on the local rental market conditions.

Look at it this way, you have $10,000 in equity in the home. What return on that would satisfy your efforts to maintain a rental property?

Let's say it is 15% or $1,500 a year. Divide that by 12, add to that your PITI amounts plus your monthly maintenance and repair reserves. This is what the house NEEDS to lease for.

Now research the local rental market and see what comparable homes are leasing for, if the answer is more than the figure you arrived at then you have a good return on your investment.

Silvercreek Farmer · #9 01/10/09, 08:01 AM

Owning and managing rental property is like having a second job, you can pay someone to manage but it is pretty expensinve, usually 10% of your gross. So that leaves you managing if you want the best return. I wouldn't try to manage more than 2-3 if you work full time (which I do). If that is all you do you could probably handle 10 or more. I have one now (my last house I lived in) which is 1.5 hours away. It is PITA because it is harder to collect rent if the renters are being difficult, and I have to pay someone for silly repairs if I can't make it down, so try to keep them close to home. Ideally they would even be on the same block, so you can see them every day. Probably the best calculation to use is ROE or return on equity to figure your return. It goes something like this: Total Return (Annual Principal paydown on the loan+appreciation on the property+or-net cash flow on the property after all expenses/maintainance/repairs/interest/insurance/taxes ect are paid) divided by the total equity in the property. Your return should be at least 10-12%, if it is not the property probably is not worth it. I am getting around 17% on mine, real good ones can turn 20+. As time goes on your return on equity tends to drop and you need to releverage the property (ie cash out refinance) to keep your ROE up. Don't worry about paying off the loan just get the best return you can. And like someone mentioned, if you have all your equity tied up in the property is can be very hard to access if you get in a bind.

suthin12 · #10 01/10/09, 08:22 AM

Purchase a financial calcultor, you can get one for less than 50 bucks, in an hour or less with the machine and the manual you will learn how long, how much, payments, amortization, etc, anyone serious about their money should have one IMHO.

whinnyninny · #11 01/10/09, 09:33 AM

Quote:

Originally Posted by edcopp

1/100th only works if you have no other expenses. Things like Taxes, Insurance, maintenance, Repairs. Vacancy, as well as the cost of management are not figured into this equation.

Yeah, I just bought a house for $79K, and my monthly payments, with escrow, are around $750. The house payment itself is $429, but property taxes and insurance add a huge amount.

I was told to charge $150-$200 more than your monthly payments. I think I'd be too afraid to rent out my home though, I've heard horror stories about renters trashing up houses! Even homes that are $1,000+/mo...