Rent where you can buy?

[LivingAlmostLarge]

I'd base the choice of renting or buying on how long I expected to be in the area. And I don't know where the breaking point on that curve is, 3 years? 5 years?

But also, not everyone wants to buy a house. I have an ex-girlfriend who has been renting since we graduated from college 15 years ago.

And for rent being cheaper than a house payment, don't hold your breath on that either. I had a great discussion with a friend last week, who her and her husband rent houses. They've got a small 2 bed room 1 batch house listed at $1,500 / month and she said they had 5 different potential tenants coming over the weekend to look at it.

How much would it cost to buy that same 2 bd 1 ba house? Where i live $1m+ to buy that small home and it's renting (that's what my friend rents) for $1700/month. Can't buy it for $1m when property taxes alone would be $10k/year.

[disneysteve]

How much would it cost to buy that same 2 bd 1 ba house? Where i live $1m+ to buy that small home and it's renting (that's what my friend rents) for $1700/month. Can't buy it for $1m when property taxes alone would be $10k/year.

How is any owner managing to rent a house for 20K/yr when the taxes alone are 10K/yr? Add in insurance, maintenance, and any mortgage payments and they've got to be losing money every month. Why would anyone do that?

[myrdale]

How much would it cost to buy that same 2 bd 1 ba house? Where i live $1m+ to buy that small home and it's renting (that's what my friend rents) for $1700/month. Can't buy it for $1m when property taxes alone would be $10k/year.

I'm guessing $120k to $150k.

My understanding is, at a minimum you want to collect at least 1% of the property's value in rent per month.

If a $1,000,000 house is being rented for $1,700 per month, that is 588 months (49 years) excluding all other cost.

[kork13]

How is any owner managing to rent a house for 20K/yr when the taxes alone are 10K/yr? Add in insurance, maintenance, and any mortgage payments and they've got to be losing money every month. Why would anyone do that?

You basically have to have bought it years ago for a far lower cost, it's gotta be paid off, and you have to be willing to accept barely breaking even. It can also just be serving as a tax haven, accepting losses to offset gains elsewhere. But frankly, it's being poorly managed.

Some people are unwilling to raise rents significantly on their tenants. That's fine, but you need to then raise it progressively over time, every year.

I try to raise the rent on our property roughly 2% every year to at least somewhat keep up with inflation, market prices, etc. Especially if you have a long-term tenant for 3, 5, 10 years, even that would put me far below market. At some point, you basically have to tell the tenant "I need to raise the rent $300/mo to catch up with the market" (or whatever). Sometimes that'll drive out your tenant... But they'll face similar rents if they try to move. Or if they do leave, it's an opportunity for bigger repairs & updates, and to rent it again at a proper market rent.

When the pandemic hit, we elected to not raise the rent on our renters, not knowing what their situation was & not wanting to get into a non-payment situation. But paired with the massive spike in market rents this year, I was basically 10% below market when their lease came up for renewal. I insisted on a 4% rent increase (which they weren't happy about & I half expected them to move out). But the middle ground was good for both of us, because it brings me closer to market, while get to rent for under the market.

[jenn_jenn]

How much would it cost to buy that same 2 bd 1 ba house? Where i live $1m+ to buy that small home and it's renting (that's what my friend rents) for $1700/month. Can't buy it for $1m when property taxes alone would be $10k/year.

I think your friend might just have a good deal on rent? I’m skeptical that is the market rate.

I don’t know anyone in California that pays $1,700/mo for a $1M home.

[Scallywag]

How is any owner managing to rent a house for 20K/yr when the taxes alone are 10K/yr? Add in insurance, maintenance, and any mortgage payments and they've got to be losing money every month. Why would anyone do that?

The devil is in the details. That house could be in rent controlled Santa Monica with a pre-existing tenant that the friend "inherited" when she purchased that property!

Or the owners don't want to share details with LAL.

In California, in most cases, they'd be barely making money even if the house is paid off, given maintenance, even if taxes are very low. Why would any landlord (unless they're your parents or grandparents) do that? So sorry, I don't buy the story otherwise, even if these are very long term and "model" tenants barring the exceptions above.

in any case, the premise that rent is cheaper than buying and that principal payments are "debt" is flawed, which is what this whole OP is based on. If renting is cheaper than anyone with one pea cell for a brain would rent!

To reiterate, there's just no way that rent only increased $300 over 11 years and rent is only $1700 on a million dollar home. Nice try, though.

[jenn_jenn]

My understanding is, at a minimum you want to collect at least 1% of the property's value in rent per month.

I’ve heard this before but I don’t think this target is realistic. I’ve only lived in California and New York but this would be way off base here and much too high. I just did rent for our condo and the would be rent for our house and they both fell around .6%. Does anyone actually rent out for 1% of the property value? Good for them if they do!

[kork13]

I’ve heard this before but I don’t think this target is realistic. I’ve only lived in California and New York but this would be way off base here and much too high. I just did rent for our condo and the would be rent for our house and they both fell around .6%. Does anyone actually rent out for 1% of the property value? Good for them if they do!

I've not come across it, but I'm sure it's possible, especially at the lower end (houses worth $80k-$130k). Also probably easier to do with multiplexes. (Ex: 4-plex worth $500k, with each door producing >$1250/mo).

For our rental, we've only ever gotten around .7-.75% of value in monthly rent, which has equated to roughly a 10% ROI for us.

[Scallywag]

I’ve heard this before but I don’t think this target is realistic. I’ve only lived in California and New York but this would be way off base here and much too high. I just did rent for our condo and the would be rent for our house and they both fell around .6%. Does anyone actually rent out for 1% of the property value? Good for them if they do!

1% of 1M is $10K? If that's monthly, that's ridiculously high. And if that's annual rent, it's equally ridiculously low. The average rent for 2 bd / 2 bth, 1000 sqcondo is $3K per month in my area which would sell for approx 700K. That's a 5% return on that investment, or will cover your PITIM, esp at current interest rates.

[SavingBucks]

I don't know anyone in California that pays $1,700/mo for a $1M home.




[/QUOTE]

That is so true. I have a rental home in So Cal that was purchased as a primary home in 1987 and has been a rental since 2012. I have new tenants (prior ones relocated to Germany) and I had at least 50 inquiries on the home which means it was probably priced too low. Home value give or take is $1.1M and rent is $3600. That is below purchasing a home for the same price and getting a mortgage with 20% down. But most of our tenants have stayed several years and I value stability over price. It also helps that there is no mortgage. But when the property was originally purchased the price seemed high and we scrimped in order to afford it. I have a lot of sympathy for those in this area trying to start out. My 23-year-old DD feels there is no hope and plans to relocate somewhere cheaper in 4-5 years. My 33-year-old DS is in a slightly better position but is planning to purchase a tiny condo in a few years. I just can't see the high prices being sustained.... prices have to tumble at some time...... I remember in the early 1990s that prices took a dive and several in the neighborhood chose to walk away -- I bet they are kicking themselves now!

[LivingAlmostLarge]

Actually I won't post it but it is estimated at $1.1 on both zillow and redfin. Also new homes in my neighborhood are going around $4.5M just sold across the street from me. Rents are not $45000/month. In fact places that are that nice might rent for $5-6k/month. So that is a not even close. It's completely out of whack. Just like salaries and living expenses in HCOLA.

This place is a 2 bd/1.5ba 1100 sq ft SFH and property taxes are $7300/year. Assessed value is $744k, it's worth a lot more than that. They have lived there 11 years and rent started at $1400 but went up to $1700. So no it is real. And I've lived in California and on the east coast and HCOLA area ALWAYS like this. READ bigger pockets and they tell you in HCOLA you are banking on appreciation and often times landlords take a hit on the rental to hold for appreciation.

Our rental in 2015 was $2400/month. It was a 3 bd/2.5 ba and at that time it was sold to the landlord for $550k. It was not 1% not even close. Then he recently sold for $978k and the rent (I am friends with the people living there she moved out this summer was $2500/month from 2017-2019 and then $2600/month from 2019-2021) for a almost $1m rental. It was sold to another investor. Her daughter went to school so she got a 2 bd apartment for $2200/month but the rent was going up to $3k and it sold for $978k. But this is a bigger house in a lesser location than my friend. About 30 minutes further out where we rented. Put that house where I live? $2m. But the rent wouldn't increase substantially.

So no in HCOLA landlords don't buy because they try to get 1%. It's not possible at all. My mom's 1 bd condo in hawaii? Renting she sends me postings on the board $1800/month for a condo that will sell for around $500k (30th+ floor, 572 sq ft, 1 parking spot, and HOA is $500). My friends run down condo in hawaii in a non-highrise next to the freeway she gets $1400/month. Probably around $500k to buy is what she's predicting but she has $800/month HOA/2 parking spots, but the downside is low rise next to freeway.

Affording HCOLA most people rent for years. Often times they rent and save and then they.

SavingBucks for a $1.1M home for $3600 is very doable with 20% DP. $1400 Interest, $1000/month Taxes, Insurance $100/month = $3500/month. Trust me I can look at my house and tell you that down to the penny. But people buying today wouldn't be paying that for my place.

[kork13]

LAL & I are discussing this on the side a bit... But a good point to bring out is the difference between return on investment (ROI, simply income vs. investment) and the internal rate of return (IRR, which accounts for rental income, tax benefits like write-offs & depreciation, and appreciation compared to initial investment). How/if the rental is financed also makes a difference.

HCOLA rentals don't work strictly from an ROI perspective. You just can't get the rents high enough. You'll rarely get above .4%-.5% of value in monthly rents. However, those HCOLA rentals do tend to appreciate significantly, as well as providing hefty tax benefits with deductions & appreciation.

A simple example with the IRR:
- $1M property, purchased 3 years ago for $850k (5-6% annual appreciation, which is fairly normal for a healthy HCOLA RE market)
- Rented for $3k/mo (.35% of value in monthly income.

The ROI is underwhelming, just 4.2%. But add in $45k/yr in property appreciation, you're already at 9.5% returns. And that doesn't even account for taxes (more complicated...but as a reasonable guesstimate --> ), which we'll assume nets the owner another 4% in annual returns. Now you're looking at 13.5% IRR. 15-20% IRR is a common goalpost... So now this "underperforming rental" actually seems to be doing okay.

As with all things, "IT DEPENDS" and the details of a situation may not always be immediately apparent.

[LivingAlmostLarge]

HCOLA rentals do not count appreciation in the ROI but the IRR is where it's at for HCOLA. While landlords under a certain income can write off the losses annually most are just trying to bank on appreciation. Again not something i tell clients but so many do it and are writing off losses on the homes while renting them out. You usually make money if you've lived there like 5 years then start renting out. But usually buying? Nope. It lags the mortggage.