Renting does not avoid the problems of owning a house.

Home ownership isn't for everyone. There are pros and cons for both renting and owning a house to meet the needs and wants of different people. Now a lot of people just don't want to own a house for a number of reasons....

"Home prices can collapse. Just look at what happened in 2008!"
Tell me about it I lost 50% of the equity in Town home 1.

"Plus you have all those repairs. New furnace, AC, maintenance and repairs, roofing, siding. Those aren't cheap."
I hear you. I paid $6,000 for a new furnace and AC because I wanted to install an AC unit but my 20 year old furnace couldn't handle it.

"Then you have nosy HOAs that are always wanting to tell you what to do with your house."
A 150 page HOA agreement is no joke. Tons of rules in there with all sorts of fines.

"You are tied down! If you get a job in another city what are you going to do with your house? With rent you can just up and move whenever. Freedom!"
I am certainly tied down with my underwater mortgage no doubt about that.

"Lastly, you have all those hidden costs. Several types of insurance and property taxes. Nope not for me I'll just rent."
It is amazing at how many extra fees are involved with owning a home.

"OMG rent is too high how do you sleep at night charging these rates!"

Now this is not a story about my tenant. I treat them well and they have been pretty quiet.
No this is a story about what I see online. I'm amazed at some of the discussions I see on renting vs home ownership. People seem to have gotten the idea that renting = relaxed existence without a care in the world. That they just pay a little bit because its really just storing some things and a place to sleep. Landlords do nothing according to Rolling Stones magazine.

Here is the thing. All those reasons you do not want to own a home? Someone has to deal with them. They don't magically go away because you do not own the building you sleep in at night. Of course rent is going to be high I am not renting as a charity I want to make profit. That means that my rent will need to be above my costs including all the things you want to avoid while renting.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Renter has agreed to month to month until June

I have to admit I was getting worried. My renter had not responded about wanting to stay and resign their lease. They had been flip flopping from 6 month leases to a month-to-month and back to 6 months. They kept saying they want to find a bigger place and their current lease was due at the end of January.

Procrastination is usually a bad thing but its the ally of the landlord. My renter had waited too long that they now had a problem.
Come to an agreement and resign the lease or find another place and move out in the next 23 days.
I now have an agreement to go month to month for the next 6 months. In June I'm done and I'm not going to do this anymore. They will sign a year lease or they are out.

Now it might seem odd that I would kick out a person wanting to pay me to stay there. Isn't that the point of being a landlord? Well there is a seasonality issue involved with renting. How many people do you know of that like to move in the winter, in the middle of a school year? Let me tell you its not many. Spring and summer are when people move. The one thing I have learned is that you do not want a vacancy. It is killer.

Let's assume you have a 10% cap rate, or 10% profit margin. After you set aside money for taxes, paying a property manager, paying the mortgage, and saving for future repairs you make 10%. Many REITs I follow have a 8%-12% cap rate so even professional real estate companies have a hard time getting much more.
For the landlord, one single month of vacancy is 8.3% of your income. Add in fess and costs for relisting your place and doing background checks etc you've lost 10% of your yearly income and you have lost an entire year's of progress.
Which is exactly why I calculate a 10% vacancy rate into my budget.

For me specifically if I have a lease due in January and they decide to move out... I could quite easily see the next four months of vacancy until spring. Thats $3,800 I lose out on but I still have a mortgage, insurance, and HOA fees to pay. My investing deposits would have to be cut to make up for it.

For now I am good for the next half year. Given this renter's history they will wait until the last minute and we may have to have an uncomfortable talk. I'll be fair and bring it up for discussion a couple months early to give them plenty of time. We will see what happens in June.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Calculating Rental property Yield on Cost

In a previous entry I went over how I compare dividends to rent.  Yield on cost is another popular dividend investor metric and when we try to compare dividend yoc with rental property yoc? It gets crazier then yield. So much in fact I felt it warranted its own entry.

Yield on cost is how much income you are currently getting based upon what you paid for the asset. The income changes with raises and cuts to the dividend but how much you paid stays the same. How much did you pay per share? Real estate can have a lot of complications for yield on cost. However I still want to calculate it so I can compare my property to my investments.  Then I can better figure out which is doing better and help determine where future purchases will go to.

First off is how much have we paid for the property. If its paid for in cash its pretty straight forward but if its through a loan then we cannot be sure how much we have paid until its paid off. At the time of this posting, every $1 extra I spend on my mortgage saves me $3 by preventing extra interest payments. As time goes on that savings will drop as more and more of my primary payment is going to principal and less to interest. The total amount paid into a property will fluctuate over time. Personally I am using a close guess on my spreadsheet but I won't know the true number for years.

Yield on cost as the same problem yield has, what exactly is considered income? There are very specific laws in calculating rental income but for a personal stat like yield on cost, we have a few options.

So what is my yield on cost?
On my spreadsheet I list Gross YoC. This is gross rent with an estimated total amount paid. I want to look at this because I can control some of my costs. My HOA fee may go up, I might get more or less insurance, I could manage the property myself and cut out the management fee. This is my maximum yield I could get.

I also have Net YoC representing the profit after fees of the property. This Net YoC excludes having a mortgage. This portfolio is for me to quit my day job with which will take years, at least another 12. I hope to have my mortgage paid off at about that time.

Rent vs Dividend stock comparison
My dividend stocks average a 5.31% yield, 7.1% YoC, and a 15.2% growth rate.
My rental property will have an 8.03% yield, 3.41% - 5.98% YoC, and a 5% estimated growth rate in rent.
To be honest, they seem fairly close to me and given the fact I am so far underwater with the loan currently, selling it is not an option.
My best option is to make tactical decisions of where to place my money as it comes up each deposit day.



Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Calculating Rental property yield.

As I make new cash deposits into my portfolio, I have to determine where the money is going to go to. How will it best achieve my goal of increase income? Do I buy more stock or pay off my mortgage early?
I have to have a way to compare different asset classes with each other. So to compare the income from real estate I frame it in terms of dividend yield.
There seems to be many ways to look at your rental income so I will share with you guys how I view and calculate it. This is for comparison's sake across different asset classes, this is not for tax purposes.


Income
A dividend paying stock takes in revenue for its product or service it sells. Then it applies its costs, and from its profit it pays its investors a dividend. The company announces the dividend amount to the world and its not open for debate. As far as receiving the dividend, the investor doesn't have to worry about these costs, they just get paid.

As a landlord our rent is revenue, it is not our profit so we cannot just use that to calculate our yield. If we want to compare our real estate income as close as possible to a dividend, we have a cost of doing business that must be paid before we can have our profit.

What's more is that our costs are not static. Some months you will replace your furnace taking 2 months or more of rent. You could go a year without having any repairs. Thats why I set aside and estimate 10% for repairs and vacancy. Its not exact but we need something to base our calculations off of.
I use my net rent as shown on the spreadsheet for calculating yield.
But wait its negative. We can't calculate our yield on a negative income, that's a loss.

Almost all of my costs are flexible as to if they occur and in some cases by how much. However they will have a chance to occur for as long as I own the property so I need to plan for them. Well all but one of them. The mortgage.
Once that is paid off it will never come back. Its a known, quantified cost that can be removed. Once we remove that we can get our long term income estimate. This also makes it closer to what a dividend would be.
That's why I use Net Rent with no mortgage as my long term calculated income for yield purposes.


Net Worth
The other half of the yield equation is how much is the property worth that I am calculating my yield off of. Real estate is very illiquid. One property doesn't have a million points of view a day setting the price on the active market.
I could use the current balance of the property. How much profit I have tied up into the property. If we are to look at capital gains of a dividend paying stock as being tied up into a position that could be sold and deployed in another stock this makes sense. However if I am looking at my net rent at a future point in time then to be fair I need to look at my property's net worth in the same way. Additionally, I plan to keep this property forever barring any local economic disasters so at some point I will have the mortgage paid off. Since this portfolio is to get me retired from my day job, this plan fits in with my strategy very nicely.
The estimated value I have as the average between Zillow.com, Realestate.com, Chase.com, Trulia.com and what my local county charges bases my property taxes on.


So what is my yield?
With all that said I have two yields listed.
The gross value yield is my rent before costs / estimated value.
The net value yield is my net rent / estimated value.
Why would I use both? Because some of these costs are unknown over the course of the year, I use these as the highest and lowest estimates. The true yield will be somewhere in between.



Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

Real Estate Portfolio

Back in 2007 I wanted to buy a home. I had two choices that I could afford. One was a house. A liquor store was three buildings away from it on a street corner and it had bullet holes in its sign. The house did not have a garage but a large carport. I own an Acura Integra which is always on the Top 10 most stolen cars of America. I've had it attempted to be broken into twice so I pretty much would have to write off the car. The price for the house was a steal and keep in mind this was 2007. Everyone was flipping houses. It was the thing to do back then. The other choice I had was a townhouse. Kind of small but it was well maintained and a good area located within close driving range of three very large employers. I decided what I would be happy to come home to and passed on the dream of flipping it for 100% profit in 5 years. 2008 came along and I was pleased with my choice.

I met my girlfriend and then later on moved in with her. She has a Saint Bernard and my HOA would not allow dogs so there was no choice in the matter. It did leave us with 1 house too many. I did my research and decided to rent it out and become a landlord.

I got myself a property manager to handle everything and let me tell you, it was a no brainer. Do you like the idea of getting a phone call at 1 A.M. in the middle of winter about a broken furnace? How about a renter that is two months later then skips town, want to deal with that? Yeah me neither. 10% a month of the rent is more then fair to make all the problems go away.

First up is the net worth of the unit. For the estimated value I use a combination of the value I pay property taxes on, Zillow.com, Trulia.com, Chase.com, and Realestate.com. The mortgage is what I still owe on the unit and as you can see its underwater, by a lot.
I have a Real Estate Cash Account which is a checking account where I pay repairs out of, make extra payments on the mortgage, and receive my rental income into.
The Real Estate Savings account is the savings account tied to that checking account. I keep $2,000 in there for any repairs. I have recently replaced the A/C and Furnace on it so do not expect any big repairs for at least a decade. But you never can be sure so I want that cushion so as not to need to sell any dividend stocks.

Now for the income part.  I collect $950 in rent a month.
-$95 (10%) is taken out for the property manager.
-$150 is what I have to pay for the HOA. Now that may seem like a lot but its a gated community of townhouses. They handle the roofing, siding of the buildings, trash pickup, landscaping, and an onsite security force. As with the property management fees, I'm willing to pay people to make problems and worries go away.
-$53.73 is what I pay for Renter's Insurance.
-$95 (10%) I set aside for vacancy months and repair. Let me tell you, you HAVE to prepare for these. They WILL come up.
-$745 for mortgage.

That leaves me with a -$200 loss every month. Not the greatest investment by far but its underwater -$15,000. I'm certainly not going to sell it. For now I will bide my time and let someone else buy me a house.


Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.