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Looking to buy my first house by the end of the summer to be used strictly as an investment rental income property, general real estate holding.

5 bedrooms, and if I can re-develop the basement to add in 2-3 rooms to bring the total room count to 7 rooms, that would be preferable.

Say for example I buy the house for $300,000.

The monthly price break down would be as follows:

  • Mortgage : $1500

  • Utilities : $200

  • Internet/cable : $100 for the house
  • Fixing Things around house/upkeep/emergencies : $150
  • Property Taxes : $150
  • What else am I missing here : $???

Total - $2100/month

I believe the laws in my city would not allow for a personal kitchen in every room. But they would allow for a kitchen in the basement. I could just advertise the kitchen as the common place to be shared betwixt renters, same as bathrooms. But this is somewhat expected when the rent is so cheap.

Say there are 7 rooms all occupied and each renter is paying $450 per month for rent.

That makes my rental income from units - $3150 per month.

Subtracting my operational expenses, I am left with $1050 per month. I am positive I would be able to find renters, cheap rent attracts certain crowds in my city (be they students, poor people, people with criminal history, etc). But I want to make it clear to my renters that if I don't have my rent money/cheques bounce by the first of the month that I will kick them out of my house for trespassing.

Any other tips to keep in mind from the financials aspect of the process?

closed as off-topic by BrenBarn, Dheer, Victor, MD-Tech, Aganju Aug 19 '16 at 4:06

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  • 6
    local zoning could also limit the number of non-related people that live in the house. – mhoran_psprep Aug 16 '16 at 16:47
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    This is a legal question, not personal finance. Laws about landlord/tenant rights vary from place to place. Even assuming you're in the US (which you don't specify), laws will vary by state and often from one city to another. That said, I think it is unlikely you'll find a jurisdiction that lets you physically confiscate people's property if they are one day late on the rent. Also, refusal to rent to families would likely be a violation of the federal Fair Housing Act. If you want to play this kind of hardball, you need to talk to a lawyer and be prepared to be sued by angry ex-tenants. – BrenBarn Aug 16 '16 at 16:49
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    I'm voting to close this question as off-topic because it is a legal question. – BrenBarn Aug 16 '16 at 16:49
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    In this province (Ontario) it can take 3 months to get rid of a non-paying tenant, so you could be out thousands of dollars (lost rent from the tenant and the time to prepare the place and find another tenant, plus fees you have to pay), plus whatever damage they do while they are waiting to be evicted. If you have a similar environment you will have to budget the time and money to avoid troublesome tenants such as habitual deadbeats, drug/party types and lawyers. – Spehro Pefhany Aug 16 '16 at 17:16
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    the definition of related/unrelated is in the specific law and depends on the exact zoning class of the property. – mhoran_psprep Aug 16 '16 at 17:33
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  • I don't think you can do 100% occupancy. No offense, but this place sounds like a horrifying place to live. I think most people will try to avoid it if they can.
  • That's a lot of people you are keeping in one house. Are you allowed to do it? What if you get couples or families trying to stay in a room?
  • Will you furnish this house? Are you budgeting for furniture?
  • You should group expenses by how regular they are. Mortgage, utilities, tax, are all things that happen every year like clockwork. Repairs happen occasionally but are less predictable - you should budget annually, not monthly. Emergencies and legal expenses should have a separate category, and they should be a fund (that you can dip in when you need to), not a monthly expense.
  • The way you want to kick people out sounds illegal, and I would guess that you would often end up in court. You will have legal fees. The $150 a month sounds optimistic - does that even cover a lawyer's consultation? And how many hours will he work on your eviction case? What if you lose and have to pay damages? With "$150 a month" it might be years before you can afford to sue any of your tenants at all.
  • How much does the house depreciate? How much of that is offset by maintenance?
  • Canada's housing market is apparently undergoing a bubble (for details I suggest putting "canada housing bubble" in your favorite search engine), which is likely to pop in the near future. If it pops, your house will be worth a lot less for a while (you won't be able to sell it if you get sick of the rental business) and rent might be depressed.
2

Sticking strictly to the money aspects. I am also assuming United States.

  1. The lender will need to know before applying for the loan that the property will be a rental, they may even need to know the scope of the number of renters.

    • They will now require you to make a larger down payment (it was 20% the last time I looked)
    • They will not count all of the rental income when determining what you can afford. They will assume that you can't fill it every month. In the past they assumed that it would only be filled 75% of the time. I have no idea how they would treat having 7 renters.
  2. Insurance. There are two types you will need to include

    • Regular fire insurance - the lender will require it.
    • Insurance to have as a landlord. This is similar to the renters insurance but to cover you due to the negligence of the renters.
  3. Income taxes. If you do run a profit you will have taxes. The surprising thing for many first time landlords is that they don't realize that the principal of the loan payment is not considered a deductible expense. Of course there is a benefit to depreciation.

  • A quick look at my profile would reveal I am canadian, but insightful answer nonetheless, especially if I consider American properties down the line. Of course If I do not have a specified amount of renters, or do not tell my bank that I plan to rent down the line they wouldn't increase the down payment minimum. I will likely not start renting for at least a month to prepare the house for renters. – sawreals2 Aug 16 '16 at 17:59
  • @sawreals2 This answer seems equally relevant to Canadians or Americans. Pay particular attention to point 3 - only the interest portion of your mortgage would be deductible, so even though you estimate net cashflow of $1,050/month, you could have taxable income of about $1,750 depending on terms of your mortgage. Assuming a 40% tax rate, this would cost you an extra ~700 / month, bringing your net monthly cash flow down to about $350 / month. – Grade 'Eh' Bacon Aug 18 '16 at 19:13

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