So I am curious if the following is possible --> Let's say I buy a house in some area with lots of housing demand (colleges + companies, etc) and I rent it out to some people. Most houses produce several thousands of dollars a month. Is it possible to pay for monthly loan payments with rent incomes? It just feels like you can buy a house and it will pay for itself... Yes/no? I know very little about investing, but it feels to me that house can purchase itself, basically... I wanna know what I did not consider... cannot be so easy after all right. House pays for itself and at the end you have free property
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This is too broad. There exists opportunities where house will generate more NET income, or pay for itself or loose money. It depends on case to case basis. The calculations need to factor the cost of funds [mortgage interest], Property taxes, Maintenance etc. Plus will the property appreciate in value or loose value. There are elements of risk; if you don't find a tenet, will it stretch your budget, houses loosing value in crash etc.– DheerMar 6, 2018 at 5:28
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2" House pays for itself and at the end you have free property" - calculate how much interest you'll pay over the life of the loan and you'll see that the house is not "free".– D StanleyMar 6, 2018 at 15:01
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3 Answers
I wanna know what I did not consider.
Some things you did not consider:
- The down payment on the mortgage--typically higher than what would be required for an owner-occupied home. (Thanks @jamesqf)
- Other costs, such as maintenance, taxes, and insurance.
- Risks, such as the risk that you might not find suitable tenants, that your house will lose value, or that the market rate for rent decreases.
- The work required to be a landlord, such as screening tenants, collecting rents (sometimes from tenants who can't or won't pay), managing paperwork, scheduling maintenance, etc. (You either have to manage this yourself, or pay someone else, such as a management company, to do so.)
Even if you make enough in rent to pay these costs and the mortgage payments--which certainly is possible in some markets--with the work and risk involved, it's not accurate to say you'd end up with "free property".
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4Also that you will have to invest a fairly large amount of money in a down payment. I think 20-25% of the purchase price is typical for a non-owner occupied dwelling (in the US).– jamesqfMar 6, 2018 at 6:03
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@jamesqf If you do an FHA loan you can get by with only putting 3.5% down. Mar 7, 2018 at 13:11
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@Anthony Russell: But you generally can't get an FHA loan on a rental property. About the best you could do is live in one room and rent out the others.– jamesqfMar 7, 2018 at 18:13
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@jamesqf I'm not sure what bank you're talking to but it's very common and very easy to get an FHA loan on a rental. I got one and it was just as easy as getting a conventional loan. The caveat is yes, you have to live in one unit for 12 months. This is house hacking Mar 7, 2018 at 18:40
Having a rental that pays for itself AND covers all of the expenses is entirely possible. Even if you live in one of the units! I should know, I did it twice 😁
Currently two of my buildings I lived in and profited from while living there. My third building I bought as an investment and it also profits.
In fact with as little as three buildings, or twelve units, I've achieved total financial independence. So yes, in short, it's possible.
Check out the website Bigger Pockets, that's where I learned about house hacking and managing properties. Also feel free to reach out to me on Twitter if you have any questions.
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The question I'd ask, though, is how much of your time you invested, and whether you made a better return on it than you could elsewhere. Of course rental properties can be profitable - else there wouldn't be any, no? - but it's work.– jamesqfMar 6, 2018 at 18:50
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It certainly is POSSIBLE. But it's by no means certain. I owned a rental property for years and the never had a year when the rent covered the mortgage, maintenance, and other expenses.– JayMar 6, 2018 at 20:29
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1@jamesqf I keep track of my monthly investment of time. Monthly on average I spend about 5 hours on my properties. That includes paying bills collecting rent and organizing repairs. MOST of the work comes from just being a good business owner. You have to make sure you do the people right, the buildings right and don't be greedy. Mar 6, 2018 at 20:34
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3@AnthonyRussell I don't doubt that you are successful at it. There are plenty of apartment complexes out there, I don't suppose most or all are losing money. My point is just that it's not necessarily easy. Whether I lost money because of a bad location, bad lucky with tenants, or because I was incompetent at managing a rental property (despite being an acknowledged genius in other pursuits!), point is, know what you're getting into. Never, ever start a business thinking, "This will be easy, the business will run itself and I'll sit back and collect the checks."– JayMar 6, 2018 at 20:57
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1@Jay absolutely! It's very hard to get into real estate starting out. There's about a billion unanswered questions and ways to fail. It's actually dumb luck I didn't fail on my first building. THANKFULLY I found bigger pockets and start asking the community questions. I also read a ton of books that put me on the path to success. If it wasn't for shitty property managers failing, I wouldn't find great deals on buildings. You should never get into an investment you don't understand. You're 100% correct Mar 6, 2018 at 21:00
The thing is, as with any other investment, you take on a certain risk.
You can always have unforeseen costs, vacancies, late rent payments or even people damaging your property. The mortgage payments will continue, despite of it all.
So it is the same as any other investment you do with borrowed money: You should be able to handle the loan, even if your investment does not perform as expected.
Other than that, it is entirely possible, and this is in fact what people with enough money sometimes do. I say people with enough money, as you you need to be worthy of a good rate to still make a profit after interest. So that explains why not everbody is doing it.
