# Buying house to rent calculation



## none (Jan 15, 2013)

Hi Everyone,

I've been chatting with a friend about finances and she's seriously thinking about buying a house and rent it out.

I'm extremely bearish on residential housing and I don't see how she won't likely lose a lot of money doing this. My rough rule of thumb that I made up about the cost of home ownership is:

Cost of house * (inflation rate + mortgage rate + 1% for maintenance & propoerty taxes - house appreciation) = currently ~7% (I think others say it's closer to 9-10%)

Assuming houses don't go up anymore nor go down (we could debate that for hours but conservatively lets say no) a 300K house costs $21 a year just to break even meaning she would have to rent the house out for $1750 a month just to break even (which she would then need to pay taxes on) - which I think is much more than she would ask.

Is there a more legit calculation on "What rent do I need to charge to make a profit on this rental" some one could supply me? I don't think she's doing all the math and I don't want my friend to get burned.

Thanks for the help.


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## Just a Guy (Mar 27, 2012)

I'd suggest she check out www.easysafemoney.com and the book there. She could also contact the writer as he does respond to emails.


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## jamesbe (May 8, 2010)

Quick rule of thumb to break even is (cost of house - 20% downpayment)* 1%

So 150,000 house $30k down. $120k mortgage, rent for 1,200 (That's the break even point).


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## none (Jan 15, 2013)

jamesbe said:


> Quick rule of thumb to break even is (cost of house - 20% downpayment)* 1%
> 
> So 150,000 house $30k down. $120k mortgage, rent for 1,200 (That's the break even point).


I don't really understand this as it ignored the opportunity cost of the money in the house. Using that equation then if she bought the house outright then she should be charging zero rent......


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## Just a Guy (Mar 27, 2012)

I think he's saying that the cost to service the debts is 1%. Of course it's a generalization which can break down...

For example, not mortgage doesn't mean no taxes or maintenance, also you can have properties cash flow at less than 1% and not cash flow at 1%. As a general rule of thumb however, the 1% rule can work (though with Canadian real estate prices, it's tough to find a 1% place).


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## jamesbe (May 8, 2010)

It's a rule of thumb. Using this rule it allows me to quickly eliminate properties from my potential list in seconds instead of hours of calculations.

If you are paying heat and condo fees and such then they need to also be factored in. If a house is "close" to my 1% then I look further, sometimes going over can be fine.

Yes you are ignoring the opportunity cost of the money in the house, but you need at least the 20% down, that is why I use that as my basis. 

Anyone can find a cash flow positive house if they pay for all of it in cash  4 years ago I found many cash flow positive places, I bought 1 (that's all I could afford). At today's prices they are no longer cash positive, I've given up ...

It's cheaper to buy than rent right now, so being a landlord makes no sense.


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## none (Jan 15, 2013)

jamesbe said:


> I
> 
> It's cheaper to buy than rent right now, so being a landlord makes no sense.


I think you got this backwards 

I totally agree. Although I pay 2000 a month in rent, if I owned the house I'm currently renting (worth 600K) I estimate it would cost me $48000/year (assuming zero growth in real estate prices). Saving $24,000 a year and not having any risk against RE tanking is pretty sweet.

My friend is part of the group where buying a house was the best financial decision they every made - I.e. house has gone up over 100K in the last 10 years. Who's house hasn't?? I sold mine for a profit of about 95K a couple years back. Anyway, I think she's still in the mindset that buying houses will pay off no matter what and I'm concerned she isn't objectively doing the math.


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## jamesbe (May 8, 2010)

Yes sorry that should read, it's cheaper to rent than to buy.


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## Just a Guy (Mar 27, 2012)

Jamesbe,

While I tend to agree that prices are high, I've managed to find three properties in the past year. They were in excellent locations and generate a lot more than 1% return. 

Now, I probably waited 5 years since my last purchase, and only started looking again because a friend wanted to sell me his place but, because a lot of investors have given up, there are some good opportunities out there.


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## jamesbe (May 8, 2010)

There may be some opportunities. I haven't seen many in Ottawa recently but I haven't looked hard, just here and there when I'm bored.

In smaller towns there are lots of cash flow positive locations if you can keep renters (the smaller towns have less employment and renters are less qualified in general).

I am making an 8% return on my current rental, anything less and IMO I rather invest in a nice dividend stock instead.


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## the-royal-mail (Dec 11, 2009)

It sounds to me like her mind is already made up, so I doubt any math you provide will do much to change her mind. Usually people who are "seriously considering" something will only pay attention to facts that support what they have basically already decided to do. We see it all the time here with new posters.

There are lots of threads and horror stories around CMF and other places, dealing with poor or annoying tenants. If I'm ever considering throwing money away on purchase of rental properties, I read those threads and it brings me back down to earth.


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## Cal (Jun 17, 2009)

As per jamesbe's example above, if you factor in for the opportunity cost of using 30K for your deposit. You would want to make at least $200 per month from the rental to break even. (assuming a total return on your investment of 8%)


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## marina628 (Dec 14, 2010)

I like to see about $200 a month over the carrying costs of the house.So mortgage +taxes+Insurance+ 1% a year maintenance + $200.I own 5 homes in the $170,000 -$300,000 range and we have been able to accomplish this.We put down 20-35% and take 25 year mortgages but by the time we do rapid weekly payments we usually get it down to 17 years on average.I almost bought a house last month it was brand new townhouse in Bowmanville Ontario listed for $220,000 but I offered $200,000 firm and it sold for $205,000.These rent for about $1300+ Utilities and was a freehold so there still are some decent deals out there ,just need to look .


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## Xoron (Jun 22, 2010)

@none,

I assume you're in BC based on your CMF Profile.

Is your friend also in BC? From what I understand, the rental rules are very tenant friendly there (as they are in Ontario). Trying to get rid of a problem tenant can take a lot of time and money. That seriously needs to be considered before becoming a first time landlord. The finances may work (1% rule, or whatever), but it all goes to hell when you don't get 3-6 months of rent while trying to get a non paying tenant out. 

Plus the costs to turn around the property for the next renter (painting, minor repairs, maybe major repairs if the last tenant trashed the place).


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## Just a Guy (Mar 27, 2012)

One thing to factor in is increasing interest rates. Remember that mortgage payments increase about $100/month for each 100,000 with each 1% interest increase. So, a 200k mortgage payment will cost $400/month more if interest rates rise by 2%. 

What may cash flow at 2.99% could kill you at the historical 8%. I think the government has been pretty clear that they want to increase interest rates, and you can't lock in low rates for the entire 25 years...

I expect a lot of foreclosures in about 5-7 years when renewals come up.


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## marina628 (Dec 14, 2010)

Just a Guy is correct ,we were paying 5.5% on some rentals and have averaged down to about 4% .I am seriously considering taking the 10 year mortgage at 3.99% when our next rental mortgage comes up as then our costs are fixed for duration of the remaining mortgage.


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## marina628 (Dec 14, 2010)

I believe this is why banks require 20-35% down on investment properties ,back 4-5 years ago you could buy rentals with 10% down ,you need to have a exit plan in case things ever change and having 20+% equity gives you that option.


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## jamesbe (May 8, 2010)

Yeah I'm paying 4.5% now, renewal is soon hope to grab a low fixed.


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## fergusonsd (Dec 30, 2012)

You and your friend should check out 
http://www.fergusonfinancial.ca/real-estate-investing/buy-and-hold-real-estate-investing/
It overviews all the costs and potential benefits of purchasing a rental property and making money by renting it long term. There are also multiple calculators and downloadable spreadsheets to help get you started.

Good luck.

Devon


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