Help us decide if our budget allows us to purchase a multi family home!
August 15, 2012 9:49 AM Subscribe
[BudgetFilter] We're about to purchase a 3-unit multi family home in a desirable downtown area near a large park designed by Frederick Law Olmsted. The rental market in our city is very strong and continues to get stronger. Does this potential budget make sense and put us in a good financial position for the future? Details and actual budget numbers within.
We will be owner occupants. We have previously owned a condo (closing the sale on 8/31). We have strong family and friend support in the area. We have lived in this small, amazing, seaside city for the past 7 years and know the neighborhoods well.
Here are the specifics - would love any feedback! Or recommendations for some type of professional budgeter who can help - we aren't looking to put our money in investments so I am thinking a financial adviser is the wrong way to go.
Yearly Expenses - some of these are inflated numbers based on the lifestyle we would like to live:
$1,800.00 - personal loan @ 0% interest
$2,400.00 - Student Loan payments
$1,085.16 - car insurance
$1060.00 - gifts & donations
$5,100 - Dining Out/Groceries
$1,322.88 - Internet/Cable
$1640.00 - Medical/Dental
2,000 - Housewares (includes moving costs and some new furniture - will be less after year 1)
$1,200.00 - Additional Roth IRA contributions
$100.00 - cat supplies
$1,200.00 - car registration/repair
$15,360 - "personal" money (includes gas, clothes, snacks, CDs, DVDS, etc for two people)
$2,000.00 - travel/vacation fund
$400.00 - concerts/entertainment
$1,482.36 - cell phones
$38,150.40 = Total “Life” Expenses
Potential House Expenses:
$35753.52 = Mortgage payments - We will be using a FHA backed loan with a fixed rate of 3.25%. The total monthly payment including taxes, home insurance, and PMI is $2979.46.
$3,000.00 - Heat
$1,000.00 - Electricity/hot water
$2,100.00 - water/sewer
$2,500.00 – repairs
$44,353.52 = Total House Expenses
$31,800.00 = Total Rental Income per year
$56757.84 = Combined take home income.. This is after taxes, 401k (with 3% and 4% match), and premiums for health, dental, life insurance, and accident insurance
$6053.52 = Yearly Bottom Line
My question is – In the first few years of owning a home, is this a reasonable number to have left at the end of the year? After we have 20% equity in the house, we eliminate the PMI at $450/mo – must have had the loan 5 years at that point. We also eliminate the student loan payments in 4 years. There are several places we can cut back in our “life” expenses if things become tight, or a major repair is planned.
Other life notes:
-after the purchase we will have approx $20,000 in savings
-we will not be having children and there is zero chance of an oops baby. No need to plan for that expense.
-my partner's father owns a lot of rental property in the area and is a supportive resource
-We are late 20s/mid 30s
- we have used the PearBudget spreadsheet for several years and feel confident that our numbers are on point for our “life” expenses.
-we have no credit card debt
We will be owner occupants. We have previously owned a condo (closing the sale on 8/31). We have strong family and friend support in the area. We have lived in this small, amazing, seaside city for the past 7 years and know the neighborhoods well.
Here are the specifics - would love any feedback! Or recommendations for some type of professional budgeter who can help - we aren't looking to put our money in investments so I am thinking a financial adviser is the wrong way to go.
Yearly Expenses - some of these are inflated numbers based on the lifestyle we would like to live:
$1,800.00 - personal loan @ 0% interest
$2,400.00 - Student Loan payments
$1,085.16 - car insurance
$1060.00 - gifts & donations
$5,100 - Dining Out/Groceries
$1,322.88 - Internet/Cable
$1640.00 - Medical/Dental
2,000 - Housewares (includes moving costs and some new furniture - will be less after year 1)
$1,200.00 - Additional Roth IRA contributions
$100.00 - cat supplies
$1,200.00 - car registration/repair
$15,360 - "personal" money (includes gas, clothes, snacks, CDs, DVDS, etc for two people)
$2,000.00 - travel/vacation fund
$400.00 - concerts/entertainment
$1,482.36 - cell phones
$38,150.40 = Total “Life” Expenses
Potential House Expenses:
$35753.52 = Mortgage payments - We will be using a FHA backed loan with a fixed rate of 3.25%. The total monthly payment including taxes, home insurance, and PMI is $2979.46.
$3,000.00 - Heat
$1,000.00 - Electricity/hot water
$2,100.00 - water/sewer
$2,500.00 – repairs
$44,353.52 = Total House Expenses
$31,800.00 = Total Rental Income per year
$56757.84 = Combined take home income.. This is after taxes, 401k (with 3% and 4% match), and premiums for health, dental, life insurance, and accident insurance
$6053.52 = Yearly Bottom Line
My question is – In the first few years of owning a home, is this a reasonable number to have left at the end of the year? After we have 20% equity in the house, we eliminate the PMI at $450/mo – must have had the loan 5 years at that point. We also eliminate the student loan payments in 4 years. There are several places we can cut back in our “life” expenses if things become tight, or a major repair is planned.
Other life notes:
-after the purchase we will have approx $20,000 in savings
-we will not be having children and there is zero chance of an oops baby. No need to plan for that expense.
-my partner's father owns a lot of rental property in the area and is a supportive resource
-We are late 20s/mid 30s
- we have used the PearBudget spreadsheet for several years and feel confident that our numbers are on point for our “life” expenses.
-we have no credit card debt
This reads more like an answer than a question. You've done all the math and you know you are fine.
But consider:
- You may owe taxes on rent. However, you may not if the depreciation offsets the rental income. That might be worth paying for an hour of an accountant's time to understand.
- Your bottom line should include your the portion of your mortgage that is going to pay down equity, which will be substantial.
- Would it be feasible to avoid the PMI by getting to 20 percent down? For example, could you get money from family? (If you do, you will probably have to make it legally a gift, but informally promise to pay it back. Obviously, both the finances and the personal relationships would have to work.)
posted by Mr.Know-it-some at 10:19 AM on August 15, 2012
But consider:
- You may owe taxes on rent. However, you may not if the depreciation offsets the rental income. That might be worth paying for an hour of an accountant's time to understand.
- Your bottom line should include your the portion of your mortgage that is going to pay down equity, which will be substantial.
- Would it be feasible to avoid the PMI by getting to 20 percent down? For example, could you get money from family? (If you do, you will probably have to make it legally a gift, but informally promise to pay it back. Obviously, both the finances and the personal relationships would have to work.)
posted by Mr.Know-it-some at 10:19 AM on August 15, 2012
$2500 doesn't buy a lot in terms of home repairs. What condition is the building in? How old are the roof, the furnace? Will any of the units need remodeling to attract tenants willing to pay the rent you're counting on?
posted by jon1270 at 10:21 AM on August 15, 2012 [1 favorite]
posted by jon1270 at 10:21 AM on August 15, 2012 [1 favorite]
I would only plan on 80% of potential rental income (turnover generally means loss of at least one month's rent), and I would also budget maybe $5K per year repairs/maintenance. Of course you won't spend this much every year, but if your furnace goes out in the middle of winter, or tree roots grow into your sewer line or whatever, you want to have the money available to take care of these things.
posted by rabbitrabbit at 10:24 AM on August 15, 2012
posted by rabbitrabbit at 10:24 AM on August 15, 2012
Congratulations on what appears to be sound financial planning up to now and into the future. You may be off 5% +/- but figures and projections seem reasonable. Only you can project vacancy rate based on location and demand. probably a good idea to assume that at least each unit will be vacant for one month a year. Rental income should be largely off by 2/3 the expense of the mortgage and other costs associated with the rental units.Have you gone over this with a tax consultant--Good luck on your new adventure
posted by rmhsinc at 10:27 AM on August 15, 2012
posted by rmhsinc at 10:27 AM on August 15, 2012
Oh, expanding on my last answer: budget $5k per year into a maintenance account and don't touch it if you don't need it. Because you may not have many repairs one year, but a lot the next, so I would say it averages out to $5K per year. Minimum.
posted by rabbitrabbit at 10:29 AM on August 15, 2012
posted by rabbitrabbit at 10:29 AM on August 15, 2012
A few points.
- $5,100 seems light on the dining out/groceries front. Like, a lot light. I'm a single guy, and I spent more than that last year. Granted, I eat out more than I probably should, and that includes money spent on dates, etc., but the idea that the two of you can spend less than $425 a month on food, total, is not terribly plausible. That's like $1.55 a meal. You can basically never afford to eat out, ever. Don't get me wrong, people absolutely do this, but they do it by eating lots of bread, peanut butter, balogna, ramen, and EasyMac. Double that amount.
- $1,640 is probably not plausible for medical/dental. Consider doubling that. If you don't spend the money this year, you will soon enough. Health care expenditures are spiky and unpredictable. And you'll also be putting things like cold medicine in there. It's not a ton, but it adds up.
- $2,000 for furniture and moving expenses is low. I just spent $1,500 on a cross-town move. And new furniture could easily cost you a thousand.
- $2,000 for travel and vacation sounds nice, but isn't actually going to fund all that much more than a few weekends at B&Bs. Pleasant and all, but don't think you're going to be able to spend a week at the beach for that, especially if you travel for holidays. A single round-trip flight for the two of you will easily cost $1,000 or more, half your budget. Most week-long vacations cost closer to $3,000-5,000.
- $1,085 for car insurance seems low. Is that the annual or the six-month premium? I've got pretty competitive rates, and I pay slightly less than that annually, but there's two of you.
- $2,500 isn't a lot for home repairs. For instance, a new roof will likely cost you somewhere in the neighborhood of $5,000-15,000. That generally happens every fifteen to twenty years. So that, right there, means you need to set aside at lease $300 a year for the roof alone; $500-1,000 is more realistic. I'd say you should plan on closer to $3,000-4,000.
- Do you have a yard? Because if you do, that costs money.
- $1,200 doesn't sound like a ton for vehicle maintenance and repair, especially not for two vehicles. My county assessed me about $300 in vehicle taxes this year. With two vehicles, that'd be $600, half your total amount. And you're going to need at least one oil change, probably two or three, per vehicle, so there's another $60-200. That only leaves like $400-500 for other repairs, for two vehicles. Just a new set of tires could easily cost you $500. Make it $2,000 at the very least.
But the real big item here is the rental income. Without knowing your assumptions, there's really no way of telling how realistic that is. Like, none. What's your monthly rent? Does that assume 100% occupancy? Where's your budget for expenses there? Does your repair/renovation budget include just your unit or the rentals too? Because if it's the latter, you need to probably budget to repaint each unit at least once a year, and may well have to replace the carpets every three to five years. All of a sudden your renovation/repair budget starts at $5,000 and goes up from there.
This is not to say that you shouldn't do this. But it is to say that it may not work out the way you think it's going to work out.
posted by valkyryn at 10:41 AM on August 15, 2012 [3 favorites]
- $5,100 seems light on the dining out/groceries front. Like, a lot light. I'm a single guy, and I spent more than that last year. Granted, I eat out more than I probably should, and that includes money spent on dates, etc., but the idea that the two of you can spend less than $425 a month on food, total, is not terribly plausible. That's like $1.55 a meal. You can basically never afford to eat out, ever. Don't get me wrong, people absolutely do this, but they do it by eating lots of bread, peanut butter, balogna, ramen, and EasyMac. Double that amount.
- $1,640 is probably not plausible for medical/dental. Consider doubling that. If you don't spend the money this year, you will soon enough. Health care expenditures are spiky and unpredictable. And you'll also be putting things like cold medicine in there. It's not a ton, but it adds up.
- $2,000 for furniture and moving expenses is low. I just spent $1,500 on a cross-town move. And new furniture could easily cost you a thousand.
- $2,000 for travel and vacation sounds nice, but isn't actually going to fund all that much more than a few weekends at B&Bs. Pleasant and all, but don't think you're going to be able to spend a week at the beach for that, especially if you travel for holidays. A single round-trip flight for the two of you will easily cost $1,000 or more, half your budget. Most week-long vacations cost closer to $3,000-5,000.
- $1,085 for car insurance seems low. Is that the annual or the six-month premium? I've got pretty competitive rates, and I pay slightly less than that annually, but there's two of you.
- $2,500 isn't a lot for home repairs. For instance, a new roof will likely cost you somewhere in the neighborhood of $5,000-15,000. That generally happens every fifteen to twenty years. So that, right there, means you need to set aside at lease $300 a year for the roof alone; $500-1,000 is more realistic. I'd say you should plan on closer to $3,000-4,000.
- Do you have a yard? Because if you do, that costs money.
- $1,200 doesn't sound like a ton for vehicle maintenance and repair, especially not for two vehicles. My county assessed me about $300 in vehicle taxes this year. With two vehicles, that'd be $600, half your total amount. And you're going to need at least one oil change, probably two or three, per vehicle, so there's another $60-200. That only leaves like $400-500 for other repairs, for two vehicles. Just a new set of tires could easily cost you $500. Make it $2,000 at the very least.
But the real big item here is the rental income. Without knowing your assumptions, there's really no way of telling how realistic that is. Like, none. What's your monthly rent? Does that assume 100% occupancy? Where's your budget for expenses there? Does your repair/renovation budget include just your unit or the rentals too? Because if it's the latter, you need to probably budget to repaint each unit at least once a year, and may well have to replace the carpets every three to five years. All of a sudden your renovation/repair budget starts at $5,000 and goes up from there.
This is not to say that you shouldn't do this. But it is to say that it may not work out the way you think it's going to work out.
posted by valkyryn at 10:41 AM on August 15, 2012 [3 favorites]
All I've got to say is, if you have a cat that only costs you $100 per year, you're doing well. I spend that in litter alone in two months!
posted by HuronBob at 10:45 AM on August 15, 2012 [5 favorites]
posted by HuronBob at 10:45 AM on August 15, 2012 [5 favorites]
One thing to consider are the potential legal expenses and lost income that may result from having to evict a tenant. My in-laws owed rental properties over the years, and though they went to great lengths to ensure good credit, income, etc., they still had several incidences of tenants who simply stopped paying rent. In most cases it sounded like they had lost their jobs or had fallen on some other type of hardship, but chose not to vacate the property. In many (most?) areas it can be incredibly difficult to have a tenant removed and I can only imagine that it is much more frustrating when you are all living in the same building. Perhaps you may even sympathize with them and want to help, but that would mean taking a hit in your own income. In my in-laws case, the non-paying tenants were all able to stay for longer than six months and in one case (he was an attorney) for over a year without paying rent. I don't know how common a scenario this is, but I just wanted to mention it to help you cover all your bases. Good luck!
posted by defreckled at 11:03 AM on August 15, 2012
posted by defreckled at 11:03 AM on August 15, 2012
In addition to deducting all your actual, tangible expenses on the rental units (2/3 of pretty much everything you spend on the house), you get to depreciate the rental units. This usually means that, for tax purposes, you will break even or even lose money on the house in the first few years.
posted by mr vino at 4:50 PM on August 15, 2012
posted by mr vino at 4:50 PM on August 15, 2012
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posted by Rallon at 10:10 AM on August 15, 2012