Comments on: Would You Buy Now to Invest and Rent Out?

By: Alison

Alison — Sun, 10 Aug 2008 18:12:38 +0000

Hello Curous:
thanks for your comment. Good point about renting out until ready to move in; have any folks reading this done that before? Or considering it now? Also, thanks for the dose of realism: not being able to rent out due to lack of renters (or suitable ones) is a real concern.

By: curous

curous — Thu, 07 Aug 2008 06:40:35 +0000

In the 20 plus years that I have lived in the Bay Area, the purchase of a house to rent has never made economic sense. However, there are circumstances were buying and renting makes sense. Say you want to buy a house now in the down market to live in the future. Can you buy now, rent until you are ready to move in and take advantage of the limited tax benefits available? Sometimes.
I have not done a survey of the rent control ordinances for the bay area, but in Berkeley, for example, the rent control provisions that apply to single family residences are relatively mild.
If you are going to rent out a house, you really do need to be realitstic about the costs — several months of a vacant property will bust your cash flow projections.

By: David

David — Thu, 07 Aug 2008 04:54:54 +0000

Not really a pity-fest. I was doing my best to correct what I’ve seen as commonly held misconceptions about the tax benefits of owning property.

I agree there are opportunities out there to make a decent buy-to-rent decision. However, I really don’t see the purpose in buying negative cash flow, and most properties, even foreclosures are still negative cash flow situations. You end up paying for your speculation as to when and how much prices will come back. And Michelle, you’ll notice the property mentioned was in Oakland, not San Jose.

With the credit situation the way it is, I understand you will likely have to put 30% down, your leverage benefits are reduced.

Anyway, you can’t just say that a foreclosure is a good investment idea or that it’s automatically a great idea to be cash flow neutral. Run the numbers, and don’t forget to make real allowances for maintenance AND vacancies.

By: Alison

Alison — Thu, 07 Aug 2008 02:53:44 +0000

Thanks David, Michelle, Dave and Red! Great comments. I’m learning a lot. David: good point about renting out an SFR vs. a multi-unit; when you put it that way, renting out an SFR doesn’t seem to make sense. Dave and Red: yes, there’s so much to think about as a landlord; it makes me wonder if it’s ever worth it. I don’t think I would be cut out to be a landlord…Michelle: I think you’re right in that this really is a rare situation we have right now in the Bay Area; what areas might you recommend to buy and rent out? Thanks everyone!

By: Michelle

Michelle — Wed, 06 Aug 2008 23:10:25 +0000

There is no rent control in San Jose on single family homes. Anyway what a pity-fest this is! The Oakland buyer Alison Ching wrote about in the blog has it right. Right now we have a rare situation, in that rents are high and real estate prices low. Why not take advantage of it? You can buy a foreclosure in a reasonable area today (I would advise a better area than some of those in Oakland), make a few repairs and rent it out for almost the mortgage payment. The ability to do this is rare in the bay area. Wait a few years and sell, or raise rents and achieve decent cash flow. Whats not to like about this? And to Red, on the earthquake damage, yes that was unfortunate but how much have you made on that house now, 19 years after Loma Prieta? A roof costs 6K and its a repair you need to make every 20 years, meanwhile houses are appreciating hundreds of thousands in the same period. Lets get some perspective here.

By: Red

Red — Wed, 06 Aug 2008 20:10:56 +0000

Being a landlord is WORK, believe me, I’ve been there. Try doing an eviction for fun. So just because buying and renting out a place might break even, you had better be able to see significant appreciation to make it worthwhile. In addition to that, there are risks, some you might not think about much; I got hit big time by the 1989 earthquake – one rental almost twisted off its foundations and it cost a fortune to jack it up and put it back. I was lucky, the house next door dropped into the basement. I’ve also had a tree fall on another place, taking out half the roof.

By: David

David — Wed, 06 Aug 2008 20:04:58 +0000

There is no real tax advantage. You get to deduct mortgage payments, etc from the property’s income. If your mortgage payment exceeds the income, you get to deduct the loss (but you still lose money, just less than the straight up loss). If they don’t, you have cash flow, and you pay taxes on the income. The only additional tax benefit you derive, if you’re cash flow positive is a depreciation benefit.

Additionally, while rents are higher now than they were a couple years ago, they can drop, and more importantly, I believe just about every jurisdiction in the Bay Area has rent control, so you’re going to be locked into the rent you charge.

People often do not calculate the tax benefits correctly. For example, they always talk about the tax benefit to owner-occupation, however, they incorrectly calculate it.

Everyone has a standard deduction, therefore, the tax benefit is the INCREMENTAL deductions gained by 1) having the mortgage interest & property taxes be greater than the standard deduction and 2) the ability to deduct state income taxes.

Your correct incremental tax deduction for a, say, $400,000 loan at 6% is:
$24,000 – $10,000 (or so, if married, can’t remember the exact amount for standard deduction)
+ property tax ($5,000 for example)
+ state income tax (another $5,000)

so $24,000 * tax bracket is the incremental benefit, not $34,000 which is how I usually see R.E. agents calculate it.

By: dave

dave — Wed, 06 Aug 2008 10:55:05 +0000

in response to Michelle:

Yes, you have the tax advantage, but you also have the tax disadvantage, namely PROPERTY TAX (which in most cases comes out to be MORE than the savings in the interest tax-deduction). And don’t forget homeowners-insurance, HOA, mello-roos, maintenance fees, buying and selling realtor costs… the list goes on.

By: Michelle

Michelle — Wed, 06 Aug 2008 04:27:45 +0000

remember you have the tax advantages so depending on whether you have other income coming in, you don’t really need to cover the mortgage completely to break even.

Rents are higher than I have seen them in some time, and rising monthly just from perusing Craigslist.

By: David

David — Wed, 06 Aug 2008 04:19:30 +0000

It rarely makes sense from a cash flow perspective to rent out a single family house, even going back 10 years.

Most SFR’s purchased to rent out are done so on the expectation of cash flow neutral, with the kicker on appreciation. Therefore, right now, with any appreciation several years away, it’s definitely a long-term investment, and one that might be worse than alternatives.

However, I’ve seen several 2-4 units for sale on craigslist that should be cash flow positive and probably would be better investments.