Adding up what the first one actually costs, including the year-two conversion

I've been building a spreadsheet for months and I want somebody to tell me what line is missing.

Target is a 285k three bed in a working neighborhood about 25 minutes from where I rent now. FHA at 3.5 percent down, so 9,975 down. My lender's estimate has closing costs at 8,400, and I'm budgeting 2,500 for the stuff you buy in the first month, mower and a washer and the rest. Call it 21k to get in. I have 26,500.

The part I'm less sure about is month 13, when I move out and rent it. Here's what I have written down:

landlord policy instead of the owner occupied one, I put 400 a year extra as a guess
turnover, paint and cleaning and probably carpet in one bedroom, 3,000
one month vacancy, 1,900
my own moving costs and a deposit on wherever I go next, 4,000

So roughly 9,000 in year two that has nothing to do with the next purchase. If I'm also trying to save a down payment for property two by then, I don't see how both happen on my income, which is 78k.

The decision is whether I put the full 3.5 percent down and keep 5,500 in reserve, or wait seven more months, go in with 5 percent down, and keep 9,000. My lender says the rate is a little better at 5 percent. Nobody has told me what a reasonable reserve is for a house I'm living in that becomes a rental a year later.

Answer

1dpatel_reCS4A

Your list is honest, which is more than most first spreadsheets. Two things I'd change.

The 400 a year for insurance is low in a lot of markets. Landlord policies price differently from owner occupied and the gap has been widening, and it varies enormously by state and by whether you're anywhere near wind or wildfire exposure. Call an agent and get an actual quote on the dwelling policy for that address as a rental. It's a ten minute phone call and it might be 400 or it might be 1,400.

Second, you have no capital reserve line for the property itself. Not turnover, actual failures. A 285k house with an unknown age water heater and roof needs a number sitting against it. If the roof has eight years left you don't need much this year. If it has two, you need to know that before you buy, and the inspection will tell you.

On 3.5 versus 5: the rate difference is usually small compared to the value of holding 3,500 more in cash while you're learning what the house costs. I'd take the cash.

4 replies

1nicole_adeyemiPassivePRO5

Check whether the city requires a rental license or registration before you can lease it out, and what the inspection involves. That's local, and it ranges from a 50 dollar form to an inspection that makes you install hardwired detectors and rebuild the basement stair railing. I've seen people budget zero for that line and then eat 2,200. Whichever municipality that 285k house sits in, read their rental ordinance now while you still have the option of buying a different house.

2megan_doyle15 Get yours

Basic question because I'm new: if you only put 3.5 percent down and rent it out a year later, does the loan change? Like does the bank move you to investment property terms once it stops being where you live? I assumed it did and that's been sitting in the back of my head.

2tashaford30PB2APRO7

rigging, my understanding is the loan you closed stays the loan you closed, the terms don't reprice because you moved. The occupancy requirement is in the documents you sign and it's typically about a year, so the thing to confirm with your own lender in writing is what that period is for your specific loan. I wouldn't take my word for it.

tally, my numbers looked a lot like yours and the line I got wrong was the deposit on my next place. I assumed one month and it was first month plus a deposit plus a pet fee, so 4,000 became 5,600 in one afternoon. Your 4,000 might be fine, it just isn't the sort of number you should carry as a round guess when you can call two landlords and find out.

Also, on your income, saving a second down payment in the same year you eat 9,000 of conversion costs is probably not happening. Mine took 20 months, not 12. That's fine. The strategy still works at that pace.