Converted on schedule, and my own rent is what wrecked it

I've built four versions of this spreadsheet and none of them have a row for where I live. Adding it tonight. That's genuinely the first thing in this post that changed something for me.

Five and a half weeks of vacancy on a turn you controlled is the expensive line, and it was avoidable. Paint and carpet can happen while you're still in the house if you stage it room by room. Uncomfortable for a month, cheaper than 2,470.

The arithmetic here fails on one assumption, which is that the rent minus the payment is the return. It isn't, on a conversion. The number that matters is the change in your total household cash position, and moving out adds a housing payment that didn't exist before.

Run your own numbers again. Before: you paid 1,802 and consumed the house. After: you pay 1,885 for the apartment and receive 1,950 gross, against a payment that is now 1,841. Gross rent minus payment is 109. Subtract a vacancy allowance, and at five percent that's 97 a month, so you're at 12. Subtract a capital reserve at even 150 a month on a house with a dishwasher that just died and a shower valve that was already leaking, and the property runs negative before management. Your household is down the difference between 1,885 and what the property contributes, which on those figures is most of the apartment payment.

That can still be a reasonable position to hold. The FHA financing put 8,540 into a 244,000 asset, and principal paydown at that loan size is real money that doesn't show up in your monthly. But it has to be held deliberately with cash behind it, and eight months of it consumed a 9,000 reserve, which tells you the reserve was sized for the property and not for the plan.

One more mechanical point. FHA mortgage insurance rules on cancellation depend on the loan's origination terms and the amount you put down, and they have changed over the years. Get your servicer to confirm your specific loan's terms in writing before you assume that 1,841 payment ever drops.

I'm planning my first purchase and I had exactly the notebook line you had. 148 a month. Thank you for posting the eight month version instead of the closing day version.

Question about the vacancy. Did you start marketing before you moved out, or after the paint was done? I've been told you can list with photos of an occupied unit and have a tenant lined up for the day the work finishes.

@wren that's what I'd want too, but a lot of applicants won't commit to a unit they can't walk through, and the ones who will are sometimes the ones you don't want. Depends on the market.

@wren I started marketing after. That's what happened, and it's the single dumbest decision in the post. I wanted it to show well. Five weeks of showing well cost me 2,470.

The apartment at 1,825 is what gets me. You went from owning a house at 1,802 to renting a smaller place for more. Was there nothing cheaper, or was the plan to buy the next house and the apartment was a stopgap?

@marlow that's the trap in expensive markets. The rent on a 2 bedroom is often close to the payment on a whole house because the house was bought at a rate and price from before. In my area you'd have found a 1 bed at 900 and the whole story reads differently.

Every unit I've bought has taught me something and this one is teaching me from a distance. The reserve sizing is the real failure. 9,000 after closing on a house with an original shower valve you'd been babying isn't a reserve, it's a hope. I keep six months of PITI per door plus a known turn cost and I still get caught.

Also the dishwasher. You lived with it for a year, so you knew. Anything you tolerated as an owner occupant is a line item on the day you leave.

I'm about a year out from the same decision, so I've gone through this twice. My question is whether you'd still have done it if you'd modeled it correctly. Would a correctly modeled version of this deal have been worth doing, at negative 200 a month household, for the paydown and the low down payment? Or does the deal fail on its own terms even with perfect planning?

@anchor it turns into a question about what the 8,540 bought. On a 244,000 house the principal paydown in year one is somewhere around 2,700 and it grows. If you can carry the monthly, that's a real return on a small down payment. If carrying it drains you to the point where you can't qualify for or fund the next one, the strategy stops working after property one, which is what happened here.

@parcel the point about the new housing being priced at today's market and the converted house being priced off an old payment is the clearest statement of the drag I've seen. That's the whole squeeze.

I'm reading everything twice at the moment and I had to read @parcel's post three times. So the strategy basically assumes you keep buying, and stopping in the middle is the worst place to stand?

@juniper roughly, yes, at least on the cash side. Stopping means you have the costs of a landlord and the housing costs of a renter and none of the second property's rent. It's not fatal, plumb still owns an appreciating asset with a good loan on it, but the monthly is at its ugliest right there.

One thing to check in your file. FHA has occupancy rules and there are circumstances where the agency's own guidance limits how soon you can get another FHA loan, which matters if you were planning to repeat the low down payment part rather than move to conventional. Ask your lender to put their read of your situation in writing before you plan around it, because loan officers get this wrong out loud all the time.

Everything in this thread is new to me and the part I'm taking is that the drip you ignore for a year is a plumber's invoice on the day you leave. That's such a simple idea and I would never have thought of it.

The 380 insurance increase plus the escrow reanalysis knocked 39 off the monthly, which was a quarter of the whole margin. Two phone calls before you move out would have told you that number. Cheap information.

I've been trying to figure out which strategy fits me and I came into this thread half sold on this one. Still half sold, honestly, but for different reasons now. The financing advantage is real and the pace is set by where you sleep. That's a strange constraint and I need to think about whether I actually want to move every year for five years.