Thought about rental properties or renting a room out

Get a mortgage, rent it out, and get them to pay your mortgage.

Such an idea is very common around here, and prevalent in other hot housing markets also. For some, it’s viewed as the road to wealth.

However, outside of significant appreciation, cash-on-cash return on homes generally don’t provide a significantly better return compared to many other more liquid investments with lower maintenance costs. Rather, it is the significant leverage available that provides an illusion of significant positive cash flow, as well as making this method of investment more readily available. And then, leverage is available with stocks, though availbility and its extent varies upon institution and investment.  For instance,

$340,000 newer duplex renting for $2000/month

$2,700/yr tax (estimate)

$250/month average utilities (a rough estimate)

… $15100/yr net, assuming 1/12 months of vacancy; 4.4% approx return

This is not factoring in wear and tear and maintenance costs yet. Assuming long-term upkeep cost is about $2000/year, and at current interest rates equal to inflation, this figure would then become 3.85%. And then again, this is a hard factor to predict as it varies upon tenant.

7-8% is usually obtainable with many stocks without taking too much risk, so to make buying such a property worthwhile, we would be counting on very significant appreciation.

Now during my own home shopping, I have debated many times between a 1br, 2br, or 3br unit. The idea was to rent out the extra room(s) to pay part of the mortgage. Looking at one pre-construction sale close to the river for top-floor condos, $280k for 1br, $440k for 2br:

$160,000 premium to have an extra bedroom, rents for $900/mo

$150 extra condo fee and utilities

$1280 extra property tax

Interest is assumed to be equal to inflation

… 4.36% approx return (approx 7k), assuming 1/12 months of vacancy, not considering wear and tear.

Return-wise, it would seem like a lot of new properties are priced in ways so that they have similar rates of return if parts of or entire units were rented out.

However, renting rooms out is easier as you can do so as part of your primary residence and hence avoid taxes, and 20x leverage is available. On the downside, you are living directly with someone all the time and may have to deal with headaches associated with such- are such grievances worth 4.36%+appreciation return minus wear and tear?

Monthly cash flow wise,

900 – 150 – 107 – 379 interest – 62.5 vacancy cost – avg. monthly wear and tear = 201.5 – avg. monthly wear and tear.

Which is not very attractive either unless the property appreciates significantly.

So I can conclude that the major boon for renting room(s) or units out is the significant leverage available.

Drawing on such an analysis and relating it to my goals, on a previous post I mentioned I wished to reach 100k net worth by age 25. I am turning 22 in 2 weeks, so this is about a 3-year horizon. If I don’t rent out that particular extra room, I would lose out on $21,000+appreciation over that period, minus wear and tear. The oilfield is largely a hit and miss, as I’m still reliant on the winter and a steady stream of work to make the bulk of my money. Overall I feel everything is high-risk, but if I am to make money, seemingly I don’t have a choice but to take it on.