This scenario has maybe a 5% of happening, so this is more of a learning situation if ever arises again. The house next door hasn't sold in a couple months and price has dropped to something almost attractive (priced at $600k)

If we wanted to purchase it and rent it out, what options are there to finance/consider?

We have about $170k equity in our current home which has a 2.5% rate. I believe a HELOC on our current home could be possible for a down payment on a loan for a new mortgage on the new house. And if we wanted to have a management company handle the tenants, we'd need to make sure the rent covers these fees in addition to the mortgage, maintenance, hoa fees, etc which is a lot to assume/hope for.

Any material, rules of thumb, advice is appreciated.

The monthly payment math on a deal like this would look something like:

Mortgage Principal & Interest at 25% down and 7%: $3,000
Taxes at 2.5%: $1,250
Insurance at 1% of purchase price: $500

Total Monthly Payment: $4,750

Jamie not sure your insurance price is correct. I'm not seeing that policy anywhere. Especially Houston. I'm guessing more like 2500-3000 for a rental home. Your taxes are also low. I'd guess 10-12k.

OP the first number you need is market rental income. What can you rented it for? From there back out the costs above and add a vacancy factor (1-2 months per 2 years) and maintenance costs.

I doubt you can break even on that type of home.

SteveBott said:

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Jamie not sure your insurance price is correct. I'm not seeing that policy anywhere. Especially Houston. I'm guessing more like 2500-3000 for a rental home. Your taxes are also low. I'd guess 10-12k.

OP the first number you need is market rental income. What can you rented it for? From there back out the costs above and add a vacancy factor (1-2 months per 2 years) and maintenance costs.

I doubt you can break even on that type of home.

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Insurance has gone crazy in Houston. A bunch of carriers have pulled out of the market and the ones that are left are upping their prices. I used to tell clients to assume 0.5% of their purchase price in insurance premiums each year, but now I'm recommending 1%. I always try to be conservative on ownership costs for deals, but OP can probably get an accurate quote in a day or so by asking. I had a buyer client who had to drop a deal in Houston under option this year because he could not get insurance for it at anywhere close to a reasonable price. Wasn't in a flood zone, but it was an older home. Broker went out to 140 different insurance companies and the least ugly date we could find to the prom insurer wanted him to replace an 11 year old roof because they said "they no longer insured roofs over 10 years old".

On property taxes for rentals in Houston, 2.5% is usually about right, but if it's in a MUD or similar or if it has an HOA, it could easily be up to 3.5%. 2.5% of $600,000 is $1,250 a month. 3.5% would be $1,750.

Looking at your numbers I did not realize you were allocating monthly costs.

Quote:

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I'm guessing more like 2500-3000 for a rental home.

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This is where I am on my similaly valued next door rental for insurance. Although, most of my value is in the land, which helps. My renewal rate was going to be about 50% more with my same current carrier - but had to shop it and got it down to about 2600 annually.

Fantastic explanation RPR, really appreciate this.

And thanks all for chiming in as well, exactly what I was looking for.

Also, don't look strictly at payment for deciding this, repairs and vacancy will happen

Consider vacancy (I usually use 3%)
Consider repairs (I use 5%)
Consider capex (I use 5%)

Those % I do off the lease value. Here's a real life scenario from one rental we bought in 2020 in BCS.

* Lease income - $2,400
* Principal - $215.98
* Interest - $468.05
* Escrow - $782.68
* Vacancy (3%) - $72
* CapEx (5%) - $120
* Repairs (5%) - $120
* Total Liabilities - $1778.83
* Cash flow - $621.17

shout out to app.dealcheck.io as a tool for running rough numbers estimates

https://app.dealcheck.io/

AgsMyDude said:

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Also, don't look strictly at payment for deciding this, repairs and vacancy will happen

Consider vacancy (I usually use 3%)
Consider repairs (I use 5%)
Consider capex (I use 5%)

Those % I do off the lease value. Here's a real life scenario from one rental we bought in 2020 in BCS.

* Lease income - $2,400
* Principal - $215.98
* Interest - $468.05
* Escrow - $782.68
* Vacancy (3%) - $72
* CapEx (5%) - $120
* Repairs (5%) - $120
* Total Liabilities - $1778.83
* Cash flow - $621.17

shout out to app.dealcheck.io as a tool for running rough numbers estimates

https://app.dealcheck.io/

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Add on some lawn service and possibly pest control to be safe unless you want to fill your weekends with mowing.

We are currently in this situation. Our tenants have been in place since Harvey. It was going great until HCAD decided to double the land value and insurance has gone up significantly since then.

This year our rental property insurance jumped up to $2,900 ($2k last year). Roughly $500k town home in Houston. As far as I know, there's really only one company still even writing rental policies down here....multiple brokers told me they don't have any companies writing them anymore.

One thing I haven't seen mentioned in any of the calculations....if you want to use a realtor to list it, listing costs. Avoidable, but has been worth it for us (using Red Pear) as both years we had a signed lease agreement within 5 days of listing.

My wife and I purchased the house next door to us and rather than rent it out, we moved in. This allowed a lower down payment and better interest rate as it became our primary residence. That's another option that doesn't look like it was mentioned above.

Regarding living next door to our tenants (we rented out our previous primary), there are definitely pros and cons. It's easy to keep an eye on the property and I keep up with the yard maintenance (mow my yard and tenant yard at same time). It's also easy to fix minor plumbing or other issues etc with the close proximity to my tools. I understand not everyone has the same experience but ours has been great so far.

Insurance and property tax increases are continuing to erode the cash flow, but protesting property tax appraisals helps. Having my primary and rental close by makes protesting easier to prepare for as well. We are in it for the long haul and very confident that the equity when we get ready to sell in 5-10 years will be worth the time spent.

rhar12 said:

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My wife and I purchased the house next door to us and rather than rent it out, we moved in. This allowed a lower down payment and better interest rate as it became our primary residence. That's another option that doesn't look like it was mentioned above.

Regarding living next door to our tenants (we rented out our previous primary), there are definitely pros and cons. It's easy to keep an eye on the property and I keep up with the yard maintenance (mow my yard and tenant yard at same time). It's also easy to fix minor plumbing or other issues etc with the close proximity to my tools. I understand not everyone has the same experience but ours has been great so far.

Insurance and property tax increases are continuing to erode the cash flow, but protesting property tax appraisals helps. Having my primary and rental close by makes protesting easier to prepare for as well. We are in it for the long haul and very confident that the equity when we get ready to sell in 5-10 years will be worth the time spent.

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We also bought the house next door and spent 9 months renovating it and moved in. Now we lease the old one and, as noted above, the hardest part is the skyrocketing property taxes and lack of a homestead exemption to temper the increases. The fact that we don't have no longer have a mortgage on either house makes it much easier.

All the chores are done x 2. Air conditioning filters. Mowing. Pest control. etc. It is also nice to be close to all our tools whenever something breaks.

Both our houses were purchased when:
1) housing prices were low, and
2) interest rates were extremely low.

I don't think we could have done it in today's economic conditions.

Unfortunately, it's about to get even worse with insurance on investment properties. Travelers, who has been the most competitive landlord insurer over the last 6 years, will be non-renewing a lot of TX landlord policies beginning in 2025. DFW for sure, and I'd be surprised if many in Austin and Houston aren't non-renewed as well. There is already such a strain on options, and then with the influx of Travelers non-renewals needing to be insured elsewhere, the couple carriers that are left will likely reach max capacity at some point

BrianDemarais said:

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Unfortunately, it's about to get even worse with insurance on investment properties. Travelers, who has been the most competitive landlord insurer over the last 6 years, will be non-renewing a lot of TX landlord policies beginning in 2025. DFW for sure, and I'd be surprised if many in Austin and Houston aren't non-renewed as well. There is already such a strain on options, and then with the influx of Travelers non-renewals needing to be insured elsewhere, the couple carriers that are left will likely reach max capacity at some point

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Our landlord policy is with Amica and it is $$$$.