Last month, my wife and I closed on our new home. Because we earn a high income, we were able to save a significant downpayment on our new house without having to sell our old one. We’ve turned our first home into a rental property now – the new tenants just moved in this month. And that makes me a newly minted, first-time landlord.
There was some debate about whether to sell our old house or keep it. I’ve heard of plenty of rental property horror stories and with the real estate market on a tear, there were good reasons to sell and cash in on the equity we’ve gained. But I thought the decision was an easy one. We had to keep the house!
At the outset, we didn’t have a lot of reasons to sell the house. We don’t really need the equity that we’ve gained – at least I don’t think we’d use it for anything particularly interesting. And we’re a family of entrepreneurs, which means we’re willing to take chances. Plus, I haven’t had a regular job in over two years, so it’s probably not a bad idea for me to have something to do. We also had a good amount of seed money from when we rented out a spare room in our house on Airbnb (I never really spent the money that we earned from Airbnb over the years).
This new endeavor means you’ll start to see some content around my experience managing a single rental property. I thought it’d be a good idea to kick start this new content with a look at what this rental property is all about and what the numbers should look like.
Why Convert Our Primary Residence Into A Rental Property?
I’ve always been a fan of earning money using the things you already own, so converting our primary residence into a rental property made a lot of sense to me. It seems like an easier way to get started with real estate investing – or at least a lot less scary compared to buying a house specifically as an investment property.
The house is a 4 bedroom, 2 bathroom home that my wife purchased in 2010 for $237,000. Her parents gave her the money for a down payment, so she did have that benefit. She then house hacked by renting out the other rooms to roommates, covering her mortgage with the rental income.
The house turned out to be a great purchase – 2010 might have been one of the lowest home value years in recent memory. To understand the value, consider that the previous owner bought the house in 2006 for $290,000. Today, we’d probably get $300,000 to $350,000 if we sold it, so it took at least 15 years to regain the value that it lost from the housing crash of the mid-2000s.
What makes our house a particularly good rental is how close it is to a large state university – just a 10-minute walk to campus. Turning any house into a rental means finding a location with appropriate demand. And I don’t think anything creates more demand for rental units than a large university. This huge demand means vacancy rates should be low – potentially no vacancy at all. Obviously, there are downsides with renting to students – more turnover and more wear and tear on the house are the two big things that come to mind. But I think the benefits should outweigh the costs.
In addition to the good location, we also have an incredibly low interest rate on our mortgage. I refinanced the mortgage last year when interest rates dropped dramatically at the start of the pandemic. Interest rates ended up dropping even more, but I couldn’t have known at the time. Still, our current rate is just 2.75%, with 14 years remaining on the mortgage. The low interest rate and relatively short time remaining on the mortgage means a lot of our monthly payment on the house is going towards building equity.
Finally, there are tax reasons to at least try being a landlord for a few years. Specifically, under current tax laws, you can exclude capital gains taxes on the sale of your primary residence so long as you lived there for 2 out of the last 5 years. In other words, we can try renting our house for up to three years and if we find that being a landlord isn’t for us, we can sell the house and cash in on our equity tax-free. That’s reason enough to at least try being a landlord. (Source: https://www.irs.gov/taxtopics/tc701)
The Anticipated Rental Property Numbers
Okay, let’s get to the part you probably care about – the numbers. As mentioned, the house is a 4 bed/2 bath that’s geared towards students because of how close it is to the university. I have it rented at $2,400 per month on a 12-month lease. Gross yearly rental revenue equals $28,800.
Fixed costs include the mortgage, taxes, and insurance. Here’s what the costs are for these three items:
- Mortgage = $882 Per Month ($10,584 per year).
- Taxes = $4,100 per year (approximate)
- Insurance = $2,100 per year (approximate)
In total, our mortgage, taxes, and insurance equals $16,784 per year. If we take the rental income minus our fixed costs, we’ll end up with a little over $12,000 in cash flow (or about $1,000 per month).
Of course, there are other costs to consider beyond the mortgage, taxes, and insurance. Maintenance is the big one. There will be regular maintenance – and probably more than most properties because of the higher turnover and the fact that students tend to put more wear and tear on properties. There are also going to be large expenditures, things like new boilers, water heaters, roofs, etc. I’m at a point where I don’t actually need the rental income, so for now, I’m setting aside 100% of the rental income to go back into the property for maintenance.
Vacancy is another potential cost to consider. Given the location, I have a feeling that my vacancy rate is going to be low. Student leases generally go for 1 year and they’re asked to sign a new lease early in the spring semester. That should give me 6 months or more to find a new tenant, which means I should be able to avoid long vacancies.
My next cost is utilities. The tenants pay for electricity and gas, but I’m covering water, sewer, and trash. I probably could have had the tenants cover this utility as well, but I never paid for water or trash when I was a renter, so I figured it was normal for the landlord to cover this cost. I estimate that it’ll cost $100 per month, so you can figure that I’ll have about $900 in cash flow before maintenance.
Finally, I have to pay for a yearly rental license. I believe it’s about $300 per year, so that’s another small cost to think about each year.
Earnings Beyond Cash Flow
The interesting thing about a rental property is that you can earn income from it in other ways, although it’s not income that’s accessible to you unless you sell the property. Specifically, there are two ways a rental property can generate income beyond cash flow – principal mortgage paydown and appreciation.
Currently, on every mortgage payment I make, about $600 goes towards reducing my principle. This number will continue to increase with each payment until my mortgage is fully paid off. So, with each payment, I’m gaining $600 of equity.
In addition, the home does appreciate over the long run, although it’s not consistent or predictable every year. Still, depending on what you value my home at now, you can say it has appreciated about 2.5% to 3.5% per year on average. At its current value, I can expect it to appreciate about $7,000 in the next year. It’s not income that I can count on or that I necessarily consider as part of the value of the rental, but it is something that does happen.
So, if I really wanted to make the rental sound good, I could theoretically think of it like this:
- $10,800 in cash flow
- $7,200 in principal paydown
- $7,000 in appreciation
- Total = $25,000 in value each year.
I’m not thinking of it like that, but it is a fact that I’m gaining equity each time I pay down my mortgage. And over the long term, the house should increase in value.
The Plan – Hold Our House For As Long As Possible
I come from a family of immigrants. And like many immigrants, we valued tangible assets. My family moved three times when I was growing up. Each time, my parents kept our old house and turned it into a rental. Over the 34 years I’ve been alive, my parents have still never sold a house. Seeing my parents follow this strategy probably rubbed off on me.
My son is a year old now. We have 14 years left on the mortgage. If we can hang onto the house for that long, by the time my son is ready for college, we’ll have an asset that can probably fully pay for his college. Or maybe if he goes to our state university, he can live there and we can collect rent from his roommates. Or maybe someone makes us an offer that we can’t refuse at some point. A lot of things can happen.
Like anyone starting with anything, I know I’ll make some mistakes. I figure at my age and my current stage in life, I can afford to make them. We’ll see what happens.
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More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with just $10 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
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More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- SoFi Money ($325) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $300 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Upgrade ($300) – Upgrade is a free checking account that’s currently offering a $300 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $300 Referral Bonus – Step By Step Directions.
- Fairwinds Credit Union ($175) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
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- Fifth Third Bank ($200) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
- GO2Bank ($50) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $50 referral bonus.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link. Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
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- Varo ($25) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $25 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $800 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I’m planning the same move, renting out my current home and buying another home in the next year or so. I’ll be following along w your story. Are you planning on starting a rental business for managing the properties? Or will you keep it under your name? Is there any tax benefit to one or the other ownership?
This is awesome, and congratulations with your new adventure!
For me personally, the first 2 years of doing single family rentals was a ‘honeymoon period’ which quickly led to a sour divorce. Nowadays, I just invest in real estate syndications since it has the benefits of growth without the hassle or worry of management.
Hopefully, your experience will be much better than mine!
Not sure our HOA would like it. I did rent out my room in my first house and that helped pay the bills.
Cool article! We have a similar house close to a different Big10 University that we bought in the depths of the financial crisis. Sometimes I daydream of moving to the country after FIRE and renting this out. I’ll be checking back to see how it goes for you!
Wow. It seems like the tenants are getting a deal. Or perhaps I’m looking at it through a local lens. Where I live there is no way there will be a 4bed.2bath house going for $2400 a month. I want to be able to eventually do the same thing you are doing but with a condo. Like always, you are an inspiration.
Market rates are going to dramatically differ depending on where you live. In Minneapolis, around the campus, this is about the going rate. I could possibly get it to $700 a room if I had more time, but I wanted to get someone in quickly since school year was approaching and I didn’t get it up for rent until mid-July.
Wow, a down payment on a $237k house as a gift sounds incredible. Most people will never experience that level of generosity.
Absolutely. There’s no doubt we’re both incredibly privileged. My parents paid for my college, which with rent and everything came out to $80k or more for the four years, so they basically gifted me $80k+ for education.
That being said, while I am definitely privileged, I’m not as privileged as some either. Parents were both immigrants with no college education, so they got to where they were with some work and some luck.
Great article, I’m in the same predicament, but since I live in the City as an apartment renter, my primary home is in a vacation destination, so renting it out has allowed me to not pay both rent and mortgage.
Look forward to reading more on your financial journey and allow me to pick up on some money saving tips.
Nice. So do you use your home as a vacation rental with Airbnb?
Yes, only Airbnb, the county where my home is has different vacation rental permits, so limiting on process, there’s fees, forms, etc. they make it so complicated and stressful just to make a living. I could write a book on this angle with city government policies.
Even though you plan to hold for less than 3 years or forever, some of your calculations could include the lost opportunity to avoid those capital gains taxes. Assuming you sell for $325,000 and have $13,000 (to make the numbers round) of deductible improvement expenses to add to the $237,000 cost basis, this might be taxes on $75,000 at say a 20% rate so $15,000. But who knows how many years to spread that across!
True. One thing to consider is in the future, can always roll the equity into another property to avoid taxes, if that’s something to worry about. Could also move back into the house in theory for 2 years (although unlikely I’d do that).
How exciting – good luck with your new venture. I like the idea of at least trying for 3 years, then selling it tax free if it doesn’t work out.
Other then regular home owners insurance, what other kinds of insurance would you need? Renters insurance?
You get landlord insurance, which is basically just home insurance but for a rental property. Renter’s insurance is something the tenants get for themselves.