5 ms·

Why should the rent cover your mortgage?

by rvense 5y ago

germandiago 5y ago
Because people who buy a place would like to reasonably be able to pay something that takes 30 years or similar to pay with the rent itself. That is a reason why you invest in the first place.
- munk-a 5y ago
  That's a pretty arbitrary measure though - you're making "free" money either way to pay towards that mortgage while retaining the whole value of the asset while it is gradually purchased. Whether you've got enough to cover mortgage or not doesn't necessarily flip a binary switch making it a good investment or not. Property ownership is a market barred from entry by a high buy in cost to account for some risk - but the risk is rather minimal and most properties are going to be value accruing over time. We can observe this by looking at how cheap general property insurance tends to be (unless you're in a really risky area - i.e. building a house in a flood plain).
  - germandiago 5y ago
    > That's a pretty arbitrary measure though It is, but I think I would find reasonable getting a mortgage if it does not impose a load on my finance by having it rented.
- deleted 5y ago
  [deleted]
ethangarofolo 5y ago
Why wouldn't it? We're talking about a mortgage on the rental property itself not on the landlord's personal residence.
- greenshackle2 5y ago
  > We're talking about a mortgage on the rental property itself not on the landlord's personal residence. Yes. Everyone in this conversation understands that. There's no relation between the amount and terms on your mortgage for your rental property and the market price to rent a given unit. If I take a 20 year mortgage does that mean I should charge more rent than if I took 30 years because my payment is higher? Should I drop rent by half when I'm done paying my mortgage since I no longer have a payment? It's nonsensical. There's especially no reason to expect that rent should cover 100% of the principal fraction of your mortgage payment. Taxes, maintenance, interest, etc. are pure costs which are understandably passed on to tenants. The principal fraction of a mortgage payment is not a cost, it is building your equity. If rent is covering all costs and "only" 50% of the principal fraction of your mortgage payment you're still making a profit. Because you're paying, let's say, $1000 of the mortgage payment with your own money, but you're getting a $2000 increase in equity.
  - ClumsyPilot 5y ago
    Indeed - it is increadible that so many people just assume rent should basically buy another person a house by default.
  - nsxwolf 5y ago
    If the increase in equity should be satisfactory, that's an argument for just letting everyone live in the place for free. I mean, you're coming out ahead. I know other landlords with multiple units. If they don't think something will be an income producing property, they won't buy.
    - greenshackle2 5y ago
      My point is that you charge market price. Because that's how markets work. Price to rent ratio varies very widely between different markets. If you don't want to buy in a market with a high price to rent ratio that's fine. There's simply no rule that guarantees a price to rent ratio such that rent covers all costs plus the full payment on a 30 year mortgage in all markets at all times.
dylan604 5y ago
Likely NOT the landlord's personal domicile's mortgage, but the mortgage on the rental property itself. Landlords with mortgages on their rental property can go upside down on their notes too.
- greenshackle2 5y ago
  If you can't bear any risk of losing money perhaps you should buy money market funds instead of real estate at 20x leverage.
  - nsxwolf 5y ago
    I bought a house just before the financial crisis and a decade later needed to move but I was underwater. I didn’t have enough money to sell it so I rented it out.
    - dylan604 5y ago
      how did this not break your mortgage agreement? most private mortgages have a clause that states the mortgaged property will be your primary residence. specifically. it is to prevent private mortgages being obtained for rental properties.
      - nsxwolf 5y ago
        Shrug. It never came up. I was all squared away with a good legal document for the lease, verified renters insurance, all that. Never even occurred to me the bank might take issue with it. Oh well, no harm done.
zip1234 5y ago
Obviously there is no rule that it should. I know plenty of people that kept their old house (and mortgage) when moving and tried to rent it out to build some equity and make money.

Why should the rent cover your mortgage?

by rvense 5y ago

Why should the rent cover your mortgage?

Because people who buy a place would like to reasonably be able to pay something that takes 30 years or similar to pay with the rent itself. That is a reason why you invest in the first place.

munk-a 5y ago
That's a pretty arbitrary measure though - you're making "free" money either way to pay towards that mortgage while retaining the whole value of the asset while it is gradually purchased. Whether you've got enough to cover mortgage or not doesn't necessarily flip a binary switch making it a good investment or not. Property ownership is a market barred from entry by a high buy in cost to account for some risk - but the risk is rather minimal and most properties are going to be value accruing over time. We can observe this by looking at how cheap general property insurance tends to be (unless you're in a really risky area - i.e. building a house in a flood plain).
- germandiago 5y ago
  > That's a pretty arbitrary measure though It is, but I think I would find reasonable getting a mortgage if it does not impose a load on my finance by having it rented.
deleted 5y ago
[deleted]

ethangarofolo 5y ago

Why wouldn't it? We're talking about a mortgage on the rental property itself not on the landlord's personal residence.

greenshackle2 5y ago
> We're talking about a mortgage on the rental property itself not on the landlord's personal residence. Yes. Everyone in this conversation understands that. There's no relation between the amount and terms on your mortgage for your rental property and the market price to rent a given unit. If I take a 20 year mortgage does that mean I should charge more rent than if I took 30 years because my payment is higher? Should I drop rent by half when I'm done paying my mortgage since I no longer have a payment? It's nonsensical. There's especially no reason to expect that rent should cover 100% of the principal fraction of your mortgage payment. Taxes, maintenance, interest, etc. are pure costs which are understandably passed on to tenants. The principal fraction of a mortgage payment is not a cost, it is building your equity. If rent is covering all costs and "only" 50% of the principal fraction of your mortgage payment you're still making a profit. Because you're paying, let's say, $1000 of the mortgage payment with your own money, but you're getting a $2000 increase in equity.
- ClumsyPilot 5y ago
  Indeed - it is increadible that so many people just assume rent should basically buy another person a house by default.
- nsxwolf 5y ago
  If the increase in equity should be satisfactory, that's an argument for just letting everyone live in the place for free. I mean, you're coming out ahead. I know other landlords with multiple units. If they don't think something will be an income producing property, they won't buy.
  - greenshackle2 5y ago
    My point is that you charge market price. Because that's how markets work. Price to rent ratio varies very widely between different markets. If you don't want to buy in a market with a high price to rent ratio that's fine. There's simply no rule that guarantees a price to rent ratio such that rent covers all costs plus the full payment on a 30 year mortgage in all markets at all times.

dylan604 5y ago

Likely NOT the landlord's personal domicile's mortgage, but the mortgage on the rental property itself. Landlords with mortgages on their rental property can go upside down on their notes too.

greenshackle2 5y ago
If you can't bear any risk of losing money perhaps you should buy money market funds instead of real estate at 20x leverage.
- nsxwolf 5y ago
  I bought a house just before the financial crisis and a decade later needed to move but I was underwater. I didn’t have enough money to sell it so I rented it out.
  - dylan604 5y ago
    how did this not break your mortgage agreement? most private mortgages have a clause that states the mortgaged property will be your primary residence. specifically. it is to prevent private mortgages being obtained for rental properties.
    - nsxwolf 5y ago
      Shrug. It never came up. I was all squared away with a good legal document for the lease, verified renters insurance, all that. Never even occurred to me the bank might take issue with it. Oh well, no harm done.

zip1234 5y ago

Obviously there is no rule that it should. I know plenty of people that kept their old house (and mortgage) when moving and tried to rent it out to build some equity and make money.