Mortgage Escrow Accounts Untimely Adjustments
Last month I converted my 2nd house to a rental property. My mortgage payment was $787 including the mortgage payment and escrow payment for taxes and insurance.
I rented the house out for $860/month which covered the monthly payment and provided a comfortable $73/mo to cover maintenance expenses. About a week after the lease was signed I got the annual escrow adjustment analysis statement from the mortgage company. Ugh -- the escrow went up $27/mo and is still under because the homeowners insurance wasn't factored into the analysis. I just purchased the property last year and the orginal escrow analysis for closing was apparently very inaccurate. So now my mortgage payment is up to $814 and still not enough is being taken out for taxes and insurance.
Its disappointing, but managable. Next time I need to pay closer attention to the escrow payments when formulating a monthly rent price. They can easily take me from cash flow positive to cash flow negative if I assume they aren't going to adjust each year.
Comments (6)
$2 mill. - Firstly, I have been a loyal reader since you got written up in Bizweek. Keep up your excellent work!
A thought here is that you could probably drop your insurance coverage to a dwelling and fire policy (which should be less expensive, albeit not a huge amount). If you shop around for it, which I know you will, you should be able to make up at least some of the difference.
Side note- many insurance companies (could vary based on state law, not sure) will not even issue homeowners policies on rental properties so they may cancel you if they realize its a rental. This happened to me when I was on an overseas assignment for work and it was a hassle. I wish I had known from the beginning - could have avoided a hassle and saved more $ too.
Posted by AK | August 20, 2007 11:28 AM
At least you are still up which is relatively rare. When you factor in the equity that you are getting and the depreciation that you can write off, you should even do better. It's also great leverage, right?
Posted by Lazy Man | August 20, 2007 6:46 PM
Lazy - yes -- I guess my return will be fair given its cash flow positive, but it still looks bad to me because I had this built in cash flow that has been unexpectedly eaten up. So even if its profitable I am kicking myself for not factoring these costs in.
AK - Yes -- I have dwelling insurance on my 1st rental. On this rental I have still kept the full policy because my possesions are still stored on the property -- I just rented out the remaining part of the property to the tenants. I did check with my insurance agent before I left about renting the house out so I think I am ok on coverage - guess we will see.
Posted by 2million | August 20, 2007 8:52 PM
How does the rent payments cover the mortgage? Don't you then have to subtract income taxes out of the rent payments, so losing another 25-25% ?
Posted by Anonymous | August 20, 2007 11:32 PM
Good question. Its true you need consider income taxes, but as a rule of thumb decpreciation will more than offset the principal payments (esp in the early years) and the interest, taxes, insurance are all expenses that are deducted before the rental income is taxed. So in effect I usually end up with a lose on teh rental property at least so far.
Posted by 2million | August 20, 2007 11:44 PM
Dude, that's a tough one. I'm sure you priced it as high as you could to get someone in there, but if you aren't making at least 1/3 of your mortage, you are hosed. I'm not trying to be mean, it's just the truth and the reason I've avoided getting in to renting. How much does it cost to repaint the entire place? How much does it cost to recarpet it or refinish the hardwoods? Sure you shouldn't have to replace or repaint, but you never know how these things end up. My wife and I are moving in to my in-laws old rental house. Their last people paid $1000 depoist (about one month of rent). Then they didn't pay a month. We told them to pay up. They promised they'd pay two months at the same time plus the late fees. They didn't pay then. A few weeks later, we found out they had moved out and trashed the place. They filed BK and my in-laws were out $5,000. Thankfully, they have more money than most and didn't hurt at all, if it were me, that could have caused some severe problems.
Posted by Eric | August 21, 2007 12:05 PM