Ok I finally bought a property as a rental!! It took me about 3 months of looking at around 75 or so homes, but finally it happened!
4 bedroom 2 full baths, built in 1990 listed for $148,000. Offered $145,000 and they accepted (would have offered full price). Rental should go at $1250, giving me ~$200 positive cash per month. The house is in perfect condition, new furnace, water heater, fridge, fresh paint. The professional inspector I had only found one minor thing, flashing on the roof needed to be nailed down.
Just did the final walk through and have the keys. The rent ad starts tomorrow and my attorney is looking over the application for me.
This was not that hard to do. Just took a lot of patience and knowing when to walk away from other deals, but it can be done. I have read a lot of posts on these boards and must say I learned a lot from reading them.
A few things though, just using rough estimates and not knowing the exact details of this deal:
Mortgage - $145K @7% for 30 years = $965
Taxes - ?
Insurance - $70 (estimate)
Maintenance/reserves = $50 (estimate)
Management = $100 (estimate 8% of $1250)
Vacancy= $62.50 (estimate 5% of $1250)
Income = $1250
Outgo (with no tax information) = $1247.50
I don’t believe that this will cashflow ~$200 – it will more likely break even at best. If you just take into account PITI when doing the math on an investment property, you’re doing yourself an analyzation disservice.
You must have a place holder for maintenance. Things will not last forever. You need to get mechanicals (HVAC, etc.) serviced. You need reserves for the roof when it goes bad. These things add up…I usually use $50 a month ($600) a year for this line.
You must figure vacancy rates…when a tenant moves out, you need to clean up and readvertise – at a minimum. In some areas, places stay vacant a while. The market is very strong here…I use 5% which contemplates 18 days a year of vacancy.
You should figure in management. This has a two-fold reason. (1) Someday, you will want to do something else or you could get hurt/ill such that you cannot perform your landlord duties. If you’ve budgeted for it, it’s taken care of, if not, it’s an additional, unplanned expense.
I’m sure you’ll be OK on this property but to go into the process with “rose-colored glasses” (and for us to let you!) is not right either.
Again, congrats and welcome to the wonderful world of landlording!
[quote author=Warped . Just took a lot of patience and knowing when to walk away from other deals, but it can be done. I have read a lot of posts on these boards and must say I learned a lot from reading them.
This is key in my opinion and sounds like you spent a lot of time looks (also very important).
Sounds like a really nice clean property. Even if you are pro-forma breakeven, I’m sure this property has up-side on rent potential as well as be very easy to sell in the future (exit strategy is also important).
Ya gotta know and understand the numbers…we have investment “rules” – after all of the smoke clears, we have to make AT LEAST $125 a month ($1,500 a year) free and clear on a property or we won’t even consider it.
Make sure you understand the property - is there a HOA fee? Does the landlord pay any utilities? It is very common for landlords of multifamilies to pay common area lighting (around walks and parking lots) and for trash removal. In some areas, snow removal is a landlord issue, etc.
You must understand the numbers before you can figure out isf a property will cashflow.
Keith makes a good point. You will notice that we all have a formula or “bread and butter” deal we look for. You need to understand your area and develop one. It includes what kind of house, the price range what it will rent for versus expenses. We don’t fall in love with the house we fall in love with the system or process. All my houses look the same on paper (more or less) what makes money is what we do, we don’t try to reinvent the wheel.
In Houston Texas I look for a 1100 to 1600 sqft single family house with 3/2/2 brick venire with a pitched roof on a slab built around 1975 to 1985 that sells for $80k or under in a nice blue-collar neighborhood that rents for $850 - $1100. That house generically will give me $150 - $250 per month every time. That is what I found out going to my local real estate investors club meeting. You need to find out what the people that are doing well are buying and buy the same thing. Don’t get fancy, follow the blueprint.
Remember real estate is local, you have to understand what makes money were you are and do it. That is why I preach go to the club meetings and learn what they are doing.
Purchase price $145,000
Down payment 20% = $29,000
Financed $116,000
The difference here is I have been paid taxes already from the sellers but I am escrowing them myself.
Mortgage $742
Taxes $250
Ins $33
total monthy payments $1025
rent = $1245 @ 85% = 1058.25 - $1025 = $33.25
So here I had some help with putting 20% down. I would rather do that then have a negative cash flow. At 85% i should have plenty of room for other expenditures. In 2.5 - 3 years I should be able to refinance and take money out and still have a positive cash flow.
Oh and thanks for the reply. I am looking forward to house #2.
(1) If you make a downpayment, you are losing the use of that money for the length of the mortgage…
(2) You still don’t reflect any maintenance, management, or vacancy figures. These items will affect the property and the bottomline – if not right now, then down the road. Is that what the 85% is trying to show? Where did you get this figure and how accurate do you believe it to be?
I’m really not trying to “rain on your parade” – just make sure that you understand that there are costs and whether or not you account for them upfront, you still gotta pay them!
Let me tell you something to substantiate Keiths standpoint
on maintenance.
We moved after renting out our SFH that used to be a
primary residence.
I had to run ads in the paper - cost around $350
Cleaning cost before tenant move in - $250
Plumbing costs for cleaning a clog - $400
The first tenant had to be kicked out after 45 days of
occupancy, since they violated the lease by renting
out a room - Expenses to do so - $400
Cleanup before the next tenant moved in $250.
Second Tenant broke the thermostat( i paid
and fixed, but they will get nailed when they
leave ) - $185
Of course, i will be adjusting the rent soon, but this
gives one an idea. The property is in a good location,
but like someone said, all folks that can afford to
purchase a home, have already done so.
The only ones left are the “cream of the Crap”.
Moreover, in locations like DC metro, where speculation
is at its peak, there are a number of newer homes rented
out for high negative cash flow in hopes of appreciation.
The older homes will have to compete with the newer
ones and appears less lucrative.
Will need the ARM squeeze to kickin to take the steam out
a bit.
I have had 3 single family homes for rent and have lost my But on all three trying to make + cashflow One empty month and BOOM . There goes your yearly cash flow.Thats why I ve gotten into multifamily.But Im willing to try again after reading some of the blogs here . :-[
