Long time lurker/reader infrequent poster with a basic question.
Does the 50% rule of gross rents that I see used so often apply to homes that are less than 5 years old and in need of little repair/upkeep? Is it more like 35% for these just to cover times of vacancy and such?
Obviously I’d want to get to 50% if I could but I’m just curious if the pro’s allow for any wiggle room(and obviously a smaller cash flow) on easy maint housing in nicer areas.
NE Florida seems to have enough deals on newer houses that could rent for 1,200-1,300 a month and might be an easier first deal for a newb like me. :biggrin
I don’t know anything about % but from my experience I would have at least 3 months of payments plus extra $500 to $1000 for maintence situations. I’ve had problems even with newer homes. Lilke one was just past the year ( like your auto batttery warranty!) and the above stove micro wave went out–. another had a large tree fall over (florida) luckly no house damage but had to get rid of the tree.
Make sure you put enough down so your payment is lower then the rent (include tax and insurance) and you can get a decent postive cash flow. I may be wrong but SFR’s are brought for longer term appreciation not so much for large cash flow. Unless you put a large down its hard to get a decent + cash flow. Let me know what you think–good luck. P.S. Look into a good home warranty package help pay for break-downs-- this has go be included when figuring monthly cash flow–to rent///
Thanks for the feedback. I thought that was the general concensus(appreciation and whatever cash flow you can get on newet SFR’s) but I wanted to be sure.
Make sure you put enough down so your payment is lower then the rent (include tax and insurance) and you can get a decent postive cash flow.
JJJack,
Having a payment lower than the rent does NOT give you a positive cash flow - not even close. Cash flow is determined by subtracting operating expenses and the mortgage payment from the gross rents. Throughout the United States, operating expenses run 45% to 50% of gross rents. Having a new house does effect the capital expenses because you shouldn’t need things like a new roof or new furnace. However, capital expenses typically only run about 5% of the gross rents per month, so having a new house is certainly not going to drop the operating expenses to 35%. In addition, most of the expenses associated with rentals are a direct result of the tenants, not the age of the building.
Finally, most new buildings will not cash flow anyway (due to the higher cost), so the entire question is really irrelevant.
Like Property Manager says, a lot of operating expenses are from tenants, not long terms costs like roofs and water heaters.
The first time a tenant stops paying so you have to evict them, then it takes you two months to go through the eviction process because they are weasles, then they knock holes in most of the walls and spill bleach all over your carpet, leaving you with a $3k cleanup, you’ll understand. While most tenants aren’t that bad, they do happen sometimes. You have to budget enough so that you don’t go bankrupt for those times you are paying a mortgage while spending out money cleaning up after idiots and going three months without any rent. If you are set up so the property will cash flow, it will kill you. If you are ignoring this, and are going with the thinking that Rent is $1500 and mortgage is $1200 then you have a positive cash flow, you are in danger.
A lot of people try to sell their houses to new investors, saying that a property cash flows when mortgage is less than rent. They sell them to NEW investors because experienced investors know better. The biggest mistake new investors make is paying too much for a property.
mad71 you are right and so is propertymanager. What the age of the house does affect capital items. The items that make up my no maintenance rentals is based on that. No matter if the house is new or 30 years old the capital items should be made right before you put a tenant in it. All the capital items are new no matter how old the property is. You should never use cash flow money to do capital repairs. These things like appliances, A/C, roofs etc should always be paid for with financed money. When you buy the house make it brand new using financed money. When they need to be replaced again 5 -10 years from now refinance the house to pull out the cash to repair them again. Cash flow fixes things like stopped up toilets, leaking faucets, and holes kicked in the walls. In my lease there is a section that says that all repairs below $XX are done by the tenant. Most people put $5 in there, I put $250 there. I tell the tenant that this house is new and needs no repairs except what is done by them. Basically I tell them that if they break it they fix it.
Say they don’t fix some things and when I get the house back I do my walk through, and I find a bunch of stuff that they never fixed, I take it out of their deposit. That means that they fix it anyway.
Don’t forget one very important aspect of a new or 5 year old house compared to a 30 to 50 year or older one…
The…TAXES…
You could have two adjacent same square footage houses, the 40 year old taxes…$2,000.00 per year, the 5 year old could be as high as triple that, or $6,000.00 per year under the right (or should I say wrong) circumstances.
Makes part of your cash flow go… :flush
Older homes have many items that may or may not be approaching the end of their functional life, but this can be offset sometimes by their being built with better materials and methods than newer homes…assuming you buy properly and are on the lookout for good construction…