I have located a few properties that I have considered purchasing with cash , fix them up a bit, and rent them out. The wall I am running into is in the numbers, assuming my math is correct:
For a home purchased for $100,000 and rented for $875.
State Tax: 10%
Rental Tax: 3.8%
Federal Income Tax: 20.2%
- $875
$279.50 ← Taxes
= $595.50
+
Property Tax: $2,000/yr
Insurance: $1900-2000/yr
Per month income after all expense (excluding maintenance): $262.16
Where is the payout? How are you making money on rentals without pricing them out of the market? Any advice would be appreciated.
I can tell you that a $100K house renting for $875 is s huge loser…
You need to rent this for something more like $1,500 or, even better, $2,000 to cashflow.
You don’t have a $262 per month income because you have not take in to account maintenance/repairs, management, vacancies, utilities, etc.
If you are paying cash for properties, you also need to factor in “loss of capital” meaning that your cash is tied up in the property and you cannot use it.
This is an “alligator”. It will eat you alive financially…
Thank you very much for your input, I’ll take all the advice I can get. So are you saying that those making money in the rental market right now are pricing the rent as you suggested and it is working? My concern is getting people into the house…how do you overcome that? I suppose you just need to advertise and be diligent? It just surprises me that someone would pay that. Thanks again.
From the info in your post, I can’t tell what the fair market value of the properties are when you buy them (I suspect the prices you mention are average FMV for properties in their condition), but at least from a cash flow perspective, you are paying way too much. As to your question regarding rents, you can only rent at what the market will bear. If you are asking $1500/month and most/all of your competition is asking $875/month, what property do you suppose will sit unrented?
In my opinion, paying too much is one of the most common mistakes new investors make (I made it when I purchased my first property). My best trick to better cash flow is to buy at significant discount from FMV (my target is 50% - 60% depending on the amount of rehab required to bring the property up to neighborhood standards) and then rent at FMV. However, at least in my area, this means VERY few, if any, properties on the MLS will meet the cash flow requirements and you must find and purchase directly from owners that NEED to sell, not just owners that want to sell. It can be tricky and hard to find these types of owners but my own limited success has been with pre-forclosures, seriously distressed properties that will not qualify for loans, and estates, or some combination of the above.
You note that you have cash and that is often the best incentive for these types of sellers to work with you. If it is truly a great deal and you want your capital back, you should be able to cash out with a conventional mortgage once any repairs are made and the unit is rented.
No, not at all…the landlord doesn’t determine rent - the market does! To make money, you need to find properties that cashflow positively…that means pay less or get more rent, one or the other. But buying a property like this and expecting anything other than a huge monthly loss is unrealistic.
…and, if you’re paying $1,900-2,000 a year for insurance - you need to find a new insurance company - you’re getting screwed.
Ok I understand what you are saying. Find the gems at a discount and go from there…I’ll keep looking for opportunity. Thank you!
Any suggestion on a better ins company? I live in Bend, OR which is where I plan to do my investing… I do have a property in SC that I rent out for a minimal profit and the lowest quote I can get is around the $2000 mark. I was surprised at the amount as well but I couldn’t find any better. Thanks guys.