I am writing here for the first time but I am a long time lurker. I am considering buying a rental property for the first time, and need your independent advice.
Quick background about myself: early 30’s, moved to this country permanently by myself 9 years ago, professional career (auditor in a CPA firm). Somewhat a risk-taker but so far have had a pretty traditional life.
None of my friends have a rental property and I’d like to get some independent points of view from people who have dealt with rental properties.
I am considering buying my first rental townhouse or a condo in NC, Cary/Morrisville area to be exact. These towns are considered desirable, safe, have great schools, etc. It seems to me that even though the prices did go down as a result of recession, these areas are holding value and are not that cheap.
I am looking at potentially buying something in $100K-$130K range.
2 bed/2 bath
Around 1100 sf
Close to major employers: IBM, SAS; close to the airport and major highways
HOA dues: ~$100/month
Year built: no older than 2001; there are a few places in my price range built in 2010.
Downpayment: could do 20% but would prefer not to if I could
Excellent credit history
Potential rent: $900-$1000
I know the rule of thumb is to charge no less than 1% of selling price in monthly rent. It does not look like I’d be able to do this in this area.
Would you consider investing in something like this?
Something that is relatively new and will not have major issues for a few years to come; something that is located in desirable areas and thus is not cheap.
Do you all invest in SFHs and stay away from condos and townhomes?
What would you do?
I could also drive 20-25 minutes and buy 3 houses at $30K each in the not so safe town but the idea of dealing with the kind of renters I’ll end up getting is not appealing to me.
Please, advise.
Thank you for your time and consideration.
We invest in lower income properties so my experience is more closely related to the 3 SFHs you listed as an alternate plan. The 1% rule of thumb for rent sounds like Realtor speak. Most Realtors think if a property rents for 1% of the purchase price that it is a “cash flowing property.” That’s just way too low for me.
You can assume that you wouldn’t have as much maintenance on a newer property, but just realize the wrong tenant could still cause plenty of damage. The thing I don’t like about condos is not having control over who the neighbors are as well as the possibility of assessments.
We have a small multi-unit building too. I’m not against investing like that, but I like having control of all the tenants. There’s another thread on here about a nightmare tenant in a condo causing problems for another investor’s tenant.
Your potential rent is too low compared to your purchase price IMO. You need more room there. Vacancy, lost rent, damage, etc will bring you out of pocket on a deal like this.
Hello Gail,
Change your mindset. Don’t buy a house worth $130k for $130k. Buy a house worth $130k for $60k. That means it needs some work. Put that work into it for the sake of talk $10k worth of fix up and then you have a house worth $130k for $70k. Then rent it for the $900 instead of the $1000. The house will rent instantly and you will cash flow $300/month.
Don’t buy a house just to be in real estate buy a house because it makes money. If you pay retail you are not making money.
are you buying for cash flow or appreciation? If its appreciation I would really think about single family instead of condo’s, but whatever you buy, make sure it has positive cash flow,that way if the market goes against you, you still have a cash flowing property
I definitely would avoid townhomes and condos, unless you can get them super cheap so that they generate large amounts of cashflow. They can be superb investments…but they have little to no appreciation in most areas unless you are in a coastal area…so they need to be bought more for the cashflow more than anything else.
Single family homes are a great way to start.
And yep…try to shoot for the 2% rule. In other words, you want to pay no more than $50,000 for a house that rents for $1000 a month…including all fixup costs. You want to get 2% of your total investment back per month in gross rent (rent before expenses). In Dallas I shoot for the 3% or better deals! All those deals are harder to find, but you can find them. Good luck!
Thank you for your valuable input, everyone! It is really appreciated, and I do take notes. I’ve already cancelled an appointment with my realtor to look at condos and townhomes that cost $100K and up, and have started looking at “distressed” SFHs.
Now I have another question for you all: how old are your rentals? Does your decision to purchase or nor to purchase depend on the condition of a house no matter how old it is, or there is a certain age of a house you keep in mind when you look for a potential rental property?
IMO age is unimportant. Three things I look at are price, size and location. There’s no right answer, but it’s worked for me.
Price = will it make me a decent profit in a year if I sell it or rent it out?
Size = the bigger the better. A large house can be converted into a multi-unit or something else. With a large lot, you can build additions or subdivided or something else.
Location = I always ask myself, could I spend a night living in this building? Could I imagine myself living in this building for a year? Can I walk around the area? Can I get excited about this location? If I can, I can probably find tenants or buyers that will too.
Just to add to my last post. Age is unimportant. I’ve owned century old buildings to newer buildings.
The only time I’d be concerned with an old building is if they had a plaque on it that said it was a heritage building or an inquiry in the city turned it up as having a heritage designation. If there’s restrictions on the repairs you have to do and approvals you need to get, we’re talking serious money that almost never is justified on what you’ll get back. There was a case of this property I heard of recently where a house required a custom thatched roof to the original historical design and wouldn’t allow for modern shingle job and the roof was leaking causing hell to the plaster inside for a few years because the last owner couldn’t afford to get the roof redone. So, a $5-$10K roofing job became a $150K roofing job. You’d never get that money back if you were renting that place out.
From what I know of NC real estate that’s too much money to spend. Being in rentals is good but you have to buy it right.
For instance the last two rentals I bought are a 3br SFH for 47k that will rent for $850/month and both sides of a duplex for $165k that rent for $950/month each side. One rent payment nearly covers PITI.
For you I would recommend both sides of a duplex for sale.When you look at those it excludes a lot of potential buyers and the marketing and price are different.
You really need a good real estate agent. Find someone that is doing what you want to do on the side. My guy will buy the deals I don’t. The ones I do buy he’s usually interested in too. We go look at them together. I got the impression he wasn’t very happy with an employee when I beat him to the last one…
I was looking into the Phoenix market, however, supply of “good deals” have seemed to dry up lately. A lot of them have already been scooped up by investors.
My ideal rental:
50k or less (minimal repairs needed if any)
3 bed/2 bath 1200+ sq ft (minimums)
Built 2000 or newer
SFR
Decent area that will rent for $800-$950/mo.
Saw a bunch of these types of deals over the past couple months, but now they seems to have disappeared.
Being a Phoenix native, resident and 10yr+ landlord/property manager here, what you have seen is no longer occurring or was a teaser. $50K won’t get you that. Maybe $150K might for something built 2000 or later. The neighborhoods that have those properties are so far out of town, you’ll have a hard time finding tenants that will put up with long commutes to work, etc. Or you’ll find something in a bad area of town (remember we are a border state with a high crime rate due to drug cartels, etc.).
You might get yourself a 2bd condo, but unless you are able to manage it here yourself, you’ll have to budget $200+ per month in HOA fees and get something in a HOA neighborhood. I probably don’t have to say much more regarding how we all despise HOAs.