Hello,
I have enjoyed reading the forums on the site for the last year or so. I feel that I’m now ready to get into the real estate market through purchasing a sfh and renting it out. I’m located in southern california, where as you know prices have taken a dive over the last 1-1.5 years.
The property I planning on purchasing is a sfh 1400 sqft 4/2. It is a bank repo listed at 105k. I’m planning on offering 90k based on the home’s condition and market conditions. the market value of comparable sells within the last 6 months would dictate a ARV of 130k. I plan on renting the property for 1600 per month, either through the section 8 program or to the best tenant available.
so here are my numbers:
purchase — 90k
rent – 1600
noi – 800 (using the 50% rule)
cashflow expected – 200
max mortgage amount 800-200 = 600
mortgage – 90k 30 year fixed at 6% = 540
does this work out? It seems like a doable deal to me.
the property only needs the carpet to be shampooed in the 4 bedrooms. the rest of the property is good to go ( no holes, all doors are good, tile roof, landscaped with auto-sprinkler system). The property was purchased in 2006 for 305k, but had previous been purchased in 1999 for about 90k. The house was built in 1992.
If that is the case, this is a deal that I would do…I’d pay $90K to get a property that rents for $1600 after paying a couple hundred to shampoo the carpets. I’d pay cash and close in a week!
It would be very difficult to get a NOO loan at 100% for 6%. So I changed the numbers around a little. Assuming 100% finanicing at 7.25% at 30 years, mortgage payment would be $613.95. If you manage the property yourself, that would leave cashflow of $187/mo. If you had a property manager, you’re looking at cashflow of around $27 month (roughly $160/mo for management fees). So, if I was in CA I might buy the property and manage it myself. But if I had a PM, I wouldn’t do it. If the property needed a lot of work to make it rentable, that changes everything. Also, as mentioned before, you might be able to get a better deal than $90k if you offer all cash with a quick closing.
The question I was answering had to do with a property that rented for $1,600 per month. In that case, if the management fee was 10% of the gross rents, that would be $160. That $160 would be included in the 50% operating expense number of $800.
If the rent was $1,000, then yes $500 should cover all the operating expenses (at 10%, the management fee would be $100 per month). However, if you were getting $1,000 rent on a $90K house, it would not cash flow because the mortgage payment would be about $600 per month.
The 2% rule is a very good screening tool, but you still need to check the cash flow. In the first case, the $90K property with gross rents of $1,600 per month does not quite meet the 2% rule, it’s actually about 1.8%, but still has VERY GOOD cash flow.
Your example, of the same $90K property with gross rents of $1,000 per month, is FAR from the 2% rule (about 1.1%) and the resulting cash flow is terrible (with a $100 per month loss).