and used it to buy a cheap SFH for about $20k. Then I rented the home to a tenant on the cheap for $400 a month which amounts to a 24% return on my investment in year 1.
How is this not a great strategy?
Welcome to the world of low income rentals. IMO, this is a great strategy. The cash flow can be great. Price appreciation is lacking compared to some REI, but I think the cash flow can make up for it. The key is to have good numbers going into the deal. You need to know where you need to be financially on a house when it’s completely ready to rent so you can make money. You should also consider working with your local HUD office to take renters on HUD (section 8). There are some hassles in dealing w/ HUD, but the benefit of having your money at the first of the moth w/ no excuses is great. What you’re asking about is exactly what my wife and I have been doing for the past 4.5 years. There’s some BS as there will always be in LL’ing, but I believe it’s worth doing.
When you look at your numbers, just realize all the things your rent coming in will have to cover. I don’t try to micro-analyze my return on investment. My P&L statements show me where my money is going and I know I have several thousand dollars left over (most months) to either pay extra on the mortgages or to pull out of the business.
Some people just really don’t want to be LL’s and the thought of it scares them. You’re not always going to have a great experience, but if you screen people and treat them well I’ve found things generally work out just fine.
Hi,
$20k SFH Purchase - $400 Per Month - 24% Returns = Not!
$4800 Per Year Income
$ Vacancy Factor
$ Adjusted Gross Income
$ Management
$ Property Taxes
$ Property Insurance
$ Maintence
$ Major Repair Reserve
$ Advertising & Legal
$ Net Income - Not Close to 24% Return per Year!
GR
That is a good strategy - but that is not the best deal around. Why? For $20k I can buy a property that rents for $700 or $750 a month…here in Dallas, in an up & coming (NOT a warzone) lower income neighborhood.
Was thinking about investing in the Phoenix area but may need to look at Dallas now. In any event, I’ll make the purchase soon. It’s just about where I buy, and whether I buy a SFH or multi-family property.
It seems the “warzone” areas provide a greater return on investment. I can use a property management company to deal with the tenants.
One thing to note about Dallas, is that you won’t find those deals on the MLS. Nearly all of my deals I purchased directly from other real estate investors or homeowners looking to unload their properties for one reason or another (reasons may or may not include loss of a job, a job transfer, death, disease, divorce, disabilty, among other things) — that’s how you find your real deals.
Also, the only real area I would not personally invest in (speaking about Dallas specifically, excluding the suburbs) is between highway 35 and highway 175 in Dallas, from the Fair Park area all the way down to just north of interstate 20. Some areas just north of I-20 are OK…but not too far north. West Dallas, Southwest Dallas, Southeast Dallas, East Dallas, Northeast Dallas, North Dallas, Northwest Dallas … they’re all fine to invest in. Just avoid most of South Dallas. You can pickup houses all day long for $10k in Fair Park…but the crackheads and extreme (I mean extreeeeeme) poverty don’t make it worth the hassle. In those areas you have a lot more property crime, people who default on their rent and little to no appreciation as well. Anyway, I know some people in West Oak Cliff (Southwest Dallas) who have seen their investments triple or more in value. Houses in Kessler Park have gone from $100k to $500k in 10 years or so in some cases!
Also, you may need to do a lot of shopping around to find a good property manager who will go into those lower income neighborhoods. I have seen and spoken to several real estate investors whom have hired a well known (local) property management company or two…and their units will have longer than normal vacancies because the landlords don’t want to go into the neighborhoods that often. My average vacancy is 1-2 weeks, for a qualified tenant, because I am aggressive at leasing. However I know one gal who had her place NEXT door to my property, which happened to be 2x as nice on the inside, and it took 7 months to get that place leased out! So line up a good property manager and go slow (in the beginning) if/when you start investing here.
Good luck!
One other thing, if that’s your last $20k you don’t need a tenant. Soon as you close the furnace will go out, then as soon as the tenant moves in they will find 17 things wrong with the house that you need to fix, then the water heater will go out, etc. But you spent all your money buying the house so there’s no reserves to handle these issues.
whyson,
Listen up. At this price point, you will be scraping your butt on the pavement of fixed costs. Just because you buy cheap, does not make the basic expenses cheap as well. Nope. The overhead costs only go so low, and no lower. :banghead
At 400/mo your overhead costs are going to be too high in relationship to both the rent and the price of this house.
I’m not sure that even getting a house for free that only rents for 400/mo is worth the effort. Just saying. :banghead
Rather focus on properties that will rent for twice that. Then, look for bargains in that niche. Then you’ll have ‘some’ breathing room, even if the cash flow is still weak for a few years.
Frankly, you’ve got to be the super-dooper landlord to stay on top of the finances of a cheap rental …without going under water several months in a row. I mean one carpet replacement can wipe out two years of cash flow on a cheap rental like you’re talking about.
I used to laugh under my breath when I would see these other slumlords (like myself) either over-fix stuff, thinking they could attract ‘more rent,’ which is a mistaken belief …or I would see the grizzled landlords installing used carpeting with ‘most’ of the urine stains removed …not replacing/installing pads, and literally shopping garage sales for window blinds, used faucets and even paint, if not scavenging Home Depot for mixed paint that customer’s rejected. Frankly, that last one isn’t so uncommon for any landlord…but I digress.
In the latter situation you’ll end up having to shop for used crap while doing your own managing, because the retail expenses of these are just too expensive for the rent you’re getting. To make matters worse, there won’t be enough margin to amortize the expenses over a number of cheap rentals.
I know a couple people who've specialized in low rent houses. They know there's no money in renting at this price point. So they owner finance everything they buy to people who can't get home loans.In fact, they’ll collect 7k or 8k dollars down on houses they bought for only 8k to 10k and resell them for 25k and finance the balance over a short time at a high interest rate.
Of course this isn’t really real estate investing as much as it is ‘note investing’, but that’s one profitable way to deal with low-rent houses.
The bottom line is to stay away from the ultra low rent properties for buy and hold. They rarely make investment sense.
However, maybe you want some solid, cheap experience…just go buy one. It’ll be a great learning experience that you’ll take with you for the rest of your life. I know it did for me; especially learning that cheap rents are a disaster for investors.
:beer
I have to say I’d absolutely get a house for free and rent it for $400. I’ve got some that I paid close to 25k for that rent for $450-500 here. Others have been far better deals. Even the 25k one that rents for $450 has been ok because the renter has been there for a very long time. I haven’t had to do much to the place either since I’ve owned it. Under normal circumstances with only one rental like that and not having a long term tenant already in place, I see what javipa is saying and it could be a crap shoot if you have a long vacancy or a tenant tears up the place. Once you get a few houses, you spread the risk around. This spring we had four vacant houses. I booted one tenant and then three others just happened to put in notice to move all at the same time. We have enough properties that we were still in the black those months too.
You’ll probably want to see if you can get a little higher rent than $400 if you’re going in at 20k, but you’re on the right track. You have to fight to fill vacancies and try to find ways to fix things for a reasonable cost. Expect more BS dealing w/ lower income renters.
What if I buy a cheap house for $20k then immediately sell it for $30k via seller financing? Seems like a viable plan to me.
If you bought a cheap 3/1 house that didn’t need anything, you might be able to sell it for $30k absolutely. But you need to buy for 15k or less. You want to buy at least 50%, or less of what you could resell it for on terms (not for cash).
Frankly the price you ask for makes zero difference to the buyers. It’s the down payment and monthly payment they care about. It’s almost like Rent-A-Center deals. Big down, no qualifying, weekly payments, and who cares what the price is…
The big selling point is that the buyer can own his house in seven years, not thirty!!!
Why weekly payments? Because the buyer gets paid weekly, and you want/need to be paid as soon as your buyer gets his check. It’s just the law at this level of financing. Waiting a month between payments and you’ll chase payments every month. It’s better to chase weekly payments in these situations. Things get away too fast otherwise.
Just for giggles… you’re not going to get auto-debits either on these buyers (so the buyer needs a physical place to drop off payments every week. Mailing is a bad idea, too.
You can really grease the skids here if you can find private money to fund the purchases and rehab at the get-go and then as you get down payments back, you eventually plow that money into ever more purchases without private money.
Also, something to remember, borrowed money has no tax liability. So you only get taxed on the money you receive as a profit.
I get myself excited just talking about the possibilities.
You forgot to include expenses and vacancy. When I include expeses including property management (which you should for comparison purposes even if it’s self-managed) I get more like a 5% annual return.
You would be Much better off trying to find a 30K house that rents for 550/month. There are enough fixed expenses that it’s not always a great idea to be in the bottom end. A good price/rent ratio is not linear in that low end. (only have 20K?–> borrow some money)
It’s not a horrible idea either, I personally wouldnt pay 20 for it though. I have a property that does me well that rents for a low amount ($450, but I bought it for 6K at auction)
Long story short, there are better investments, but it might not be bad either, just don’t give yourself delusions that you are anywhere remoteley close to 24%.