I am buyng a REO from a bank. The lender has done all the repair work and the house is in move in condition. New everything. They wanted $78K, I bought for $73K.
My plan is to keep this 3/1 as a rental for about 10-15 years. I have none of my money in it and my total payment is $773 and can easily rent it for $850-875. WE plan to put all of the payment into the paying the house off early.
Basically we bought this is unit as a long term investment with cash flow later in life or a buy and hold to flip later. The house would only retail for $86K though.
This is my firt venture into the rental/flip REI world. What are your opinions on this plan? Many thanks!
<My plan is to keep this 3/1 as a rental for about 10-15 years. I have none of my money in it and my total payment is $773 and can easily rent it for $850-875. WE plan to put all of the payment into the paying the house off early. >
You have only about a $75-100 positive cash flow and haven’t mentioned “vacancy”, “management” (YOUR time is worth something, too!), and “Maintenance”.
I think the plan is basically OK but I would build up some reserves before paying extra against the mortgage. What will you do if a $2,500 furnace or air conditioner craps out? Even if the shingles are good now, at some point they will end their useful life. If there is a catastrophic event (say a hurricane), even if you’re insured, how will you pay the deductable?
Just my two cents and a few things to think about.
By “vacancy” I meant a “vacancy rate”…how long between renters do you think that you will be?
A 5% vacancy rate contemplates about 18 days a year of vacancy (5% X 365 days in a year), a 10% vacancy rate is about 36-37 days a year. This takes into account how hard a place is to rent back out as well as a short period to get it ready to ‘re-rent’…
With a 5% vacancy rate, you are going to “lose” about $525 based on the rent of $875 ($875 X12 months in a year X 5%)…this means that no rent is coming in during that period but the mortgage, taxes, insurance, etc. still need to be paid. This is where having a reserve comes into play – otherwise, it is money straight out of your pocket, vice coming out of the income the house has already generated.
Congratulations!
If you actually “flip” it you may pay capital gains and have other selling costs for only 13k. My problem with this is it may be difficult to find another great deal so fast. If you can then you just entered the flipping zone.
True, your + cash flow is not great but it’s ok. If you have 3-5k set aside you should be fine. Since you have it rented it may now be an excellent long term investment. This of course depends on many factors.
I would definitely not pay it off sooner though. You would then loose the advantage of writing off the interest against rental income. You would also lose the most important weapon you have in financing real estate, LEVERAGE. Use the property at some point to spring board into the next.
That’s my 2 cents,
Ed
I am also doing the same thing. I just bought a duplex for $12,900 that needs about $7000 in repairs. It will rent for $275 per side. My mortgage will be $200 per month plus taxes and insurance. You may want to look at some duplexes as well. I am doing a house also where the purchase price is $16,500 with about $3000 in repairs and it will rent for $450 to $475. I like cheaper deals because it is easier to make a $200 payment than a $750 payment. I am paying about $2000 each as a down payment and both deals are about 70% of retail. I would have paid about 10% more for the same income. I try to get the payment at 50% of the rent.
Many thanks Guys!! We have it rented with $90 pos cash flow. I think this will be a long term equity building investment for us. We got excellent renters in the house. We also need some tax savings.
I am looking for some duplexes as well. Ted, you sure find some sweet deals. I’ve got a handfull of properties that I am looking to filp now that we got the first on under our belt.
I’m with you on the cheaper deals. I am looking at some $40-50K homes that I plan to offer 70% on to start. These are REOs and motivated sellers, but they are all listed with realtors. I have several realtors bird dogging now. I am also going run some ads and use bandit signs starting this month.
Good luck on this one, Skeeter…hope you find many more in the future!!!
It’s always mind-settling to get the first one done and say “Hey, I CAN do this” (I just went through this with my wife – I have had properties before we were married but this is our first one together). It is also ‘calming’ to know that you have good renters. We just put a young Air Force couple (both are in the AF) in our property.
I’m in the same exact situation as you. My wife was a little apprehensive at first. I really wanting to get the first “flip” done now. Good luck and I hope you find some great deals.
Skeeter - congrats on your first deal! We love the “higher end” rental market. Less hassles with renters, less hassles with the property - in general. On my higher end stuff I’ve always operated with literally almost NO vacancy. Last year, on 8 units, I had a total of 6 open days. And that is very typical. Having a properly worded lease can really protect you against open days.
The only thing you mentioned that I would change is what to do with your $90 profit every month. Instead of paying on the mort., I’d build a reserve for when repairs come along. I think someone mentioned this - I jsut wanted to second it. Unless you have another source of ready cash for maintenance. Then once you get the maintenance fund where you want it you can start paying on the principal.
Best of luck! Feel free to email me if you ever have a land-lordy question!
Karla in Amarillo