Someone give me a reality check if its not this simple.
3 Bed 1.5 Bath, .77 acres house… $65k (10% down @ 5%)
Debt Service $476
Repairs $150
Property Mgr $80
Rent $800
$94 profit
Year income $1128
Cash Investment $3250
…34% return, game over.
Am i missing something?
Per month
I think you are making a lot of assumptions with these numbers. First, you are assuming that you will have a tenant right away and incur no holding costs.
I’m not that experienced but I’d assume there would also be taxes, unexpected loan fees, due-diligence fees etc.
Hi,
Property Taxes, Landlord / Tenant Insurance, Vacancy Factor, Normally 20% Down for Non - Owner Occupied Property Or 2nd TD for 10% with PMI and a payment, Repairs, Short Term Replacements, Long Term Replacements, Appliance Repairs, Overhead, Legal, Advertising, Contracts and Supplies, Cost's to Purchase, Etc.
GR
Both GR and dood are right. If it were simple, everyone would be doing it. Lots of things can look good on paper, but reality is much different. One month of vacancy and a couple little other things would wipe out your listed profit.
But using the 50% rule… then I am good to go.
No, using the 50% rule you’re $76 in the hole every month. The 50% rule does not include debt service as part fo the 50%.
You’re not far off here, but you need a property that rents higher than $800. Property taxes, maintenance, insurance, etc are all about the same on similar sized properties in different rent categories. Around here it’s almost always about $200/month for taxes and insurance. That’s a lot bigger deal on a $500 house than a $1000 house.
but if i drop the property mgr and do it myself or but even still, arent there successful investors on here that operate in the 20% range?
Maybe, but until you’re a successful investor, you shouldn’t make the assumption that you can operate with a 20-30% operating expense. Every calculation you make when acquiring a property should be on the conservative side – especially if you’re inexperienced. That way you KNOW the deal will work.
Aside from this, you’re completely oversimplifying the analysis. You should be calculation Net After Tax Cash Flows from prospect properties, then discounting the cash flows to present time to determine the projected return.
Additionally, your IO isn’t just your down payment… you’ll have closing costs most likely and like others have said you need to calculate for vacancy and holding costs. I’m not sure what 65k gets you in your market, but where I am you can bet that a 65k home needs some rehab before it’s rent ready.
Though it isn’t as easy as you thought, don’t let it deter you. Keep researching. Maybe take a real estate or finance class if you really want to learn the intricacies, otherwise check out one of the “how-to’s” that are always being promoted on this website.
Wait, maybe I misunderstood the 50% rule. I though 50% of rent is budgeted for every cost of the property except debt service. After debt is paid and the 50% is allocated, the rest is profit…right?
No, you’ve got it right in your last post here. What I believe Estrogen Hostage was trying to say is that in your example, you listed $476 for debt service and $800 for rent. Using the 50% rule on those numbers means your debt service eats up 50% of the rent plus the extra $76 - hence him saying you’re $76 in the hole right out of the gate.
Did you figure in lawn care and snow removal into your holding cost? Will the tenant handle those issues? What about advertising to get a tenant? PM willing to deal with all this headaches for $80 a month as well? Do taxes adjust after you own property? (where I am from the following tax year they jump up to about 1.8-2.2% of purchase price and while you own the home it can never increase more than 3% a year so it can really jump)
What about a deferred expenses that will arise through ownership. Is the house rent ready?
Do you own a home now? If so think of all the things you need to pay for? If you rent a home think of all the things that go wrong and someone else pays for?
Well, you’re not likely to get a 10% down payment on an investment loan. The standard is 20-25%, these days. There is a narrow exception for Fannie Mae Homepath loans, which can be done at 10% down for certain Fannie Mae REO properties on the homepath.com website. So the higher down pmt, and figuring in closing costs of $2k or so, as well as out-of-pocket renovation expenses to make it rent ready, will knock your ROI down a lot.
Other than that, the 50% rule is usually a pretty good guideline for expenses/vacancies/capital reserves, adjusting down or up a bit if taxes are above/below average in your area (average being about 1.75-2.00% of value), age of house, quality of neighborhood, etc. Once your rents are up to about $1,000, it is reasonable to expect expenses to be a little lower due to better tenant quality.
What about these numbers, do i have good numbers that you would invest in?
$34,000 @ 4.5%
Principle & Interest…$150
Taxes…$31
Homeowner Ins…$66
Mortgage Ins…$26
$1980 Downpayment with $3,000 in “rent ready repairs”. …$4980 Total
$273 Total Monthly
$700 Rent (Generated from comparable near properties)
Utilizing the 50% rule minus $350
~$77 per month net cash flow on $4980 IO…16% return, game over.
(Assumptions:
The property will actually need $5K in repairs
That 50% of rent will actually go to repairs and maintenance, whats not used past a 4% repair fund, will be added to profit)
Am I missing anything?
You are not going to be able to borrow 34k with a 2k down payment. Banks want to see 20% down. You will also struggle to find any bank willing to do such a small loan. Many banks have 50k minimum, some a little lower, but none of them want to do 34k loans, as the administrative costs of originating small loans eats up profits. (Plus they don’t want cheapo properties as collateral, looks bad on their books). And of course, loans have CLOSING COSTS, at least 1k, probably 1.5k, that have to be paid out of pocket (appraisals, title search, title insurance, attorney fees, recording fees, processing/underwriting fees…)
Hi,
Faceplant, Faceplant, Faceplant!!
$700 Market Rents
$ 70 Vacancy Factor
$630 Effective Net Rents
$315 50% of 50 / 50 operating rule
$315 Effective Expense Budget
Property Taxes
Property Insurance
PMI (Principle Mortgage Insurance)
Maintence
Appliance Repairs
Replacement Reserves
Major Remodel Reserve
Property Management Cost
Legal
Advertising
$315 Effective Debt Service and Positive Cash Flow
First Mortgage Principle and Interest
Second Mortgage Principle and Interest
Cash on Cash Returns
Positive Cash Flow - Profits
Most mortgage lenders will not loan as little as $34k, most have $50k to $60k minimums!
What you describe here is “Owner Occupied Scenerio”! Are you buying and moving into a new home?
Investment financing today requires 10% to 25% down or combo of seller carry second with down payment (Usually 10% to %15% minimum)
GR
I though the 50% rule includes vacancy…? I disagree, if I have found a 16% ROI…then I get a loan and at lease keep 8%.
Yes, the 50% guideline includes vacancies, operating expenses, and average capital expenditures (roofs, mechanicals, etc.) over time.
how can an investor generate cash flow if the 50% rule and principle takes all the rent? Unless the investor put 50% down initially, cash flow cant be generated…right? :rolleyes
Hi,
Let me give you a hint at buying rentals, no one else knows this so keep it a strict secret between us investors!
I don’t pay retail for real estate!!! I don’t pay retail for real estate!!! I don’t pay retail for real estate!!!
With that said if I say pay 70 cents on the dollar and I put down 20%, I am actually getting a first mortgage for 56 cents on the dollar!! Wow, did you catch that???
Now what if I buy a property for 65 cents on the dollar and I put 20% down, I am actually getting a first mortgage for 52 cents on the dollar!! That’s pretty neat right???
So now my expenses and debt service / cash flow look pretty good!
Remember, you promised, don’t tell anyone about this as we would not like the cat to get out of the bag!
GR
I comprehend that but if I cant cash flow a $35k note with $700 …