Author Topic: New Here - How to evaluate rental property -- is it a good deal ?  (Read 2145 times)

WorkingOnIt

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Hi All,

I've been lurking here for a month or so reading old threads.  This forum is exactly what i've been looking for !

I'm not sure the best way to introduce myself so I will just right in ..

DH and I are considering getting into the Rental Property Business.  We are about 10 years from him retiring and we are wanting some more diversification in investments and income. We are both salaried and all but 5% of our income is from our jobs (other 5% is from VRBO'ing our vacation home when we are not there).

So we are wanting to get to a point where we have a few other paid for homes that we rent. We are thinking the $200K range, and we expect to take a mortgage out for it.  Our vacation condo is paid for (about $250K) .. our home we still have a mortgage @ 2.875% for another 9 years.

We have a good amount of "disposable" income (we save 50% of what we make right now) .. and I'd like to use some of this for a rental property.

So the question(s) I have
- How do we determine if it is a good buy ? Is there some formula for rental roll vs price pd ? Does a formula consider taxes (like in Tx w/ high real estate taxes), insurance
- How much should we assume for mtce costs ?
- Since we plan to take a loan for the rental (we do have enough in accessible investments to pay all cash, but that doesn't feel good to us .. i.e. if we don't include 401k/IRA type investments - we have about 240K (much in mutual funds or company stock). I don't want to deplete all of that .
- Taking a loan incurs costs .. can you ever make $ while paying interest ?

If anyone has any experience or websites etc I'd be very grateful !

Tx



waltworks

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Re: New Here - How to evaluate rental property -- is it a good deal ?
« Reply #1 on: March 31, 2014, 04:01:19 PM »
Google is your friend here. Biggerpockets.com has a ton of good information, also check the RE forum here at MMM.

Basic rules are usually:
-Rent should be 1-2% of total purchase price per month.
-Costs will be ~50% of gross rent (so if you're financing the deal, half of your rent minus P&I is your monthly cash flow, roughly)

This is all assuming you are going to buy/hold and want immediate cash flow. If you are flipping, or have an inside line that you'll see a ton of appreciation, or are doing some mix of strategies (ie live in one side of a duplex and rent the other half or something along those lines) the "rules" can be bent or broken in some cases. Just don't fall into the (I fell in once, long story...) "Rent minus mortgage and taxes = profit!" trap.

-W

the fixer

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Re: New Here - How to evaluate rental property -- is it a good deal ?
« Reply #2 on: March 31, 2014, 04:03:10 PM »
There's tons of info on BiggerPockets: the blog, forum, and podcasts.

It sounds like you have a lot to learn. Read up on 50% rule, 1%/2% rule, cap rates and cash on cash return.

Yes you can make money in real estate that has a mortgage. A basic rule of thumb is to compute the cap rate and see if you can find a loan with an interest rate lower than that. To find a true deal, look for properties with a net operating income (rent minus vacancy and all non-financing expenses) that's high enough to pay for a mortgage even if the property were 100% financed. Take a look at the recent thread in Real Estate and Landlording where more experienced people are posting examples of properties they own and how much rent they bring in.

WorkingOnIt

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Re: New Here - How to evaluate rental property -- is it a good deal ?
« Reply #3 on: March 31, 2014, 04:08:59 PM »
Thanks Guys !

I have a LOT to learn. I've just spent the last 6 mos learning and getting all investments in order, this is next on my list.

We are looking to buy and hold, and eventually pay it off (maybe 3-5 years), we do have a bit of an inside (realtor friend  also deals w/ foreclosures for banks - and short sales). So we can get a small amount of equity appreciation at the outset (after spending 10-15k for fix ups to rent).

Thanks for the tips -- off to start my reading !

the fixer

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Re: New Here - How to evaluate rental property -- is it a good deal ?
« Reply #4 on: March 31, 2014, 04:15:38 PM »
If you are interested in fixing houses, also read about the 70% rule. I almost made the mistake of buying a house that needed a ton of work but wasn't priced as a rehab. I still would have made a profit, but the amount of time and risk I would have put into it wouldn't have been worth it. Always ask the question of whether your real estate agent will make more money on the deal than you will.

If you're going to do a buy-and-hold rehab for a rental I think you can bend the 70% rule a bit, but IMO you shouldn't go past 80% or so.