Author Topic: What am I missing?  (Read 937 times)

87tweetybirds

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What am I missing?
« on: August 01, 2018, 05:59:28 AM »
Hey all!
DH and I are fairly new to the real estate market, but I've been studying here for a while and I think I've run the numbers right.
We purchased a home in a university town about 45 minutes from us from an acquaintance thinking to either rent or flip it.
Purchase price (including closing costs) $63,000(3 bed 2 bath).
Estimated repair costs $10k. (contractor said $5k, but I'm going conservative because I've never seen a construction project actually finish at estimate, and if I'm over, even better)
Trulia/Zillow estimated price $125k. City taxes (from 2016) are based of an estimated $90k value. We figure if we decide to sell we should be able to get somewhere between that.
Before we had even closed, we had several people contact us asking if they could rent it. (The acquaintance gave them our number). And we signed an agreement with a couple for rent to be $850/month.
Google says vacancy rates in this town run 5-10

My calculations have it right around 1% as a rental. DH is planning on managing it himself, and doing as much of the repairs as he can himself.
But long term, would we be better keeping at as a rental or flipping it?





waltworks

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Re: What am I missing?
« Reply #1 on: August 01, 2018, 08:19:04 AM »
Profits on low end properties are always going to be cost dependent. What are the property taxes, expected maintenance costs, etc?

For example, if you purchased the place with cash, the 50% rule says you'll make ~$425 a month here. But if:
-Rent $850
-Property taxes $150/mo (not uncommonly high)
-Maintenance/capex $300/mo
-Vacancy $80/mo
-Management $100/mo (I'll get into why I don't think you're going to want to manage yourself in a second)
-Insurance $100/mo (varies wildly from place to place)

You're down to $120/mo already on your $75k investment. Not good. Your costs might be WAY lower, of course, but we don't have any of those numbers to work from here.

I will also say - managing and repairing things yourself when the property is 45 minutes away is a recipe for disaster. If you have to go out to fix something that will take 1 hour, it's going to be 3 hours including travel time. That's not good. If you have 20 of them and you can combine errands/trips, maybe. But otherwise it's a LOT of driving back and forth which costs you in both time and gas money/car depreciation.

If you can actually get $90k+ for the place, I'd probably flip it rather than rent it. But it would depend on the actual numbers.

-W


bacchi

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Re: What am I missing?
« Reply #2 on: August 02, 2018, 12:10:33 PM »
I will also say - managing and repairing things yourself when the property is 45 minutes away is a recipe for disaster. If you have to go out to fix something that will take 1 hour, it's going to be 3 hours including travel time. That's not good. If you have 20 of them and you can combine errands/trips, maybe. But otherwise it's a LOT of driving back and forth which costs you in both time and gas money/car depreciation.

Oh yeah. I sold a place that was only 25 minutes away for this very reason. It just carved away large chunks of time from my life for not-fun tasks like replacing a garbage disposal or fixing a hole in the garage door.

MoneyMatrix

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Re: What am I missing?
« Reply #3 on: August 07, 2018, 05:07:27 PM »
What to do with it depends on a lot of things, but the main thing is what are your goals? 
Also, cashflow, and long term potential for the property.
Make sure you determine all the costs and tax implications before you sell. They add up.


Blindsquirrel

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Re: What am I missing?
« Reply #4 on: August 07, 2018, 07:19:05 PM »
   I would look at Zillow and Craigslist for rent numbers, in most markets a 3/2 goes for a good bit higher than 850. Also, as the fellow above said, what are your long term goals? That really determines what you should do.

87tweetybirds

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Re: What am I missing?
« Reply #5 on: August 09, 2018, 03:51:16 PM »
   I would look at Zillow and Craigslist for rent numbers, in most markets a 3/2 goes for a good bit higher than 850. Also, as the fellow above said, what are your long term goals? That really determines what you should do.
we did look at both Zillow and craigslist as well as Trulia before we bought the property to see rental costs in that town. We're priced about average for a 3/2. We live in a fairly low cost of living area.

What to do with it depends on a lot of things, but the main thing is what are your goals? 
Also, cashflow, and long term potential for the property.
Make sure you determine all the costs and tax implications before you sell. They add up.

Goals: Either 2nd source of income, or profitable flipping opportunity. Long term DH would like to have several rentals to create sufficient enough income to help us be FI, mostly I question this being one of those rentals because of the distance to manage it.

The property is in a university town, in a decent neighborhood close to campus, after we fix the major repairs we really have a couple of options, 1-continue to rent it for the $850/mo, 2-divide it into a 1/1 and 2/1 (hardest part would be putting in a kitchen area) which would increase potential rental income possibly another $150, or 3-selling it and taking that $ to a different investment.

Profits on low end properties are always going to be cost dependent. What are the property taxes, expected maintenance costs, etc?

For example, if you purchased the place with cash, the 50% rule says you'll make ~$425 a month here. But if:
-Rent $850
-Property taxes $150/mo (not uncommonly high) We estimate it to be closer to $100 (with it being a primary residence it was $86/mo)
-Maintenance/capex $300/mo
-Vacancy $80/mo
-Management $100/mo (I'll get into why I don't think you're going to want to manage yourself in a second)-DH has a good friend with a property management company, and we have talked about eventually hiring his company to manage it, once DH's primary job makes it not as feasible to travel that far when maintenance requires
-Insurance $100/mo (varies wildly from place to place) its more like $40


That would make it more like $185/mo. Thanks for the "additional costs" of rentals list there

waltworks

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Re: What am I missing?
« Reply #6 on: August 09, 2018, 06:31:54 PM »
How many $185/mo properties do you need to be FI?

Forget it, flip the thing.

-W

tralfamadorian

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Re: What am I missing?
« Reply #7 on: August 10, 2018, 04:30:35 PM »
What to do with it depends on a lot of things, but the main thing is what are your goals? 
Also, cashflow, and long term potential for the property.
Make sure you determine all the costs and tax implications before you sell. They add up.

+1

I don't think the property is an automatic sell at all. If you want to get into property investment, at first blush it sounds like a winner. Not too pricey, cash flows, steady stream of tenants. Give it a try and see how you like it. Maybe you'll be ready to sell in a year (and avoid short term gain tax on your profit by holding it that long) or maybe you'll be ready to buy the whole street.