Author Topic: Should I buy a rental property? Help me think!  (Read 5284 times)

szmaine

  • Stubble
  • **
  • Posts: 170
Should I buy a rental property? Help me think!
« on: October 02, 2015, 09:32:09 AM »
Hi All,

I need some advice!

I was just curious about how much housing buy/rent was close to work and was perusing Zillow. There is a little house (~950sqft) for sale near my place of work, about 4 miles!  For $40K....that's right $40K (this is northern ME so keep that in mind) and I'm considering the possibility of buying it. I haven't seen it yet but have an appointment. I can tell from the pictures that it is super clean...the realtor confirmed my suspicions that it is an estate sale. Its been under contract twice, one person was trying to buy it remotely from Afganistan or someplace like that, and another person was a student, very young, who backed out with no explanation. Anyway, it does need the roof done and was told that it wouldn't get financed unless it was done - however, I would pay cash. Roof= 5K tops. I think I'd be inclined, IF it had no other bad problems to offer $35K and see what happens...I can imagine they might be getting anxious to have it sold before winter with the very bad roof.

Why would I want to do this??? Well it's super cheap and near work - I currently commute 30miles each way. We are staying put until she graduates HS this year plus it will take time to get our current home ready for sale. I donít want to stay in Maine forever so I'm not looking at this as our forever home, but while she is in college we will stay and such a place would be adequate. Until we relocated, it would be easy to keep it rented due to all the college students. I would probably try to do it through word of mouth since I work here. I'd rather have older grad students. Also, there are a lot of property management services here due to large number of absentee landlords, services for plowing, emergencies etc that are very reasonable should one opt to use one.

The idea here is that I'd already have a place lined up should we move and a possibly pretty good investment if we did not. I would also then be able to reassess my retirement investment strategy when my current house sells (worth 3x what the new little house costs) since I would not have to buy or rent anything.

My back of the napkin numbers, estimated monthly:
Tax= 133
Ins= 40
Heat/water= 100
Mgt/plowing, etc = 100

Rent= 950-1100
Cash flow= 575-725
Return= 17-20%

What do you think? It seems like under my ideal scenario there is a really good margin of safety in the rental income for any unplanned repairs/renovations (I am told there is a attic space next to the two little cave like bedrooms that could be converted into a much larger master bedroom). And I have a lot of cash sitting about...even if I paid cash I'd still have a good EF on hand and  I have already paid off my main home so I feel pretty secure about our current financial situation. I will still be able to fill a Roth and max out my 403b.

Thanks for any thoughts negative or otherwise! I don't have anyone close that is smart about this stuff and I really like having folks to hash it out with. I've never thought of doing this before so the idea is a little intimidating but very interesting!

Thanks for any input.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10360
  • Location: la belle province
    • Here's how you can support science today:
Re: Should I buy a rental property? Help me think!
« Reply #1 on: October 02, 2015, 10:15:17 AM »
Seems like an interesting opportunity, and one that could be quite lucrative for you if your back-of-the-envelope calculations are anywhere near correct.  Plus, you seem to have the cash on hand to do this without a mortgage.

Honestly, the biggest advantage I see would be to cut your existing commute from 30mi to 4mi.  The savings on commuting alone could pay off the home in just two years if you decide to live there when your daughter goes away to college.

Where in Maine?  Orono?  .. I might need a rental there next year.

What did it look like when you got a walk-thru?

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #2 on: October 02, 2015, 10:54:00 AM »
Yes, Orono.

Doing a walk through next Wed. They had lots of pictures and its looks in very good condition inside. But I walked around the outside today and as expected the roof is quite deteriorated...on the side I assume gets the most sun it looks like ruffles the shingles are so deteriorated. The worst is over the 3 season porch which is deteriorated rolled roofing...it appears to have leaked into the porch as I could see a couple drop ceiling tiles have fallen. Man, someone ought to get out and put a tarp over that. It looks recent, we just had some severe rain and could be more on the way. 

Last year, we got our first big snow fall the first week of November. I wouldn't buy it if I had to try get it through a winter with out re-roofing. Not much time left to it done. I guess it might be worth calling some local contractors and see if it even feasible to get someone to do it this fall before I do the walk through.

Why might you need a rental next year?


DaveR

  • Stubble
  • **
  • Posts: 243
Re: Should I buy a rental property? Help me think!
« Reply #3 on: October 02, 2015, 11:17:34 AM »
On the surface, the numbers aren't bad.

Things to consider:
Rule of thumb is 50% of rents (over time) will go to expenses: taxes, mgmt fees, vacancy, cleaning, repairs, etc, etc. Can you for sure get those rents? What does a comparable house rent for? At $950/mo, your expenses over time will be on the order of $425/mo, so cash flow probably isn't as good as you think. I generally forecast 5-7yrs of income/expenses.

The other rule of thumb is the 2% rule: your rents should be higher than 2% of the rent-ready price (purchase + improvements). You're looking at $40k + 5k for the roof, so $45k * 2% = $900 monthly rent. You seem to be in good shape... but that roof probably means there are other issues lurking. What else needs to be fixed to be comparable to a $1000/mo rental around there? New carpets? Do you need a washer/dryer? Other appliances? It doesn't necessarily kill the deal, but you do need to understand the numbers.

And though you have the cash, is it financeable? You're playing bank, so what would a lender worry about on the deal? Appraisal? Loan to value? If you couldn't walk into the bank and easily get an mortgage on the property you need to consider why.

norabird

  • Walrus Stache
  • *******
  • Posts: 7840
  • Location: Brooklyn NY
Re: Should I buy a rental property? Help me think!
« Reply #4 on: October 02, 2015, 11:29:37 AM »
I think it sounds like a great opportunity! Fun project, and even if your returns aren't as high as you project it would still be an asset.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10360
  • Location: la belle province
    • Here's how you can support science today:
Re: Should I buy a rental property? Help me think!
« Reply #5 on: October 02, 2015, 11:47:27 AM »
Good luck with the walk-thru.  No harm making an offer that's the asking price minus all the costs of any major renovations necessary - worst they can do is say "no" and stick firm to the asking price.  I agree with DaveR that there may be other problems lurking if the roof has been than bad all summer. 

Why might you need a rental next year?
I'm considering applying for a few positions at UMaine. 

pbkmaine

  • Walrus Stache
  • *******
  • Posts: 8297
  • Age: 62
  • Location: The Villages, Florida
Re: Should I buy a rental property? Help me think!
« Reply #6 on: October 02, 2015, 11:47:40 AM »
Let us know what happens!

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #7 on: October 02, 2015, 12:40:04 PM »
On the surface, the numbers aren't bad.

Things to consider:
Rule of thumb is 50% of rents (over time) will go to expenses: taxes, mgmt fees, vacancy, cleaning, repairs, etc, etc. Can you for sure get those rents? What does a comparable house rent for? At $950/mo, your expenses over time will be on the order of $425/mo, so cash flow probably isn't as good as you think. I generally forecast 5-7yrs of income/expenses.

I'm sure of the rents..$950 would be minimum. Hot competition for housing around here. A co-worker also has a rental, almost always rented out. I plan to pick his brain a bit too. But I'm just wanting to rent it for a year or so and then move in. Not sure about longer term after that, I'd have to play it by ear. It is assessed at 80K for taxes right now. When the market crashed and the paper mill shut down things never really bounced back...all that's left really driving the local economy are the students/university.

It has washer/dryer/stove, newer looking oil boiler, very clean looking inside...we shall see!

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #8 on: October 02, 2015, 12:40:38 PM »

nereo

  • Senior Mustachian
  • ********
  • Posts: 10360
  • Location: la belle province
    • Here's how you can support science today:
Re: Should I buy a rental property? Help me think!
« Reply #9 on: October 02, 2015, 12:56:21 PM »
[ When the market crashed and the paper mill shut down things never really bounced back...all that's left really driving the local economy are the students/university.

It has washer/dryer/stove, newer looking oil boiler, very clean looking inside...we shall see!
When did the paper mill shut down?  I lived there in 2005-06... guess a lot has changed (including rental prices.  $950, yikes!)

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #10 on: October 02, 2015, 03:19:19 PM »
Oh, the past 5 yrs have been awful for the mill. Bought and sold 4-5 times. Open, closed, open etc.

The latest...
https://bangordailynews.com/2015/09/29/news/bangor/owners-announce-closure-of-old-town-pulp-mill/

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #11 on: October 02, 2015, 03:35:19 PM »

And though you have the cash, is it financeable? You're playing bank, so what would a lender worry about on the deal? Appraisal? Loan to value? If you couldn't walk into the bank and easily get an mortgage on the property you need to consider why.

The realtor was very forthcoming...no financing is available with the roof in the condition it in. When I bought my current fixer upper one could do purchase plus improvement financing thru a first time buyer program with the state housing authority. But perhaps this is no longer an option following the mortgage crisis..I don't know, but can see how this could be trouble if you are cash strapped an need a 20% down payment and park money in escrow for the roof. Just speculation of course...

Another Reader

  • Magnum Stache
  • ******
  • Posts: 4976
Re: Should I buy a rental property? Help me think!
« Reply #12 on: October 02, 2015, 04:52:14 PM »
No financing restricts the pool of buyers to cash only and generally gives you a lot of negotiating power.  Get some estimates and start low with your first offer, with those in mind.

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Should I buy a rental property? Help me think!
« Reply #13 on: October 03, 2015, 06:33:13 AM »
Sounds like a good opportunity.  Don't forget to have repair money factored into your cash flow.  Over time, wear and tear will mean you will have repairs on the house in the future.  I usually estimate 1% of the home's purchase price every year, which has been conservative for me.  However with such a low purchase price, I would estimate a little bit more... I would err on maybe $600-$800 per year for repairs and factor that into my calculation. 

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #14 on: October 03, 2015, 01:12:20 PM »
Thanks for all the good advice! I'll give an update after Wed. ☺

Fireball

  • Stubble
  • **
  • Posts: 230
Re: Should I buy a rental property? Help me think!
« Reply #15 on: October 03, 2015, 09:36:06 PM »
"No financing restricts the pool of buyers to cash only and generally gives you a lot of negotiating power.  Get some estimates and start low with your first offer, with those in mind."

+1.....Sit back and think of what a low offer would be. Then deduct about $5,000 off that. Worst thing they can say is no.

Ryan

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #16 on: October 04, 2015, 07:56:50 AM »
Okay thanks! I am thinking long and hard on this...been reading some good threads over at BH. The bad tenant stories are disturbing and I am carefully weighing my capacity to deal with such matters. I am not in the least a shrinking violet quite the opposite...but am cautious about complicating my life.

The sellers have to be very anxious about going into another winter with that roof just as I am feeling anxious about the time left before the snow flies to get in done should I buy it - I will not buy it if I dont have a commited contractor to do it asap. IF I can't find other serious issues...it could be really hard to pass up if I could get it for 30K.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10360
  • Location: la belle province
    • Here's how you can support science today:
Re: Should I buy a rental property? Help me think!
« Reply #17 on: October 04, 2015, 09:00:09 AM »
Okay thanks! I am thinking long and hard on this...been reading some good threads over at BH. The bad tenant stories are disturbing and I am carefully weighing my capacity to deal with such matters. I am not in the least a shrinking violet quite the opposite...but am cautious about complicating my life.

The sellers have to be very anxious about going into another winter with that roof just as I am feeling anxious about the time left before the snow flies to get in done should I buy it - I will not buy it if I dont have a commited contractor to do it asap. IF I can't find other serious issues...it could be really hard to pass up if I could get it for 30K.

Seems to me you have an absolute "floor" (downside risk) here of ~$40k.  That would be if you purchased the property, redid the roof and then the place burns down without insurance and you get nothing back.  Obviously the likelihood of that happening is almost nil (chances are you could re-sell it at a loss with a new roof and only loose a few $k). IN your first couple of posts you detailed the projected upside - cashflow of $500+/mo.  The property also seems to fit the 2% guideline DaveR outlined.

So - if your finances are such that the worst-case scenario won't bankrupt you and you have a high level of confidence that the most likely outcome is around your projected profits I think it's a good fit.
And as I stated earlier, one of the most appealing options this property has for you is the potential to live closer to work and downsize after your daughter leaves for college.  It could be a fall-back strategy if you can't find good renters... the savings you'll have cutting your commute by 26 miles could give you a ROI in about two years. 

Valetta

  • 5 O'Clock Shadow
  • *
  • Posts: 72
Re: Should I buy a rental property? Help me think!
« Reply #18 on: October 04, 2015, 09:20:10 AM »
Okay thanks! I am thinking long and hard on this...been reading some good threads over at BH. The bad tenant stories are disturbing and I am carefully weighing my capacity to deal with such matters. I am not in the least a shrinking violet quite the opposite...but am cautious about complicating my life.


Yes bad tenants can happen. But we've been landlords for years and only had one "bad" tenant and it wasn't even that bad. They moved out early and broke their lease but we found a replacement right away so it wasn't even a big deal. People that post bad tenant stories online - those are the exceptions, not the rule. People only post the stories that are interesting enough to post online. Some of our former tenants have even become friends. Have a good lease, do a background check, and you'll be fine.

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #19 on: October 04, 2015, 11:58:08 AM »
Okay thanks! I am thinking long and hard on this...been reading some good threads over at BH. The bad tenant stories are disturbing and I am carefully weighing my capacity to deal with such matters. I am not in the least a shrinking violet quite the opposite...but am cautious about complicating my life.

The sellers have to be very anxious about going into another winter with that roof just as I am feeling anxious about the time left before the snow flies to get in done should I buy it - I will not buy it if I dont have a commited contractor to do it asap. IF I can't find other serious issues...it could be really hard to pass up if I could get it for 30K.

Seems to me you have an absolute "floor" (downside risk) here of ~$40k.  That would be if you purchased the property, redid the roof and then the place burns down without insurance and you get nothing back.  Obviously the likelihood of that happening is almost nil (chances are you could re-sell it at a loss with a new roof and only loose a few $k). IN your first couple of posts you detailed the projected upside - cashflow of $500+/mo.  The property also seems to fit the 2% guideline DaveR outlined.

So - if your finances are such that the worst-case scenario won't bankrupt you and you have a high level of confidence that the most likely outcome is around your projected profits I think it's a good fit.
And as I stated earlier, one of the most appealing options this property has for you is the potential to live closer to work and downsize after your daughter leaves for college.  It could be a fall-back strategy if you can't find good renters... the savings you'll have cutting your commute by 26 miles could give you a ROI in about two years.

Just to clarify, this would be the downsize from 2000sqft to 950sqft if we moved there when our current home sold. The point for me about the commute is not financial first most but is gravy on top of my priorities...mainly making life easier for us both. DD has aspergers and will need my continued support thru college and will be going where I work - 50% off tuition for dependants! So living that close would be a big plus given different schedules and the availability of public transport and/or quick ride home from me. Other factors include reclaiming 1.5 hrs spent commuting.
Downside factors include that I've already got an old house on my hands that needs repirs to sell - but the problem is not finances just my capacity to juggle all the moving pieces and whether it's wise to add to that right now. 

norabird

  • Walrus Stache
  • *******
  • Posts: 7840
  • Location: Brooklyn NY
Re: Should I buy a rental property? Help me think!
« Reply #20 on: October 05, 2015, 11:18:59 AM »
Still hoping it works out for you! May be living vicariously though.

szmaine

  • Stubble
  • **
  • Posts: 170
Re: Should I buy a rental property? Help me think!
« Reply #21 on: October 06, 2015, 04:39:36 AM »
So far, I can't find a contractor that can commit to the roof...everyone is going flat out to get existing jobs done.