Author Topic: Thoughts on Rental Property  (Read 2206 times)

MillenialMustache

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Thoughts on Rental Property
« on: June 26, 2014, 06:55:45 AM »
My DH and I are 27 and we paid off our home four months ago. Since then, we have been saving for a down payment on a rental property, and have around $30,000 now. We bought our house near the bottom of the market about three years ago for $57,000 - a fixer-upper, but all cosmetic (flooring, paint, etc). I know that we live in one of  the "less desirable" sections of our county (but we like it). We have been looking for an investment property for about two months, and have not seen as many fixer uppers. In our area, it seems they are going for more too - around $80,000 or so. We are considering buying our rental property in the "better" part of town to be more attractive to renters. We are seriously considering a home that is $129,000, more than double what we spent on our home. It is a little dated, but not a fixer-upper. It is right by the university I work at, so we believe we will easily rent to grad students/faculty. It is not in the "student ghetto" but more in the nice neighborhood by the university. We were not even expecting we would be able to afford something in that area, but since this is older (1958) it is a much lower price (we are buying from the original owner though, which is nice). For instance, a 2006 two story home sold for $175,000 just recently on the same street. Another home on the same street that was built in 1964 that in my opinion is not as nice as ours sold a little over a year ago for $137,000. Therefore, even though this home is more than we thought we would spend, we still think it is a good price, will probably be easier to rent, and will rent for a higher amount.

My big holdup is that theoretically we could get a house $30,000-$50,000 cheaper - it will either need work or be in a less desirable area, or both. However, we would be able to pay it off that much sooner. Yet, it will likely draw a lower rent income.

Any thoughts?

neo von retorch

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Re: Thoughts on Rental Property
« Reply #1 on: June 26, 2014, 07:41:24 AM »
I don't think the cost of your primary home is relevant to the discussion, beyond emotions. :-)

How do the numbers work out, i.e. cost of interest, taxes, insurance and maintenance compared to the rent you'll bring in (factoring in for some hopefully brief periods of vacancy)? How long until you break even covering the initial closing costs?

rmendpara

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Re: Thoughts on Rental Property
« Reply #2 on: June 26, 2014, 07:50:54 AM »
Current home vs new property cost is irrelevant. You got a good deal, be happy!

You need to project a full income statement for any property, and compare the Net Income to the Total Invested and come up with a Rate of Return (this is more comparable across properties).

So, Net Income = rent - mortgage* - taxes - insurance - agent fees (leasing) - maintenance

*mortgage includes principal and interest, so remember that if you are close to zero Net Income, that some of your mortgage is exchanging cash for home equity

Rate of Return = Net Income / Total Invested (use this rate to compare properties)

Of course, there are a lot of estimates, so it's obviously a risk.

For a first property, I would advise taking a property that is low maintenance (i.e. well maintained or relatively new), not a cheap property (so you can attract higher rent tenants in a better neighborhood while you learn how to be a landlord), and stay cash flow positive!

If you can do those 3 things, you will probably do just fine. Oh, and be sure you can cover at least 3-6 months of monthly payments out of pocket (rough rule of thumb, in case you have a repair come up that you have to do while a tenant can't stay there). If you can do that, then the property won't bankrupt you.

Your other option is to go for a cheaper property, and pay for it in all cash. As your cash flow stabilizes after a year or so (you make the necessary repairs and get it rented out), you can go for a bigger property with a mortgage.

In general, I say go where the deals are. You can't control the market. There may be no fixer uppers that make financial sense, or there may be no nice condos that make sense, so you have to star tlooking and drawing up your financial estimates before you really know what will work.

Good luck!

Btw, I own 1 condo (all equity now, bought foreclosed in 2012) and it was the best decision of my life. I net $6k in cash on a $90k investment.