Author Topic: Advice on purchasing new rental  (Read 1390 times)

gradstudent

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Advice on purchasing new rental
« on: April 27, 2014, 02:49:51 PM »
I am seriously considering purchasing another rental property. I currently have two, the homes my wife and I owned before we got married. Combined, they have a free cash flow of about $500 a month, after management fees and expenses, in addition to approximately $600 a month in principal payments. Mortgages are at 3.25% and 3.75% and I'm in no hurry to pay them off at that rate. There are several homes for sale in a very good neighborhood, great public school system, attractive area for families with good long-term growth prospects. The ones I'm looking at fall in the middle of the market, with an estimated rental rate of $1,200 a month. One of our rentals is in the same neighborhood and rents for that and is comparable to the homes I'm looking at.

The numbers: approximately $150k to buy the house. I'm thinking about putting 50k down which is around 1/4 of my liquid net worth. This would generate a mortgage of around $650 or so after taxes and insurance are included at today's 30 year 4.25% rates. After management fees, the free cash flow monthly would be around $500, with an additional $300 or so of principal payments. Factoring in an average vacancy rate of 10% (which is very conservative for the area), this is around 8k of profit a year, or a 16% return on my investment.  Am I missing something in my math? Thoughts?

Another Reader

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Re: Advice on purchasing new rental
« Reply #1 on: April 27, 2014, 06:13:54 PM »
If you buy it as an investment property, your interest rate on the loan will probably be about one percent higher than an owner occupied property loan would be.  You may have more problems qualifying for the financing depending on how your lender looks at your other two rentals.  Although you have not experienced a lot of expenses on your other houses, you will eventually have to repair and replace components of the houses.  Also, tenants are generally hard on paint and carpet and my rule of thumb is 5 years on each, unless you get really clean tenants, then it's usually seven years.

I personally would want one percent per month in rent to consider buying in this type of neighborhood.  Putting that much cash down to force it to cash flow is not attractive to me.

arebelspy

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Re: Advice on purchasing new rental
« Reply #2 on: April 27, 2014, 06:59:24 PM »
I personally would want one percent per month in rent to consider buying in this type of neighborhood.  Putting that much cash down to force it to cash flow is not attractive to me.

OTOH, they apparently keep 200k in cash, so getting it put into a vehicle returning probably 6% is an improvement.
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Another Reader

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Re: Advice on purchasing new rental
« Reply #3 on: April 27, 2014, 07:38:35 PM »
Warren Buffett and most large American corporations are sitting on huge hoards of cash waiting for an investment that meets their ROIC requirements.  It's tough to justify investing in much today, except Michigan houses!