Talk through some numbers with me?

[begood]

I'm having a house attack, and I'd love some feedback about whether this is even worth pursuing.

We are in kind of an unusual situation. We live in provided housing through my husband's job. We currently pay only for utilities and lawn care. We sold our last house in the summer of 2009 (after buying in 2007) and basically lost 20 years of equity in the sale. OUCH.

DH is 50, I am 51. Our daughter has 5 more years in the private school that drove the decision to move in the first place, and then college. We have a sizeable 'stache which will need to cover education, retirement, and at some point, housing.

A house has gone on the market less than a mile from where we live now. It's the size/configuration we want: 1800 s.f., 3 bedrooms + a small study, 2 full baths, 1 floor, on a 2-acre lot with both woods and "meadow" land. It has exactly the number of rooms we want. The only thing it's missing is a garage, but there's plenty of space to put up at least a carport, if not a full garage.

The house is priced at the top of our comfort zone at $325K. Based on some cursory research into the rental market in this area (which is super tight on small single-family homes), it looks like we could get around $2K/month in rent. Taxes are $3360/year.

In this area, it's very hard to find 1-story houses that aren't ordinary rectangular brick ranch houses. Most of what's in our price range is split-levels in cookie-cutter neighborhoods. So the house itself is particularly appealing to us because of what it offers in comparison to what else we've seen available in our price range.

We're considering buying it as an investment property, then moving into it in 5-10 years. But how do I make sure the numbers make sense? And is it really dumb to think that far ahead? And if we get a loan on it as a rental property, what happens if it becomes our primary residence?

I ran a couple of calculators I found online, and it seems like the cash flow would be almost even for the first few years. But that's with ballpark numbers.

I think the general response will be: "You don't know enough. Go do some research!"

So I'd appreciate any help getting pointed in the right direction.

[mastrr]

Generally you want your rental to rent for over 1% of the homes value (the higher the better).  So in the example you provided if you can collect $2,000 per month in rent you want the homes value to be less than $200,000.  There is a lot more that goes into it but that's a good starting point.

[begood]

Generally you want your rental to rent for over 1% of the homes value (the higher the better).  So in the example you provided if you can collect $2,000 per month in rent you want the homes value to be less than $200,000.  There is a lot more that goes into it but that's a good starting point.

I'd heard the 1% rule, but I wasn't sure what it was one percent of... home value makes sense. So, in the case of this house, we'd want it to rent for $3250/month, which it would not support. For example, a house is currently for rent in our market for $3350/month. It's 3100 s.f., 4 BR/3BA + library + in-law suite + gourmet kitchen in a golf-course community. The house is also for sale... for $600K. So rent is about .5% in that case. Extrapolated, that might mean the house we're looking at wouldn't rent for $2K, but instead for $1.6K.

It doesn't sound financially prudent, does it?

[CashFlowDiaries]

Here are some rough numbers I came up with real quick including costs that I include in all my rental evaluations. 



As you can see, its just about breaking even not to mention this is all based on that you will be doing your own property management.  The numbers are just not there.  In my opinion, I dont think this would be a good investment to get into.

[begood]

That is one beautiful spreadsheet, CashFlowDiaries! Thank you for taking time to do that - I really appreciate it! :)

We probably would NOT be managing the property. We have friends with two rentals already, and we would have approached them about adding the management to their list for the accepted percentage. Once I add that expense in, then even all-cash doesn't seem to make it workable.

We could buy it outright for cash, but I sure as heck wouldn't want to have to sell mutual funds right now to do it!

No, alas, I will have to let this dream go. When we're ready to move into a house ourselves, I think the machinations will be less complex and we'll have a better sense of whether to jump on a particular property. In our area (outer Philly burbs) houses in that price range are selling above listing price and within days.

[CashFlowDiaries]

Youre welcome!  Glad you like my spreadsheet.  I use it quite often.  Im actually just now starting to look for a new rental property also.

I think you are making the right decision to pass on this one.   The market might be better for you later on anyways.  You never know.

Where I live in Austin, TX the numbers dont make sense here for cash flow either which is why I started investing out of state.  Definitely not for the faint of heart as it requires a ton of research but I am doing quite well with it for now.

Good luck!

[Dicey]

Hi begood,
I did something like this. DH and I were reviewing sales histories for homes for sale in the same area and our conclusion is that the only reason I didn't lose my ass is because I bought when the market was low. And we're being generous when I say didn't lose my ass, because I haven't really made spectacular returns on my investment either. I vote no. There will always be another house, or you can build what you want when you're ready. In the meantime, your investments keep growing and don't call you to tell you the A/C went out again after you just spent $1700 fixing it. Ask me how I know.

[begood]

Hi begood,
I did something like this. DH and I were reviewing sales histories for homes for sale in the same area and our conclusion is that the only reason I didn't lose my ass is because I bought when the market was low. And we're being generous when I say didn't lose my ass, because I haven't really made spectacular returns on my investment either. I vote no. There will always be another house, or you can build what you want when you're ready. In the meantime, your investments keep growing and don't call you to tell you the A/C went out again after you just spent $1700 fixing it. Ask me how I know.

Oh no! That sounds like a sad tale. :(

We missed our "bottom of the housing bust" by about three years here, I think. We weren't in a position to do anything about it back then. You are quite right that there will always be another house, and I dream of building a house that suits us to a T.

[Dicey]

Hi begood,
I did something like this. DH and I were reviewing sales histories for homes for sale in the same area and our conclusion is that the only reason I didn't lose my ass is because I bought when the market was low. And we're being generous when I say didn't lose my ass, because I haven't really made spectacular returns on my investment either. I vote no. There will always be another house, or you can build what you want when you're ready. In the meantime, your investments keep growing and don't call you to tell you the A/C went out again after you just spent $1700 fixing it. Ask me how I know.

Oh no! That sounds like a sad tale. :(

We missed our "bottom of the housing bust" by about three years here, I think. We weren't in a position to do anything about it back then. You are quite right that there will always be another house, and I dream of building a house that suits us to a T.

Not a sad tale, because I love the house, but a cautionary one. I have a big, fat reserve for this property, so the repair is no big deal, even the extra $450 it cost me last Friday. However, should a real estate investor of the likes that hang out at this fine establishment happen to see my numbers, I'd be jeered back at least a level, if not two. I have good reasons to be happy with this purchase, but most all of them have nothing to do with ROI. And fear not, there will be another "bottom", if not a full bust, sometime in the next decade. It's the nature of the beast. Just keep saving so you don't miss the next one.

[reklar]

Here are some rough numbers I came up with real quick including costs that I include in all my rental evaluations. 

Nice, found the spreadsheet online ... one thing I don't understand though.  The Cap Rate calculation in the above example and on the spreadsheet seems to be:

(Yearly_Cash_Flow + Yearly_Mortgage_Payment) / Purchase_price

This does not jibe with what I understate cap rate to mean which is typically just Yearly_Cash_Flow/Purchase_Price ...  Could someone please enlighten me?

[CashFlowDiaries]

That is because Cap Rate is used to calculate an all cash purchase.  Its only doing that in the formula to basically remove the mortgage payment away that you would not be paying to properly calculate a cap rate.  The Cash on Cash is the calculation that should be used when financing a property.  .

Make sense?

[reklar]

That is because Cap Rate is used to calculate an all cash purchase.  Its only doing that in the formula to basically remove the mortgage payment away that you would not be paying to properly calculate a cap rate.  The Cash on Cash is the calculation that should be used when financing a property.  .

Make sense?

Yes, thanks, I see what is happening there.  I was a bit confused because in the column above cap rate it says "Financed Purchase". 

[CashFlowDiaries]

That is because Cap Rate is used to calculate an all cash purchase.  Its only doing that in the formula to basically remove the mortgage payment away that you would not be paying to properly calculate a cap rate.  The Cash on Cash is the calculation that should be used when financing a property.  .

Make sense?

Yes, thanks, I see what is happening there.  I was a bit confused because in the column above cap rate it says "Financed Purchase".

yeah youre right, i should move that to the other side.  Good point!