Update: Bought first house a month ago, analysis versus results.

[frugally]

Hi Folks,

I thought it would be interesting for those of you who haven't pulled the trigger yet to see a real-life deal and how it went down (initially).  This was my first property.  Here are the stats from my original post:

Original Analysis

Home:
3 Bedrooms - decent sizes
2 Bathrooms (there's really a third, but it's in the unfinished basement)
No Garage
Solid neighborhood with little-to-no crime
List Price: $80,000 (this is also ARV)
My Price: $73,500

Cash In:
Down Payment (25% to get a 4.625% conventional loan): $18375
Closing: $1400 (seller is paying an additional $1400 per the deal)
Immediate Repairs: $2500 (parts of the roof looked to be in rough shape to me, the home is already licensed as a rental though so it's mostly rent-ready)
Total Cash In: $22,275

Income/Expenses:
Rent: $1000 - confirmed this is reasonable with my PM and a couple others.  Worst case scenario in my mind is $950 if it isn't renting...
Mortgage (P+I): $283.42
Taxes: $92
Insurance: $55
Vacancy: $83.33
Repairs and CapEx: $150 - the house is small, and having no garage I think will keep the repairs + CapEx at 13%, but I don't want to make that assumption without advice...
Management Fee: $75 - lease signing fee isn't included but I think I'm going to have us find the tenant.  We know the property manager well enough and will work it out.
Cashflow: $261.25 ($3135/year)

Investment Numbers:
Cash-on-cash: 14.07%
Cap Rate: 8.44%

Actual Results
Home:
Price: $72500 - found some plumbing issues during inspection and we got $1000 off the price.  Cost us $700 to fix.
Inspection: $325
Plumbing: $700
Other repairs: $600
Closing costs: $2000 - was a little more expensive than anticipated.
Cash In (25% Down): $21,750

Income/Expenses:
Rent: $900 - it's been tough trying to get a renter in before winter, and we've found that our property manager uses her assistant to show our property.  Above we originally thought we'd do it but decided to see what we were paying for.  My wife showed the property and the first showing we got a renter.  We think we could have gotten $950/month for it if we did it ourselves and are viewing this as a learning experience.  We did a 9-month lease so we could show it again in the summer when there is more demand.
Mortgage: $283.42
Taxes: $92
Insurance: $55 - right on
Vacancy: $83.33 - went one month so right on so far...
Repairs and CapEx: $135/month - adjusted for lower rent and no garage/driveway.
Management Fee: $75/month - Going to try to negotiate not paying the lease-signing fee since they didn't find sell the tenant on it.
Cashflow: $176.25 (2115/year)

Year 1 CCR: 9.7%

I'm not terribly upset by this.  Quite frankly I'm just happy I don't have to pay for the heat on the house through a MN winter.  Next year we should be able to get $950 or $975 in rent and up that CCR. 

Major things I learned:
Prioritize a backyard over a front-yard when looking (turned away a lot of applicants)
A 1-car garage is a boon to rentability (though perhaps increases costs equally)
The salesperson makes a huge difference when showing a property.
Get your leases to line up with when there is the most demand.  We might try one more 9-month lease even to push us toward June, that seems to be the best time for rental demand in our area.

[Must_Stash]

Thanks, Frugally.  I find it very interesting and encouraging.

[gimp]

Great post. Thanks.

[arebelspy]

I love how realistic you make your estimates.  Estimated expenses 455/1000 estimated rent = 45% expenses (and just over 50% on the 900 rent) - 50% rule tends to be more reliable than most new people think, though you might do slightly better depending on vacancy, maintenance (and the property's age), etc.

Given that sometimes you'll have tenants renew a lease and stay an extra year or two, your numbers should be slightly better than your Y1 ones, on average.  Especially if you end up bumping the rent a bit, etc.

All in all it looks like you're set to earn double digit cash on cash returns, with higher overall returns when you count in principal paydown and any appreciation that occurs.

That on a property that is just over the 1% rule (900 rent on ~75k property after repairs = 1.2%). The cheap leverage definitely helps with that return.

Now just go buy another dozen or so and you'll be ready to FIRE!  ;)

Even if someone doesn't want a whole bunch of properties, just a few to supplement FIRE income and provide a stable base is never a bad idea.

Thanks so much for posting this - solid, real life examples are definitely fun to see.

[Notch]

Wow, you have almost 15% gross yields!

Where I live, in regional Australia, the average rent is $1,400 per month and the houses cost $370,000.

[marty998]

Wow, you have almost 15% gross yields!

Where I live, in regional Australia, the average rent is $1,400 per month and the houses cost $370,000.

Makes you cry doesn't it? LOL. We (should) get cap gains to help us sleep at night.

Well done to the OP.

[jnc]

Congratulations. Looks like a solid property and an excellent learning experience.

[GardenFun]

For your first go around, that was smooth sailing.  Congratulations! 

[VirginiaBob]

Wow, you have almost 15% gross yields!

Where I live, in regional Australia, the average rent is $1,400 per month and the houses cost $370,000.

Where I am at in Virginia, it is about $200,000/$1,200.  Still far below the 1% factor, making investment property not much of an option. 

[Nate R]

Major things I learned:
The salesperson makes a huge difference when showing a property.

Can you elaborate on what you mean by this? What was done or not done that helped/hurt?

[johnhenry]

Gongrats!!  You are on your way!

The hardest part of this business is estimating expenses and rent, but those things come with experience. 

I completely agree with you about backyards and garages increasing rent and rentability.

Your thought process is spot on about housing being more in demand in certain times of the year.  And in certain times of the year, like when it gets dark early it may even be worthwhile to schedule showings on weekends during optimal warmth and daylight hours vs in the evening, in the dark.  Thinking about those little things can make a difference.

With that said, I wouldn't get too focused on making sure your place gets leased at a period of high demand.  Basically because it's likely to be out of your control.  Unless you plan on kicking out your tenants when their lease expires, or letting them know the rent will rise, tenants will not necessarily move out when their lease is up or when you want them to.  They will move when their circumstances dictate. 

Seasonal demand is something it doesn't hurt to be aware of.... but in the long run you will probably find it better to focus on reducing turnover and turnover downtime than trying to control when the turnover occurs.  Just make sure you get advanced notice of moves and then work diligently to have the place ready to show/lease ASAP are the things you can control and should work hard at.

But back to the other side of the coin.  If you do run into a situation where you decide it IS appropriate to raise the rent on a tenant, it may be wise to notify them a couple months ahead of your ideal turnover period in hopes that they'll move during that period if that's what they decide.

Not trying to nitpick your strategy, just telling what I've experienced.  Overall, you are obviously on the right track and thinking about all the right things.

[frugally]

First of all, thanks for the kind words everyone!  I'm especially interested to see what happens now that we need to get another renter and will probably be pushing into November.  We'll keep those showing tips in mind, johnhenry.

Major things I learned:
The salesperson makes a huge difference when showing a property.

Can you elaborate on what you mean by this? What was done or not done that helped/hurt?

Absolutely.  My wife has a few years of sales experience (in jewelry) and is just generally good at picking up social cues.  Our PM's assistant, on the other hand, could generally be described as unpleasant.  After four unsuccessful showings, my wife decided to show our property.  She closed on the very first one - she made sure to accentuate the good parts about the property (living space, kitchen, deck), and downplay the bad parts (no garage, bad yard layout).  One example: she heard the potential tenants whispering about no backyard for their pets, and redirected them to the fact that there are a bunch of dogs in the neighborhood and makes for a great place to have  a pet.

[Handlebar Harry]

Now just go buy another dozen or so and you'll be ready to FIRE!  ;)

@arebelspy - I may be asking the most stupid question on here, but I'm still trying to learn all the acronyms... what is FIRE? lol

[arebelspy]

Now just go buy another dozen or so and you'll be ready to FIRE!  ;)

@arebelspy - I may be asking the most stupid question on here, but I'm still trying to learn all the acronyms... what is FIRE? lol

Financially Independent Retired Early.

Here's a few more for you: http://forum.mrmoneymustache.com/ask-a-mustachian/all-these-acronyms!/

:)

 

[Handlebar Harry]

Financially Independent Retired Early.

Here's a few more for you: http://forum.mrmoneymustache.com/ask-a-mustachian/all-these-acronyms!/

:)

Perfect! Thank you!

[gimp]

Another renting tip - if you know someone handy with a camera, you can attract a lot more people with good photos than with cell phone camera photos.

It's really as simple as: wide angle lens (not fisheye, just wide angle) + good flash(es) + good understanding of light and lighting. Makes your rooms look bigger, brighter, cleaner, friendlier.

I can't tell you how many apartments I've rented where they either had no photos, or terrible photos (pixelated photo of a toilet, or a photo of a dark corner of a room...).

(Okay, if you have excellent lighting, you just need someone with an iphone who has a good understanding of light and how to take a good photo. You can learn this yourself without paying anyone.)