Author Topic: Case Study: Buy a $15k rental house?  (Read 4615 times)

Tecmo Super Bowl

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Case Study: Buy a $15k rental house?
« on: June 16, 2015, 09:24:32 PM »
I'm wondering if I should even consider investing in a rental house that is $15k.  Also, I have a few questions about buying a house at such a low price.

Details:
2 BR / 1 BA
~700 Square feet
C- or D+ neighborhood
Potential Rent: $400-450
Asking Price: $15,000
Age: 1927
Detached 2 car garage
Interior would probably need new carpet (has some hardwood or laminate too) & painting, but from the limited pictures does not look awful
Family owned
Would be my first rental
Is about an hour from me in the town I grew up in and still have family there

The neighborhood is interesting...it's in an industrial area of a blue-collar town, but there is a park down the block.  There are a couple boarded up houses in the surrounding blocks, but the block that the house sits on seems well-maintained, all things considered.  I don't think it's the safest part of town, but it is definitely not the worst part of town. 

I figure I would need to plow in some rehab money to make it fresh and marketable (new carpet, fresh coat of paint)...maybe $5k.

I feel pretty confident that it could fetch $425 in rent. 

So that means 425/(15000+5000) = 2.1% of the purchase+rehab price in rent. 

Assuming I put down 25% and get a loan for the rest at 5% (is that even possible?), my monthly debt service would be about $60.  My net income would be $150 a month using a rough 50% rule.  So, annual income of around $1800 for a pretty small up-front investment of 8750.

Since I don't have 15k to buy it all cash, is it possible to get a mortgage for such a small amount?  Or could I get a conventional loan to do it?  I'm guessing most investors at this level just pay cash. 

Also would love to hear any comments on the idea in general.  There is obviously a price to be paid for the good cashflow...wondering about tenant quality and how much of a hassle a property like this might be.  For some reason I am hopeful, but maybe that is my n00b naivety. 

Thanks guys.

Cococola

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Re: Case Study: Buy a $15k rental house?
« Reply #1 on: June 16, 2015, 11:06:16 PM »
My experience had told me NOT to buy a cheap property at a bad neighborhood
Why?
Most likely people don't take care of rental apartments, if a toilet breaks, it costs about the same to replace one whether it's an high rent or low rent, however, if rent is so low, it takes too much time to recoup the expense.
1 hour away it's a bit too far

Good luck!


jnc

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Re: Case Study: Buy a $15k rental house?
« Reply #2 on: June 17, 2015, 05:32:26 AM »
I've never had a mortgage for such a low amount. Many lenders don't do mortgages under 50k, though i've gotten exceptions for a loan amount of 40k.

You don't mention the property tax and insurances costs for this property. Make sure to find these out first.

I agree that this might not be worth the hassle given the low rent and the quality of the neighborhood. Also as Cococola said there are some fixed cost repairs (water heater, etc...) that would take too much time to recoup.

J Boogie

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Re: Case Study: Buy a $15k rental house?
« Reply #3 on: June 17, 2015, 08:18:04 AM »
You don't mention the property tax and insurances costs for this property. Make sure to find these out first.

+1
Yup, the smaller the purchase price, the larger a role these expenses play in your cash flow calculations.

And even if you don't plan on using a property management company, I'd build that into an alternate calculation and consider it a very likely scenario - unless you have that rare personality type that enjoys stuff like doing background checks and serving eviction notices to single mothers.

This essay cracked me up quite a bit (his other essays are funny too) and I found it especially relevant.

http://thebillfold.com/2012/08/the-ups-and-many-downs-of-becoming-a-landlord/

sammybiker

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Re: Case Study: Buy a $15k rental house?
« Reply #4 on: June 17, 2015, 05:30:51 PM »
I've purchased an $11k 2bd/1ba, very similar to what you laid out, C neighborhood but great street.  However, my rents were higher (market rent is $600-$625).

That said, because the rents are so low, taxes, insurance and maintenance/repairs/vacancy take a huge chunk out of your gross rents.  I make it work with this one but...I wouldn't venture much under those rents and expect to cash flow.

Same thing on the mortgage...this is a cash deal only, I imagine.  Sounds like a great deal for a lease-option sale or something creative...but a long term rental, at those rent rates (and that neighborhood), no.
« Last Edit: June 17, 2015, 07:07:34 PM by sammybiker »

Tecmo Super Bowl

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Re: Case Study: Buy a $15k rental house?
« Reply #5 on: June 17, 2015, 05:49:13 PM »
Thanks for all the replies.  I was very excited to see something nearby hit the 2% rule, but didn't consider the larger impact of maintenance costs on a low-rent property.  That's a great point.

What I'm hearing is that while the numbers may work out cashflow-wise on paper, with such low rent there is much less wiggle room if something does go wrong.  Even if it does hit 2% of the purchase price in rent, I'm only getting $150 profit every month ($425 rent - 50% of rent for expenses [213] - $60 debt payment)...which isn't much cover at all.

The thing that really attracted me to this property is that it was within reach affordability-wise, wouldn't tie up too much of my money, and seemed like a way to get started with a cashflowing property.  Sounds like maybe it would be better to save up and get something nicer that may not quite hit 2%, but would afford me greater gross rent for my troubles.

Besides, if it needs to be an all-cash deal, then I really can't afford to do it anyway.

I welcome any additional thoughts!


Bearded Man

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Re: Case Study: Buy a $15k rental house?
« Reply #6 on: June 18, 2015, 01:22:46 PM »
You've got several factors in your favor: you live close enough, and know the area, still having family there.

That said, it is unlikely that you can get a loan for that little amount. Those kind of houses investors buy in cash and it's really only worth it if you do it that way and you buy a lot of them. Let's say you have 500K and you buy 33 of them with cash, not accounting for closing costs and other fees. At $200 a month net profit, you're making $6,600 a month profit. These houses will likely not appreciate enough to be worth even considering on the side, cash flow is your sole income here.

That said, in your calculations, you're leaving out closing costs. Those will eat into your numbers, and for a small deal like this it's not even worth financing, if you could even find someone to loan on a deal like this. It's not worth the lenders time to process a loan for this.

I paid 64K cash for my first house in a similar situation as what you described, not great but not terrible neighborhood 5 years ago. Now developers are building new homes all around there and I get $700 a month net income from it while the house continues to go up in value. I've considered cashing out my hand full of properties in the Seattle area and moving it to Ohio or some place similar, but I don't think the cash flow is worth the loss of property appreciation, and the extra work required to manage 33 units vs 4-5.

arebelspy

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Re: Case Study: Buy a $15k rental house?
« Reply #7 on: June 19, 2015, 01:45:51 PM »
If you can't afford the cash to do this deal (20k), you shouldn't be jumping into land lording.  You won't get a mortgage on a place that low, as people mentioned earlier.

I don't mind a house costing that little, but I wouldn't buy a house that rented for so little.  The tenant quality in that price range, in my experience, is somewhat lacking.

Run the numbers for something in a bit nicer area nearby that you can get a loan on--say, 60-70k purchase price.  What are the rents?  Of course you still have that first issue, lack of cash and getting in over your head.  Save up for a bit, and continue researching and learning, IMO.  It's great that you want to take action though!  :)
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CashFlowDiaries

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Re: Case Study: Buy a $15k rental house?
« Reply #8 on: June 19, 2015, 02:48:34 PM »
The 2% rule is very difficult to find. Most of them are in bad areas.  I personally would not touch that deal with an 8 foot pole.  Just thinking about dealing with the tenants is a nightmare.  The quality tenants you would find would make life not easy my friend.

Keep saving and find something better.

Tecmo Super Bowl

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Re: Case Study: Buy a $15k rental house?
« Reply #9 on: June 20, 2015, 09:06:49 AM »
Bearded Man, thanks for explaining the "buy a bunch of cheap houses" strategy.  Makes sense.

ARS, yes, I should cool my jets and save and learn.  I must admit that people like you inspire me to get started as early as possible, but I'm not quite ready yet.  60-70k is a good goal to shoot for.  If I do it in my current city, then I am likely in a C or C+ neighborhood, but at higher rents (maybe 600-800 range).  Like everyone has said, the difference in tenant quality between $425 rent and $800 rent might be pretty large.

CFD, thanks for the input.  Sometimes it feels like something is wrong since I can't find any of these deals around, but they are just rare.  I need to learn a lot more while I save!


Really appreciate the feedback from everyone.  I dream of FIRE just like everyone here, and real estate seems to be a good path to take, but the barrier to entry is high, especially as a married couple with only 1 full time salary (the other part time).  I will continue to save and learn more, hoping to get into a rental sooner rather than later. 

Another thought I had is maybe we just save up a down payment for a nicer house and keep our current one as a rental later.  I guess we'll see.   

arebelspy

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Re: Case Study: Buy a $15k rental house?
« Reply #10 on: June 20, 2015, 09:25:51 AM »
So I mean, if you can actually afford it (save up and pay cash), you can probably learn a LOT by buying something like this, managing it, and dealing with the * show that accompanies it.

As long as it doesn't scare you off real estate, it could be a good learning experience, and then you could sell it a few years later, probably break even, and buy better stuff and have learned a lot.

It's probably not optimal, but it's not terrible either.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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forummm

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Re: Case Study: Buy a $15k rental house?
« Reply #11 on: June 20, 2015, 10:14:31 AM »
I don't know what your personal living situation is. Would this $15k house be something you could live in? That's an insanely cheap place to live. If you're renting now, it would almost certainly save you a lot compared to your current rent. If you own now, perhaps sell your house or rent it out? You should be able to borrow $15k minus what you already have somewhere. Whether through a personal loan, a 401k loan, a 0% interest balance transfer, from family, etc. Then pay off whatever the loan is with the rent or mortgage payment you aren't making anymore. You could have a paid off house in just a few months.