Case study- buy a house to live in, then rent it out (military)

[Mazzinator]

We are looking to buy a house primarily as an income property, but we will benefit from living in it for 1year and getting a VA loan. I will have to fly to VA from HI in the spring to buy the house so that plays into the numbers as well. But here's a ballpark of what we're looking at.

VA loans can also roll in fees/closing costs for $0 out of pocket.. But i think the loan is capped at 103%..not sure.. So anywhere between $0 - $9,500 out of pocket at closing.

Other background info..
$65k retirement
$25k in Roth contributions
$10k in taxable account,p
$5k cash (can save about $2k/mn "extra")
40% "savings rate"
$58k student loans ($100/mn min payments, on IBR through 2016, then $600/mn)

All numbers are ballpark/rounded.

House $100k

DP could be 0% or up to 20%

VA loan fee: (seems 5% is best "deal")
0% dp - 5% dp = 2.15 ($2,150)
5-10% = 1.5% fee ($1,500) + ($5,000)
10%+ = 1.25% fee ($1,250)

30yr va fixed currently (0 points) 3.625
15yr va fixed "" 3.00

Closing costs $3,000 (guesstimate)

1100 Rent

450 Mortgage 30yr 0%dp 3.625
100 Tax
75 HOA (snow removal, garbage, community pool)
50 Insurance
165 Maintenance and vacancy(15%)
110 Property Manager (10%)

1,100-450-100-75-50-165-110 = $150 net profit
(50% rule = $100 profit)

Questions:
1. Is this idea worth flying from hawaii to virginia (cost ~$1,500 for plane ticket/hotel/etc)
2. If yes, should we put anything down? Roll in fees and closing costs?

Thanks in advance!!!

[MsPeacock]

Hi - When you say income property - do you mean you are expecting to make the $100-$150 per month as income, or that you expect to make money if/when the house increases in value?

Having had rental property - I think that you are likely to actually lose money in what you propose. Your costs are very close to the amount you anticipate having as income. That does not take into account adequate repair/maintenance costs, or the cost of paying the mortgage while the house is unoccupied between tenants. Are you planning to manage the property from Hawaii? If so, how will you manage to show the house to potential tenants? How will you manage repairs when they need to be done? If you plan to use a management company you can expect to pay them something like 10% of your rent in fees, which wipes our your profit completely. What will you do if you have to deal with evicting a tenant? Is the house near a military base where there is high turnover of tenants?

I think it is very difficult to make money on a rental, and even more so when you put you put a very low down payment down. Are 100k houses in that area renting for $1100 per month?

I'm sure more experienced posters will chime in - but to me it looks like a bad idea.

[thedayisbrave]

I wouldn't do it, personally.  I don't even think about a potential rental property unless it meets or exceeds the 1% rule.  This one does, but just barely.  I still wouldn't do it, especially considering you have a pretty high amount of student loan debt.  I'd focus on knocking that out!

[Mazzinator]

Thanks for your replies...

MsPeacock, my numbers reflect your questions (or at least i thought they did..oops) I will edit my op for clarity.. We will PCS (army move) from hawaii to va in the summer, live there for 1 yr, and then pcs who knows where.

Brave, it is just over 1%...which is why i am questioning it. Due to being eligible for a VA loan, 0% down, we could focus of paying off debt and investing.

Thanks again!!

[Mazzinator]

If we did buy a place here...

Do you think my vacancy (8%) and maintenance (7%) numbers are high enough?
-i expect average turnover, this is not near a military base, and my target tenants are not military.
-There is a neighborhood closer to the military center, which is about .5% rent ratio, and would have a very high turnover and usually rents with 10 months leases!! But our military peers keep buying and buying, claiming the ease of finding awesome tenants (because your tenants would be your peers/subordinates with stable high incomes)

What do you all think of an HOA for single family?
-this place is gated, on a golf course, with several pools and community playgrounds

I am very confident in my rent amount and it may even be a bit low. I was going with the whole "low/at market rent for a better pool of applicants"
-this community is also just barely coming out of a foreclosure short sale time. I could try to buy one of those, but i was mainly looking at "move in ready" homes for ease of our big move back to the mainland.

Should we pay anything out of pocket? Or try and roll most of it in the loan?
-most advice on biggerpockets is the "least money out of pocket and still profit" is a decent deal. So, 0 out of pocket, 100% finance and it still cash flows $100/door (unless this rule only applies to multifamily?)

Should we count our "savings" in buying vs renting? $1100-$700(fixed costs) = $400/mn savings
- for those military people, bah here is ~$2,000/mn. And $700 is about 8% of take home pay.

For our debt-
$10k is at 3.5% (will be paid off this year, or could use this money for a big down payment)
$22k is at 0% (thru 3/2016, then fixed 4.75) (currently on IBR with $0/mn payment, interest forgiven)
$23k is at 4.75 (but does not compound, also on IBR)

Any other info, advice or thought would be soooo helpful!!!!

[CheapskateWife]

Hi Mazz,

It looks like you and the DH have put alot of work into this plan and the numbers seem great, but are you open to advice from someone who just moved from Fort Lee?

Please don't do this.  We purchased a home in Chesterfield in 2012 with the same purpose; but Fort Lee is downsizing, and Petersburg/Colonial Heights/Chester/Chesterfield area is really not an area I would consider owning in.  Our tenant options were not terrific (military does not always equal good tenant) and you will only be there for a year before moving on?  It makes my head spin to think how much you will be putting yourself through in that 12 months. 

If you are talking HOA with golf courses, you are looking at senior NCO and Officers for tenants...did you know Fort Lee is primarily AIT students?  The pool of potential tenants may be smaller than you think?

If you were my girlfriend and we were having coffee at my breakfast table, I would beg you not to do this to yourself, but to plan a purchase at the following duty station where you have some room to breathe and figure out the market.  Why not buy an investment property in HI and hire Nords to manage it for you? :)

If you do go through with it, however, I would recommend a down payment on a modest house (think under $200K).  Using the VA loans are a terrific deal if you are staying in the house long enough to recoup the funding fee, but you are looking at a 5-7 yr commitment just to break even on a liquidation.  Those loans just aren't set up to be benificial for investors.  DH and I have been juggling 2 of them with home and then investment properties and we have learned some painful and expensive lessons.  PM me if you like!

[arebelspy]

What are your long term plans?

Something like this should be just above break-even for now, but if you take a long term view, picking up 10 of these could set you up nicely in addition to any pension you may have.

It's not a great deal, but most people's first deals aren't.  If it's something that gets you started, it may be worth it.  If you're only planning on purchasing one or three, this probably shouldn't be one of them.

[Mazzinator]

Thank you all for your replies.

This property is near Charlottesville, va and our target tenants are not military.

Long term, i was thinking to buy about ~5 over the next ~6yrs. Then, just before/at/near FIRE we might pay one off, just for cash flow. But..and a big but..i'm not against changing plans once i'm learned.

I know of "better deals" elsewhere, but i'm not going to live there/can't take advantage of a VA loan. and we want to use our "cash" for the other non owner occupied houses, when we're ready to send the cash to real estate vs SLs.

So this is the best i can do, where we are moving to. But if it doesn't make sense...then it doesn't make sense.

Ballpark thinking...
(For the paid off house) $100k, $1,100rent at 50% rule = $550/mn or 6% swr (or whatever you'd call it)
plus
~$100/mn x 4 houses = $400/mn.
Or
Just buy 10 ;-)

For a grand total of ~$1,000/mn...

Not looking for immediate cash flow. Our goal is to a) somewhat diversify; b) steady source of income in FIRE even after expenses. Current AA is 100% equity with ~$5k/mn pension.

Looking for more a backup to our backup to our backup in FIRE. We plan on using the "nords" strategy of using/moving cash.

Should i just "pick one" and post actual numbers? I already have them all done ;)