Author Topic: Case Study: The not-great rental  (Read 1374 times)

trammatic

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Case Study: The not-great rental
« on: October 28, 2015, 03:00:12 PM »
Hi everyone...relatively new to real estate here.  Last summer, I rented out the house we used to live in.  It's working fine so far, and seems to be cash-flowing okay, but I doubt I would have bought the property as an investor.  Here are the details:

Market Value: 270,000
Original Purchase price: 325,000 (in 2005)
Interest Rate: 3.99%, HARP refi, so no PMI.
Mortgage Term: 30 yrs fixed
Term remaining: 27.5 yrs
Amount remaining on mortgage: 235,650
Gross Rents: 1800, but a couple of houses in the same neighborhood went for close to 2000.
Principal and Interest (the P&I of your PITI - should match with the above info): 1181
Taxes and Insurance (the T&I of your PITI): 319
HOA costs: 0
Deferred maintenance notes: New roof needed before sale.  It's in good shape for its age, but is almost 30 years old.  A couple contractors told me in the last year that it should have 3-5 more years on it.  All of the houses in the neighborhood that sold were required to have new roofs as part of the contract, so that value above factors in a new roof.  This was a big motivation to rent--cap ex or expense instead of a homeowner cost.  I have a contractor in the family, so can likely do it for close to materials cost.
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):

So to sell, I imagine about 20,000 in closing costs, which would bring my net into the neighborhood of $15,000.  As of now, I'm making $3,600 per year in cash flow and $4,800 in principal, which is 42% on $20,000 principal.  Finally, if I rent it for 3 years, I can take a capital loss from my initial purchase price to somewhat sweeten the deal.

Having lived there for 10 years, I know the systems of the house, and all of them are in great condition except the roof.  (heat pump and water heater only a couple of years old, appliances are bargain basement and in fine shape, etc.)  It seems like with the exception of the roof (which I'd have to replace anyways) the house is in good shape.  I had 12 showings in the first weekend it was listed and one ended up  renting it.  I'd put the rent low because I was scared it wouldn't rent...first time mistake.  It's in the Washington, DC area, so not much available for cheaper real estate purchases.

My long term goal is cash flow.  I would never buy a rental with these numbers.  If I take out an improvement fund, management fee, and a vacancy provision, along with raising the rent to 2000, I would just about break even.  The tenants I have now are fine, but they nickel and dime everything and are very opposed to a rent increase.  I'm just curious if I should continue to rent it out to these tenants and leave 2400/year on the table, find new tenants and expose myself to potential vacancy, or sell at the end of the year.  Also, these tenants are interested in a lease-to-own agreement, so that's also a possibility that would save me some closing costs...

Thanks!  I appreciate the help!!

GuitarBrian

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Re: Case Study: The not-great rental
« Reply #1 on: October 28, 2015, 09:29:56 PM »
If you think you can easily rent it for $2000... then you should go for it. Raise the rent on the current tenants (when lease expires or whatever). That $200 a month is a big deal.

Also, you say the current tenants are picky. That gets old real fast. Which means it isn't a big loss, loosing them.

I require a very large deposit generally, 1.5-2x rent. I want the move in cost to be high. Deadbeat renters don't have the cash and there are cheaper places to get into. I always rent to pets. And I charge a Pet fee, not a pet rent, basically I am trying to raise the cost to move in. It really works, bypasses most all of the flakes. I don't let people split up the deposit. I also don't prorate their rent... I start it the day they move in. I do let them pay the deposit before they move in to secure the house, then the first months rent later, but still before they move in.

I also start the listing around $100 more than I think it will rent for. If the phone doesn't start ringing... I wait a day or two and drop $50... then a day or two another $50... then $50... until I start getting 5-10 calls a day. I also use that to my advantage, if I get someone right away that checks out.. good income, nice people, I will offer them the original price (the one I researched and had in mind).


I replaced my roof last fall. I did all the labor myself (hired 1 helper for 2 days $150) I also kept track of all the expenses... every single item. The total cost was $3743 this was for 50 year shingles Timberline UltraHD from HomeDepot. Roof was 2200 sf, with a 700 sf flat patio. I had 3 estimates done before hand, $7600-$8500. I removed 2 layers and refelted + replaced 4 sheets of plywood.

If you are going to buy anything from HomeDepot or Lowes, make sure you buy some 10% off coupons... they are cheap on eBay and accepted at both places.


Just looking at your numbers.. I think you are OK, the extra $200 will put you into the Good category I think.

It is possible to sell without a commission, you will be in for the title fee. You can do this through Zillow, Craigslist, ect. Todays buyers are looking at more than just the MLS (infact you can list on the MLS for a flat fee as well) You can also negotiate with your realtor for a reduced commission... and you can set the other side (the buyers realtor) commission as well. This use to be a big hush hush, but again, the realtors aren't the ones providing all the info to their buyers, the people are able to search and then tell their realtor what they want to go and see. The buyer's agents isn't going to deny their client because you are only offering a 1% commission. That is still $2,700.

Anyway this is getting long. Good luck!