Author Topic: Good option for a rental?  (Read 2294 times)

freelancerNfulltimer

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Good option for a rental?
« on: June 27, 2014, 11:54:51 AM »
(I know I'm including a lot of extemporaneous info, I'm just trying to put down where my thought process is coming from)

I currently have two rental properties. One is a rental because it was my primary residence I can't sell it for anywhere close to what I owe. I didn't want to live there anymore. I wish it was off the books. It is pretty basic as far as finishes go, and my tenant, while they pay on time, isn't the greatest as far as keeping the place clean and not breaking things. I also can't charge enough to cover my expenses so I lose at least $220/month. For me it was worth to take this loss to get out of the condo.

My new primary residence, which is in a desirable part of town, has a detached garage apartment that my mother paid to renovate because she lived there for a year why she was building a house for herself. The renovations covered:

  • New electric
  • Adding an in-unit washer/dryer
  • New tile floor in kitchen and bath
  • Adding central AC (in Florida)
  • Adding dishwasher and disposal
  • Granite countertops
  • Tile backsplash
  • All new appliances
  • New cabinets
  • Hardwood floors

The total cost I think was $30,000 for the reno.

It currently rents for $750/month. My mortgage is $1800/month.

I think if I hadn't renovated the unit I would only get $450/$550 for the unit. It's only 600 square feet. Because the finishes are so nice I have been able to rent it within one day of listing it each time I've listed it (I'm on my second tenant). I get tons of interest in it. The quality of tenants the unit attracts is higher than the other property so it's a lot less hassle (and maintenance expense) than my other property as far as managing it.

I'm looking to buy another property in the same part of town. I want to put the same type of improvements into the property. Because it's a historic neighborhood, there's no consistency in the range of houses. You'll have $400,000 single family houses next to $120,000 duplexes. There's also a mix of residential and commercial properties on the edges of the area.

I found a very small 2 bedroom 1 bath that I'm interested in offering $65,000 on. For comparison purposes, this house is in a slightly less nice part of the neighborhood than my apartment, right next to several businesses. It also literally has no yard. (My apartment also has no yard). They both have one off street parking spot.

I think the improvements would cost $20,000

I would have to finance 50% of the improvements partially through a credit card or Prosper so this is what the numbers would look like.

$300 P&I
$222 loan for improvements at 12% over 5 years for $10,000 - (I could easily pay this off faster, probably in a year or two, I'm just trying to run conservative numbers)
$126 Property Tax
$120 Insurance (guess on my part, it would require flood insurance)

TOTAL: $568

I think I could easily rent it out for $850, but I might be able to get $950-$1000. It's really hard to find comps in this part of town as most of the rentals are not updated. Which is why I think it's so easy to rent my apartment, it just is so much nicer than the rest of the inventory.

But I don't know how to see if this makes sense numbers wise. Do I look at the current expense, or at what it would be after the $222 loan drops off? How do I consider the $10,000 in cash I want to put into the improvements?

I know that without the $222 for the improvement loan that $850 with a $346 monthly cost makes sense for me.

Would I just take the $65000 purchase price + $20000 improvements x 1% to get to what I should need for rent. If so that works out at $850/month which I should be able to get.

Sorry if these seem like questions with obvious answers, or if I went into too much detail - I just like overanalyze things.


waltworks

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Re: Good option for a rental?
« Reply #1 on: June 27, 2014, 12:31:54 PM »
Yeah, you are making it too complex. 1% of whatever you have to put in (cost of property+repairs) is the mininum you should look to get in rent.

HOWEVER - it sounds like you are not necessarily in a great financial position to do this. You need a 12% loan to do improvements? Do you have enough money stashed to deal with a big maintenance problem or an eviction/legal issue?

-W

SunshineGirl

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Re: Good option for a rental?
« Reply #2 on: June 27, 2014, 12:45:43 PM »
I'd get rid of the albatross around your neck - your condo. Clear that off your books like you said you want to...or, are there improvements you could do that would enable you to charge higher rent? You've seen the difference that can make.

While the price of the property you're considering is attractive, the location you describe (next to businesses, no yard...on a busy street?) would concern me.

Freedom2016

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Re: Good option for a rental?
« Reply #3 on: June 27, 2014, 12:54:39 PM »
Disclaimer: I don't own any investment properties yet. But I have done enough reading to say the following:

The economics on the place you're considering look bad - you will likely have negative cash flow.

50% rule of thumb says you can expect, long-term, to spend 50% of rent payments on expenses - vacancies, maintenance, capital expenditures, taxes, insurance, property management. The remaining 50% is "available" for loan repayments and free cash flow (profit).

@ $850/mo rent: $425 on expenses + $522 debt service = $947/mo = CASH FLOW NEGATIVE
@ $900/mo rent: $450 expenses + $522 debt service = $972/mo = CASH FLOW NEGATIVE
@ $1000/mo rent: $500 expenses + $522 debt service = $1022/mo = CASH FLOW NEGATIVE

Let's imagine that your expenses actually hold steady at the $425/mo level (what you should expect in outlays @ $850/mo): @ 900/mo rent you're still cash flow negative. @ 1000/mo you are finally cash flow positive, but only $53/mo.

freelancerNfulltimer

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Re: Good option for a rental?
« Reply #4 on: June 27, 2014, 02:20:32 PM »
I'd get rid of the albatross around your neck - your condo. Clear that off your books like you said you want to...or, are there improvements you could do that would enable you to charge higher rent? You've seen the difference that can make.

While the price of the property you're considering is attractive, the location you describe (next to businesses, no yard...on a busy street?) would concern me.

I can't get rid of the condo. That would require me ruining my credit by doing a shortsale which is not acceptable. I'm not putting any more money in that condo. The street isn't busy, but the next to business is a little concern. No yard isn't that much of an issue, it's an extremely walkable part of town with lots of parks.

freelancerNfulltimer

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Re: Good option for a rental?
« Reply #5 on: June 27, 2014, 02:21:33 PM »
Yeah, you are making it too complex. 1% of whatever you have to put in (cost of property+repairs) is the mininum you should look to get in rent.

HOWEVER - it sounds like you are not necessarily in a great financial position to do this. You need a 12% loan to do improvements? Do you have enough money stashed to deal with a big maintenance problem or an eviction/legal issue?

-W

Yes, I do have additional money. I just don't want to tap into it for doing all the improvements. I am also required to have cash reserves for 6 months of rent for all rental properties by the lender for this next property.

waltworks

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Re: Good option for a rental?
« Reply #6 on: June 27, 2014, 03:39:21 PM »
Sell the first condo, even if you have to come to closing with cash.

-W

arebelspy

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Re: Good option for a rental?
« Reply #7 on: June 27, 2014, 11:52:32 PM »
I'd get rid of the albatross around your neck - your condo. Clear that off your books like you said you want to...or, are there improvements you could do that would enable you to charge higher rent? You've seen the difference that can make.

While the price of the property you're considering is attractive, the location you describe (next to businesses, no yard...on a busy street?) would concern me.

I can't get rid of the condo. That would require me ruining my credit by doing a shortsale which is not acceptable. I'm not putting any more money in that condo. The street isn't busy, but the next to business is a little concern. No yard isn't that much of an issue, it's an extremely walkable part of town with lots of parks.

(Emphasis added.)

But that's exactly what you're doing, every month.

Walk away (voluntary foreclosure), short sale, or pay the difference if you want to preserve your credit, but bleeding cash every month is probably the worst option, financially.
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