The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: swimmer21 on October 21, 2013, 08:30:25 AM
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I'm thinking about making an offer on a duplex of $155,000. It's in a relatively affluent neighborhood, that's regarded as the "fun place to live if you're in your 20s" locally. Prices are likely to go up, though I don't want to factor appreciation into the cost.
The units are both largeish 2 bedrooms, with a private porch, and a shared backyard (which some of which might be used up by an addition in the future). My guess is that they'd easily rent for $900 each, and if you searched around and cared less about tenant quality, you could rent them at $1000, which is what the currently rented unit is at.
I'm thinking about living there myself, and renting out the other other unit. However, I'm trying to make the math work as an investment property first, to see if it makes sense to buy it at all.
Here's monthly expenses as I see them:
Mortgage: 833
Taxes: 450
Garbage: 57.25
Snow Removal (ammortized): 15
Lawn Mowing (ammortized): 25
Water: 25
Insurance: 60
For a total of 1515.25
Income would be 1800 - 150 for 1 month vacancy = 1650
Now snow removal and lawn mowing will be done by me for much less money, however I'd still like to factor that in to value my time a little
The question is, if the relatively low cashflow would be enough for routine maintenance, large capital expenditures, longer spells of vacancy and problem tenants.
To me, the idea of buying this property, living in half of it, and collecting $1350 in rent for it, makes a ton more sense than renting a similar place for $1000 a month a few blocks away as I'm currently doing, but I just want to make sure I'm not being unrealistically optimistic.
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Sounds like a great option to live in one side and rent the other. Only other question is the personal/lifestyle one - do you LIKE this property? Can you see yourself living there awhile? Or is it just "a good deal" that you wouldn't be happy in? If everything is on the same page I say go for it!
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It sounds like a great idea to me, since you already live in the area and like it.
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I just played with a mortgage calculator.
You're not intending to put any money down? $833 comes out to be for a 30 year loan at 5% with nothing down.
There are different strategies, but I'm one to always put 20% down. Are you sure you can afford this property?
Do you have any OPM (other people's money) to work with? Are you pretty handy, or are you likely to hire out for maintenance? If you've never been a landlord before, living next door is a good way to start.
Just looking at purchase price and anticipated rent, it does look like a good deal.
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It's not great, numbers-wise.
$1800 on $155k is pretty close to 1%, nowhere near the 2% 'holy grail'.
Assuming you put 20% down to save fees, mortgage of $120k, 25 year at 3.5% it's just over $600 a month; property tax seems very high and might be the deal-breaker - $450 a *month*??
Maintenance @ 1% adds another $1.5k per year or $125 a month. You'd need to do a lot of work to ensure you get a good tenant, assuming you're going to manage it yourself - but, if you assume you'll one day move away and have a property manager in, that's another 10% reduction in monthly income...
Really on $155k you'd want to go for $2k as an absolute minimum rent. Is that price including any renos, fees, etc you'd have to pay up front? Like the cost of getting the mortgage? Think you can talk them down to, say, $140k?
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daverobev (and other non-newbies)
Has there been a thread discussing the history of the 1%-2% rule? It seems that in high property tax areas like swimmers' and mine, that algorithm needs to take property tax into account.
Also, taxes as high as swimmers' NOT including garbage? Huh. Our high taxes include garbage pickup. And leaf and brush pickup.
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Really on $155k you'd want to go for $2k as an absolute minimum rent. Is that price including any renos, fees, etc you'd have to pay up front? Like the cost of getting the mortgage? Think you can talk them down to, say, $140k?
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I think this is going to be very regional. There is no WAY you could rent a 155k place for 2k anywhere that I have lived (Idaho Arizona California).
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Really on $155k you'd want to go for $2k as an absolute minimum rent. Is that price including any renos, fees, etc you'd have to pay up front? Like the cost of getting the mortgage? Think you can talk them down to, say, $140k?
I think this is going to be very regional. There is no WAY you could rent a 155k place for 2k anywhere that I have lived (Idaho Arizona California).
That is kinda the point - you're not getting a good investment on properties like that. IE, don't invest. Don't invest in properties in Ottawa, either, which is exactly why I just bought a place in Texas, where the numbers will hopefully work out.
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daverobev (and other non-newbies)
Has there been a thread discussing the history of the 1%-2% rule? It seems that in high property tax areas like swimmers' and mine, that algorithm needs to take property tax into account.
Also, taxes as high as swimmers' NOT including garbage? Huh. Our high taxes include garbage pickup. And leaf and brush pickup.
No, not really - they just dictate that buying in those markets is not a good investment for cashflow. You can buy for appreciation, but that's not guaranteed. If you buy something that cashflows, it is less of a problem.
See bigger pockets for all this - they debate the 50/2 rules a lot there. Many people don't like those rules, but they are good rules of thumb (for the US and Canada; they don't really work in the UK, where the tenant pays the council tax, not the owner paying property tax).
1% should be your absolute minimum. So $1800 does work on that front, but like I said it's not great.
I'm surprised arebelspy hasn't jumped in - he's one of the RE gurus. I, alas, am but a newbie.
*Edit* http://www.biggerpockets.com/search?term=50%25+rule lots.. and lots.. and lots there!
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*Edit* http://www.biggerpockets.com/search?term=50%25+rule lots.. and lots.. and lots there!
Thanks!! Super helpful threads there for newbies!
I should work on these types of number crunches over on my thread, treating all of our improvements as if I was buying a small property (with the "purchase price" = the total cost of the remodel), and see what happens...
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I think you are correct to look at it a little differently than as an investment only. You should also look at it as a way to live very cheaply while others pay your mortgage, allowing you to save more money.
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First my thought on a down payment: I highly urge you to put a down payment of no less than 20% so it will cash flow without you in a unit. If you ever want to move out, it will not make sense which defeats the purpose of that type of investment. Rates are low right now, so don't count on being able to build equity and re-fi later at these low rates. Yes the property taxes are high enough to limit your cash flow, but there are other benefits to the property given its location. If you were just looking for a pure rental property, other locations have much better numers.
Second my thoughts re property taxes, and our lesson learned: I have a quick story, it may or may not apply. When we started our rental hunt in the city limits (we are 2 blocks out of the city limits) we immediately noticed some cost differences. 1. property taxes way lower and 2. water/sewer way lower. We had to adjust our property hunt to avoid where we live, even though we would love a property IN our neighborhood, I cannot justify the extra $150 + / mo to buy here. When I compare the property tax break down of the city limits homes versus our home, we have 2 extra line items that make up the difference, A second fire station tax and one other tax. I might be only 2 blocks out of the city, but I am paying that extra Fire station fee for homes many miles outside the city. The $ per CCF for water/sewer is lower in the city as well.
Which leads me to the question, have you investigated the taxation zones in your city/region?
It is literally taking away your income just because of the location you choose, so research, research, research:)
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So I had made a couple mistakes in my analysis.
That mortgage was for a non owner-occupied rate, because I wouldn't actually be able to move for about 5 months. Also, I used the tax rate for a 4 bedroom instead of a 2 bedroom unit, which is a little higher.
Basically, what I'm thinking now, is that the first place I buy will probably not be able to to be in my neighborhood of choice. The tax rate won't be any lower, but a comparably sized duplex, in similar condition would go for about $85k, and would fetch $1500 in rent, which is a much better proposition as a rental. Either way, I think I need to wait until I'm actually ready to move in, in order to get an owner occupied rate.
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If memory serves, we bought an income property as owner-occupied even though we didn't move in right away. We showed paperwork of intent to move or something, as we had to give the tenants proper notice.
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SunshineGirl The most flexible lender I've talked to said that 60 days is the longest they can give before I move in.
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The lender may look at the leases, one of your options is to put it under contract and offer cash for keys.
Id recommend doing the deal, you're not going to hit 2% on your first unit. It takes lots of work and experience to find that deal.
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If you only have five months until you could move in, you wouldn't have that much time to kill - you'd be back and forth between offers for a little while, then there are inspections, etc., which have to take place usually within about ten days, etc. Just make the closing date as far out as the seller would permit and then you could give that 60-day notice to the tenant.
Having been in rentals a long time now, I bought in OK neighborhoods, and I wish now that I'd bought in one-step-up from where I did -- so, I still think you shoudl consider this property, especially if you intend to hold it long term and intend to live in it yourself.