Would something like this seem reasonable (southern Florida house):
http://miami.craigslist.org/pbc/reb/4405204645.html
$74,000
Figure $100,000 by the time you factor closing costs/remodel
Rent it for $1200 a month and be at 1.2%?
Or do you look for much much cheaper?
The reason I ask is that if I were going to own rentals, I think it would be Florida as that is the only area I wouldn't mind spending a decent amount of our retirement time in.
I don't look at the purchase price of the house as my investment, since I don't pay that--the bank pays it up front by giving me a mortgage, and the tenants pay them back. So I don't factor in the purchase price or the portion of rent that covers the mortgage at all.
I look at it like this:
- my investment is the actual money I have to come up with. In other words, down payment, closing costs and any rehab costs.
- my return is the amount of rent that exceeds the monthly mortgage payment. (That payment includes taxes and insurance, but again, since those costs are entirely paid for out of the rent, I ignore them in my calculations).
- from that excess amount, I then subtract maintenance, vacancy and any utility costs I have to cover (garbage pickup, gas/electric when between tenants...). What's left is my return.
So on a $100k house, my investment will be $25k (banks require 20-25% down on investment properties) plus around $5-7k closing costs, plus rehab. The most I've spent for rehab was around $10k and the least was $0--we both work full time so at the moment fixer-uppers are not our thing).
I bought two houses in that price range and one yields about $925/mo after I pay the mortgage (including taxes/insurance) and the utilities I cover, while the other yields about $700/mo. So in total about $19,500/yr, on a total investment (as defined above) of about $78k. Even subtracting 10-15% for maintenance, and 6% for vacancies (average in my area--these places rent fast), that is an enormous ROI, without even factoring in that the tenants are also buying houses for me!!!
I realize how fortunate I am and how these possibilities don't exist everywhere... low purchase prices usually go along with low rents, and when purchase prices get too high (CA, NYC, HI...) the rents don't keep up. But if you can find $100k-ish properties in Florida, that's awesome. Your next step is to check Craigslist to see what comparable places rent for.