Author Topic: Experienced landlords: What do you think of this as a first rental investment?  (Read 3794 times)

sandandsun

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Looking for a low stress entry into rental property to see if I like it/want to continue in ER... No personal debt and no mortgage on primary home, maxing out all Ret accounts, just looking for a way to bring in some relatively easy extra income in retirement... And, frankly, set myself up with something to do in retirement...


Possible property:
- 400 sq ft, 1 BR, 1 bath apartment that sits on top of a 400 sq ft .5 bath unfinished workshop area.
- unfinished area is also 400 sq ft and could be finished later as a separate rental- each has a separate entrance and no shared entrance
- stand alone building, quiet neighborhood in desirable rental area

Purchase price- approx 45k
Down payment- 9k- 11300- whatever is needed to avoid pmi
Mortgage- let's say 35k on 15 yrs fixed at 4.1 = 260/ mo
Taxes and insurance approx 50/mo (prob slight overestimate... )
So, 310.00 in fixed costs per month assuming I go w 15 yrs

Can rent for 550/ mo with Only minor renovations (add washer/dryer and kitchen cabinets).  If downstairs was finished out later, could likely get 850-900 easy w 2 units.

Have first tenant lined up if I deceide to buy- single nurse moving back to area looking for small apt near hospitals...

What say you, experienced landlords out there?  Goal would be to pay off mortgage within 7 yrs (when I plan to FIRE) and have the additional income free and clear in retirement...

Is this a good starter property for a beginning landlord?

SaintM

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Monthly cash flow:  $240 (550 rent - 260 PI - 50 escrow)
Cash outlay:  $9000 down payment
12 month yield: 32%

With the second unit, 12 month yield jumps to 72%

That does not include the monthly increase to net wealth from paying down the debt, which I wouldn't be too eager to do, or the tax benefit of deducting all expenses plus depreciation.

Where do I sign up???

sandandsun

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Thanks for the reply, St. Michael!
So, you wouldn't pay down the debt? You would go w 15 or 30 yr mortgage and just carry that for the life of the loan? I said 15 yr due to the difference rate (about 1.0percent difference right now... And im already freaked out by the higher rate for rental properties anyway...).
Will they loan me such a small amount? Any minimum mortgage amount on rental property?

SaintM

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Here is the way I look at loans on income-producing property:

With 90% LTV ($9k down, $36k financed)
Monthly cash flow: $240 (550 rent - 260 PI - 50 escrow)
Cash outlay:  $9000 down payment
12 month yield: 32%

With cash deal ($45k down)
Monthly cash flow:  $500 ($550 - $50 tax/ins)
12 month yield: 13%

iamlindoro

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You likely have access to actual tax numbers, and you should get a quote for insurance.  $50 sounds far too low for both together pretty much anywhere.

What are you numbers for expected vacancy?  What amount every month do you intend to put towards reserves for major repairs?  What about budget for non-capital repairs?  What improvements or repairs are necessary to make it rent-ready?  What are your closing costs?  If you are basing your interest rate on normal mortgage quotes, you should be aware that investor mortgages are generally higher interest rates by 1-2%.  4.1% seems unlikely.

Basically, the absence of these items in your evaluation, and the shockingly low guesstimates on others suggests that you may need to do a little more homework before you are ready to evaluate a deal.

Taking your numbers and amending them to those I personally feel more comfortable with, this deal becomes just ok, but nothing special.  Based on what we see here, however, it's very hard to get excited about and very possibly not a good deal.

sandandsun

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You likely have access to actual tax numbers, and you should get a quote for insurance.  $50 sounds far too low for both together pretty much anywhere.

What are you numbers for expected vacancy?  What amount every month do you intend to put towards reserves for major repairs?  What about budget for non-capital repairs?  What improvements or repairs are necessary to make it rent-ready?  What are your closing costs?  If you are basing your interest rate on normal mortgage quotes, you should be aware that investor mortgages are generally higher interest rates by 1-2%.  4.1% seems unlikely.

Basically, the absence of these items in your evaluation, and the shockingly low guesstimates on others suggests that you may need to do a little more homework before you are ready to evaluate a deal.

Taking your numbers and amending them to those I personally feel more comfortable with, this deal becomes just ok, but nothing special.  Based on what we see here, however, it's very hard to get excited about and very possibly not a good deal.

Thanks for reply!
Closing costs are includedin total mortgage listed above, assuming 20 percent down (but that was one of my questions- will it be 20 or 25?)  - or we can even bump the mortgage number up to 36k to pad it another 1000 for evaluation purposes.
here is what other numbers are based on:
 interest rate: my credit score is over 800, I have zero debt, with a 6 fig income, so I will qualify for best rate. It's 3.1 right now on 15 yrs so I added a full point due to rental- is that not enough to add? That was my best guess based on research.
Insurance and taxes - that's based on my own house- for a 200k property my taxes are less than 90 per month and insurance is 76 per month... I will get info from seller, but both of those costs are VERY low around here. Realtors website listed both at 40, I increased to 50 for calculations.
Vacancy rate- how would I know that? I would assume low since its a desirable area, but how to calculate?
I would put about 2500 in it right off the bat for upgrading kitchen and adding washer dryer- I don't think it needs anything else, but have appt to go inside next week - new furnace just installed etc. 
my plan would be to keep a couple grand in cash dedicated to repairs- everything else I would throw at mortgage to pay off in 7 yrs (planned FIRE date).  I have plenty of cash reserves to take care of issues that come up, so would let cash flow go to mortgage repayment.  At least that is the plan right now Due to FIRE date- unless I am shown it makes more sense to carry mortgage for full term.
Anything else I need to be looking at?

clarkfan1979

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If you are looking for a low stress rental, I think this achieves its goal of being low stress. Small purchase price, small carrying costs and small sq. footage for repairs.

I would be eager to rehab the downstairs to get more rental income. However, that would probably increase the stress level a little which is not your goal. Good luck.

waltworks

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Google 50% rule.

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Mazzinator

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Can you even get a mortgage for under $50k?

arebelspy

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Monthly cash flow:  $240 (550 rent - 260 PI - 50 escrow)
Cash outlay:  $9000 down payment
12 month yield: 32%

So you'll never have a vacancy, repair, or any issues?

It very much depends on your local market and your personal goals, but this isn't a property I'd purchase.  400 sqft, 550 rent for $45k?  No thanks.
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sandandsun

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Thank you all for the input- much appreciated!