Author Topic: first rental  (Read 2563 times)

skylernow

  • 5 O'Clock Shadow
  • *
  • Posts: 6
first rental
« on: July 07, 2016, 03:37:07 PM »
Dear friends,

We have been looking for a  rental property and now have the opportunity to purchase a 4 bed 3.5 bath property (for sale by owner) that is in a very desirable community with great schools. Property was built in 1992 and has a finished basement with a kitchenette and a separate door for access from the back side of the house.

Homes go up for sale very seldom in this neighborhood (272 homes total in the subdivision). Currently, there are two houses that are for sale priced at 465k and 390k.


The new property price is 285k (investor owned, we know him personally, he is retiring and moving to a warmer state).
This house has always been a rental, so no disclosures, but we will  hire an inspector.
Appraisal on Zillow is 357k and rent "Zestimate" is $2050.00.
HOA fees are $650.00 a year (mandatory).

We would have to bring 9k for closing costs ($0 down payment) @ interest rate of 3.25%.
We have the option to roll all closing costs into the mortgage,so $0 out of pocket costs other than inspection.

Our monthly payment would be $1617 (includes tax and insurance, we do not have PMI).

Rents for comparable properties run between $1600-$2200 (depending on upgrades) according to MLS records run by our realtor.
The property will need fresh paint and new carpet (about 8k).
Roof and gutters are 5 years old, front is brick and the sides are some kind of Hardie siding, freshly painted.
Realtor says this neighborhood is so desirable that she doesn't think we would ever be vacant for long.

About us:
Both working, combined income of 125k a year

Assets:
26k in cash
167k in Trad and Roth IRAS
120k in a 403b
DH will also receive a pension when he retires in 10 years, not sure about the numbers.



Debts:
$1600 monthly  mortgage payment on our primary home, just refinanced at 2.35% for 15 years, has a balance of 200k, home is worth about 270k

Our savings average about $2500 a month for the past year, once we finished paying off all student loans.

We were planning on starting out with a more modest rental house (planned on spending about 160k).
Does this look like a good investment based on our assets/debt and income ?
What else should we be thinking about?







Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: first rental
« Reply #1 on: July 07, 2016, 04:17:19 PM »
What makes you think this is a good rental investment?

A good rental investment should generate at least 1 percent of the value per month in rent.  In it's current condition, it should rent for $2,850.  Fixed up, it should rent for a lot more.  Over time, you should expect to pay 45-50 percent of the income on the various expenses, including capital improvements.  If it rents for $1,600-$2,200, you will net $800-$1,100 every month on average over time assuming 50 percent expenses.  That means you can expect to be cash flow negative over time.  You have too little cash on hand and you are putting nothing down - in my opinion you are grossly under capitalized.

Before you write any checks, please read a good book or two about the numbers involved in operating rental property.  There is a list at the top of this category.  Sword Guy recommends Gallelini's book, which is supposed to be comprehensive.  I was a landlord before his book came out, so I haven't read it. 


iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: first rental
« Reply #2 on: July 07, 2016, 04:27:03 PM »
^^ Strongly agreed. I know that the fact that the property being owned by an experienced investor may impart an air of legitimacy to the whole affair, but on numbers alone this is a strong pass.

For the next one, as Another Reader said, take the time you need to build sufficient cash reserves. I suggest being able to make the down payment, closing costs, expected up-front repairs *and* have enough left over to cover PITI for a minimum of six months on whatever you plan to buy.

You just never know when unexpected expenses are going to crop up, and the last thing you need is to be scrambling to cover costs right out of the gate.

skylernow

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: first rental
« Reply #3 on: July 07, 2016, 05:03:24 PM »
I thought the fact that we don't put any of our $$ down is a good thing,
we get to continue building the cash reserves, while locking in a very low interest rate?

Does everyone here build the equivalent of 6 month cash reserve before purchasing a property?

Should we stop contributing to the retirement accounts and focus on accumulating cash faster ?
We have contributed the maximum to all retirement accounts for the past 4 years.


In our market, I can't see finding a better deal right now.
We want the property to be close to us, within 30 min from our house.

Iamlindro,  the mortgage of $1617 includes the taxes and insurance.
Insurance quote was for the specific property, obtained from my agent and the taxes already reflect the fact that property is not owner occupied.








Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: first rental
« Reply #4 on: July 07, 2016, 06:10:26 PM »
Why did you decide you wanted to get into rental property?  Cash flow?  Appreciation?  Tax benefits?  Because your friends are?

The house may or may not be a good deal, depending on the exact location and the condition.  You may not build cash reserves if something expensive needs to be replaced.  You may be in the hole instead.  Why would an experienced investor want to sell the property at what appears to be a below market price?   Is he financing the property as well?  If it's really worth $400k with a few minor fix-ups, why doesn't he do them and reap the profit?  Is the realtor representing you or the seller in this transaction?  I see some red flags here.

You can't limit yourself to properties within 30 minutes of your house if you are investing for cash flow and the numbers where you live don't work. 

Again, read iamlindoro's summary of how to evaluate property and a book that explains the numbers of investment properties.  Once you understand the basics, come back with questions.


iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
Re: first rental
« Reply #5 on: July 07, 2016, 06:11:01 PM »
I thought the fact that we don't put any of our $$ down is a good thing,
we get to continue building the cash reserves, while locking in a very low interest rate?

Being unable to afford the down payment is an immediate indicator that you're undercapitalized. Rental properties can unexpectedly become very expensive despite our best efforts to do due diligence and choose good ones.  Case in point, I closed on a property this year that cost me triple the original repair estimate through no fault of myself, my contractor, or my inspector. Shit just happens sometimes, and it's as likely to happen on day one of year one as it is many years down the road.

I am guessing that you might be in your 20s or maybe early 30s, and missed the housing meltdown in 2008 or 2009. The constant message of "put little or nothing down and refi in a few years" is the one that left millions in foreclosure.  The reason we suggest having a good amount of equity AND cash reserves left over is to be able to weather this kind of adversity.  Going in with zero down and scant reserves might go fine... but under the right (wrong?) circumstances, it could ruin you. Also, in this specific instance, the extra interest will only make this property more cash flow negative than it already is.

Does everyone here build the equivalent of 6 month cash reserve before purchasing a property?

I'm certain not everyone does.  It's just a good rule of thumb, and it's one that lenders will enforce after your fourth financed property, too.

Should we stop contributing to the retirement accounts and focus on accumulating cash faster ?
We have contributed the maximum to all retirement accounts for the past 4 years.

Personally, I wouldn't.  In your shoes I would take my time in building my reserves, read everything I could find on landlording, and probably consider investing out of my area.

In our market, I can't see finding a better deal right now.
We want the property to be close to us, within 30 min from our house.

This may mean that there aren't any viable rental opportunities in your market. I know how that is, my area is the same (and it's why my rentals are all many states away).  It doesn't mean that you should make a poor investment just because poor investments are all that's available, though.

Iamlindro,  the mortgage of $1617 includes the taxes and insurance.
Insurance quote was for the specific property, obtained from my agent and the taxes already reflect the fact that property is not owner occupied.

Right, so my suggestion would be to have a reserve of $9702 in the bank as an absolute bare minimum after making a down payment, paying closing costs, and paying for all expected up-front repairs.

skylernow

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: first rental
« Reply #6 on: July 08, 2016, 05:57:18 AM »
Another reader:
we would buy this house because we feel it will appreciate greatly in just a few years.

Location is very desirable. It is close to a major highway. A new hospital is being built nearby and all land available has been developed in the recent years. Top schools.
The plan was to keep this house as a rental for a few years and than sell for a profit.
 

It's an owner finance deal. The 9k in closing would be all we are spending. No PMI.
I am consulting my realtor (family friend), but she is not involved int he transaction, it's an owner finance. She is helping with comps and advice about trends in the area.

The investor is letting the house go without upgrades because he is in his 70s and has been selling his portfolio of 100+ properties for the past 2 years, trying to get out of landlording and cashing in.

He said he does not want the hassle of contractors and remodeling, that's why he is selling it cheaper.
His current lease expires at the end of month and tenants are moving out.


Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: first rental
« Reply #7 on: July 08, 2016, 07:40:20 AM »
What happened to values in your area from 2008-2012?  Did properties appreciate over that period?  Appreciation is not guaranteed.  In the most desirable areas, it is likely to exceed inflation over time.  However, a lot of the recent run-up in prices is due to low interest rates, foreign investment in US properties, and a recovering economy with employed people needing housing.  Demand has exceeded supply.  Economies soften, foreign investment slows, employment weakens.  The house next door to me in Silly Valley that would have sold for $1.1MM in 2006 and $1.3MM today, sold for $790,000 in 2012.

You have demonstrated little understanding of how rentals work and you seem uninterested in learning.  You have been told by people in this business for years that you are under capitalized.  You appear to have made up your mind about buying this property. Not much more anyone here can say to "help" you.

skylernow

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: first rental
« Reply #8 on: July 08, 2016, 08:35:36 AM »
We have absolutely not made up our minds,
in fact,  we will call the guy today to tell him we will pass.


Since I posted, I checked  Imlindoro's posts and the other blogs he recommended on this forum.

BTW, I have been actively reading this blog since 2012.
I credit it for all of our success so far. It changed us.
When I first started reading the blog, we had debt in the hundreeds and very little in retirement.
We knew nothing about investments and taxes.
Fast forward to today--we are debt free, except for the house, and actually have cash savings.
We maxed out all retirement available every year, plus started an HSA and for 2 years we are not touching that money and paying for medical out of pocket (thanx Mad Fientist).
We have been contributing to a 529 for our kids.
A few years back that seemed so unattainable!

That' s huge for us.

Definitely willing to learn.

Until recently, my spouse was fiercely against owning a rental and now he's changed his mind and is willing to try.
I have not been reading the Real Estate and Landlording forum because I knew we wouldn't want to be landlords.
Agreed, we do need to take time to learn about this before jumping in.

Thank you for taking the time to comment.

J Boogie

  • Handlebar Stache
  • *****
  • Posts: 1032
Re: first rental
« Reply #9 on: July 08, 2016, 10:45:53 AM »
I think your title is what caused people to be so bearish on this idea.  (To be fair, you didn't title it by accident but you did later indicate your strategy had a 3-5 year exit in which you forecast pretty decent profits from appreciation)

It's terrible as a rental, as has been pointed out.

But if you've studied your real estate market and this property is indeed currently undervalued, and you are handy and could do much of the renovation yourself, it might be a great opportunity.  Especially if you lived in it for a couple years so you don't have to pay capital gains tax on the sale.

Shoot, if you've maxed your pretax investments you could probably do a lot worse than this.  Just remember, it's a terrible buy-and-hold rental.  And people on this board are generally bearish on real estate appreciation plays, so that's why this idea has gotten shot down as quickly and forcefully as it has.  But it could be a decent live-in slow flip.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: first rental
« Reply #10 on: July 08, 2016, 11:20:17 AM »
Yes, depending on the location, the property could be a good slow flip.  For someone that knows the market, has rehab experience, and is well capitalized, it's possible a decent profit could be made.  But an inexperienced, under capitalized buyer would be taking on a lot of risk.  In the OP's shoes, I would learn a lot more about investing, join a local real estate investors association, and perhaps partner with an experienced investor to learn first hand.

OP, your idea makes some sense.  You are just not yet in a position to evaluate the investment thoroughly and you do not have the reserves to start your investing career with a project like this one.  You are doing really well with your other investments.  In your shoes, I would stay the course with them and accumulate some cash.  You will be much better positioned to start investing if you do that.

NoNonsenseLandlord

  • Bristles
  • ***
  • Posts: 396
  • Age: 60
  • Location: Eagan, MN
    • No Nonsense Landlord
Re: first rental
« Reply #11 on: July 15, 2016, 07:10:28 AM »
I am not sure how you get a non-owner property with $0 down.

Can you afford to pay your existing mortgage, and the new one?  A bank will require that.  Can you afford the fix up costs? 

Many people think a rental will make them plenty of money.  I have done it, but it takes money to learn the skills.  Do not think a management company has it figured out either.

skylernow

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: first rental
« Reply #12 on: July 25, 2016, 09:00:03 PM »
Update:
we decided we are not ready to buy this property. Will continue to build savings and learn.

Can you guys comment on what are the disadvantages of buying an owner financed property?

Same investor is selling a few more (much cheaper) properties, some with renters in place already and he is willing to finance.

He is in his 70s (I would guess late 70s).

Suppose he passes away before the entire mortgage is paid.

Can the estate (children) be a problem?