Author Topic: First Rental Number Crunch  (Read 3220 times)

thelamb

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First Rental Number Crunch
« on: December 22, 2014, 07:33:17 AM »
Guys, I've been looking at some properties for investment, specifically to rent out.  This would be my first and I want to start small to mitigate risk and to learn the ropes.  Assuming I've done all the research on the area, why the price is what it is, how much work is needed, etc, assuming I have plenty of cash reserves to handle a down year or a major expense (like a new roof), and assuming I want to take a very conservative view of the earnings potential (I'm not thinking about appreciation or other factors that will impact the value) , can y'all take a look at my numbers and tell me what you think? 

1.) Am I calculating all the right things or missing something? 
2.) Would you consider it a good move?

For #2, my quick thoughts:  on the most conservative side (regular expenses, low occupancy), returns are negative or insignificant at best and obviously index funds would be safer, more profitable, etc.  However, if fortunate enough to get a long-term resident and can avoid constantly doing repairs, then the upside (as a percentage) is huge.  I would hope over a long enough period to average these out.  And, though I'm not considering it in these numbers, there is potential for decent appreciation due to some things I know about the area in question--namely private investment that will spur a lot of job growth. 

Anyway, the numbers and thanks!

Purch Price                    $40,000.00             
Down + Expenses    $11,200.00             
Mortgage princ            $30,000.00             
Rate                            4%            
Month P/I                         $143.00             
Taxes                           $66.67             
Insurance                           $50.00             
Total Mrtg Pay                 $259.67             
Maintenance                 $200.00             
Total Month Exp                 $459.67             
               
Rent    $650.00             
               
         With Maintenance      
Occupancy             60%   70%            80%            90%            100%
Total In         $390.00   $455.00   $520.00   $585.00   $650.00
Gross Profit   -$69.67   -$4.67   $60.33   $125.33   $190.33
Yearly       -$836.00   -$56.00   $724.00   $1,504.00   $2,284.00
Return           -7%             -1%   6%             13%   20%
               
         Without Maintenance      
Occupancy              60%   70%             80%   90%           100%
Total In           $390.00   $455.00   $520.00   $585.00   $650.00
Gross Profit   $130.33   $195.33   $260.33   $325.33   $390.33
Yearly         $1,564.00   $2,344.00   $3,124.00   $3,904.00   $4,684.00
Return             14%   21%              28%   35%             42%


Jon Bon

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Re: First Rental Number Crunch
« Reply #1 on: December 22, 2014, 08:52:51 AM »
Hey lamb,

What neighborhood are you looking at in columbus? I have a few rentals there as well and pretty sure I would not touch anything that is that cheap. You are going to get poor quality tenants at that price point.


My rule of thumb is rent should be around 1% of the purchase price. So a house that costs 200k should be getting you 2000 monthly. Obviously you want to make that ratio as favorable as possible.

My advice to you would be start with a nice duplex in an area that you would want to live. Mortgage rates will be dirt cheap if you make it your primary residence. Live in half, and rent the other half. It's a great way to get your feet wet




You can shoot me a message if you want some more details.

thelamb

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Re: First Rental Number Crunch
« Reply #2 on: December 22, 2014, 09:09:41 AM »
Hey Jon Bon,

South of Children's.  It's a rough area, for sure.  It's intriguing due to the fact that Nationwide just bought out all of the old Africentric HS land and is going to develop r&d, outpatient facilities, etc.  And I feel I've heard that there are other investors looking to improve the area to the south of Livingston, East of Parsons.  Also, I own my house not far to the west. 

Right now, I'm interested in building out a data structure that I can use to evaluate prospects, even if I do realize that I need to drastically increase my price point and required starting capital.  From what you're telling me, I think need some sort of cost/rent ratio and I need some way to calculate risk, in relation to the type of tenants.  Thanks for the input!

waltworks

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Re: First Rental Number Crunch
« Reply #3 on: December 22, 2014, 09:24:21 AM »
What kind of tenant quality are you looking at here? At $650/mo for a SFH I'd expect a lot of pretty awful tenants, damage, and turnover. You will probably make a little bit of money but I'm not sure it'll be worth the headache.

I don't know if I'd count on the neighborhood appreciating or improving. I mean, if it does, that's great. But not something I'd include in my expected return calculations.

If you have the $11k burning a hole in your pocket and you're ok hiring out management if it gets too annoying, I say go for it, though.

-W

sammybiker

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Re: First Rental Number Crunch
« Reply #4 on: December 22, 2014, 10:39:23 AM »
Ohio is the land of 2%+ deals.

I would recommend finding decent school districts and focusing on starter homes in those areas.

I don't know Columbus well but would imagine you could be all-in 35-50k and have a decent, small property that will attract C+ to B- renters for $600-700/mo.  No war zones but certainly not class A. 

Jon Bon

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Re: First Rental Number Crunch
« Reply #5 on: December 22, 2014, 08:31:33 PM »
Lamb,

I don't know the area and would never invest in an area that I don't know. However It does sound like you have a handle on the neighborhood. The question is what sort of investment property do you want to hold? SFH? Multifamily? Condos?

Do you follow or listen to bigger pockets? Great info there and can help you nail down what you want to do.

Echoing on what the other posters said tenant quality is going to be THE factor. personally I don't think I could handle the "work" that comes with a rental for a few hundred a month but it might be good to figure out what kind of realestate investor you want to be.

Bobberth

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Re: First Rental Number Crunch
« Reply #6 on: December 22, 2014, 08:38:25 PM »
I doubt you can get a mortgage for $30k.  At least not a standard one and not for 4%.  Most likely you will need all cash or a LOC on another property so something to buy properties at that price point. 

Where did you come up with $200 for maintenance?  A rule of thumb is 50% of rents go to expenses and the loan payment (PI only as TI are expenses) comes out of the other 50%.  What is left over is your cash flow.  This is known as the '50% Rule'.  It has been shown to be accurate over large number of units over long periods of time.  It is possible to be an outlier and do better or worse than 50% in expenses as it is an average.  In your case, 50% of $650 is $325.  Subtract out $143 PI and that leaves you with a theoretical $182 cash flow.  Once you run the 50% Rule and find that it's an investment that meets your requirements, it's always best to plug in actual numbers: water rates, sewer rates, trash, taxes, vacancy, management, repairs, insurance etc to make sure you will fit your actual expenses into 50% of actual rents.

Poorman

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Re: First Rental Number Crunch
« Reply #7 on: December 23, 2014, 11:41:35 AM »
I doubt you can get a mortgage for $30k.  At least not a standard one and not for 4%.  Most likely you will need all cash or a LOC on another property so something to buy properties at that price point. 

There are some lenders that will go that low.  The only rate adjustment should be due to the occupancy status (investment property), not the small loan balance.  When I was interviewing lenders for my last purchase, I had one tell me they would go as low as $10,000, which I thought was hilarious.

Blindsquirrel

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Re: First Rental Number Crunch
« Reply #8 on: December 23, 2014, 06:25:11 PM »
1. Look on CL in Columbus for houses and see what is there before you do this.
2. I would stay out of the hood.
3. If you can't beat 2% in Ohio, I would not touch it.