Hello fellow Mustachians!
I'm a 25yo recent graduate, trying to get to FIRE in 10yrs, considering my first investment property. A bit about me: I grew up in the Detroit suburbs, but moved to CA for college and now live & work in the SF Bay Area as a software engineer.
My parents, who still live in MI, recently decided to get into real estate investment by buying a newbuild condo in Ann Arbor. I took a look at their #s, and was pretty impressed.
I am planning to duplicate their investment by this summer when I accumulate the money (there's still a couple buildings under construction).
My main aims:
(1) This should not be time-intensive. I'm fine with putting in time upfront, but don't want to do so on an ongoing basis (hence newbuild, mgmt company, etc). My field has high-returns-to-skill, so I have high ROI from time spent on professional development (earning 100k; could get 10-15%/yr raises for next 4-5yrs).
(2) I preferred Ann Arbor over other locations in MI -- my hometown, Livonia, has one of the lowest price-to-rent ratios in the country, but I plan to hold forever, and risk in Ann Arbor is lower due to the University of Michigan.
(3) Assuming this works, I'm going to do it maybe 4x over the next five years.
My main questions:
1) Do the numbers below look reasonable?
2) If #1, any reason why I should just put my $ in an index fund instead of this?
3) If I looked harder for other properties (keep in mind I'm out of state), could I expect to find properties with substantially better #s?
My parents' #s:
Condo: $152,000 cost, 25% down (38,000), at 3.8% interest for a 15yr loan
Cashflow:
$1500 rent
less
-$450 principal payment
-$360 interest payment
-$360 property tax, insurance, etc
-$150 monthly payment to management company
-$210 HOA fee
net:
-$30 monthly cashflow
Income
$450 principal
$380 appreciation (= 3%/yr = 0.25%/mo * 152,000)
$150 tax savings from depreciation = ((152,000 / 27.5) / 12) * 30% rate; I plan to hold forever.
less
-$30 monthly cashflow
-$100 budgeted for tenant turnover (first month new tenant rent to prop. management = $1500/12, so $128/mo if change every yr)
-$60 budgeted for repairs (4% x 1500 -- remember, new construction)
-$105 budgeted for vacancy (7% x 1500)
net:
$685 monthly = $8,220 yearly
...for a $8,220 / $38,000 = 21.6% annual return.