Author Topic: How am I doing so far?  (Read 4166 times)

Drifterrider

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How am I doing so far?
« on: February 23, 2015, 06:53:37 AM »
I've been reading this forum for a little while and just registered.

I just bought my first rental house.  1,450 SF, brick ranch, 3/1.5, large kitchen and covered parking. (carport).  Only 50% of SFR in this area have covered parking.  My parents have had rental property in the same neighborhood for 60 years (yes, 60 years) and I lived in the neighborhood as a child (which was a long while ago).  I no longer live in that town.

I know the rental market in this town and I will be using a property management company that has been in business 35 years and they ONLY manage rental property.  There is a chronic shortage of affordable SFR in this town (lots of apartment complexes).

My rental is 2 miles from a military base, 1 mile from grocery shopping, 2 miles from the mall and restaurant row and 2 miles from downtown. 

I bought a foreclosure in need of renovation.  I did so intentionally.

Cost incl closing:  $47,000
Budgeted repairs:  $20,000
Overages:     $5,000
Total invested:  $72,000
Market value when finished:  $87,000 (average sales price in this area for a fully renovated SFR is $60 per SF).

I knew I would have to fully renovate the house now rather than kick the can down the road a few years.

Improvements are:

New Roof
New replacement windows
New bathrooms (stripped to the studs)
New Kitchen cabinets, flooring, appliances.
New carport roof
Some new plumbing
Some new electrical work

Excepting the roof, windows, plumbing and electrical I'm doing the work myself.

The market rent is between $800 and $850 per month.  The management fee, taxes and insurance will cost $270 per month.  In gross terms the ROI is just over seven years.  My savings was only paying 0.15% interest.

I have no mortgage on this property.  Per my read of the IRS rules, I can take expenditures against ordinary income for last year (bought property in September) because I materially participate (I hired and supervised the workers, plus I do a great deal of the work myself).  I expect to have it available for rent 1 April.

I earn six figures.  I have ten months of take home pay in ready cash and if I were to economize I can live one year without further income.  I max my 401K plus the over 50 "catch up".  I have no consumer debt.  For short term disability I have ten months of sick leave accrued.  I have a long term disability policy.

Worst case I lose my income, lose my house and have to relocate to my rental which is paid for.

I have a mortgage on my primary residence which I have no intention of ever paying off.  I consider it a current living expense and will sell when I retire.  My mortgage is less than rental for this area.

I think I'm doing well but:  what am I missing?

EDITED:  The property is insured for $125K which is the lowest amount of coverage I've been able to obtain. 

« Last Edit: February 23, 2015, 09:46:34 AM by Drifterrider »

KD

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Re: How am I doing so far?
« Reply #1 on: February 23, 2015, 08:25:26 AM »
Sounds good.  Do you have insurance on the property while it is under repair? 

waltworks

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Re: How am I doing so far?
« Reply #2 on: February 23, 2015, 09:46:38 AM »
50% rule says you will be making something like $5k/year on your $80k investment. So not terrible, but not amazing either, given that you've put in a bunch of work that you aren't directly paying yourself for.

-W

Drifterrider

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Re: How am I doing so far?
« Reply #3 on: February 23, 2015, 10:03:41 AM »
What 50% are you calculating?

Gross receipts:  $10,200
Tax/Ins/Fee     -    3,060
Net                   $7,140 per year.

$72,000 invested gives me an annual yield of nearly 10%.

ShoulderThingThatGoesUp

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Re: How am I doing so far?
« Reply #4 on: February 23, 2015, 10:04:21 AM »
What 50% are you calculating?

Gross receipts:  $10,200
Tax/Ins/Fee     -    3,060
Net                   $7,140 per year.

$72,000 invested gives me an annual yield of nearly 10%.

There is no maintenance in that calculation.

waltworks

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Re: How am I doing so far?
« Reply #5 on: February 23, 2015, 10:13:08 AM »
Fire up google: 50% rule. Long story short, over time, half of your gross will go to expenses of one kind or another, in general. For very high end properties the rule breaks down some IMO but for what you've got there, it's probably pretty accurate.

The usual assumptions are something like (assuming $10k/year gross):
-Management 10%. So now you're at $9000.
-Vacancy 10%. $8000.
-Taxes and insurance. For you sounds like around $2k? So we're at $6k.
-Repairs/maintenance - lots of ways to look at this but the IRS lets you depreciate the structure about 3% a year for a reason. Everything will eventually break, just a matter of time. Call it 1.5% or something, so another round $1000 to make it easy. Now you're at the $5k approximation I just mentioned.

Of course, there are always risks beyond that - tenant sues you, tenant trashes the place and you have to fix it/insurance premium rises. It can be expensive to evict someone, too, especially in certain states, and eventually you will probably have to evict someone.

If you aren't aware of this sort of stuff already, you had some good luck to end up with a property that isn't a horrible money pit, so kudos, you're doing way better than I did on my first rental! Now you'll know for next time.

-W

What 50% are you calculating?

Gross receipts:  $10,200
Tax/Ins/Fee     -    3,060
Net                   $7,140 per year.

$72,000 invested gives me an annual yield of nearly 10%.
« Last Edit: February 23, 2015, 10:24:09 AM by waltworks »

Drifterrider

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Re: How am I doing so far?
« Reply #6 on: February 23, 2015, 10:36:33 AM »
What 50% are you calculating?

Gross receipts:  $10,200
Tax/Ins/Fee     -    3,060
Net                   $7,140 per year.

$72,000 invested gives me an annual yield of nearly 10%.

There is no maintenance in that calculation.

Complete renovation underway now.  New everything.  The only system that is not being replaced is the HVAC (which could require work).  What maintenance are you thinking of?  I don't expect to have to do any maintenance for at least five years (due to equipment malfunction). 

waltworks

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Re: How am I doing so far?
« Reply #7 on: February 23, 2015, 10:49:41 AM »
Spoken like someone who has never owned a rental...

Shit breaks. Period. Your tenants will NOT take perfect care of it all. And if it's all new, that's great, but eventually, you will need a new furnace, water heater, etc, etc, etc. Say a water heater will set you back $1000 (I know, that's more than you have to pay for a cheap one by quite a bit, just using it for an example). Even a nice water heater doesn't have an expected lifespan beyond 10-15 years, so that's $100/year. It doesn't matter exactly when it breaks, that's just a cost you expect to have to pay eventually.

You really should just do some more reading - this stuff has been argued to death a billion times and all the experienced landlords know very well that there will be (significant) maintenance costs even on a new structure.

-W

Complete renovation underway now.  New everything.  The only system that is not being replaced is the HVAC (which could require work).  What maintenance are you thinking of?  I don't expect to have to do any maintenance for at least five years (due to equipment malfunction).

Drifterrider

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Re: How am I doing so far?
« Reply #8 on: February 23, 2015, 01:02:13 PM »
Spoken like someone who has never owned a rental...

Shit breaks. Period. Your tenants will NOT take perfect care of it all. And if it's all new, that's great, but eventually, you will need a new furnace, water heater, etc, etc, etc. Say a water heater will set you back $1000 (I know, that's more than you have to pay for a cheap one by quite a bit, just using it for an example). Even a nice water heater doesn't have an expected lifespan beyond 10-15 years, so that's $100/year. It doesn't matter exactly when it breaks, that's just a cost you expect to have to pay eventually.

You really should just do some more reading - this stuff has been argued to death a billion times and all the experienced landlords know very well that there will be (significant) maintenance costs even on a new structure.

-W

Complete renovation underway now.  New everything.  The only system that is not being replaced is the HVAC (which could require work).  What maintenance are you thinking of?  I don't expect to have to do any maintenance for at least five years (due to equipment malfunction).

I guess my years of managing my parents rentals don't really count huh?

Over time, EVERYTHING breaks.  Over time, my new roof will need to be replaced.  My new windows will wear out and my new appliances will break:  over time.

We have never had a 10% vacancy.  Perhaps many of you live in a high turnover area.  Of the three properties my family still owns (they own it, I work it) the shortest term tenant was 14 years.  The longest term tenant moved in in 1991 when my father bought the house.  She is still there.  The oldest property is 60 years old and it is vacant now because we are doing a complete renovation (inside only, the roof is still good). 

Yes there are repair and maintenance issues: over time.

I would like to know what water heater cost you $100 per year.  The one I just bought was $450 and if last 20 years like the last one did (the one we just replaced last year) that works out to $22.50 per year.

I can tell you that over the last 60 years of my parents owning rental property, never have they spent 50% of their gross rents in cost.  Perhaps we are lucky or perhaps we manage well.  We don't have high turnover, we never have vacancies we don't want.  As I mentioned in my first posting that area has a chronic shortage of rental SFR.

We also don't try for substantial rent increases each year.  2 to 3% most times.

But perhaps I'm wrong.  I've been told I was wrong to pay cash for the house when I could get a mortgage and pay someone else interest.  I was told I was wrong when I started buying stocks after the crash. 

I would suggest if someone is routinely paying 50% cost, or routinely having 10% vacancies they might want to choose a different property.

But, I can get snide remarks almost anywhere :)

And I'm already looking for my second rental :) 


waltworks

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Re: How am I doing so far?
« Reply #9 on: February 23, 2015, 01:15:37 PM »
Hey, I hope you do great. I'm just saying - people who do this professionally expect 50% costs.

I mean, don't get me wrong - you will make money. You stand a good chance of doing better than that 50%. Most RE investors, though, take a very conservative approach when calculating ROI. Better to be pleasantly surprised, right?

Don't come here and ask "how am I doing" and expect nothing but high fives, this is the land of the facepunch. Your property is fine, but it's no goldmine.

-W

monarda

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Re: How am I doing so far?
« Reply #10 on: February 24, 2015, 08:46:01 AM »
+1 to what Walt said.
It might not be 50% expenses, but it'll probably be at least 40%. Little things will add up.
I thought about our numbers- we came out to 43% expenses over the 12 years we've owned our property. We've had no unplanned vacancy in 10 years. When we leave a place open between tenants for painting, that's only a few days.

Some more expensive things you're not including:  What about carpeting and flooring? That needs replacement or to be refinished at least every 10 years, carpeting more often. What about the exterior siding- needs paint? We've painted the exterior of all of our properties, coming up on the second paint job being needed.  Gutters? Landscaping?  Driveway- concrete or asphalt? Sidewalks? Cement stairway (that was close to $3000)? Deck? Upgrade the insulation to conserve energy! Then you can increase rent a bit by virtue of the lower utility bills. Water softener? That's pretty much a necessity in our area- super hard water.

Like Walt said, better be conservative in your calculations and be pleasantly surprised than the other way around.
And I agree, your property is fine.

arebelspy

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Re: How am I doing so far?
« Reply #11 on: February 28, 2015, 09:23:12 AM »
What 50% are you calculating?

Gross receipts:  $10,200
Tax/Ins/Fee     -    3,060
Net                   $7,140 per year.

$72,000 invested gives me an annual yield of nearly 10%.

There is no maintenance in that calculation.

Complete renovation underway now.  New everything.  The only system that is not being replaced is the HVAC (which could require work).  What maintenance are you thinking of?  I don't expect to have to do any maintenance for at least five years (due to equipment malfunction).

That's great, but if tenants move out after a year or two and you need to do paint/carpet and it's empty for a few weeks or a month, the fact that the roof is only two years old has nothing to do with the fact that you'll still be out several thousand bucks from all that.

Turnover costs are the biggest part factor, so minimize those.  I wouldn't always count on decade long tenants, but maybe that is the norm for your area.

Also 50% rule includes about 10% for management - if you're doing it yourself, that's fine, but don't count it as part of your ROI.  That part is return on time/labor, not return on investment.  So if you are doing it yourself, expect to see closer to 40% long term.  If you're doing the whole rehab now (-5%) and managing yourself (-10%), maybe you only see 35% expenses or so over the next decade.  That's completely in line with the 50% rule.
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clarkfan1979

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Re: How am I doing so far?
« Reply #12 on: March 03, 2015, 08:38:28 AM »
If you really know the neighborhood well, I wouldn't worry about the smaller returns. I would argue against trying to go to a different area with the possibility of higher returns that you know very little about.

Every situation is different. All real estate is local. If your parents are still alive, I would try to get as much information from them as possible. I also have a problem with the 10% vacancy rate assumption.

I am going to give you a high-five for investing in what you know. After this experience you will learn even more.

It's ok if the first deal isn't the best. However, as you learn more, your ROI should increase. If it doesn't you should re-evaluate your strategy. Some people spend all of their time looking for the best deal and never do anything.