The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: mrigney on September 05, 2013, 09:32:38 AM
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So I'm looking to potentially get my feet wet in real estate. Wasn't actively looking, but a friend has brought a property to me to see if I'm interested in investing in it with him (50/50 split). Area of town I would probably consider lower middle class. Not great, not bad. Older (houses built in the 60s/70s for the most part). Houses for sale in this particular area range from $35k (rehab projects) to $110k. Here are the numbers that I have run:
Assumptions:
20% down (58k sale price, 46.4k mortgage)
30-year fixed mortgage at 5.5% (added 1% to primary residence mortgage rates per Redstone)
Going rents in the area for a 3/1.5 are between $650 and $800 according to zillow and the couple properties in the area listed on a property management site that I have done business with before.
Gross Revenue (assuming vacancy rate of 8.5%): $7700
Expenses: $6076
Mortgage: $3156
Taxes: ~$800
Insurance: $350 (taxes and insurance based off a $75k valuation of house and my and insurance for my house while we rented it out)
Maintenance: $1000 (house has been redone, new roof, new appliances, etc)
Management: $770 (standard 10% of rent)
Net Income: $1625
Cash-on-cash return: $1625/$11600 = 14%
Cap rate = Net Operating Income (gross minus all operating expenses, not mortgage )/Cost of Investment = 8.2%
Questions I would have:
-What are hard numbers for some of the things I've estimated? e.g. what is the actual vacancy rate for that area/price point?
-What is a realistic interest rate?
-What does that area of town look like in 5-10 years?
-Are my maintenance costs too high? Too low? Roof and appliances are new...other big ticket item is HVAC, obviously.
What are MMM forums thoughts? Is this a decent opportunity? Bad? Good? Obviously limited info here, so let me know if more is needed.
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Who is getting the mortgage? Or is one getting the financing, the other putting up the down payment (for the 50/50 split)?
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Haven't worked through it, and in fact, we weren't sure how that would normally work (would be a first rental property for both of us...both of us have kept an eye out for properties for a while, though). Would banks consider a joint mortgage or is that out of the question? Potential partner is out of town for the next week. I'm doing some legwork w/a realtor friend who is doing a market analysis for me, I'm talking to the management company who rented out my primary residence for a year while I was living out of state for a job assignment (but am back living in that residence now). Hadn't thought about the possibility of one getting the mortgage and one providing the financing.
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What'll you do when he becomes a drunk? Gets divorced? Gets on drugs? Gets disinterested?
Pen an agreement. You're gonna be in a 30 year contract. With a partner? What could go wrong?
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@willn I appreciate the "facepunch," and sure, I've read MMM blog about his real estate investment gone wrong. You act as if people never enter into investments together, and honestly seems a little harsh. You could say ridiculous things about any investment opportunities. What if the market crashes and my $60k house is suddenly worth $30k and people are leaving my city in droves? What if that part of town ends up overrun with gangs unexpectedly and rent prices collapse? I can handle the partnership part of it.
If it makes it easier, analyze it as if I'm going in on it by myself (which is a possibility). What do the numbers say? Or you can analyze it where he gives me money to invest up front and then is out of the picture, mortgage in my name, etc. However you want to deal with it, I'm looking for more of a numbers analysis than a partnership analysis at this point.
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Ok I hear ya. Didn't mean it as a facepunch as much as a "what isn't being asked that's important in a deal".
The numbers are the easy part, 6th grade math really. Risk management is harder and more interesting to me so I veer toward that. And I have seen first hand more partnerships go flat or fail than prosper. So that's the reasoning.
To your question though, I like the math and your numbers look fine to me. Are values up? Down? Is it nearby? Why a property management fee? Is this long distance from you? Add some expenses to deal with that aspect if so. Do you like landlording? Does your wife? How does it affect your life other than money, in other words?
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Yeah, I understand the concern with partnerships. Hope I didn't come across as snarky in the response. The management fee was in there just as a "worst case" scenario. Being new to the game, our biggest fear is screening potential tenants and evictions, both of which can be hassles (well, the eviction part at least). Management company takes care of that. We're willing to do, but want to throw in "what could we make w/this property as passively as possible." Obviously dropping the management company produces extra cash-flow at the cost of our time. Property is about 5 miles from my office, about 17 miles from both of our houses.
As to your question of do I like landlording and does my wife? I'm not sure I can adequately answer it honestly...how can I really know if I like landlording having never done it (except for the 1 year stint through a management company when I was out of state...that was pretty hassle free...but it was also a higher value property that was less than 5 years old). I like the idea at least, of semi-passive income as a means to help with FIRE, and I don't think I will mind landlording. Educate me...what are the biggest headaches (dealing with bad tenants, I would assume)? What makes landlording enjoyable to you?
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Screening tenants really isn't the hard part. Once you have certain criteria for what you want in a tenant, you screen for it, and if they don't meet the criteria, they don't get the place. Simple. What people often do wrong is not KNOW their standards, or they get impatient and rent to the first person who wants it. As with other investments, you make your money going in, so just do your due diligence on who you put in there in the first place. If your state allows it, you can charge a nominal fee of like $25 for screening/application, and that will weed out undesirables, especially if you tell them up front what you're looking for (XX years employment, good references, X down payment, etc.)
As far as this investment goes, it sounds fine to me, although it might be a good idea to buy it on your own and have your friend buy one on his own, and then pool together other aspects of land-lording (time spent on repairs/help each other out, etc.) That house is a small purchase, and I think a partnership isn't necessary. (Is a mortgage even necessary?) If you both buy a couple on your own, you'll then later have a better sense of how you'll work together and maybe make a larger purchase...?