Author Topic: English Major needing a Math Tutorial  (Read 3102 times)

Woodreaux

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English Major needing a Math Tutorial
« on: February 18, 2014, 09:43:04 AM »
I'm looking at purchasing a rental property for around 40-45k. It is currently rented out at $600/mth and has longtime tenants that are always on time with payments according to current owners.

The current owners say they net ~$6k with about $1200 going to taxes/ins/upkeep.

How do i determine ROI?  Does this seem like a decent investment?
Thanks in advance for answering this basic question.
Woodreaux

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Re: English Major needing a Math Tutorial
« Reply #1 on: February 18, 2014, 10:08:44 AM »
6000 - 1200 = 4800

4800/40,000 = 0.12 or 12% best case.

Thats a heck of a good return! Of course it will get eaten into by dead time, bad tennants that trash the place etc.

But I'd do it in a heat beat.

Frank

daverobev

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Re: English Major needing a Math Tutorial
« Reply #2 on: February 18, 2014, 10:10:39 AM »
Biggest Q would be: if the property does that well, *why* are the current owners selling?

If the place is solid, tenants are good then it is an ok investment (depending on property taxes in that area, how much renovation needs doing). The holy grail is 2% of purchase price - so for $40k, $800 a month gross rent. > 1% is ok for single family. The other rule of thumb is that 50% goes to tax/insurance/upkeep.. so their $6k sounds optimistic... Perhaps some repairs to do.

More investigation needed!

arebelspy

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Re: English Major needing a Math Tutorial
« Reply #3 on: February 18, 2014, 11:35:13 AM »
6000 - 1200

You misunderstood the math.  They're grossing 7200, minus 1200 = 6000 net (not the 4800 net you came up with).

The problem is, they have only insurance and taxes.

What about maintenance?  Vacancy?  Capital repairs? Management? Collection loss? Advertising/concessions/rent fees? Legal (eviction or llc) costs? Utilities (some can be passed on to tenants, maybe not all, and you'll still be paying them when there is no tenant)?

There's way more costs than what is being claimed.  you are not netting 6k on 7200 gross (16% expenses?  hahaha).

I'd personally be interested at a purchase price of ~30k, minus whatever repairs are needed.  (So if minimal repairs are needed, say 3k of paint and carpet, then 27k would be my offer price.)

If it's in a great neighborhood, or the place is rented under current market (i.e. maybe it should be rented for 650, or 700), I may go a little higher.

I'm just guessing here, but I'd bet your ROI on something like this, if you purchased it at 42.5k (halfway between the 40 and 45 you stated) would be around 5-8%, depending on how good your property manager is (3-4% if it's you managing it, and it's your first time).

As you could probably get that same return with equities with less hassle and less risk, I'd pass, unless, like I said above, you get it at a much better price or the rent is higher.
« Last Edit: February 18, 2014, 11:40:50 AM by arebelspy »
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Woodreaux

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Re: English Major needing a Math Tutorial
« Reply #4 on: February 18, 2014, 12:28:17 PM »
Thanks for the replies...
Biggest Q would be: if the property does that well, *why* are the current owners selling?

If the place is solid, tenants are good then it is an ok investment (depending on property taxes in that area, how much renovation needs doing). The holy grail is 2% of purchase price - so for $40k, $800 a month gross rent. > 1% is ok for single family. The other rule of thumb is that 50% goes to tax/insurance/upkeep.. so their $6k sounds optimistic... Perhaps some repairs to do.

More investigation needed!

The current owners are parents of a friend of mine. They are trying to unload most of their rentals due to not needing the "hassle" of being landlords due to their current financial status. They have a few of these type of properties and also flip houses every couple of years.
The numbers given to me (~$1200/yr) for expenses are pretty current for this specific property as far as taxes and insurance.

They recently replaced the AC/Heating central unit and also replaced the roof so I expect some upkeep and maintenance costs but I feel that the "major" upkeep expenses are covered for the immediate future.
They have also updated most of the plumbing as well.

6000 - 1200

You misunderstood the math.  They're grossing 7200, minus 1200 = 6000 net (not the 4800 net you came up with).

The problem is, they have only insurance and taxes.

What about maintenance?  Vacancy?  Capital repairs? Management? Collection loss? Advertising/concessions/rent fees? Legal (eviction or llc) costs? Utilities (some can be passed on to tenants, maybe not all, and you'll still be paying them when there is no tenant)?

There's way more costs than what is being claimed.  you are not netting 6k on 7200 gross (16% expenses?  hahaha).

I'd personally be interested at a purchase price of ~30k, minus whatever repairs are needed.  (So if minimal repairs are needed, say 3k of paint and carpet, then 27k would be my offer price.)

If it's in a great neighborhood, or the place is rented under current market (i.e. maybe it should be rented for 650, or 700), I may go a little higher.

I'm just guessing here, but I'd bet your ROI on something like this, if you purchased it at 42.5k (halfway between the 40 and 45 you stated) would be around 5-8%, depending on how good your property manager is (3-4% if it's you managing it, and it's your first time).

As you could probably get that same return with equities with less hassle and less risk, I'd pass, unless, like I said above, you get it at a much better price or the rent is higher.

As far as vacancy, the property has been rented to the same renters for about two years now and they are not interested in leaving anytime soon. 
This area is going to see an Industrial Boom soon and I feel that I will not have much trouble keeping it rented out as it's also in a fairly decent neighborhood and close to where the jobs will be.

The $600 is low in my opinion but they have not raised the rent since it has been the same tenants for a while and they have been good tenants.
If they were to move out I would try to get at least $700 for this specific property.

I have been debating on whether to take on a rental property vs. REITs recently due to a large amount of cash sitting idle in my Savings account.

With these numbers... 7200 - 2000 = 5200 / 42,500 = 12.23% it still seems like a good deal without any major repairs or vacancies in the foreseeable future.
But then again the risk is always there as with everything.

The management of the property and the majority of repair work would be done by me and my family. Electricians, welders, Handyman types strewn all across my immediate family.


arebelspy

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Re: English Major needing a Math Tutorial
« Reply #5 on: February 18, 2014, 01:05:56 PM »
My recommendation is you educate yourself on the issues that you'll be taking on.  :)

https://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-book-recommendations/

http://www.biggerpockets.com
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

daverobev

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Re: English Major needing a Math Tutorial
« Reply #6 on: February 18, 2014, 06:55:00 PM »
<snip>
The management of the property and the majority of repair work would be done by me and my family. Electricians, welders, Handyman types strewn all across my immediate family.

Sounds like you'd be sorted, then... the place has been significantly updated, has good tenants (still over the longer term do factor in 10% vacancy... put it away into a 'cover the bills' fund). Don't count your chickens, but generally if the people are trustworthy it's all good.

To (slightly) counter ARS, jumping in/dealing with the consequences is a good way of 'character building'... as long as it doesn't leave you bankrupt or at the wrong end of a lawsuit (->bankrupt!).

If you have construction people in the family, get one of them to look the place over, otherwise get a proper thorough inspection...

arebelspy

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Re: English Major needing a Math Tutorial
« Reply #7 on: February 18, 2014, 10:04:44 PM »
To (slightly) counter ARS, jumping in/dealing with the consequences is a good way of 'character building'... as long as it doesn't leave you bankrupt or at the wrong end of a lawsuit (->bankrupt!).

That's true.  There's no teacher like experience.  If this isn't a one off thing, but a learning experience, it may not be a bad idea.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.