Author Topic: Possibly my first rental - need your help with the numbers  (Read 3840 times)

SofiaBourbon

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Hi all,

I need your help with the numbers. Is this a good deal? I did a few online calculators and I came up with a good profit over time but I am not sure if it considers the length of the loan. Also the area is in transition meaning it could go either way; there is theft and break ins.

Home:
Lot: 0.34 acres
Single Family
Built in 1961
Cooling: Central
Price/sqft: $59
Tax: $973
Cost of the home:65,000
Loan amount $61,750 @ 4.5 % for 30 years
The home can rent for $850 - $995
Monthly payment of $438 (principal+ interest, estimated taxes (not sure if this includes the property taxes or loan taxes?) + insurance (escrow) + private mortgage insurance.


Thank you!

SofiaBourbon

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Re: Possibly my first rental - need your help with the numbers
« Reply #1 on: July 23, 2014, 05:34:59 AM »
One more thing, there is a management company that charges 6% of the monthly rent to manage the place. They will also find screen and find tenants.

Again, thank you for your replies.

Guizmo

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Re: Possibly my first rental - need your help with the numbers
« Reply #2 on: July 23, 2014, 07:25:48 AM »
If you are sure of everything else, the only thing I would worry about is the condition of the house. Will you need to put in $10k to fix it up? Are there structural problems or mold issues? Make sure you do a good inspection. I would do it if it turned out to be fine.

Another Reader

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Re: Possibly my first rental - need your help with the numbers
« Reply #3 on: July 23, 2014, 07:37:39 AM »
No, this is not a good rental,  If it rents for $900, using the 50 percent rule, you will average $450 a month after all expenses over time.  Your PITI is $438 today, and taxes and insurance will increase over time.  Your cash flow today is neutral at best.  Your rent will have to increase at the rate the expenses increase, and that often is not achievable.  In addition, I do not understand how you can borrow on a rental property at that interest rate with a tiny down payment and a small principal. Conventional financing would require a much higher down payment and lenders charge extra fees on mortgages of less than $100,000. 

There is also risk that the neighborhood will deteriorate.  I would not touch this property.


waltworks

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Re: Possibly my first rental - need your help with the numbers
« Reply #4 on: July 23, 2014, 11:36:01 AM »
It would be a semi-ok deal if you had enough money to put down to avoid the PMI and the neighborhood was decent. As it stands, I'd pass.

-W

johnhenry

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Re: Possibly my first rental - need your help with the numbers
« Reply #5 on: July 24, 2014, 12:48:42 PM »
I wouldn't be afraid of this place at all..... based on the numbers you provided and looking only at the numbers.

a) Your $850-$995 rent is a big swing.  I'd try to pin that down, but even at $850 it could perform OK.

b) The taxes seem cheap... You may be lucky and in an area with low property taxes.  But don't forget if this place is on the county PVA books for a much lower price and you buy for $65K, the taxes will go up.  Again, slightly higher taxes wouldn't be a deal-breaker, but you want to know the numbers you can know going in.

c) I agree with the others about the PMI.  It just doesn't make sense to pay it.

I do think this deal comes down to the intangibles.  Mainly the neighborhood and the age of HVAC, roof, windows, other big-ticket items.  If those items are older or in bad shape, I'd wait on a better deal.  If the neighborhood is "iffy" or still in a transitional stage, I think I'd look for one with better numbers to mitigate that risk.

The other thing is accurately estimating your rent.  Here's one strategy you could employ... that I don't think most folks would morally oppose... especially if it's sitting empty now.  If you've got pictures of this place, put up ads listing it for rent at $995 and see what kind of interest you get. You can just list the area, and not include the exact address.  Be sure to state the place won't be available to show/occupy for 30-45 days.  If you are unsatisfied with the level of interest or you nix the deal for any other reason, you can just let the interested parties know that "the deal fell through" and the place is no longer available.

dd564

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Re: Possibly my first rental - need your help with the numbers
« Reply #6 on: July 25, 2014, 08:35:14 AM »
Hi all,

I need your help with the numbers. Is this a good deal? I did a few online calculators and I came up with a good profit over time but I am not sure if it considers the length of the loan. Also the area is in transition meaning it could go either way; there is theft and break ins.

Home:
Lot: 0.34 acres
Single Family
Built in 1961
Cooling: Central
Price/sqft: $59
Tax: $973
Cost of the home:65,000
Loan amount $61,750 @ 4.5 % for 30 years
The home can rent for $850 - $995
Monthly payment of $438 (principal+ interest, estimated taxes (not sure if this includes the property taxes or loan taxes?) + insurance (escrow) + private mortgage insurance.


Thank you!

If the house is in good condition and if you are handy and you can make repairs yourself, there is some meat on the bone.
I'd do whatever you can to avoid PMI however. 

If your cashflow breaks even on the first six years, you'll be up 10% from forced savings. 
That's an additional $6,175 on a down payment of $3,250. 
Your total equity after 6 years will be $6175 plus your down payment of $3,250 = $9,425.  This is with the assumptions of $0.00 annual cashflow and 0% appreciation.
I think that's an annualized return of 48%.
($9,425 / $3,250) / 6 years.

This also does not include the benefits of holding debt against inflation.

Granted, it's better for a longterm hold since realtor fees will eat a portion on any sale, but the contribution to your net worth should not be ignored as it will only accumulate faster with more returns each year you hold the property.

In the end it all depends what your expenses will be and whether the neighborhood appreciates or depreciates in value over time.
« Last Edit: July 25, 2014, 08:39:49 AM by dd564 »

escolegrove

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Re: Possibly my first rental - need your help with the numbers
« Reply #7 on: July 25, 2014, 10:45:18 PM »
What type of neighborhood is your house located in? Will you have trouble keeping it rented or have "hard" tenant that will do extra damage or wear and tear? Can you self manage the house yourself? I am very pro "self managing" I even started a website/blog about it.  We own 4 rentals, 3 of them are 3,000 miles away. I tend to buy more expensive house that I can manage myself. The tenants are professionals and honestly while my margins are less my expenses are much lower and I have higher appreciation potential.

Good Luck! Rentals are lots of fun!

arebelspy

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Re: Possibly my first rental - need your help with the numbers
« Reply #8 on: August 14, 2014, 08:52:22 AM »
No, this is not a good rental,  If it rents for $900, using the 50 percent rule, you will average $450 a month after all expenses over time.  Your PITI is $438 today, and taxes and insurance will increase over time.  Your cash flow today is neutral at best.

50% rule counts T&I, so that's getting double counted if you're subtracting PITI instead of just P&I.

Nevertheless, I still agree, I wouldn't get this, for a few reasons.  First is age of the property (when were the last major renovations done).  Next is management.  I'd be wary of any company charging only 6% - where are they cutting corners? Finally: location.  Theft and break-ins?  That's a deal killer right there.  That'll kill all your cash flow, give you lots of vacancies, etc.  I wouldn't just cross my fingers on the area improving.

This is a definite pass, regardless of if you may cash flow a hundred or two each month.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

5inatrailer

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Re: Possibly my first rental - need your help with the numbers
« Reply #9 on: August 14, 2014, 08:56:19 AM »
Congrats.

I read a good one last night:

All commercial real estate owners look at buying a property only if the price is less than 8x the gross rental revenue.  Makes all the other factors easier to understand.  This way, you have to make money on the rent and the capital appreciation (if any) is a bonus.


In Canada people are going nuts over real estate- no job losses/ GFC and historically low interest rates.
See post here;
www.greaterfool.ca

arebelspy

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Re: Possibly my first rental - need your help with the numbers
« Reply #10 on: August 14, 2014, 10:12:51 AM »
Congrats.

I read a good one last night:

All commercial real estate owners look at buying a property only if the price is less than 8x the gross rental revenue.

GRM rules of thumb like this are much like the 1% rule of thumb for residential real estate.

GRMs, will vary by location though, like CAP rates.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

johnhenry

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Re: Possibly my first rental - need your help with the numbers
« Reply #11 on: August 15, 2014, 12:38:35 PM »
Congrats.

I read a good one last night:

All commercial real estate owners look at buying a property only if the price is less than 8x the gross rental revenue.  Makes all the other factors easier to understand.  This way, you have to make money on the rent and the capital appreciation (if any) is a bonus.


In Canada people are going nuts over real estate- no job losses/ GFC and historically low interest rates.
See post here;
www.greaterfool.ca

Yes, one who relies on that metric is relying on a 1.04166% rule. :)