Author Topic: Potential First Rental Property  (Read 5886 times)

Crazydude

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Potential First Rental Property
« on: January 21, 2015, 12:08:12 PM »
So there are two properties on my watch list. Either would be my first rental property purchase. Here's my favorite:

3 bdr, 2 bath, 1150 sq ft, basement, garage.

Price: 74,900   Closing costs: 5000   Repairs: 4800 (new windows, cabinets, paint)  Total out-of-pocket: 24,780
Down payment: 14980
Rent: 1200

50% rule = 600 cash flow
600-300 (mortgage)
$300 true cash flow

300x12 = 3600   or ROI of 14.5%

Based on my research this seems like a decent deal. It meets the 1.5% rule. The only problem I'm facing is the bank (it's a foreclosure) is only accepting cash offers due to a miniscule amount of mold in the basement. My mother is a realtor and has checked the house out herself.

I suppose I could use a hard money loan (then refinance into mortgage) but I think this is more risk than I want to take. Any thoughts on the numbers themselves or my purchase dilemma?
« Last Edit: January 21, 2015, 01:57:25 PM by Crazydude »

zoltani

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Re: Potential First Rental Property
« Reply #1 on: January 21, 2015, 01:30:34 PM »
So there are too properties on my watch list. Either would be my first rental property purchase. Here's my favorite:

Price: 74,900
Down payment: 14980
Rent: 1200

So? Are you asking a question about something?

That is an amazing lack of information.

Crazydude

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Re: Potential First Rental Property
« Reply #2 on: January 21, 2015, 01:51:06 PM »
So there are too properties on my watch list. Either would be my first rental property purchase. Here's my favorite:

Price: 74,900
Down payment: 14980
Rent: 1200

So? Are you asking a question about something?

That is an amazing lack of information.

I guess something fishy happened with the script when I posted it, cause yes there is a lot of missing info. Updating it now.

iamlindoro

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Re: Potential First Rental Property
« Reply #3 on: January 21, 2015, 02:14:51 PM »
On numbers alone, looks pretty decent.  Remember that "% Rule" is calculated by taking Gross income for the year (figuring in vacancy), dividing by 12, then dividing by the total cost including closing costs and improvements, so:

74,900
+ 4800 (Does this include mold abatement? Don't get stuck with this liability)
+ 5000
--------
84700 Total cost of property

Income = 14400
Expected vacancy = 10%
Gross Income = 12960

(12960/12)/84700 = 1.28% monthly income

Not quite 1.5%, but still fairly decent.  Now if those numbers look good, how is the quality of the area?  Objectively, is it A/B/C?  For 1.28% I think you'd want to be in a B area.  Anything worse and you might start to see the vacancy go up.

arebelspy

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Re: Potential First Rental Property
« Reply #4 on: January 21, 2015, 02:15:48 PM »
Sounds like a decent one to start based on the numbers.

Do more analysis than the 50% rule - what are taxes and insurance in your area?  What's your management plan?

The mold worries me.  How much will remediation be?

If you can't finance and can't afford to pay cash, it may just be a pass and keep looking.
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Crazydude

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Re: Potential First Rental Property
« Reply #5 on: January 21, 2015, 02:31:00 PM »
iamlindoro,

Thanks for the feedback.
The area is somewhere in between a "B" and an "A"

arebelspy,

Taxes for the property would be about 3800, or 317 a month. Insurance about 50-60 a month.
Allocating 600 for 50% rule, 377 (tax and insurance) falls into that with plenty left over.

My mother who visited the property said the mold looks like something she could clean herself fairly quickly. If the gravity of the issue is only that, it doesn't sound like a big deal.

My mother would also property manage for free she has told me, however I have no issue paying her something, even 10%.
« Last Edit: January 21, 2015, 02:32:54 PM by Crazydude »

zoltani

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Re: Potential First Rental Property
« Reply #6 on: January 21, 2015, 02:55:09 PM »
Yes, think of the 50% "Rule" as more of a guideline, a quick back of the envelope calculation. Run more specific numbers to try to better estimate your cash flow.

IME the bank has rarely made an exception when stating cash only offers, but that is only my experience. It could be that the bank is only accepting cash offers because they know that it will be difficult to get a loan with the mold issue? Cleaning mold is one thing, performing true remediation to correct the source of the problem is a whole other thing.

Crazydude

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Re: Potential First Rental Property
« Reply #7 on: January 21, 2015, 03:00:31 PM »
Yes, think of the 50% "Rule" as more of a guideline, a quick back of the envelope calculation. Run more specific numbers to try to better estimate your cash flow.

IME the bank has rarely made an exception when stating cash only offers, but that is only my experience. It could be that the bank is only accepting cash offers because they know that it will be difficult to get a loan with the mold issue? Cleaning mold is one thing, performing true remediation to correct the source of the problem is a whole other thing.

I will do more research on the mold issue. The 4800 repair expenses is also a high estimate.

arebelspy

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Re: Potential First Rental Property
« Reply #8 on: January 21, 2015, 03:27:59 PM »
Taxes for the property would be about 3800, or 317 a month. Insurance about 50-60 a month.
Allocating 600 for 50% rule, 377 (tax and insurance) falls into that with plenty left over.

Yeah, no, you'll likely be above 50% with taxes that high.  10% vacancy runs you 120/mo.  10% management runs you another 120.  You're already over your 50% without any maintenance costs, turnover costs, utilities (which you'll pay during vacant months even if tenants pay while it's leased), etc.

That's why it's important to do an actual analysis of the numbers and not use a rule of thumb.
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Crazydude

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Re: Potential First Rental Property
« Reply #9 on: January 21, 2015, 04:00:34 PM »
Taxes for the property would be about 3800, or 317 a month. Insurance about 50-60 a month.
Allocating 600 for 50% rule, 377 (tax and insurance) falls into that with plenty left over.

Yeah, no, you'll likely be above 50% with taxes that high.  10% vacancy runs you 120/mo.  10% management runs you another 120.  You're already over your 50% without any maintenance costs, turnover costs, utilities (which you'll pay during vacant months even if tenants pay while it's leased), etc.

That's why it's important to do an actual analysis of the numbers and not use a rule of thumb.

Hmm. Isn't 10% vacancy meant to cover utilities when it's vacant? I was figuring before that 10% monthly rent would more or less be a general figure to use to cover vacancy, maintenance, etc.

SunshineGirl

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Re: Potential First Rental Property
« Reply #10 on: January 21, 2015, 04:03:11 PM »
Those closing costs are ridiculously high! More than 5% of the sales price. What's the reason for that?

arebelspy

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Re: Potential First Rental Property
« Reply #11 on: January 21, 2015, 04:10:52 PM »
Hmm. Isn't 10% vacancy meant to cover utilities when it's vacant? I was figuring before that 10% monthly rent would more or less be a general figure to use to cover vacancy, maintenance, etc.

It's not meant to cover anything - it's just a round number.  :)

Find out an estimate of what you actually expect the vacancy to be (and utilities for that time, including hookup fees, etc.).   That's why we've been mentioning "run the real numbers, not rounded rules of thumb."  :)
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Crazydude

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Re: Potential First Rental Property
« Reply #12 on: January 21, 2015, 04:42:32 PM »
SunshineGirl,

I agree the closing costs are high. As are the taxes. Unfortunately that's just what taxes are here. Here is a summary of the closing costs estimate:

Closing costs:

Broker Fee 295
Appraisal Fee 550
Credit Report 27
Tax Service 84
Processing Fee 195
Property Inspection Waiver 75
Tax proration 875
Settlement or closing fee to 300
Owners Title Ins 527
Lenders Title Ins 231
Deed/Mortgage/Release 18
Deed/Mortgage/Release 70
City/County Tax Stamps 348
State Tax Stamps 51
Recording Processing/Tax Cert Fee 15
Total ~3900

Prepaid Items:

Interest 71
Hazard Ins Premium 750
Hazard Ins 3 mos 187
City Property Tax 6 mos 750
Aggregate Adjustment -312
Total ~1400

~5300 (Loan agent wrote 4550 so there must be a deduction I'm not seeing here)

Blindsquirrel

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Re: Potential First Rental Property
« Reply #13 on: January 22, 2015, 04:53:18 PM »
 I would skip it unless you are in an area of high COL/high appreciation. What is the value for quick sale after you fix it up? If you can add enormous value with cheap repairs it might be worth it. The taxes alone eat 3 months of your gross. Have you looked on CL? Often wholesalers post deals there. Some are good, some worse. For comparison, last rental we did we had $34,800 invested between purchase and repair. Place rented instantly at $850 a month, taxes are $789 a year. I think with a bit of looking you can find a much better deal.

Crazydude

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Re: Potential First Rental Property
« Reply #14 on: January 23, 2015, 07:05:23 AM »
I would skip it unless you are in an area of high COL/high appreciation. What is the value for quick sale after you fix it up? If you can add enormous value with cheap repairs it might be worth it. The taxes alone eat 3 months of your gross. Have you looked on CL? Often wholesalers post deals there. Some are good, some worse. For comparison, last rental we did we had $34,800 invested between purchase and repair. Place rented instantly at $850 a month, taxes are $789 a year. I think with a bit of looking you can find a much better deal.

That is an insanely good deal. I'm buying in Michigan, and this house is in high appreciation area currently. Last year housing prices rose 14%. However, a deal like yours I have yet to find. I'll will pass on this house however, as it sold yesterday. The next one on my list is move in ready and I'd expect it to churn a 12% ROI.

arebelspy

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Re: Potential First Rental Property
« Reply #15 on: January 23, 2015, 09:18:19 AM »
I would skip it unless you are in an area of high COL/high appreciation. What is the value for quick sale after you fix it up? If you can add enormous value with cheap repairs it might be worth it. The taxes alone eat 3 months of your gross. Have you looked on CL? Often wholesalers post deals there. Some are good, some worse. For comparison, last rental we did we had $34,800 invested between purchase and repair. Place rented instantly at $850 a month, taxes are $789 a year. I think with a bit of looking you can find a much better deal.

That is an insanely good deal. I'm buying in Michigan, and this house is in high appreciation area currently. Last year housing prices rose 14%. However, a deal like yours I have yet to find. I'll will pass on this house however, as it sold yesterday. The next one on my list is move in ready and I'd expect it to churn a 12% ROI.

House prices that were drastically undervalued (like Vegas in 2011 or Michigan now, perhaps) and are bouncing back to a more normal valuation doesn't necessarily indicate a long term appreciation area (and in fact, may be the opposite).  So unless you're making a short term (speculation) play based on that, I'd look more at what you expect the area to do long term than what it did last year.
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.

Crazydude

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Re: Potential First Rental Property
« Reply #16 on: January 23, 2015, 09:38:50 AM »
I would skip it unless you are in an area of high COL/high appreciation. What is the value for quick sale after you fix it up? If you can add enormous value with cheap repairs it might be worth it. The taxes alone eat 3 months of your gross. Have you looked on CL? Often wholesalers post deals there. Some are good, some worse. For comparison, last rental we did we had $34,800 invested between purchase and repair. Place rented instantly at $850 a month, taxes are $789 a year. I think with a bit of looking you can find a much better deal.

That is an insanely good deal. I'm buying in Michigan, and this house is in high appreciation area currently. Last year housing prices rose 14%. However, a deal like yours I have yet to find. I'll will pass on this house however, as it sold yesterday. The next one on my list is move in ready and I'd expect it to churn a 12% ROI.

House prices that were drastically undervalued (like Vegas in 2011 or Michigan now, perhaps) and are bouncing back to a more normal valuation doesn't necessarily indicate a long term appreciation area (and in fact, may be the opposite).  So unless you're making a short term (speculation) play based on that, I'd look more at what you expect the area to do long term than what it did last year.

True. I'm not even factoring in house appreciation for my considerations, I'm solely concerned with long term ROI based on rent. Appreciation is just a bonus right now. Out of curiosity however, does anyone here have a minimum ROI they must be able to achieve in order for them to buy a property? I'm wondering how my 12% stacks up.

arebelspy

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Re: Potential First Rental Property
« Reply #17 on: January 23, 2015, 09:57:22 AM »
True. I'm not even factoring in house appreciation for my considerations, I'm solely concerned with long term ROI based on rent. Appreciation is just a bonus right now. Out of curiosity however, does anyone here have a minimum ROI they must be able to achieve in order for them to buy a property? I'm wondering how my 12% stacks up.

Depends on your goals and market.  A blanket number for every situation doesn't make sense.  Just ask marty998.  ;)
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Crazydude

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Re: Potential First Rental Property
« Reply #18 on: January 23, 2015, 10:02:44 AM »
True. I'm not even factoring in house appreciation for my considerations, I'm solely concerned with long term ROI based on rent. Appreciation is just a bonus right now. Out of curiosity however, does anyone here have a minimum ROI they must be able to achieve in order for them to buy a property? I'm wondering how my 12% stacks up.

Depends on your goals and market.  A blanket number for every situation doesn't make sense.  Just ask marty998.  ;)

Well that's true but I hope it's more than 4% or else you'd be better off with VTSAX. People generally choose real estate because they want to get higher returns than they could on the stock market.

arebelspy

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Re: Potential First Rental Property
« Reply #19 on: January 23, 2015, 10:04:13 AM »
True. I'm not even factoring in house appreciation for my considerations, I'm solely concerned with long term ROI based on rent. Appreciation is just a bonus right now. Out of curiosity however, does anyone here have a minimum ROI they must be able to achieve in order for them to buy a property? I'm wondering how my 12% stacks up.

Depends on your goals and market.  A blanket number for every situation doesn't make sense.  Just ask marty998.  ;)

Well that's true but I hope it's more than 4% or else you'd be better off with VTSAX. People generally choose real estate because they want to get higher returns than they could on the stock market.

Sometimes.

Tell that to the Chinese buyers buying at a 4 cap or lower in SF.

Again, it's not black and white, and depends on the investor.
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Another Reader

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Re: Potential First Rental Property
« Reply #20 on: January 23, 2015, 10:42:12 AM »
4 percent is high in the better parts of the Bay Area.  You can get 0.3 percent per month in rent in my neighborhood in the South Bay now.  Subtract all the expenses and you are looking at a cap rate in the low 2 percent range, ignoring reserves for capital improvements.