Author Topic: Rental property returns  (Read 3073 times)

Murse

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Rental property returns
« on: December 18, 2016, 01:15:40 PM »
When doing an analysis on a property, doesn't the closing costs end up costing you 1-2 years of your positive cash flow? I am currently under contract for a 1910 home that is 43k for 675 rent. I had the inspection done and I am having second thoughts.

SwordGuy

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Re: Rental property returns
« Reply #1 on: December 18, 2016, 01:52:31 PM »
Closing costs for us, on a $99,000 purchase, were:

$515.00 Title examination - and they had to work for this one, 4 liens to deal with before closing
$291.06 Title insurance for us.
$  15.00 Commitment Fee - something to do with the title company.
$  31.00 County recording fees.
$256.56 Pro-rated share of taxes.

I don't consider pro-rated taxes paid at closing to be a purchase cost.  It's more of a pre-paid operational cost.

This was a cash purchase so no insurance for the bank. :)  No bank fees. :)

Drifterrider

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Re: Rental property returns
« Reply #2 on: December 18, 2016, 02:25:07 PM »
Who handled the closing and what was their fee?

In Goldsboro the lawyers have nearly doubled their fees in the past two years.

Did you do your own inspection?

Murse

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Re: Rental property returns
« Reply #3 on: December 18, 2016, 05:26:55 PM »
No, this is an out of state property. I have only paid for the inspection so far

SwordGuy

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Re: Rental property returns
« Reply #4 on: December 18, 2016, 07:29:40 PM »
So, what are the numbers?

Principal and Interest if not a cash purchase?
PMI if not a cash purchase?
Insurance?
Property Taxes?
HOA?
Utilities the tenant won't pay?
Vacancy %?
Other expenses?
Maintenance set-aside?

Add that all together.
Subtract from 12 * $675 = $8100 for yearly profit.  (I ignore depreciation capture as a hedge against occasional bad expenses.)

What are your expected closing costs? 
Repair cost to get ready for rent?
Add to sales price for total cost to market.

Divide yearly profit by total cost to market.

What's your percentage?  Can you do better in the stock market?

Will there be any appreciable property value appreciation?

Drifterrider

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Re: Rental property returns
« Reply #5 on: December 18, 2016, 08:07:25 PM »
No, this is an out of state property. I have only paid for the inspection so far
[/quote

Sorry, I was asking Swordguy about his closing.  I saw no lawyer fee listed.  His town is about one hour away from my property.

SwordGuy

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Re: Rental property returns
« Reply #6 on: December 18, 2016, 09:19:08 PM »
Going thru the HUD Settlement statement:

These charges were paid by the seller:

Realtor commission.
Online auction website commission.
Outstanding liens.

$100 Delivery/Cancellation fee to lawyer.
$200 Document prep fee to lawyer.
$198 State Tax/Stamps.

Lawyer explicitly stated that he was representing us in the transaction, not some other party.  (When the banks are involved, we pay the lawyer but they work for the bank.)

Wish I had known they were ready to sell before the auction house got involved.   Might have saved me $10,000.  Been tracking this property for 3 years waiting for it to come to a reasonable price.

That's all there was.

Cheapest I've ever seen it.  :)   PM me if you want contact info for the firm and lawyer.

Drifterrider

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Re: Rental property returns
« Reply #7 on: December 19, 2016, 07:08:19 AM »
Going thru the HUD Settlement statement:

These charges were paid by the seller:

Realtor commission.
Online auction website commission.
Outstanding liens.

$100 Delivery/Cancellation fee to lawyer.
$200 Document prep fee to lawyer.
$198 State Tax/Stamps.

Lawyer explicitly stated that he was representing us in the transaction, not some other party.  (When the banks are involved, we pay the lawyer but they work for the bank.)

Wish I had known they were ready to sell before the auction house got involved.   Might have saved me $10,000.  Been tracking this property for 3 years waiting for it to come to a reasonable price.

That's all there was.

Cheapest I've ever seen it.  :)   PM me if you want contact info for the firm and lawyer.

Did you buy through an on line auction?  I'm looking at one now (before it went to auction the sellers just wouldn't lower the price and it has some major repairs needed).  I'm hesitant to bid on line, not having any experience that way.

Tell me how it worked for you.

SeattleCPA

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Re: Rental property returns
« Reply #8 on: December 19, 2016, 08:09:09 AM »
It might be overkill, but at our CPA firm website, we've got a free Excel template you can use to calculate an IRR... which is a little bit more expansive and holistic way to assess the potential profitability of a real estate investment:

http://stephenlnelson.com/articles/multifamily-real-estate-investments/

P.S. A really (dangerously?) quick way to size up the profitability of a rental property is to calculate the cap rate and add that to the appreciation rate. That total gives you the unleveraged IRR. Obviously, the appreciation part is tenuous...

Drifterrider

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Re: Rental property returns
« Reply #9 on: December 19, 2016, 12:39:42 PM »
Going thru the HUD Settlement statement:

These charges were paid by the seller:

Realtor commission.
Online auction website commission.
Outstanding liens.

$100 Delivery/Cancellation fee to lawyer.
$200 Document prep fee to lawyer.
$198 State Tax/Stamps.


Cheapest I've ever seen it.  :)   PM me if you want contact info for the firm and lawyer.


Not to throw stones at you but I would ask (when you refer to items paid by the seller) how much money did the seller bring to the table?

If you brought $50,000 and the seller brought nothing, didn't it cost you $50,000 (except you might not be able to count every item when you compute your capital cost)?

SwordGuy

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Re: Rental property returns
« Reply #10 on: December 19, 2016, 10:18:00 PM »
Don't want to hijack this thread, but I'll answer the questions already asked.

Bid $99,000 via an online auction.  Seller got $90,000 of that, auction site took the rest.   Sure as heck wish I could have bought before that $9000 disappeared into the auction company.   Other costs took that $99,000 bid into $100,108.62 according to the HUD form.   But it actually turned out about $40 less, so I have to pick up a check from the lawyer.   

I did my own house inspection.   

I would not normally do that, but I've been checking out this particular property for 3 years.   I've already budgeted to replace and repair the roof, plus the hvac, major plumbing and electrical work, ceilings, insulation, and mold remediation.  Also expect to put in new appliances, repair kitchen cabinets, and upgrade the floors, plus landscape the grounds.  Oh, and fill in the oil tank buried in the back yard and remove the original oil heating unit, strip off the exterior paint and stain/seal the wood back to the original natural wood color. 

There wasn't a lot left for an inspector to find. :)

Repairs will cost $80,000 to $150,000, depending upon how a few breaks go and how well we manage expenses.  We'll be doing almost all the work ourselves except the roof, hvac, electrical and plumbing.  Plus maybe the mold remediation.

Sale price should be $250,000 to $375,000.  Depends on how the market is in 2 years, how good a job we do, how well we publicize it, and whether we get lucky and find the right buyer.  One tried to buy the house, unfixed up, knee deep in trash, garbage, broken liquor bottles and drug needles 3 years ago for $325,000!  (And we know how to reach them when they come back to Ft. Bragg after their next deployment, which will be about the time we have it fixed up.  (Here's to getting a bit lucky!)  But we also have a strategy for marketing the house that will be a lot of fun to do, and we have a number of inexpensive ideas that will make this unique property even more cool to live in.     I think we'll get a very good return on our investment with the various improvements we have in mind.

Goal #1: Don't lose money.   Goal #2: Save the house, it's an architectural gem.  Goal #3: Make money.  So it's not primarily a money making enterprise.  It's a cultural salvage project.

I can call in a few favors and most likely get one of several realtors to handle the sale for free if need be.

My journal on this site is in my tag line if you have more questions.

Hope that helps!




Bobberth

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Re: Rental property returns
« Reply #11 on: December 20, 2016, 03:38:20 PM »
If you're fully leveraged and getting $100/door like many around the internet suggest, MANY things can cost you 1-2 years of cash flow. This is especially true with low rental amounts. A $1k fix is a half month rent at $2k/month rent, 1 month rent at $1k/month, 1.5 months at your price point, 2.5 months at $400/month etc. A water heater will pretty much cost the same on a property that rents for $400/month and $2k/month. But the percentage of cash flow eaten up by that cost will be (should be) considerably different.


NoNonsenseLandlord

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Re: Rental property returns
« Reply #12 on: December 23, 2016, 12:52:05 PM »
If you do not generate 10%+ on any cash invested, from day one of it being rented, skip the property.