The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: jeepbraah on February 22, 2013, 08:23:18 AM
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Here is my plan and situation. I don't want to be tied down to a property as I am still early in my career and have no plan on retiring in this area. My goal is to purchase a rental property about 30 minutes away from where I live while renting out an apartment for me and my wife. Most likely going to use a management company as I don't have the time currently to be a landlord as well. End goal is to have someone move in and have them pay the mortgage, if there is a time of no people renting I can easily afford to pay the mortgage and rent.
Actual numbers will be
$3,000 left over for disposable income after cost of living, rent/food/gas everything, and retirement savings maxed out for 401k/roth ira.
Putting down around $40,000 on a $150,000 property.
$1,200 mortage payment including condo fees, taxes, and insurance.
$1,500 or around this number for rent from this property. I have a mentor that owns property in the same condo and this is what he has his rented for. Of course %10 will be taken by the management company.
Anyone have tips or advice on this goal?
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You'd only be making $150 a month on rent if there are no repairs or maintenance needed. If you have to replace carpet or something all your profit would be quickly gobbled up. It would take forever to even earn your down payment back.
Are there not better rental options? $150,000 seems a lot for a condo.
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Yeah, numbers seem pretty poor. $150/mo with NO Vacancies and NO maintenance. At BEST, you're looking at a 4.5% return on 40K down. Obviously that gets better if/when rent is able to be raised. But still, not a lot there to start with.
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You'd only be making $150 a month on rent if there are no repairs or maintenance needed. If you have to replace carpet or something all your profit would be quickly gobbled up. It would take forever to even earn your down payment back.
Are there not better rental options? $150,000 seems a lot for a condo.
In northern Virginia so not very many options. I would more than likely continue paying down the mortgage to get a ROI sooner.
The goal right now isn't to get rental income from it today, or even in a few years. But to have that income when the mortgage is paid off a few years down the line.
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Buy a duplex owner occupied, live in one half, rent out the other. Eventually move out and rent out both halves.
Agree with the other posters - those numbers are pretty bad, I likely wouldn't touch it at those numbers, depending on how much the condo HOA is.
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When factoring in vacancy, repairs, and management you will probably be cash flow neutral and thus your return will come from principal reduction. Based on the limited infor it looks like the deal will give you about a 4% cash on cash return and a 5% leveraged return.
As others have said, not worth it. I have the same issue in my area - rentals just don't pencil out.
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When factoring in vacancy, repairs, and management you will probably be cash flow neutral and thus your return will come from principal reduction. Based on the limited infor it looks like the deal will give you about a 4% cash on cash return and a 5% leveraged return.
As others have said, not worth it. I have the same issue in my area - rentals just don't pencil out.
Should you look at a normal 7-10% return on property?
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When factoring in vacancy, repairs, and management you will probably be cash flow neutral and thus your return will come from principal reduction. Based on the limited infor it looks like the deal will give you about a 4% cash on cash return and a 5% leveraged return.
As others have said, not worth it. I have the same issue in my area - rentals just don't pencil out.
Should you look at a normal 7-10% return on property?
Obviously that depends on your comfort and differs not only by individual but by market.
Arebelspy won't look at anything less than 10% cash on cash and in some regard that is warranted because he has been looking at markets that have good amount of risk still but he was buying at what seems to be a bottom. For me in my area, I would be interested at 6-7% cash on cash as the are is extremely stable but not high growth and new development is non-existent and foreclosure stock is light.
People like to say that you shouldn't do it if you don't get x% - that is not true. Like everything else your return should factor in risk which includes predictibility of cash flow and local demographics/economic drivers. You can get crazy returns in the dakotas but it is a one trick pony driving the economy and already values are two high and development (i.e. added supply) is happening and could soften the rental market.
At the end of the day a 4% return might be good for you - its not for me. That said investors in NY for apartments would kill for a 4% cash return but they take less because well it is NYC and its a huge economy and it is land locked so rents and values will rise - very few markets have this dynamic.
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I would not even consider this deal, especially since it's a condo. You will get hit with ever-increasing condo fees, assessments, and fines for mis-behaving tenants. Vacancy and collection loss, repairs, and replacements will make the cash flow negative. Relying on appreciation to juice your return is speculative at best.
How marketable is this unit - how many bedrooms and baths? Does it have parking? Is it in a high demand rental area? Is it in a growing area or in a landlocked downtown? What's your exit strategy?
What experience does your mentor have? How many properties does he or she own? Owning a property or two in a rising rental market makes you look like a genius.
I'm with Arebelspy and Tooqk4u22 on this one.
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How marketable is this unit - how many bedrooms and baths? Does it have parking? Is it in a high demand rental area? Is it in a growing area or in a landlocked downtown? What's your exit strategy?
What experience does your mentor have? How many properties does he or she own? Owning a property or two in a rising rental market makes you look like a genius.
Its near a metro with shuttle service, he says he hasn't had a vacancy longer than two months and that is the exception to the rule. One bed one bath. Does have parking. Very high demand area. Pretty landlocked I would say. Exit would be to sell?
He has been a landlord for 5 years and owns 4+ rental properties.
What exit strategies are there besides sell or continue to rent?
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To part of your original point, I think it's a pretty good idea to first buy an investment property and continue to rent.
Having said that, this likely isn't the best property to buy.
In our case, we bought a fourplex, lived in one unit rent-free and had other tenants pay the mortgage. When we moved out, the cash flow from the fourth unit paid our mortgage at the next place, etc.