Author Topic: Evaluating Rentals that don't Appreciate  (Read 2874 times)

thesaucyfox

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Evaluating Rentals that don't Appreciate
« on: May 30, 2017, 07:04:38 AM »
This is my first post on here but I've been reading the blog for a while.  3 months ago I purchased my first rental house for $50,000.  It was move in ready, I put up a sign, showed it 16 times in 2 weeks and had a renter in 4 weeks for $875/month and $2,000 down.  I have the opportunity to buy the house next door, similar size/rent, for $40,000 and it will need a little work but not too much.  The tricky thing about these houses is they are in a FEMA flood area so: 1) They aren't going to appreciate as fast as other properties since flood insurance makes them tough to sell and 2) I am paying cash and not keeping a mortgage to avoid paying the flood insurance.  I'm just wanting some insight as to how to look at the numbers to evaluate the deal.

Recap:

$100,000 cash investment
$1,750 monthly gross income

Thanks for any insight

waltworks

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Re: Evaluating Rentals that don't Appreciate
« Reply #1 on: May 30, 2017, 09:38:33 AM »
That is a hard situation to evaluate, because the returns in terms of cash flow should be at least decent (see the sticky at the top of the forum for how to post a RE case study if you want more useful feedback) BUT - there's a decent chance you lose your whole investment if the big flood comes, and you can basically never sell so they're totally illiquid, which is a huge disadvantage vis a vis other investment options.

Probably the best way to do it would be to assume that 50% of the market rate (assuming you can even get it on the open market) for flood insurance is an accurate assessment of the annual risk/cost of a big flood. Subtract that from your other numbers and see where you're at. If there's no open market/only gov't cheese flood insurance, subtract that entire amount.

To be honest, you are just in a race against time, since AFAIK in FEMA flood zones it's not a matter of if, but when. I'd hate to sit at my computer all day worrying every time a tropical storm started up during hurricane season, too.

But good luck.

-W
« Last Edit: May 30, 2017, 09:49:12 AM by waltworks »

thesaucyfox

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Re: Evaluating Rentals that don't Appreciate
« Reply #2 on: May 30, 2017, 03:34:09 PM »
Thanks for the reply.  I guess I should clarify. I know this area very well and have lived here my whole life.  I feel very confident that flooding is highly unlikely.  2008 saw the worst flood in the area in the last 100 years and it didn't even get close to the house.  So my question was more related to the math of an investment with the intention to keep it with a high cash flow return, but no appreciation.

waltworks

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Re: Evaluating Rentals that don't Appreciate
« Reply #3 on: May 30, 2017, 07:06:40 PM »
Step 1: Read sticky.
Step 2: Post specific numbers.
Step 3: Get useful replies.

-W

SwordGuy

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Re: Evaluating Rentals that don't Appreciate
« Reply #4 on: May 30, 2017, 07:28:49 PM »
1.75% of your investment on a monthly basis is a good start.

What are your expenses?  Gross $ is a good start, but net $ is what matters.

thesaucyfox

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Re: Evaluating Rentals that don't Appreciate
« Reply #5 on: May 31, 2017, 07:23:44 AM »
This is all the information from the sticky.  As you can see,  most are NA which was really the point of my question.  How do you evaluate a property like this in which most of those things don't apply. i.e. there is no mortgage so no leverage.

Market Value: 54,000.00
Original Purchase price:54,000.00
Original Mortgage Amount: NA
Interest Rate: NA
Mortgage Term:NA
Term remaining: NA
Amount remaining on mortgage:NA
Gross Rents: $875
Principal and Interest (the P&I of your PITI - should match with the above info): NA
Taxes and Insurance (the T&I of your PITI): $1,100.00/yr
HOA costs:NA
Deferred maintenance notes:

Cwadda

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Re: Evaluating Rentals that don't Appreciate
« Reply #6 on: May 31, 2017, 07:29:17 AM »
thesaucyfox, I've attached a cash flow calculator for playing around with numbers. Maybe this will help to visualize things.

Lan Mandragoran

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Re: Evaluating Rentals that don't Appreciate
« Reply #7 on: May 31, 2017, 08:43:54 AM »
The bigger pocket's rental calculator is really very good as well. I believe you get 5 free uses with a basic free account.

Alternatively this one is pretty decent (not as good as BP's but, no account required)

waltworks

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Re: Evaluating Rentals that don't Appreciate
« Reply #8 on: May 31, 2017, 12:39:54 PM »
Ok, what are you estimating for management, vacancy, capex, maintenance?

On a house this cheap I'd ballpark 10% for each of them, probably? If T&I is ~$90/mo and each of the others is ~$85/mo then your cash flow is somewhere in the ballpark of $345 a month. Not too shabby for a $54k investment, though the maintenance and capex numbers might be on the low side? Hard to say without knowing the house and the area better.

I probably wouldn't buy a place in a flood zone even if I wasn't worried about my own property flooding, though. If the neighborhood/town is at high flood risk (which is IMO only going to get worse) then even if your place is high and dry... nobody will want to live there if the rest of the town is abandoned/super sketchy because only the poor will live there.

-W


Goldielocks

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Re: Evaluating Rentals that don't Appreciate
« Reply #9 on: May 31, 2017, 09:02:57 PM »
Assuming 1 month in 12 vacancy (assumes it is a nice property, not a dump), you have a 15.8% annual return.  Less after maintenance, and your expenses, but still excellent.   Again, I assume good property and renters with modest amount of hours on your part, on an annual basis.

I am guessing that the depreciation for flood zone is built in.  Therefore, if you are a good property manager, you maybe want to develop a business of several doors, and then when you sell, you could sell x doors for a total amount (including good renters in place, with a good history).

Your business would be purchased for the cash flow, and what you get would be discounted for the buyer's perceived risk regarding the flood zone.   You perceive the risk to be low.   Would everyone else?

So your risk is the investment going to zero before 7 years are up (or losing all your tenants and cash flow).   Seems like a good business risk to me.

Anyway,   I would plan to eventually sell this as a business with a set cashflow for modest input of annual maintenance and effort, that returns over 15% on the capital dollar invested, with potential for capital appreciation ( you may get smaller less vacancy rates when you have more doors).

thesaucyfox

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Re: Evaluating Rentals that don't Appreciate
« Reply #10 on: June 07, 2017, 06:28:32 AM »
Thanks Goldielocks.  I like the idea of selling it as a business and not individual houses.  The cashflow is very good.  We are three months in and have had no issues yet on the first house.  I had an accepted offer of $39,000 on the second next door and after inspecting the AC, lowered it to $34,500 since it needs to be replaced.  I estimate we will have a renter in 2 months with $43,000 in it and $875/month.

hucktard

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Re: Evaluating Rentals that don't Appreciate
« Reply #11 on: June 07, 2017, 12:08:36 PM »
Man, I would love to be able to buy rental houses for $50K. There is nothing under about $250K around here (Front Range Colorado).