Author Topic: single women needs advise  (Read 4116 times)

cv

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single women needs advise
« on: May 24, 2014, 06:33:58 AM »
Need help/advise from seasoned mustachian landlords. 

I am a single women in her mid 30s who has been renting in ann arbor MI (planning on staying longterm). I've recently found a condo community that I really like, it is within walking distance to the university hospital, very close to the river which runs through the city with scenic runs/bike trails nearby. There is a unit 800 sqft for sale for $150k (closing costs factored in), which was a 1965 built apartment converted/upgraded in 1999, in very good condition.  HOA is 190 (water, outdoor maintenance) and tax is 2k a year; I can collect approximately 1100 per month for rent from streaming population of medical students/residents. I think within the next 10 years probably the hot water/furnace and the  major appliances would have to be replaced. Without going into too much detail, I must pay cash in full for the price of the place.

Would this be a good starting rental property for me to own? Thanks in advance for the thought!

former player

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Re: single women needs advise
« Reply #1 on: May 24, 2014, 06:46:03 AM »
Is the need to pay cash related to you or to the property?  Because if it is related to the property, then it immediately reduces the sale value, as you won't get many, if any, private buyers.  Which means 1) bargain hard and don't overpay - you need to get commercial landlord rates of return on your investment and 2) it is a very long term investment.

cv

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Re: single women needs advise
« Reply #2 on: May 24, 2014, 06:54:05 AM »
the need to pay cash is unfortunately the state of the market in this area- multiple bidders with cash power. My concern also is that I do not want to overpay for any property; it is difficult for me to gauge according to trulia/zillow property value; recent sale of similar units can also be over-inflated.

Seeking the Brass Ring

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Re: single women needs advise
« Reply #3 on: May 24, 2014, 06:56:24 AM »
I'm not sure I'd call myself a seasoned landlord but here's my quick analysis:

Just looking at the expenses you listed I don't think this is a very good deal. 

HOA + taxes = $357/month

1100 (rent)-357 = $743 cash flow per month

743 * 12 = $8916 per year

8916 / 150000 (purchase price) = .05944 return

This is really not a very good return on investment and there are going to be a lot of other costs, insurance and repairs for example, that are not factored in yet.  There are also issues with condo investing (no control over HOA fees, deferred major maintenance) that you have to be really careful of.  If you think you want to get involved in real estate, check out some of the recommended books and start doing some reading.  College towns can be great locations but not every deal is a good one.

Letj

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Re: single women needs advise
« Reply #4 on: May 24, 2014, 07:24:32 AM »
Seasoned landlord here. This is not a good rental property. If you can't get $3,000 in rent, it's a no go.

money_bunny

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Re: single women needs advise
« Reply #5 on: May 24, 2014, 07:25:05 AM »
I'm going to agree on this with the cash only stipulation. What is the available population to sell this to? Not that many people have that much money. I own a studio in a co-op that requires 20% down. Many people coming up with that is difficult. It's wonderful that you have this money to invest. Good work.

The other factor is locking up 150K of your money now when you are in your 30's into one thing versus putting 30K plus closing costs into this property and getting an 80% mortgage and then putting the money into other investments either more properties or index funds. I'm also in my mid 30's you and I have the advantage of time. My own personal plan is to buy a multi family with ideally 4 units because the taxes in NJ are less for me divided by 2, 3, or 4. As a single guy I don't need a whole house.

You may want to take a similar approach with buying a duplex with a loan since you will be responsible for the mechanicals in either case based on your post. You also can then sell it to someone else who can get a 5% loan if they want to get started.

I'm a big believer that Real Estate is a significant component to being able to FIRE. It is a component though.

waltworks

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Re: single women needs advise
« Reply #6 on: May 24, 2014, 10:53:10 AM »
Google 1% and 50% rules. This is not a good rental property.

-W

Daleth

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Re: single women needs advise
« Reply #7 on: May 24, 2014, 02:28:08 PM »
Need help/advise from seasoned mustachian landlords. 

I am a single women in her mid 30s who has been renting in ann arbor MI (planning on staying longterm). I've recently found a condo community that I really like, it is within walking distance to the university hospital, very close to the river which runs through the city with scenic runs/bike trails nearby. There is a unit 800 sqft for sale for $150k (closing costs factored in), which was a 1965 built apartment converted/upgraded in 1999, in very good condition.  HOA is 190 (water, outdoor maintenance) and tax is 2k a year; I can collect approximately 1100 per month for rent from streaming population of medical students/residents. I think within the next 10 years probably the hot water/furnace and the  major appliances would have to be replaced. Without going into too much detail, I must pay cash in full for the price of the place.

Would this be a good starting rental property for me to own? Thanks in advance for the thought!

The 1% rule says that a property is worth considering as an investment as long as the monthly rent you can bring in is equal to or greater than 1% of the price--so it would need to be $1500/mo on this property, except that given the steep HOA fees it would really need to be $1500+HOA fees/month. The comment from Letj about needing to get $3000/mo probably stems from the 2% rule, which is another approach to finding good properties. I use the 1% rule and have had no problems with it.

College towns and hospital towns (especially teaching hospitals) are great locations for investment because there is a never ending stream of new potential tenants. So you're good there. However, just as a mental exercise, here's a much better way of investing $150k in investment properties in Ann Arbor:

- Put $40k down on a $200k property (for instance: http://www.realtor.com/realestateandhomes-detail/101-Highlake-Ave_Ann-Arbor_MI_48103_M44197-14717?row=15, though for this you'd need to jack up the rents to hit $2k/mo; or maybe this http://www.realtor.com/realestateandhomes-detail/2881-Elmwood_Ann-Arbor_MI_48104_M35052-84975?row=6)

- Put $50k down on a $250k property (for instance: http://www.realtor.com/realestateandhomes-detail/1107-Elder-Blvd_Ann-Arbor_MI_48103_M42251-56964?row=1) and rent it for at least $2500/mo--so with that example, you'd need to get $1250 or each of the two 2BR apartment.

- Put $60k down on a $300k property (for instance--this is $275k but you get the gist: http://www.realtor.com/realestateandhomes-detail/344-8Th-St_Ann-Arbor_MI_48103_M48441-01869?row=2 --is it possible to get $1400-$1500/mo for a 2BR in A2? Note that this house has a 2-car garage; tenants with cars, especially in snowy climates, LOVE that and will pay extra, and if your tenants don't need it you can rent the garage separately to someone else).

I hear you saying that all-cash deals are what you're competing against, but most people who buy in A2 buy the normal way (i.e. with mortgages), and just because there are a few millionaires throwing money around doesn't mean you SHOULD be competing with them. Also, any chance you could buy a multi-unit and move into one unit yourself? That would let you get the house for much less money down.

medstudent

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Re: single women needs advise
« Reply #8 on: May 24, 2014, 08:37:21 PM »
Hi,

I realize this might seem troll-ish because this is my first post, but I have been reading the MMM blog/forum forever and registered just to respond to you. I am a medical student who lives in the complex you are talking about. (And yes - it is a fantastic area! I love it.) I bought 4 years ago and I am currently renting out my second bedroom to a resident. I plan to keep the property after I leave as a rental (probably 4 years from now).

I bought my unit for about $105k (25% down) and I also live there, so I get tax exemptions, etc for it being my primary residence. I will be the first to admit that I don't know a lot about the "rules" of investment properties - this is my home first and a rental second, so other people here can probably help you much more with the math side. However, I have been very happy with the place, both as a home and in terms of cash flow, because having a tenant brings my housing costs to almost 0. I will note that when I moved in 4 years ago, association fees were $155; they rose to $170 the year after that and are now $190. So as someone pointed out, the condo fees may be an issue for a solely-investment property. On the other hand, it is SO easy to find tenants and since they are usually medical students/residents, a) they are too busy working/studying to tear your place up, and b) their program start/end dates line up so well that I have been able to move from tenant to tenant with very little interim vacancy. In addition (and forgive me if this is all old news to you) the apt complexes that compete with this condo complex for the med student population have steadily jacked up prices by almost $50/month each year for the last few years. (on average). So the trend is definitely looking up; my whole unit rented for $850/mo 5 years ago and I am getting close to $600/mo now from my tenant/housemate

If you want to discuss more specifics regarding the area/complex I am happy to do so via PM.

 I also did not know there were any mustachians in my area, so I'm excited to find someone almost literally in my backyard!

SDREMNGR

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Re: single women needs advise
« Reply #9 on: May 24, 2014, 09:06:34 PM »
It's not the deal of a lifetime but it's not a bad deal as far as real estate purchases go.  You could do worse.  One idea to avoid having a lot of your cash tied up is to purchase it, rent it up, and then refinance it at today's low rates.  That way, you will be able to make a higher rate of return.

As far as people who talk about 1% and 2% rules, it really depends on the market.  It is hard to find anything that meets the 1% rule here in San Diego.  Back in 2009, you could find things that did, but not so much today.  In my SFR neighborhood, you are lucky to meet 0.7%.  That doesn't mean that you should necessarily buy that condo that you are looking at, but if that's the best thing you can find, it doesn't seem like you will get hurt from it.  If you can figure a 7% cash on cash return plus whatever appreciation, depreciation deduction, and income tax deductions will net you, you are looking at somewhere on the 10%+ on annual basis.  Not super great, but not too bad.  And if the area gets better and you can increase rent, then you can expect higher returns.

waltworks

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Re: single women needs advise
« Reply #10 on: May 24, 2014, 10:55:27 PM »
Why would you include depreciation? That's just tax deferral, not actual savings. And if it's not your residence, there aren't any income tax deductions to be had.

This property will bring in something like a 6% annual return assuming NO vacancy, no maintenance AT ALL, no legal fees, management fees, special assessments from the HOA, etc. Add in some vacancy, a bad tenant or two, paying a manager (or paying yourself your own going rate to do the work), and at least some maintenance and you're at basically zilch. You might make something on appreciation. Or you might not.

The fact that properties that don't meet the 1% rule don't exist in your/the OP's area doesn't mean that you should buy something that doesn't. It means your area is currently not a great place to buy rental property. Look elsewhere or at alternate investments.

-W

It's not the deal of a lifetime but it's not a bad deal as far as real estate purchases go.  You could do worse.  One idea to avoid having a lot of your cash tied up is to purchase it, rent it up, and then refinance it at today's low rates.  That way, you will be able to make a higher rate of return.

As far as people who talk about 1% and 2% rules, it really depends on the market.  It is hard to find anything that meets the 1% rule here in San Diego.  Back in 2009, you could find things that did, but not so much today.  In my SFR neighborhood, you are lucky to meet 0.7%.  That doesn't mean that you should necessarily buy that condo that you are looking at, but if that's the best thing you can find, it doesn't seem like you will get hurt from it.  If you can figure a 7% cash on cash return plus whatever appreciation, depreciation deduction, and income tax deductions will net you, you are looking at somewhere on the 10%+ on annual basis.  Not super great, but not too bad.  And if the area gets better and you can increase rent, then you can expect higher returns.

rmendpara

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Re: single women needs advise
« Reply #11 on: May 25, 2014, 12:00:04 AM »
Need help/advise from seasoned mustachian landlords. 

I am a single women in her mid 30s who has been renting in ann arbor MI (planning on staying longterm). I've recently found a condo community that I really like, it is within walking distance to the university hospital, very close to the river which runs through the city with scenic runs/bike trails nearby. There is a unit 800 sqft for sale for $150k (closing costs factored in), which was a 1965 built apartment converted/upgraded in 1999, in very good condition.  HOA is 190 (water, outdoor maintenance) and tax is 2k a year; I can collect approximately 1100 per month for rent from streaming population of medical students/residents. I think within the next 10 years probably the hot water/furnace and the  major appliances would have to be replaced. Without going into too much detail, I must pay cash in full for the price of the place.

Would this be a good starting rental property for me to own? Thanks in advance for the thought!

It's a fair deal, but nothing spectacular. $1,100 is enough to stay afloat, but not making too much in terms of profits. Do you see this appreciating 5%/yr for at least a few years? Do you think repairs/maintenance will be minimal (compared to another property)?

Let's see:

Annual rent: $1,100 x 12 = 13,200
Tax: (2,000)
HOA: 190 x 12 = (2,280)
Maintenance reserve = 50 x 12 = (600) --> sooner or later, you'll probably have to pay for something

You're at a gross income, before vacancy/agent rent commissions, of +$8,320. Let's call it ~$8k / 150,000 = 5.3% (before vacancy/commissions/surprises)

Not great, but could be a lot lower. Looks like you have ~667/mo to work with, so maybe a $50k refi loan to lock in some cheap financing after you buy?

I'd look to see if there are better deals, but property near a university is tough to find, especially in good condition. Vacancy will likely never be a big issue. Occasional repairs like water heater/HVAC will come up on an older property.

If you can't find anything in the ballpark, I'd say go for it. It's not a SCREAMING BUY, but it's a solid way to put $150k to work.

Bearded Man

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Re: single women needs advise
« Reply #12 on: May 25, 2014, 12:46:27 AM »
I wouldn't invest in a single condo or town home. The HOA will likely have renal caps, so there will be periods you can't rent it because rentals are at capacity for the complex. Buy the building or buy SFR instead.

SDREMNGR

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Re: single women needs advise
« Reply #13 on: May 25, 2014, 08:31:05 AM »
Q: Why would you include depreciation? That's just tax deferral, not actual savings.

Tax deferral is savings.  It allows real actual money to be saved.

Q: And if it's not your residence, there aren't any income tax deductions to be had.

Go back and read a real estate investment book.  Investment properties also get tax deductions and you can deduct a heck of a lot more as an investment property.

Q: This property will bring in something like a 6% annual return assuming NO vacancy, no maintenance AT ALL, no legal fees, management fees, special assessments from the HOA, etc. Add in some vacancy, a bad tenant or two, paying a manager (or paying yourself your own going rate to do the work), and at least some maintenance and you're at basically zilch. You might make something on appreciation. Or you might not.

It also assumes no increase of rent which is very unlikely.  She can check on health of HOA reserves and any history of special assesments to see if there is cause for concern.

Q: The fact that properties that don't meet the 1% rule don't exist in your/the OP's area doesn't mean that you should buy something that doesn't. It means your area is currently not a great place to buy rental property. Look elsewhere or at alternate investments.

Also places that meet 1 or 2% rule typically will be low rent, lower price places and lower appreciation.  And also they will tend to be 5+ unit apartments that cost more in total cost and higher rate of financing cost for commercial loans.  In the beach areas of San Diego, you are looking at 3 to 4 cap deals.  That means you can expect to get 3 to 4% return on cash purchases.  So why do people buy these properties?  Appreciation!!!  And potentially lots of it.  It's the difference between buying a useable but basic car or a collectors item.  Both will get you from point A to B but the collectors item will have a ton more interested buyers at resale.  It's a greater gamble and the safety margin is in buying at right price or right time and/or selling at the right time.  Buy low and sell high or buy high and sell higher, but avoid having to buy high and sell low.  Much like buying a high PE ratio growth stock and making money.

Value cash flow investing is one way to make money in RE but not the only way.  Some people have a knack in seeing areas of change and appreciation, some people can improve homes.  Every celebrity that you have seen buy a home for $5 million and sell for $10 mil do it with appreciation.  And high appreciation investing is about having a good eye for growth trends.

Also not everyone wants to buy out of town.  If one is limited to buying in town, then look for the best deal you can.  I've bought things that were awesome deals and others that weren't as great, but if managed well and purchased with decent safety margin, they all made me money.  And only the properties recently bought during 2009-2011 met the 1% rule and barely but one those properties already nearly doubled in price and my $35k down payment has been turned into equity of $125k in 2 years plus 12% cash flow during that time. Had I only cash flowed 4% during that time, I'd still be happy.

I still think that buying, renting, then refinancing is the way to go.  It'll be a good way to get feet wet and not a bad one.  You'll have decent cash flow and you can work on increasing it through smart improvements to draw good tenants.  And you can prevent bad tenants through good tenant screenings.  Don't rent to anyone with below 680 credit or bad rental history.  That will save you 90% of headaches right there. 

That's another side of the 1-2% rule properties, typically you are in rougher areas of town or country and you have to deal with lots of problem tenants.  College kids are potentially problematic but if you choose wisely, you really can avoid most problems.  I've honestly maintained less than 2% vacancy rate for my 5 personal properties over the last 5 years and close to 3% for my clients.   Good management can improve returns.
« Last Edit: May 25, 2014, 08:43:03 AM by SDREMNGR »

JoJoP

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Re: single women needs advise
« Reply #14 on: May 26, 2014, 07:45:16 PM »
I agree with SDREManager-- not all properties in all areas will meet the same magic formula.   It's not a one size fits all investment plan, but there are certainly guidelines that can be heeded as words to the wise.

I live near a Marine base, which, like a college town,  artificially increases demand for nice, affordable rentals for a transient population.   This a gold mine for landlords!   You're in a high demand area, with a top notch (med students, for chrissakes!) pool of tenants.  The upthread person in the same complex has lots of positives to share.

 I used to shy away from someone that I knew would be moving in a few years.  At that time, my ideal tenant was someone who had long term plans to stay in the area (5+ years).  My choices were biased towards tenants who were very long term in their prior residence.  What I've learned in the subsequent decade of landlording is that it's very difficult to self manage and keep your rents tracking inflation/ housing cost increases.  Perhaps a management company would have better luck, but regular rent increases have not worked well for me.  When I have good/excellent tenants, it's difficult to raise the rents.  They know us well, and they don't like it!

 I keep good tenants/very low vacancies by having my rents at or slightly below market, but, with no rent increases, this can put my cash flow behind the curve.  When they finally move, voila... now I can make a big hefty rent increase to line my pockets.  Your student tenants, too, will rent, stay and move on.  This can be a real blessing. 

If you think you need to diversify, you could get the feel for the viability of a financed offer, or, you could get a cash out refi or equity line once you own the property. 

SDREMNGR

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Re: single women needs advise
« Reply #15 on: June 03, 2014, 07:31:42 AM »
@JillP.  It's hard for some people but keep track of rent trends and increase rent to keep up slightly below market.  Also make friends elsewhere, not with your tenants.  I would doubt that you give $1200 in gift money to your mom or dad or siblings, why give it to your tenant?  That's what under renting by $100 a month costs you annually.

JoJoP

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Re: single women needs advise
« Reply #16 on: June 04, 2014, 09:20:43 PM »
Good point SD mgr.   I know it does add up, especially year after year, x8 rentals.  Maybe I'll take a harder look at that strategy. 

Another Reader

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Re: single women needs advise
« Reply #17 on: June 05, 2014, 03:35:49 PM »
I increase rents to existing tenants when the market supports the increase, but no more than two or three percent most years.  The cost of a turnover is likely to be much higher than the rent loss.