We are quite unexpectedly looking into buying our first rental (the owner of the worst house in our neighborhood died, house was in foreclosure, estate forfeited it to the bank on friday). We are planning on making an offer.
The house is trashed, so we are planning on somewhat extensive rehabilitation. We are putting together an offer (it won't be contingent on financing, which will be necessary for this property we think).
I am confused by the way most people seem to evaluate deals, because they look at purchase price as a fixed quantity instead of something that is negotiated.
The house we are looking at is a 2b2br, 1k sf, roughly the same blueprint has 3 other houses on its block that are rentals for 800-900. The area sees lots of shorter-term rentals (college and military near by).
My calculations were as follows:
850 rent
210 Property Taxes
85 vacancy
75 insurance
55 repairs (1% of property)
25 water
25 sewer
40 bug abatement and lawn care
85 property management
These costs add to:
600 / month.
So rent would have $250/month remaining for cashflow and mortgage (we would plan to take out a mortgage after renovation, so our cash can work harder).
That seems to imply to me that if purchase and rehab costs added up to 50k, we would end up with 15k cash spent (10k in equity in the house, 5k on loan fees/inspections/closing costs). That would leave a mortgage of ~200/mon, meaning cashflow of ~50/. So it would turn a profit of ~600/yr, for a 4% return. Obviously this doesn't account for growing equity (and deliberately so). Regardless, 4% would seem a pretty mediocre return. So then it seems to me the best thing to do is just adjust offer until the money makes sense (since costs of 40k bump cash flow to 8% return).
I have three questions:
Is this just the worst way to think about a rental purchase, is this genius, or somewhere inbetween?
What rate of return on your investment would you set as a minimum threshold before you became interested in a property?
One consideration for us, is that currently I have side-gig time free, so would manage the property ourselves (similarly, I am fairly handy, and most repair money would end up going to me). How much would you let that affect your choice on minimum return rate?
Any comments appreciated, as while I have been reading up and thinking about rentals for over a year, none of it has been really serious (and this is a time-limited opportunity).