Author Topic: Is this a good first rental?  (Read 1591 times)

Jtrey17

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Is this a good first rental?
« on: December 06, 2018, 04:10:36 PM »
Hello, I am looking to buy my first rental soon and I think Iíve found a contender. Could I ask for feedback?
Price: $115,000
Rent collected per month: $2100 total (4 plex with 2 - 1b/1b and 2 - 2b/1/b)
Rental history: 100% occupancy. Renters have been here for between 3-10+ years. The area is lacking rental properties (per facebook) and folks are constantly looking for places to rent. A long time renter takes care of lawn and snow removal currently.
Taxes: $2406
Owner utilities: $3796

Per the owner the roof will need replacing soon. Also the basement gets water when itís rains but that is common to the area (my house down the street also gets water).

So what do you think? Experienced landlords, is this house a good deal?

Jtrey17

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Re: Is this a good first rental?
« Reply #1 on: December 06, 2018, 04:12:28 PM »
Oh and one more question please. Are rental loans much the same as residential? Do I need 20% down to purchase?

YttriumNitrate

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Re: Is this a good first rental?
« Reply #2 on: December 06, 2018, 04:38:50 PM »
Well, how much time are you willing to devote to this project? My preference would be to start with a single family home since you have fewer tenants to deal with, but there's certainly more potential money in multi-family if done right.

clifp

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Re: Is this a good first rental?
« Reply #3 on: December 06, 2018, 05:01:28 PM »
Oh and one more question please. Are rental loans much the same as residential? Do I need 20% down to purchase?

Non owner occupied loans tend to have higher interest rates, and many times require a higher downpayment 25-30%.  That being said if you are willing to pay a higher interest rate you can find lower down payment loans.

The numbers on your property are quite good.  I had a 4 Plex for a while and had issues getting decent tenants.

Jtrey17

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Re: Is this a good first rental?
« Reply #4 on: December 06, 2018, 05:09:44 PM »
Well, how much time are you willing to devote to this project? My preference would be to start with a single family home since you have fewer tenants to deal with, but there's certainly more potential money in multi-family if done right.
Thatís a good question and one I am completely ignorant in of how much time it will take! I am willing to put the time in to get everything running smoothly. I was thinking a 4 plex would be easier in terms of fixing stuff (one roof, not four). But I havenít given much thought as to the tenant aspect. Thank you!

Jtrey17

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Re: Is this a good first rental?
« Reply #5 on: December 06, 2018, 05:14:28 PM »
Oh and one more question please. Are rental loans much the same as residential? Do I need 20% down to purchase?

Non owner occupied loans tend to have higher interest rates, and many times require a higher downpayment 25-30%.  That being said if you are willing to pay a higher interest rate you can find lower down payment loans.

The numbers on your property are quite good.  I had a 4 Plex for a while and had issues getting decent tenants.
I really havenít given much thought about tenants, how to get good ones, and how to keep them, I guess. Definitely appreciate that consideration!

Rookie loan question-how do I qualify for a non-owner loan? Do they pull off my credit score and income? Like a residential loan?

clifp

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Re: Is this a good first rental?
« Reply #6 on: December 06, 2018, 06:09:18 PM »

I really havenít given much thought about tenants, how to get good ones, and how to keep them, I guess. Definitely appreciate that consideration!

Rookie loan question-how do I qualify for a non-owner loan? Do they pull off my credit score and income? Like a residential loan?

Pretty much, although I've never gotten one but my partner in some of my rentals has.

You'll also need to get copies of the leases the tenants have otherwise the banks, will generally give you no or limited credit for the rental income the properties generates.  Worse case you'll have to qualify for the loan using just your existing income.  But hopefully, you can find a bank that is more lenient.

tralfamadorian

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Re: Is this a good first rental?
« Reply #7 on: December 06, 2018, 06:10:46 PM »
Rookie loan question-how do I qualify for a non-owner loan? Do they pull off my credit score and income? Like a residential loan?

Fannie/Freddie investment property loans ask for all the same information as an owner occupied. When it comes to calculating your DTI, they will include the current rent rolls * 75% against the new mortgage.

In general, tenants in multi-family stay for shorter periods of time and are less desirable then tenants in SFH within the same general location. But every market is different. The above is generally more of an issue in a market with lots of SFH properties and only a few MF. If there are mostly small multi-family properties around, then it's not a problem.

Owner utilities: $3796

What utilities is the owner covering? It sounds high for just the common area.


Renters have been here for between 3-10+ years.

Long term renters are often paying under-market rent. Do you have an idea of whether they are paying market rent or not? If not, will you have issues moving them up to market or asking them to leave if they do not want to pay that amount? Rent control, landlord/tenant laws, etc.


Price: $115,000
Down Payment: $23,000
New Roof: $?
Other deferred maintenance: $?

Rent: $2100
Taxes: $200
Owner utilities: $316
Lawn care/snow removal (tenant doing it will not be there forever): $?
PI&I (guesstimate $1k/yr insurance): $778
Management (you should pay yourself): $210
Repairs: $210
CapEx: $210
Vacancy (mathematically there will be vacancy at some point): $210
Net: -$34/mo


From the information you have given us, as an investor I would be wary but interested for two reasons. First, because tenants there that long are probably significantly under market. Secondly, because the owner utilities look like at least water for the units, maybe some others as well. If so, then the tenants can be paying for their portion of utilities as well.

Cons that would make me take a pass if any were present- 1) If most the properties in the area are SFH, 2) Rent control or strong tenant laws that would make repositioning the property difficult, 3) Other expensive issues besides the roof (wiring, plumbing, mold in the wet basement), 4) Rents are already market rate and/or utility bill back is disallowed/uncommon in market, 5) Serious work needed during tenant turnover unless the rent increase to market would be large (at an avg of $525/unit, it would take forever to get that remodeling investment back).

rothwem

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Re: Is this a good first rental?
« Reply #8 on: December 07, 2018, 07:02:02 AM »
I really havenít given much thought about tenants, how to get good ones, and how to keep them, I guess. Definitely appreciate that consideration!

Oof.  You aren't ready to own a class D property yet.  If you google "tenant horror stories", 99% of them come from properties like the one you're considering.  There's a reason this is such a good deal. 

The people that are successful with low end real estate are a special breed. They pay everything in cash.  They drive an old pickup truck usually, unless they're eastern European, then they drive a late 90's BMW or Mercedes.  They fix EVERYTHING themselves and are usually not afraid of being an asshole to anyone.  Go to any real estate meetup, and they'll stick out like a sore thumb. If that doesn't sound like you, you're going to have a hell of a time with this place. 

Another Reader

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Re: Is this a good first rental?
« Reply #9 on: December 07, 2018, 07:30:30 AM »
The first thing you should ask is would you live in that neighborhood and that property?  If the answer is no, you should pass, unless you are the person that Rothwerm describes.  For most new investors, a property in a B+ neighborhood with decent tenants in place is a good way to get started.  Once you learn the ropes, then you can pick the direction for your future investments.

Jtrey17

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Re: Is this a good first rental?
« Reply #10 on: December 07, 2018, 11:32:51 AM »
I really havenít given much thought about tenants, how to get good ones, and how to keep them, I guess. Definitely appreciate that consideration!

Oof.  You aren't ready to own a class D property yet.  If you google "tenant horror stories", 99% of them come from properties like the one you're considering.  There's a reason this is such a good deal. 

The people that are successful with low end real estate are a special breed. They pay everything in cash.  They drive an old pickup truck usually, unless they're eastern European, then they drive a late 90's BMW or Mercedes.  They fix EVERYTHING themselves and are usually not afraid of being an asshole to anyone.  Go to any real estate meetup, and they'll stick out like a sore thumb. If that doesn't sound like you, you're going to have a hell of a time with this place.
Ok, being truthful, I wanna be that person, just not sure that I actually AM (or could be) that person. Thanks for the  considerations-I really appreciate your time. I may just have a wild and crazy Friday night of reading tenant horror stories 😁.

Jtrey17

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Re: Is this a good first rental?
« Reply #11 on: December 07, 2018, 11:37:37 AM »
The first thing you should ask is would you live in that neighborhood and that property?  If the answer is no, you should pass, unless you are the person that Rothwerm describes.  For most new investors, a property in a B+ neighborhood with decent tenants in place is a good way to get started.  Once you learn the ropes, then you can pick the direction for your future investments.
Thatís a great question-yes I would live there. I donít at all want to be a landlord who doesnít take care of her properties. As a single mom with an old Victorian house to manage now, I get the value of fixing things properly and keeping up the property. I want my tenants to feel proud of their home. I want me to be able to figure out how to do that for them and still maintain the property as income producing for me. Thanks much for replying, these are all so valuable to me!

cchrissyy

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Re: Is this a good first rental?
« Reply #12 on: December 07, 2018, 12:13:03 PM »
Quote
Thatís a great question-yes I would live there
Are you available to do so? even for a little while?  If so, you can get the mortgage at owner-occupied rates.  You have to intend to live there but there is no requirement to stay any certain length of time.

waltworks

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Re: Is this a good first rental?
« Reply #13 on: December 07, 2018, 01:01:53 PM »
I don't think I would buy this place for $115k. Sounds like a lot of hassle and trouble. If you want to be a slumlord, you have to DIY everything and cut as many corners as possible and basically be totally ruthless, because otherwise tenants will just walk all over you. I know I could never cut it - I'm just not capable of being a jerk and I'm way too nice/sympathetic. When I had rentals I kept it to pretty much A-/B+ places where I could deal with the tenants without undue stress.

-W

Jtrey17

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Re: Is this a good first rental?
« Reply #14 on: December 07, 2018, 01:33:49 PM »
Quote
Thatís a great question-yes I would live there
Are you available to do so? even for a little while?  If so, you can get the mortgage at owner-occupied rates.  You have to intend to live there but there is no requirement to stay any certain length of time.
No-the house is fully rented and I wouldnít put anyone out. Also Iím a single mom of 4 so we really wouldnít fit in any of the units. I wish I could though.

Jtrey17

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Re: Is this a good first rental?
« Reply #15 on: December 07, 2018, 01:37:37 PM »
I don't think I would buy this place for $115k. Sounds like a lot of hassle and trouble. If you want to be a slumlord, you have to DIY everything and cut as many corners as possible and basically be totally ruthless, because otherwise tenants will just walk all over you. I know I could never cut it - I'm just not capable of being a jerk and I'm way too nice/sympathetic. When I had rentals I kept it to pretty much A-/B+ places where I could deal with the tenants without undue stress.

-W
I think our personalities sound pretty similar! The area is low cost of living. Iím curious about being a slumlord comment. I donít see it that way at all. Do you think that because the profit margins are low that I would have to DIY to keep a profit? Or could I kindly ask what youíre seeing in the info that Iím not?

waltworks

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Re: Is this a good first rental?
« Reply #16 on: December 07, 2018, 01:59:43 PM »
$400-600 a month for an apartment (I'm assuming that's close to the breakdown for the 1 vs 2 bedroom places) with utilities paid sounds insanely cheap to me. Like, slum cheap. I don't know of a whole lot of places in the US where rentals that cheap are anything but D/F level neighborhood/tenants. But you say you'd live there, so maybe you're somewhere with super low housing costs.

Properties like this have usually also been managed by someone who did everything as cheaply as possible (often DIYing badly/incompetently), so none of the existing stuff (appliances, paint, HVAC, carpet, etc) will be very durable or high quality. Tenants will be SUPER hard on all of those things too. Repair/maintenance and CapEx costs will all be much higher than for a SFH in a B neighborhood.

Look over Trafalmadorian's breakdown. I think all his numbers are fairly realistic for a property like this, and the end result is going to be negligible income from it. If it was a cash cow, the owner wouldn't be selling it, right?

-W

AlexMar

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Re: Is this a good first rental?
« Reply #17 on: December 08, 2018, 07:34:31 AM »
At first I read this as a duplex, don't know why.  And I was thinking "hmm... not bad."  - as a 4 plex?  At this price and low rents? etc.  I agree with others.  This is not a property I'd be interested in.  We are talking about $500/mo units with utilities included and that's insane as waltworks suggests.  Sounds like a slum.

Jtrey17

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Re: Is this a good first rental?
« Reply #18 on: December 09, 2018, 07:56:27 AM »


Owner utilities: $3796

What utilities is the owner covering? It sounds high for just the common area.


Renters have been here for between 3-10+ years.

Long term renters are often paying under-market rent. Do you have an idea of whether they are paying market rent or not? If not, will you have issues moving them up to market or asking them to leave if they do not want to pay that amount? Rent control, landlord/tenant laws, etc.


Price: $115,000
Down Payment: $23,000
New Roof: $?
Other deferred maintenance: $?

Rent: $2100
Taxes: $200
Owner utilities: $316
Lawn care/snow removal (tenant doing it will not be there forever): $?
PI&I (guesstimate $1k/yr insurance): $778
Management (you should pay yourself): $210
Repairs: $210
CapEx: $210
Vacancy (mathematically there will be vacancy at some point): $210
Net: -$34/mo


From the information you have given us, as an investor I would be wary but interested for two reasons. First, because tenants there that long are probably significantly under market. Secondly, because the owner utilities look like at least water for the units, maybe some others as well. If so, then the tenants can be paying for their portion of utilities as well.

Cons that would make me take a pass if any were present- 1) If most the properties in the area are SFH, 2) Rent control or strong tenant laws that would make repositioning the property difficult, 3) Other expensive issues besides the roof (wiring, plumbing, mold in the wet basement), 4) Rents are already market rate and/or utility bill back is disallowed/uncommon in market, 5) Serious work needed during tenant turnover unless the rent increase to market would be large (at an avg of $525/unit, it would take forever to get that remodeling investment back).
[/quote]

This breakdown has been really valuable for me to see-thank you for taking the time to do that. Iím still dissecting it, in fact. I have the P&L for last year and it looks a bit different. I will post it here later today.

The local utility company always holds the owner responsible for water/sewer so usually landlords just pay for it.

waltworks

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Re: Is this a good first rental?
« Reply #19 on: December 09, 2018, 08:05:39 AM »
1. Make sure you get a copy of the owner's actual tax return for the property. I've seen all kinds of ridiculous claims made by people selling rental properties. Of course, they might have also lied on their taxes - but if they did, they usually lie in the other direction (claim they made less than they really did).

2. If the property has been super profitable and no money has been spent on maintenance/capex, that's a huge red flag - they have let *everything* go and there will be a ton of problems you'll have to deal with down the road.

-W

tralfamadorian

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Re: Is this a good first rental?
« Reply #20 on: December 09, 2018, 09:37:57 AM »
As Walt said, I would ask for the schedule E, not a spreadsheet p&l. A seller has reason to tweak a spreadsheet so the property looks more profitable but the schedule E will be the opposite.

Unlike some others, I'm not presuming that the property is D class since you haven't given the location and said that you would be comfortable living there at a different point in your life. The numbers you have given would also be in line for a rural area that is perfectly safe but population/income does not support high property prices.

Jtrey17

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Re: Is this a good first rental?
« Reply #21 on: December 09, 2018, 10:43:40 AM »
As Walt said, I would ask for the schedule E, not a spreadsheet p&l. A seller has reason to tweak a spreadsheet so the property looks more profitable but the schedule E will be the opposite.

Unlike some others, I'm not presuming that the property is D class since you haven't given the location and said that you would be comfortable living there at a different point in your life. The numbers you have given would also be in line for a rural area that is perfectly safe but population/income does not support high property prices.

Thank you, I will request that and get more info on what has been done to the property over the past dozen years to better know what Iím (maybe) getting into.

And yes, youíre right. Itís a safe, small town that I grew up in. Population is 9,000 and itís not uncommon for people to just not make that much money here. I probably know the renters (through school most likely) or can Ďask aroundí if I feel the need. The area is very non-crime (except drunk drivers). I drove by the property last night and was pleased to see Christmas decorations all around the place-the tenants have really seemed to make this place their home, which is exactly how I would want them to feel (sense of pride). But again, I donít know what I donít know-that could be argued a bad thing too!