Residential Home for $125K. Rent for $1,400 / mo.

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Mark2614
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Residential Home for $125K. Rent for $1,400 / mo.

Post by Mark2614 »

I'm 33 and investing most of my money in stocks / bonds. For the last 10 years. I'm a very disciplined investor and have a 90 / 10 stock / bond mix with low cost index funds.

I'm considering getting into real estate. I was a landlord once, and actually kind of enjoyed it (I think I'm good at it). In general, if I could make 7 to 8% in stocks with doing zero work, I would just do that. However, with the real estate properties, I could do it with just 20% down and use the banks money (15 year loan), and let the property pay for itself.

Is this worth it? Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.

Is this worth the effort? How do we compare the returns of this compared to my stock market investments? Please note, this is just 20% cash down payment. In other words, after I pay 20% cash down payment, the rent income will cover 95-100% of the rest of the costs even with the 15 year loan. Homes in this market are not too difficult to find tenants.

Should I? I keep talking myself into it. Then talking myself out of it.
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David Jay
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by David Jay »

You are a "silent partner" in your mutual funds. Not so much with rental property, so it is not fair to compare percentage returns. If you enjoy the 11PM calls about the plugged sink, have at it.

been there, done that, have the tee shirt...
Last edited by David Jay on Thu Jul 06, 2017 2:01 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
Mark2614
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Mark2614 »

David Jay wrote:If you enjoy the 11PM calls about the plugged sink, have at it.

been there, done that, have the tee shirt..
I'm aware that a rental property is a lot more work. But how do we look at it from a returns perspective. If you put just 20% cash into a property similar to my example, above, and in 15 years, it's 100% paid off, what kind of return did you make? I'm trying to compare the potential returns to my existing stock market investments.

I'm trying to figure out how MUCH more I could make over 15 years so I can weigh if it's worth the hassles and extra work.
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David Jay
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by David Jay »

Mark2614 wrote:
David Jay wrote:If you enjoy the 11PM calls about the plugged sink, have at it.

been there, done that, have the tee shirt..
But how do we look at it from a return perspective. If you put just 20% cash into a property similar to my example, above, and in 15 years, it's 100% paid off, what kind of return did you make? I'm trying to compare the potential returns to my existing stock market investments.
See my edit above. It is not fair to directly compare the return on rental property to a totally passive investment like mutual funds.

I think you need to evaluate the time you will spend and charge your current salary rate against the property because that is the opportunity cost of your management time (i.e. that is the cost of the money that goes into your investment accounts).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Gufomel
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Gufomel »

I'm not sure I understand your question. Are you just asking how you do the math to calculate your potential return given the facts/projections you've outlined?
bloom2708
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by bloom2708 »

Consider it and then walk away.

Keep it simple. Save more. Value your precious time. Spend time with family, friends, hobbies, exercising, reading, etc when not working or sleeping.

You may or may not come out a bit ahead. You will work and work hard at the real estate thing. I watch my sister and best friend constantly bust their humps every weekend.

Get the itch to buy real estate, buy more of your low cost, index funds. Go for a bike ride :wink:
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
psteinx
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by psteinx »

Mark2614 wrote:Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.
OK, so let's run some quick numbers. We'll take midpoints, and apply some common sense additional items:

House = 127500 But let's add 8% transactional costs to this, partially for stuff when you buy, but also a bit of a reserve for when you sell. So,
House = 137700 with reserve
Rent = 1300*12 less 8% vacancy allowance = 14352
Tax = 4000 (WOW!)
Insurance = 900
Maintenance = 1350
Utilities = ??? (Renter pays all? Bundled into maintenance?)
Property management = ??? (OK, you'll manage it yourself, perhaps, but is your time free?)

Income = 14352-4000-900-1350 = 8102
So, on a sort of loosey goosey basis, cap rate is around 8102/137700 = ~5.9%
Now, could you boost those returns by using a mortgage? Perhaps, but commercial/investment mortgages tend to be pricier than owner-occupied rates. If you pay 4.5%-5.5% or so for a mortgage, on say a 25% downpayment, you're only modestly increasing your cash on cash return.

Now, you might get some property appreciation out of this. But I'm gonna guess that a $140K house is not exactly in a prime location and/or market.

And, what about your time? If you invest 60 hours up front and 15 hours per year on this, you're essentially subsidizing the somewhat modest expected returns with a lot of free labor. What price do you expect to make on your time - $20? $30? $40?

Could you make money with this? Yeah. Is it a slam dunk? Not in my opinion...
Topic Author
Mark2614
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Mark2614 »

psteinx wrote:
Mark2614 wrote:Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.
OK, so let's run some quick numbers. We'll take midpoints, and apply some common sense additional items:

House = 127500 But let's add 8% transactional costs to this, partially for stuff when you buy, but also a bit of a reserve for when you sell. So,
House = 137700 with reserve
Rent = 1300*12 less 8% vacancy allowance = 14352
Tax = 4000 (WOW!)
Insurance = 900
Maintenance = 1350
Utilities = ??? (Renter pays all? Bundled into maintenance?)
Property management = ??? (OK, you'll manage it yourself, perhaps, but is your time free?)

Income = 14352-4000-900-1350 = 8102
So, on a sort of loosey goosey basis, cap rate is around 8102/137700 = ~5.9%
Now, could you boost those returns by using a mortgage? Perhaps, but commercial/investment mortgages tend to be pricier than owner-occupied rates. If you pay 4.5%-5.5% or so for a mortgage, on say a 25% downpayment, you're only modestly increasing your cash on cash return.

Now, you might get some property appreciation out of this. But I'm gonna guess that a $140K house is not exactly in a prime location and/or market.

And, what about your time? If you invest 60 hours up front and 15 hours per year on this, you're essentially subsidizing the somewhat modest expected returns with a lot of free labor. What price do you expect to make on your time - $20? $30? $40?

Could you make money with this? Yeah. Is it a slam dunk? Not in my opinion...
Cap rate of 5.9% seems about right. But what about the cap rate if I buy it with 20% down and a 15 year loan at 3.5% interest?
renue74
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by renue74 »

Not worth the effort. You're paying too much for the property.

Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Typically...I look for potential rental property that is 16% or more in COC return. I have some in the 30-40% range.

The property market is so hot now that I've stopped looking for rentals. In fact, I just posted 2 of my rentals for sale on Craigslist last week and got 6 cash offers....basically doubling the price of the properties I purchased in the Summer of 2015. So in 2 years, the property doubled in value?!?!? Whatever....it's like a piranhas market out there now.
Last edited by renue74 on Thu Jul 06, 2017 2:31 pm, edited 1 time in total.
psteinx
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by psteinx »

Mark2614 wrote:Cap rate of 5.9% seems about right. But what about the cap rate if I buy it with 20% down and a 15 year loan at 3.5% interest?
Still not compelling, IMO. That said, do you really think you can get 3.5% rates on investment properties with 20% down and without other high fees? (Legit question, I don't follow this stuff that closely. But I am skeptical of the 3.5% figure...)
KlangFool
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by KlangFool »

Mark2614 wrote:I'm 33 and investing most of my money in stocks / bonds. For the last 10 years. I'm a very disciplined investor and have a 90 / 10 stock / bond mix with low cost index funds.

I'm considering getting into real estate. I was a landlord once, and actually kind of enjoyed it (I think I'm good at it). In general, if I could make 7 to 8% in stocks with doing zero work, I would just do that. However, with the real estate properties, I could do it with just 20% down and use the banks money (15 year loan), and let the property pay for itself.

Is this worth it? Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.

Is this worth the effort? How do we compare the returns of this compared to my stock market investments? Please note, this is just 20% cash down payment. In other words, after I pay 20% cash down payment, the rent income will cover 95-100% of the rest of the costs even with the 15 year loan. Homes in this market are not too difficult to find tenants.

Should I? I keep talking myself into it. Then talking myself out of it.
Mark2614,

Is it cash flow positive? If not, you have to put money into the house every year. Then, you have to "buy and pray" that you last long enough to sell the house for profit.

KlangFool
Jags4186
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Jags4186 »

Mark2614 wrote: Cap rate of 5.9% seems about right. But what about the cap rate if I buy it with 20% down and a 15 year loan at 3.5% interest?
You likely wouldn't be able to for an investment property.

I *know* people make lots of money on real estate. But something always tells me they're only making money because either they got lucky with above average property appreciation, they have some sort of other business that lowers the cost of maintaining property, or they're getting some sort of incentive from the municipality.

I also think people also are simply much more comfortable using leverage on real estate than on stocks and thats where people make money on real estate. You can make lots of money in stocks leveraging, you can also lose a bundle.

One other thing to consider when wanting to buy a bunch of rental units is the opportunity cost of keep a pretty significant reserve fund available earning 1%.
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Meg77
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Meg77 »

Mark2614 wrote:
David Jay wrote:If you enjoy the 11PM calls about the plugged sink, have at it.

been there, done that, have the tee shirt..
I'm aware that a rental property is a lot more work. But how do we look at it from a returns perspective. If you put just 20% cash into a property similar to my example, above, and in 15 years, it's 100% paid off, what kind of return did you make? I'm trying to compare the potential returns to my existing stock market investments.

I'm trying to figure out how MUCH more I could make over 15 years so I can weigh if it's worth the hassles and extra work.
It is very difficult to predict actual rental returns. One major vacancy or maintenance issue can wipe out years worth of cash flow for example - or things could go great for years. But there are three primary types of "return" on rentals: cash flow, appreciation, and reduction of mortgage principal (if you use leverage). There are also some tax benefits to be had depending on your circumstances, but that's more icing than cake.

I paid $130,000 for a rental property in 2008 and was getting $750 per side (duplex) on average for the past few years. Cash flow was negative the first few years but evened out after I hired a property manager. Cash flow averaged $3,000 a year on average 2012-2016. I barely had to get involved either except to file a roof insurance claim after a hail storm. I
put down 20% or $28K including closing costs, so that's about 10% a year return just via cash flow. Plus the mortgage was ticking down a couple grand a year. And I assumed it was appreciating at least 3% a year - plus I didn't pay any taxes on my returns or gains since I still had a small tax loss most years.

Then this spring, there was a plumbing backup. Turns out the 60 year old metal pipes had corroded to the point of needing a full replacement (digging under the house, etc.). Total cost was just over $30,000. I had thought of selling despite the more than decent returns since the house was so old and really should have been returning well into the double digits to justify the maintenance risk and lower income area it was in. But trading costs are high, so I didn't. :oops: I listed it for sale soon after the plumbing thing was done (it had a new roof too) and got a cash offer for $250k within days.

One of the best days of my investing life was the thrill of buying that rental. An even better day was the one where I sold it. I still have four other rentals so I'm not opposed to it. I look at it as more of a diversification of income stream than a higher rate of return though. After hassles are factored in, the returns are comparable to the stock market. Great some years, lousy in others, averages out over time, generally upward trend. You might get lucky or unlucky depending on timing, location, etc. If you have a knack or interest in it, it's a great alternative asset class to expose yourself too in my view.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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Meg77
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Meg77 »

Mark2614 wrote:
psteinx wrote:
Mark2614 wrote:Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.
OK, so let's run some quick numbers. We'll take midpoints, and apply some common sense additional items:

House = 127500 But let's add 8% transactional costs to this, partially for stuff when you buy, but also a bit of a reserve for when you sell. So,
House = 137700 with reserve
Rent = 1300*12 less 8% vacancy allowance = 14352
Tax = 4000 (WOW!)
Insurance = 900
Maintenance = 1350
Utilities = ??? (Renter pays all? Bundled into maintenance?)
Property management = ??? (OK, you'll manage it yourself, perhaps, but is your time free?)

Income = 14352-4000-900-1350 = 8102
So, on a sort of loosey goosey basis, cap rate is around 8102/137700 = ~5.9%
Now, could you boost those returns by using a mortgage? Perhaps, but commercial/investment mortgages tend to be pricier than owner-occupied rates. If you pay 4.5%-5.5% or so for a mortgage, on say a 25% downpayment, you're only modestly increasing your cash on cash return.

Now, you might get some property appreciation out of this. But I'm gonna guess that a $140K house is not exactly in a prime location and/or market.

And, what about your time? If you invest 60 hours up front and 15 hours per year on this, you're essentially subsidizing the somewhat modest expected returns with a lot of free labor. What price do you expect to make on your time - $20? $30? $40?

Could you make money with this? Yeah. Is it a slam dunk? Not in my opinion...
Cap rate of 5.9% seems about right. But what about the cap rate if I buy it with 20% down and a 15 year loan at 3.5% interest?
Cap rate is the same regardless of financing, by definition. It's used to compare rental properties to one another without muddying the waters with different financing options (or lack thereof).

Cap rate doesn't take into account appreciation though, so a 6% cap rate on top of 2-3% appreciation on top of 2% from mortgage reductions on top of some tax advantages isn't a bad deal at all. But it's hardly a "slam dunk," I agree, since cap rates take "expected" maintenance and vacancies into account - which are the huge wild card. My properties can vary in cap rate dramatically depending on which year I'm looking at, or which 3 year average.
"An investment in knowledge pays the best interest." - Benjamin Franklin
psteinx
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by psteinx »

Meg77 wrote:Cap rate doesn't take into account appreciation though, so a 6% cap rate on top of 2-3% appreciation on top of 2% from mortgage reductions on top of some tax advantages isn't a bad deal at all.
Cap rate doesn't take principal payments (within an overall mortgage payment) into account.

And I think that for some properties, assuming even 2-3% appreciation might be optimistic. In my metro area of St. Louis, for instance, there are huge chunks of the area where residential property has slowly, or quickly, declined to near zero value (for income production anyways) - boarded up, derelict, or whatnot.
Last edited by psteinx on Thu Jul 06, 2017 2:44 pm, edited 1 time in total.
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Meg77
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Meg77 »

psteinx wrote:
Meg77 wrote:Cap rate doesn't take into account appreciation though, so a 6% cap rate on top of 2-3% appreciation on top of 2% from mortgage reductions on top of some tax advantages isn't a bad deal at all.
Cap rate doesn't take principal payments (within an overall mortgage payment) into account.

And I think that for some properties, assuming even 2-3% appreciation might be optimistic. In my metro area of St. Louis, for instance, there are huge chunks of the area where residential property has slowly, or quickly, declined to approximately zero value (for income production anyways).
Very true, in many majority rental markets (blue collar or low income neighborhoods where few own their homes), appreciation tends to be flat over time, or at least below the average of the entire city. But cash flow tends to be better. The "nicer" or more trendy areas might have strong appreciation but below average or even negative cash flow depending on your financing structure.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Beach
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Beach »

Never underestimate the unexpected expenses or circumstances that come with a rental. Getting rid of my rental was one of the happiest days of my life.
runner540
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by runner540 »

As a long time renter in several markets, that rent seems high for a $125k property. But every local market is different. How confident are you in that rent estimate?
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Pajamas
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Pajamas »

Mark2614 wrote: In general, if I could make 7 to 8% in stocks with doing zero work, I would just do that. However, with the real estate properties, I could do it with just 20% down and use the banks money (15 year loan), and let the property pay for itself.


Real estate properties require a good deal more work than any stock investment, even if you use a property manager.
Trying2Save
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Trying2Save »

Can anyone recommend any reading material for someone who is interested in getting into real estate from an investing stand point.

Thank you in advance,
Trying2Save
bloom2708
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by bloom2708 »

Trying2Save wrote:Can anyone recommend any reading material for someone who is interested in getting into real estate from an investing stand point.

Thank you in advance,
Trying2Save
https://www.biggerpockets.com/
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
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Nate79
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Nate79 »

Those who take on mortgage to pay for rentals instead of paying cash greatly underestimate the potential risk. Add a recession, vacancy, and decreased home value (along with upkeep cost, mortgage cost, etc) and you can quickly have a financial disaster.
EasilyConfused
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by EasilyConfused »

renue74 wrote:Not worth the effort. You're paying too much for the property.

Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Typically...I look for potential rental property that is 16% or more in COC return. I have some in the 30-40% range.

The property market is so hot now that I've stopped looking for rentals. In fact, I just posted 2 of my rentals for sale on Craigslist last week and got 6 cash offers....basically doubling the price of the properties I purchased in the Summer of 2015. So in 2 years, the property doubled in value?!?!? Whatever....it's like a piranhas market out there now.
I'm in the same boat. I got extraordinarily lucky 6 months ago on a property where the owner died, the inheritor was out-of-state and wanted absolutely nothing to do with long-distance landlording, the realtor called me first, and my low-low-lowball cash offer got immediately accepted. If not for that, I'm in a 30-month buying drought. I just doubt now is a time to get started in real estate in most markets unless crazy circumstances are involved.

I'm stealing your spreadsheet, by the way. Very nice.
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unclescrooge
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by unclescrooge »

psteinx wrote:
Mark2614 wrote:Here's a typical example in my state:

- House sells for $125-$130K.
- Rents for $1,200 to $1,400 a month.
- Property taxes about $4,000 a year.
- Insurance is $800-$1,000
- Maintenance is $1,200 to $1,500 per year.
- I can easily buy 5 or more homes like this with just 20% cash down payment.
OK, so let's run some quick numbers. We'll take midpoints, and apply some common sense additional items:

House = 127500 But let's add 8% transactional costs to this, partially for stuff when you buy, but also a bit of a reserve for when you sell. So,
House = 137700 with reserve
Rent = 1300*12 less 8% vacancy allowance = 14352
Tax = 4000 (WOW!)
Insurance = 900
Maintenance = 1350
Utilities = ??? (Renter pays all? Bundled into maintenance?)
Property management = ??? (OK, you'll manage it yourself, perhaps, but is your time free?)

Income = 14352-4000-900-1350 = 8102
So, on a sort of loosey goosey basis, cap rate is around 8102/137700 = ~5.9%
Now, could you boost those returns by using a mortgage? Perhaps, but commercial/investment mortgages tend to be pricier than owner-occupied rates. If you pay 4.5%-5.5% or so for a mortgage, on say a 25% downpayment, you're only modestly increasing your cash on cash return.

Now, you might get some property appreciation out of this. But I'm gonna guess that a $140K house is not exactly in a prime location and/or market.

And, what about your time? If you invest 60 hours up front and 15 hours per year on this, you're essentially subsidizing the somewhat modest expected returns with a lot of free labor. What price do you expect to make on your time - $20? $30? $40?

Could you make money with this? Yeah. Is it a slam dunk? Not in my opinion...
Additionally, maintenance on rentals runs about 2% of purchase price.
nerdalerted
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by nerdalerted »

EasilyConfused wrote:I'm stealing your spreadsheet, by the way. Very nice.
Same here. Thanks for that!
RenoJay
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by RenoJay »

I still think the best way to get a decent return in real estate is to lend other people money. Hard money lending rates are ~8% - 10% and it's entirely possible to get a first lien on a property where the borrower puts down a 25%+ cash down payment (i.e. there should be equity in the property as a cushion.) The returns are predictable and regular, there's downside protection from the cash down payment, and virtually no ongoing effort. When we consider that cap rates are in the 6% range, I'd rather get 8% and make my money off someone else's optimism, down payment and effort. I've been doing this kind of lending for about 4 years now and no borrower has ever missed or been late on a payment.
deltaneutral83
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by deltaneutral83 »

I always thought 1% of "all in price" collected in rent was a solid situation on that front. The 3.2% in property taxes is outrageous I assume.
Topic Author
Mark2614
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Mark2614 »

RenoJay wrote:I still think the best way to get a decent return in real estate is to lend other people money. Hard money lending rates are ~8% - 10% and it's entirely possible to get a first lien on a property where the borrower puts down a 25%+ cash down payment (i.e. there should be equity in the property as a cushion.) The returns are predictable and regular, there's downside protection from the cash down payment, and virtually no ongoing effort. When we consider that cap rates are in the 6% range, I'd rather get 8% and make my money off someone else's optimism, down payment and effort. I've been doing this kind of lending for about 4 years now and no borrower has ever missed or been late on a payment.
How do you do this? Is there a website that facilities this or are you just making deals in your local market?
Savesavesave
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Savesavesave »

I paid $130,000 for a rental property in 2008 and was getting $750 per side (duplex) on average for the past few years. Cash flow was negative the first few years but evened out after I hired a property manager. Cash flow averaged $3,000 a year on average 2012-2016. I barely had to get involved either except to file a roof insurance claim after a hail storm. I
put down 20% or $28K including closing costs, so that's about 10% a year return just via cash flow. Plus the mortgage was ticking down a couple grand a year...
Setting aside debt and risk, I get how 3,000 cash flow is 10% cash on cash in year one (28k equity). If you have $50k in eequity after year 5, isn't that same cash flow then 5%? I.e. you have 50k invested to net 3k per year.
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Watty
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Watty »

Mark2614 wrote:- I can easily buy 5 or more homes like this with just 20% cash down payment.
If you are looking at putting more than $100K into real estate be sure to compare your numbers to just buying REITS. You could also buy the REITs in a retirement account which would be a lot more tax efficient.

If you buy five properties like that you are in some ways just creating your own little REIT that is focused on one price range in one city. The diversification and flexibility of a REIT could be very nice to have. Many(most ?) of them use financing for leverage so you would be getting that too.

deltaneutral83 wrote:The 3.2% in property taxes is outrageous
+1

That would be a red flag to me that there might be some fundamental problems with the economy of that area.

I didn't crunch the numbers but I would guess that even with a low down payment loan and PMI that it would be less expensive for someone to buy a house there instead of renting one from you. There can be be all sorts of reasonable reasons that it makes sense for people to rent instead of buying but I would be concerned that many potential renters have financial or credit problems that make it hard for them to be able to buy. Many renters may also be saving up to buy a house so you might have higher than normal turnover when you do find a good tenant that eventually purchases their own home.

If this is the very low end of the local housing market you should be sure that you are getting enough return to handle all the extra hassles of the low end market.

I would also crunch the numbers to see if buying one $250K home to rent might make more sense than buying two $125K homes.

If the homes you are looking at are 40+ years old then you also need to consider that they may be at the end of their useful life within your lifetime since you are 33 right now. You might not be able to count on them to provide you with retirement for you in another 40 years when you are in your 70's. Even if you keep your houses well maintained the subdivisions they are in my be pretty grim when the houses are 80 years old if the other houses are not well maintained.
renue74
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by renue74 »

EasilyConfused wrote:
renue74 wrote:Not worth the effort. You're paying too much for the property.

Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Typically...I look for potential rental property that is 16% or more in COC return. I have some in the 30-40% range.

The property market is so hot now that I've stopped looking for rentals. In fact, I just posted 2 of my rentals for sale on Craigslist last week and got 6 cash offers....basically doubling the price of the properties I purchased in the Summer of 2015. So in 2 years, the property doubled in value?!?!? Whatever....it's like a piranhas market out there now.
I'm in the same boat. I got extraordinarily lucky 6 months ago on a property where the owner died, the inheritor was out-of-state and wanted absolutely nothing to do with long-distance landlording, the realtor called me first, and my low-low-lowball cash offer got immediately accepted. If not for that, I'm in a 30-month buying drought. I just doubt now is a time to get started in real estate in most markets unless crazy circumstances are involved.

I'm stealing your spreadsheet, by the way. Very nice.
This person is right....it's probably not the best time to get started in the rental market. When I can buy a crappy property and in 2 years sell it for double the price...with the buyers not even really doing a proper inspection and due diligence, it's getting bubbly.

As an inexperienced real estate investor, you're running up against long term landlords....with cash burning holes in their pockets.

People try to approach me all the time looking for owner financing deals or make offers with mortgage contingencies...but there's always a full crew of cash buyers.
EasilyConfused wrote:I'm stealing your spreadsheet, by the way. Very nice.
Yeah....I love my spreadsheet. Within seconds, I can vet a property and then test. I think I stole it from a guy at biggerpockets a few years ago.
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Gamma Ray
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Gamma Ray »

renue74 wrote: Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing


Yeah....I love my spreadsheet. Within seconds, I can vet a property and then test. I think I stole it from a guy at biggerpockets a few years ago.
Thanks for the sheet, it gives a really good picture of basic income/vs expense for the long run, just one question What is the "Equity Accrued" for?
renue74
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by renue74 »

Gamma Ray wrote:
renue74 wrote: Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing


Yeah....I love my spreadsheet. Within seconds, I can vet a property and then test. I think I stole it from a guy at biggerpockets a few years ago.
Thanks for the sheet, it gives a really good picture of basic income/vs expense for the long run, just one question What is the "Equity Accrued" for?
Equity Accrued is basically where your tenant is paying the mortgage....so in addition to cash flowing the property, the principle is also paid for by the tenant's rent payment.
Raabe34
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Raabe34 »

It doesn't fit into a neat asset allocation. You need to look at it as a business purchase because that's really what it is. Whatever you do don't stretch yourself to buy too much too soon as invariably something will have a bad run in rentals(I have 9 units) and you need to be solvent enough to handle it.
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Gamma Ray
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Gamma Ray »

renue74 wrote:
Gamma Ray wrote:
renue74 wrote: Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing


Yeah....I love my spreadsheet. Within seconds, I can vet a property and then test. I think I stole it from a guy at biggerpockets a few years ago.
Thanks for the sheet, it gives a really good picture of basic income/vs expense for the long run, just one question What is the "Equity Accrued" for?
Equity Accrued is basically where your tenant is paying the mortgage....so in addition to cash flowing the property, the principle is also paid for by the tenant's rent payment.
I see, so it doesn't take the expenses into consideration?
I was also in the market for a home, which would be my 2nd property if I were to buy it.
2 Family property for $900k with taxes of about $7500. When I took the lowest possible rent income, it turned out to break even, but when I considered potential expenses and possible vacancy, I decided not to go in because at near $250 down payment and with potential loss, we would be buying the house solely for the future potential appreciation of home value, which is very very likely. However, I would not consider buying a home where I would have to pay more per month out of pocket in addition to my large down payment just for it's potential appreciation.

For the OP, maybe one or two properties is fine with the said rent because you basically cover your purchase price in 7 years. I don't know if we have any real estate investors here, but I believe the break even is usually 10 years (if you don't count the interest because with interest you are borrowing for 15 or 30 years).

If I had 125k, and if it gave me a clean $1400/mo, I would definitely get that property, but not more than 2. It's just putting too many eggs in one basket, and surely you will never get mortgage after your 2nd one. Some people might frown upon the idea of putting $125 and not using bank's money, but being able to pay it off in 7 yrs is huge plus. Maybe if there is a way to finance it for 10 yrs or maybe 5ARM+ or whatever they are offering now, just so you get some tax benefits.

Could you please share more info, where are these properties, is it an emerging place like they recently built a university or something? I don't know anywhere in the metropolitan area where people would be willing to pay $1400/mo rent for a place that can be bought/financed for $125k.
RenoJay
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by RenoJay »

Mark2614 wrote:
RenoJay wrote:I still think the best way to get a decent return in real estate is to lend other people money. Hard money lending rates are ~8% - 10% and it's entirely possible to get a first lien on a property where the borrower puts down a 25%+ cash down payment (i.e. there should be equity in the property as a cushion.) The returns are predictable and regular, there's downside protection from the cash down payment, and virtually no ongoing effort. When we consider that cap rates are in the 6% range, I'd rather get 8% and make my money off someone else's optimism, down payment and effort. I've been doing this kind of lending for about 4 years now and no borrower has ever missed or been late on a payment.
How do you do this? Is there a website that facilities this or are you just making deals in your local market?
There are websites I've seen (do a Google search for "crowd funded real estate") however I personally only do deals in my local market and all are run through an experienced hard money broker who dots the i's and crosses the t's from a legal/compliance perspective. I don't like pooling my money with other investors and I do not allow anyone to make underwriting decisions on my behalf; I look at the real estate and meet the borrowers personally.
JGoneRiding
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by JGoneRiding »

I would totally do it if I could find that kind of deal. But do a 30 yr no reason to be tight on the cash flow.

Rough rule of thumb if you can get 0.8 to 1 % of fmv to rent it's a good deal. If you cam get greater than 1% it's a great deal, that is rare to impossible in higher cost of living areas. But lower cost of living usually have low to no appreciation.

How I personally compute roi. Rent - all expenses / money into home.
JGoneRiding
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by JGoneRiding »

Savesavesave wrote:
I paid $130,000 for a rental property in 2008 and was getting $750 per side (duplex) on average for the past few years. Cash flow was negative the first few years but evened out after I hired a property manager. Cash flow averaged $3,000 a year on average 2012-2016. I barely had to get involved either except to file a roof insurance claim after a hail storm. I
put down 20% or $28K including closing costs, so that's about 10% a year return just via cash flow. Plus the mortgage was ticking down a couple grand a year...
Setting aside debt and risk, I get how 3,000 cash flow is 10% cash on cash in year one (28k equity). If you have $50k in eequity after year 5, isn't that same cash flow then 5%? I.e. you have 50k invested to net 3k per year.
Unless you are personally paying for the equity (ie putting money in cause of artificial low cash flow) then no I have never considered that part of my investment and roi bec that is done with opm. It would be like trying to say the stock return isn't as good cause the value went up amd then didn't go up by as much the following year. It's not like you suddenly put more money in to have the same stock.
inbox788
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by inbox788 »

Mark2614 wrote:Should I? I keep talking myself into it. Then talking myself out of it.
No! If you're so equivocal about the deal, it's not worth it or you haven't done your homework. Keep life simple and wait for a better opportunity. The only time you should do it is if you're very eager to get in the business and this is a screaming buy opportunity. In that case, jump in with both feet. Don't try to talk yourself into something that's not clear. Trust your intuition that there's something unresolved.
michaeljc70
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by michaeljc70 »

Are you sure about the monthly rent amounts? Where I live (Chicago) there is no way you can get 1% or more of sales price for monthly rent.
alaskantraveler
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by alaskantraveler »

On the surface it would appear to be a good environment to invest in rentals. In my city, a house that rents for $1400 would sell for more like $200k.
Here is a mortgage calculator that I love and use all the time. https://www.vertex42.com/Calculators/ho ... lator.html

A good rule of thumb is to expect 5% or rents to go towards maintenance and 5% of rents towards capital expense. 92% occupancy rate is also a standard.

What utilities do you have to pay? In my city the homeowner frequently pays for Water/Sewer on rentals. That cost $100/month.

the forum over a bigger pockets will have lots of advice for you.
EasilyConfused
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by EasilyConfused »

renue74 wrote: As an inexperienced real estate investor, you're running up against long term landlords....with cash burning holes in their pockets.

People try to approach me all the time looking for owner financing deals or make offers with mortgage contingencies...but there's always a full crew of cash buyers.
This is another good point for first-time RE investors to think about in this market. Those of us who are already in real estate have been piling up cash and credit from our rentals with nowhere to put it because prices have been so high. On those rare instances when a screaming deal does come on the market, your contingent-on-financing offer will usually lose out to someone else's "I have cash, let's close in 3 days" offer, even if it's a little less. It's just a tough time right now.
inbox788
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by inbox788 »

alaskantraveler wrote:A good rule of thumb is to expect 5% or rents to go towards maintenance and 5% of rents towards capital expense. 92% occupancy rate is also a standard.
I assume 92% comes from 11/12 months rented. This is an interesting assumption and depending on your renters can seriously impact your estimates. If you turn over every year, and the unit takes a month to clean up and rent out, then the estimate is correct. If you find steady renters or are in a lower turnover area, that could become 35/36 or 97%, and that's without considering minor cost savings like less cleaning fees. Having 5% more income to the top line can mean a whole lot whether one should invest in property or not (i.e 5% vs 10% returns and maybe more if you adjust for leverage). The inverse is also true, so a 5% or 8% higher vacancy rate can mean losses. Major maintenance/capital expenses can also be a big risk.
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Gamma Ray
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Re: Residential Home for $125K. Rent for $1,400 / mo.

Post by Gamma Ray »

alaskantraveler wrote:On the surface it would appear to be a good environment to invest in rentals. In my city, a house that rents for $1400 would sell for more like $200k.
Here is a mortgage calculator that I love and use all the time. https://www.vertex42.com/Calculators/ho ... lator.html

A good rule of thumb is to expect 5% or rents to go towards maintenance and 5% of rents towards capital expense. 92% occupancy rate is also a standard.

What utilities do you have to pay? In my city the homeowner frequently pays for Water/Sewer on rentals. That cost $100/month.

the forum over a bigger pockets will have lots of advice for you.
While your link has a good visual representation, it seems to focus on calculating how much you can save by paying more each month, the link below is great for potential landlords, it does overshoot certain things, but it's better to overestimate your expenses.
renue74 wrote: Rental Analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing


Yeah....I love my spreadsheet. Within seconds, I can vet a property and then test. I think I stole it from a guy at biggerpockets a few years ago.
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