Potential Real Estate Rental Investment

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William104
Posts: 101
Joined: Mon Oct 12, 2015 12:09 pm

Potential Real Estate Rental Investment

Post by William104 » Fri May 10, 2019 3:47 pm

Would like some feedback on a potential real estate investment I am looking at to use some excess cash on. My situation:

31 y/o Married w/2 kids
Income varies but around 250k AGI
Current home 380k mortgage on 775k value home at 3.25%
Retirement investments ~150k combined
Cash in MM account 85k
No debt other than mortgage

I'm looking at purchasing a rental in a neighboring area that is growing significantly as the pricing in my city has gotten very expensive. I have family in this area, know it well, and am in the real estate business so know values. Purchase price 360k for 4 bedroom nice updated home. PITI $1,600 w/ 25% down using the excess cash in MM. Rental income estimated between $2,150-$2,250. The home has been updated and safe to expect minimal maintenance for next few years.

While this isn't necessarily lucrative I do have this cash that has been set aside for a potential home upgrade for my family. With prices hitting 1M for something we want I think we have decided to stay put for a while. I'm also not comfortable putting this cash into the market as I want the liquidity to be able to do things like this if a scenario arises. I think it has very good upside potential on future value at current price as well as a decent annual ROI compared to putting it into the market at the moment. And yes I still max my SEP-IRA and started backdoor Roths and HSA into 90/10 stocks regardless of market activity. Would love some thoughts on this one way or another.

runner540
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Re: Potential Real Estate Rental Investment

Post by runner540 » Fri May 10, 2019 4:56 pm

If you are in the real estate business, not sure what value you'll get here. How did you calculate annual ROI and include vacancy and maintenance. Who will cover utilities, lawn care, pest control etc? (You or renter)

Is there a good demand for renting 4BR updated homes? I'm a happy renter of a SFH but why would a family that can afford $2k+ of rent not just buy?

Your retirement looks a little low for your age/salary. I think the housing market momentum turned last summer in many hot areas, but since you are in the business you may know better.

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abuss368
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Re: Potential Real Estate Rental Investment

Post by abuss368 » Fri May 10, 2019 8:01 pm

In my opinion your portfolio is a little on the low end for your income and age. I would consider building your portfolio much higher.

At one time I considered direct real estate investment. But I listened to many stories (Taylor Larimore being one of them) and I decided to invest in low cost index funds.

That said we have invested in the Vanguard U.S. REIT and Vanguard International REIT Index funds for many years for our real estate allocation and it was worked well.
John C. Bogle: "Simplicity is the master key to financial success."

Hulu
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Re: Potential Real Estate Rental Investment

Post by Hulu » Fri May 10, 2019 8:51 pm

Your mm and home equity aren’t doing much for you however I’d triple check your assumptions on the future popularity of the location. And ask yourself about your end game. You only listed piti which is only part of the equation. Your time is worth a lot so maybe go forward if you’re buying ten of these in the future.

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Sandtrap
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Re: Potential Real Estate Rental Investment

Post by Sandtrap » Fri May 10, 2019 9:01 pm

Some very real scenarios to consider:

1 Is this a temporary investment or are you planning to invest more time and money in R/E income property?

1b do you have ambitions of moving up the rental property ladder over time to get into multi-unit rental housing or apartment buildings?

2. Is the area of such appreciative value that you would be able to at least recoup 100% if you resold in 3-5 years?

3. how would it effect you financially if the property were vacant for 4-6 months?

4. what would your "net" annual ROI be after all expenses when collecting market value rent?
a. if self managed?
b. if delegated?

5. have you had prior "direct" experience as a landlord and property manager?

6. how would you feel if the R/E market stalled and rents had to be lowered?

7. how would you feel if a tenant did not pay rent for 2 months and it took you another 2 to evict while collecting nothing, and you would have to pay to restore the unit to rentable condition which would take another 1-2 months?

8. how would you feel if a tenant took you to court?

9. At 31 yrs of age, married, w/2 children, and a mortgage and career. . . how would you feel if a number of the above happened at the same time. . . and added to what you already do?
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abuss368
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Re: Potential Real Estate Rental Investment

Post by abuss368 » Fri May 10, 2019 9:04 pm

www.reit.com

Passive, diversified, low cost, and simplicity.

Consider alternatives.
John C. Bogle: "Simplicity is the master key to financial success."

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unclescrooge
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Re: Potential Real Estate Rental Investment

Post by unclescrooge » Fri May 10, 2019 9:05 pm

Sandtrap wrote:
Fri May 10, 2019 9:01 pm
Some scenarios to consider:

1 Is this a temporary investment or are you planning to invest more time and money in R/E income property?

1b do you have ambitions of moving up the rental property ladder over time to get into multi-unit rental housing or apartment buildings?

2. Is the area of such appreciative value that you would be able to at least recoup 100% if you resold in 3-5 years?

3. how would it effect you financially if the property were vacant for 4-6 months?

4. what would your "net" annual ROI be after all expenses when collecting market value rent?
a. if self managed?
b. if delegated?

5. have you had prior "direct" experience as a landlord and property manager?

6. how would you feel if the R/E market stalled and rents had to be lowered?

7. how would you feel if a tenant did not pay rent for 2 months and it took you another 2 to evict while collecting nothing, and you would have to pay to restore the unit to rentable condition which would take another 1-2 months?

8. how would you feel if a tenant took you to court?
+1

Also, I'd add that this sounds like a terrible investment to me. Unless you are resigned to being a long term renter and have decided to hedge your housing costs by buying a home in a neighborhood you could possibly live in if circumstances changed.

riverguy
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Re: Potential Real Estate Rental Investment

Post by riverguy » Sat May 11, 2019 11:47 am

At best you have 8% cash on cash return. Not good.

StealthRabbit
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Re: Potential Real Estate Rental Investment

Post by StealthRabbit » Sat May 11, 2019 12:25 pm

I have a few rules... (50 yrs as RE investor PT - 30+ property transactions)
I prefer multi-tenant NNN commercial to residential. "wisdom" = Don't buy anything with a bedroom! and minimal baths! (toilets)

1) only buy what you can resell tomorrow for 110% (you make your equity gain on your purchase price (same with stocks / any investment that is not a 'collectible' - buy ONLY resellable props (I like rural view props or park setting for any residential, ez to resell and to rent)
2) Only pay what you can rent out for 1% / month of capital investment (A $300k property would need to rent for $3000 / month, or you better keep looking for a better investment)
3) Have a Maint plan (incase you move)
4) Have an exit plan

Hang on... it never works out as planned.

stoptothink
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Re: Potential Real Estate Rental Investment

Post by stoptothink » Sat May 11, 2019 12:41 pm

unclescrooge wrote:
Fri May 10, 2019 9:05 pm
Sandtrap wrote:
Fri May 10, 2019 9:01 pm
Some scenarios to consider:

1 Is this a temporary investment or are you planning to invest more time and money in R/E income property?

1b do you have ambitions of moving up the rental property ladder over time to get into multi-unit rental housing or apartment buildings?

2. Is the area of such appreciative value that you would be able to at least recoup 100% if you resold in 3-5 years?

3. how would it effect you financially if the property were vacant for 4-6 months?

4. what would your "net" annual ROI be after all expenses when collecting market value rent?
a. if self managed?
b. if delegated?

5. have you had prior "direct" experience as a landlord and property manager?

6. how would you feel if the R/E market stalled and rents had to be lowered?

7. how would you feel if a tenant did not pay rent for 2 months and it took you another 2 to evict while collecting nothing, and you would have to pay to restore the unit to rentable condition which would take another 1-2 months?

8. how would you feel if a tenant took you to court?
+1

Also, I'd add that this sounds like a terrible investment to me. Unless you are resigned to being a long term renter and have decided to hedge your housing costs by buying a home in a neighborhood you could possibly live in if circumstances changed.
+2. The numbers look terrible for a hot market.

WhyNotUs
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Re: Potential Real Estate Rental Investment

Post by WhyNotUs » Sat May 11, 2019 9:51 pm

You might be able to find an RE investment spreadsheet on the web (I have not looked), I have used an app called Property Evaluator for several year
http://realestatetools.com/#apps

It is simple to use and will help you work through expenses that I am not sure you are evaluating and give you a 5, 10, and 20 year look at normal RE metrics. I would urge you to use caution in your estimation of appreciation greater than inflation.

Going through the exercise on a series of properties will help you build more confidence in your analysis.

Can't say too much with the limited info that you provided about expenses but the nutshell version looks pretty thin and that you are relying on appreciation to make this a good move. Sometimes that works..... If you are a realtor, that helps some with the expenses related to acquisition and sales but I would not consider this a liquid investment. Sandtrap asked some wise questions, there are RE professionals that can do well with rentals but if we get a bad housing market and you are not selling and your rental won't sell, it can get interesting quick. Many realtors in my area were buried in debt during the housing crunch.
I own the next hot stock- VTSAX

Nissanzx1
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Joined: Wed Jul 18, 2018 11:13 pm

Re: Potential Real Estate Rental Investment

Post by Nissanzx1 » Sun May 12, 2019 7:41 am

In your case it’s too much risk for a small reward.

We have a couple small rentals but paid cash only after our home was paid for. Keep your risks as low as possible. Find a steal with cash (steal, not just a deal). You are young there is plenty of time.

I do agree with others about making sure you are saving enough in retirement. I didn’t myself, now playing catch up...

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