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I think the biggest thing is to not make the critical error that I see so many people do, and even brag about which is to simply find a property where your mortgage is X$, and the rent is at least X$, or really anywhere near X$. You will be losing money every month and the only scenario in which this might be reasonable is if you have some belief that the property will appreciate. Now, last year when I went looking for my first one, I was looking for a clean house, where the rent was 1% of the purchase price or more. Often times people will say 2% is what you should go for and it's a bit more complicated than just the ratio. As the price of a house rises, you can get a lower percentage because it's a higher total amount while the cost to maintain a house tends to be similar. So for example, if you have a 60k house that rents for 600$. Let's say you're PITI is around 300$. That leaves you with 300$ for vacancy, maintenance, advertising and so forth. You're likely going to be lucky to cash flow 100$ a month, which if you put 15k down, is a pretty weak return unless the house is going to appreciate noticeably and chances are a 60k house is not unless we get into a bubble again. Now I got a house for 130k, that rents for 1375$. My PITI is 700$ leaving 675$ over for all of that other stuff. I actually figure the rest costs me around 300$-375$ a month, leaving me with around 300$ in cash flow. In my case it's around 10% return on the cash I put down. The 2% idea would be to get that house that rents for 600$ for 30k. Let's say that cuts your payment in half, you then make a similar amount to what I make, and you have a ton of equity. These sorts of deals can be had, but generally they are in certain markets and when presented with them, you're generally going to be paying cash for the house and not financing at all (It's harder to find a <= 50k mortgage). The next step to not losing your shirt is picking tenants. Don't rent to my tenant, she's a flake and it's hard to screen every bad apple out but I have learned a lot in the past year. Make sure that they can afford the rent, and I'd say to look for people where the rent is less than 20% of what they earn. Have a good lease with strong penalties if they are late, even a day late. Mine turned out to be too soft because I thought I would screen people out so well that it wouldn't be an issue. I learned quickly that a 35$ late fee is not sufficient to avoid people being late for example. Get a book about the real estate laws in your area, since inevitably you'll have to follow them.
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May 10, 2013 14:33
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TouchyMcFeely posted:Things are starting to look a little clearer now. Thanks for everyone's efforts. I think it's again something that varies depending on a variety of factors but even if it's high, if you use 50% as a guideline to evaluate a property, if you then only run 40%, the rest is just money in your pocket.
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May 10, 2013 15:37
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DemonLlama posted:That makes sense when you own the property outright. What if you buy a building to rent via mortgage? Neither is right, it's two seperate things. The cap(italization) rate is what he was talking about, and does not take into account a mortgage. What you're talking about is more like cash on cash return, or what you earn on the money YOU put in. If you buy something outright, they are the same thing. This is why typically even if you had the 110k to buy the house outright, it's a terrible investment compared to how you could buy 4 similar houses using leverage to get 4x the cash flow.
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May 10, 2013 16:33
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kitten smoothie posted:Yep. This sounds like that study that day care fine study that Freakonomics discussed. Some late fees don't encourage good behavior, they encourage people to think they can just pay you for their bad behavior. That is exactly what my lease said except no explicit grace period, just rent due on 1st, 35$ after 5 days. This gave me at least the option to on the 2nd post a pay or quit notice. My tenant was confused but I explained that the late fee is separate. From now on it'll be like 100$ on the 2nd. The other bad side at least in my state is that in the scenario where I post a pay or quit, and they owe late fees, if they pay me the rent only, I can't do anything, the fees are something I'd have to take them to small claims court to get.
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May 13, 2013 01:58
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spog posted:I'm interested. It depends. While people say that property management is maybe 8-12% of gross, you have to look at it like it really is, probably more like half of your profit. So I have a house that rents for 1375$, I'd be paying 137$ a month, plus often half of the first months rent for a new tenant. I project out to make only around 300$ in profit a month from the house, so over the course of the last year, that would be 2304$. That is 2/3rd of my profit gone to cover management which has taken just a few hours of my time. I'd consider it in a scenario where I didn't have a mortgage and as a percentage of profit it was closer to 10%, or of course investing out of my local area which is something I'm going to be doing in the future.
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May 13, 2013 04:09
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Weinertron posted:I see renting for 2% of its value thrown around all over the place as a rule of thumb, is it a sign that one should rent if rents are under 1% of property value in a neighborhood? There's an upper middle class neighborhood near me where there are only a couple of rental houses, but they are being rented for $2400/mo in an area where homes are $380k+. Is this insane landlords losing money? They may be losing money, or they may be making it, using the value and rental rate is not enough information to determine. You can pay cash for a property like that, and make 1500$ a month on it. You're cash return will be miniscule but you're making money. If you finance a property like that however, that 1500$ goes towards P&I, and you're probably losing money each month, although there are some intangibles that may mean over a long period you end up ahead. For example, your principle is dropping each year, so that's say +7k in this sort of scenario, and the house may appreciate, let's say 3% so that's close to +12k. That is an increase in your net worth but it's not necessarily a great idea when you can get all three, cash flow, principal reduction and appreciation. Often times people renting houses like that are either former occupants of the house who couldn't or didn't sell for some reason, or people who are just stupid and assume that since 2400 > 2000, that they are making 400$ a month. They may, until the roof needs to be replaced.
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Jun 10, 2013 18:40
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Gamesguy posted:I think the 2% rule is for economically depressed areas, you're basically slum lording. I own two rental properties in San Diego outright and I don't even get 1% despite purchasing them at below market value(both were foreclosures) and near the very bottom of the housing market. Maybe I've just been lucky but when I see people throwing numbers out like 50% of the rent going towards expenses I don't even understand how that can happen. Here's my personal experience with being a land lord. It's not so much slum lording, it's all about location where you can get 2%. Equivilent houses can have radically different values in different areas, while rents vary less. You can get a 50k house that rents for 1k in many areas, but in other areas the exact same house might cost 150k, and you'd be renting it for only 30% more. 1% is a decent guideline but when looking at a house to purchase with financing you must have a spreadsheet that breaks down everything. Include the price, your down payment (typically at least 20%), your anticipated expenses (use 40-50%), anticipated rent and your return and then you can start to get a feel for what would work in your area. The 40-50% expenses are long term realities. If you bought a brand new house, and turned around and rented it your expenses will be much lower, initially at least. Chances are there is no way a brand new house is a good rental investment so you'll likely have a house much older. While your expenses one year may be low, the next you may have to replace the roof and the furnace and lose money that year. A lot of people think or try to convince others (to sell them bad investments) to think that Rent - Mortgage Payment = CASH FLOW, but that is short term thinking because it does not include the realities of owning a house, which includes random and not so random expenditures.
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Oct 22, 2013 17:19
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Gamesguy posted:See I don't agree with this at all. Roofs here last 15 years or so, and a full replacement will cost ~10k(less for me since my dad is a contractor) for the size of property I have. Annualized over the its lifespan, the cost is less than $700 a year or only 4% of my net income. Furnaces are even less, a full replacement costs only about $1500, annualized over its lifespan and the cost is miniscule. Water heaters are cheap as well, and damages from a broken water heater or a leaky roof is covered by my insurance. But that's the thing, expenses are anything you spend money on, they aren't only repairs. You probably pay property taxes, you say you pay insurance, and in many situations you have to cover utilities, either all the time or at least during vacancies. Now let's say one of your tenants trashes the place and leaves, you have the security deposit for that right? Well let's say it costs 1k more than their deposit to fix the damage, oh now it's decision time, is that enough to warrant going after them in terms of your time and likely your money? Do you spend 1k to get a judgement for 1k and then have them declare bankrupcty? Or do you just eat the 1k and fix it? Just last month I was in this scenario and I opted to just eat it, only to later get a bankruptcy notice. Same with eviction. Person stops paying, that's your time and/or your money to get them evicted and depending on your states laws, you may have to pay to store their junk, and you won't be getting rent for at least a month. Without a doubt, if you are handy and can do many repairs yourself, manage your rentals yourself etc, you can have lower expenses (I'd say mid to high 30s) over a 15+ year period, but when you are evaluating what is a good purchase, it helps to use a conservative number like 50% to be able to identify what is a good investment or not.
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Oct 22, 2013 20:43
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moana posted:I'm considering buying another single-family home in a city a couple of hours from where I live to rent out, and would like an outside opinion. You'll probably need 20% down to get financing, 25% is for the best rates. As has been mentioned, on homepath properties you can do less after an investor exclusion period. Your numbers are too wide and likely optimistic on both ends. Your mortgage itself would almost certainly be more than 1500$ and that's without even factoring in taxes and insurance. If it were me I would budget 2100 but that's based on just a ballpark estimate, when this is something that you can know precisely. If you rent it for 2500$, and pay 2k even, that leaves only 500$ for all other expenses and your profit. Many months you'll have none but then along comes a month when you have to replace the roof and it costs you 10k which in this scenario is almost two years of profit. Then you have times when it's vacant, which people who do this for a living estimate costs you 8%. The expenses versus income part is only one aspect of the overall return as you mention. Each month adds some amount of equity, in your case probably around 500$ a month initially. Also don't presume you'll have huge tax benefits. While on paper all of my rentals are money losers in terms of the IRS when you factor in expenses and depreciation, there are restrictions on deducting that, that I could take advantage of in 2011, but boned me in 2012. They would bone you also because you can only deduct these loses if your income is < 150k or you or your spouse do 751+ hours of real estate related work. Even in the income case, it phases out starting at 100k and is capped at 25k in deductions. This means, no deduction for the interest, property taxes, expenses related to it etc. The only way this investment would make sense is if it's a long term, basically retirement play where you anticipate losing a few hundred dollars a month for at least 15 years (in theory rents go up but your payment doesn't), to have an income producing property when you are done working, ie when it is close to or totally paid off. As long as you know that's what you're getting into it's fine.
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Jan 2, 2014 17:26
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moana posted:Hmm. What do you think should be my primary goal as a 30-yr old hoping to maximize lifetime wealth? My thinking is to take on as much risk as possible early on so that if anything bad happens I can bounce back. I don't need extra income right now, and I don't want to spend lots of time managing a property, which is why I'm shying away from the traditional n-plexes that people seem to like to invest in. I guess I just don't want to be stuck with a rental that I don't want to live in, you know? I'm not sure how silly that is given that I want to hold onto my first home as well. You're thinking in terms of risk is reasonable although I would not advise you to take on as much as possible, but using the leverage you have now, could certainly lead to wealth in the future. In terms of a rental you'd want to live in, is that because you don't want to be a slum lord or something else? You don't have to invest in low end housing to make a profit, you just have to know what goes into making someplace profitable. When I was evaluating properties to purchase, I found that if I could not lease it for at least 1% of the cost, assuming I put 25% down, then generally they were not worth it. Even then the return on my money was only 10%, but in my particular area it is hard to find much better. It is enough to cover property management so you never have to deal with it, and you'd still make money in most cases. What I'd suggest is to just do some reading and start to evaluate properties. I had a spreadsheet where I could drop in the list price, the likely rent, and my expense ratio and it would spit out everything from the mortgage payment, to the profit numbers. You'll start to see what can work and what can't and can decide from there how to proceed. I have never bought a lot to develop but I've been looking and it has it's own set of issues. For example, does it have access to sewer, if not can you even put in a septic system? That's one of the many questions that you need to answer as a contingency on your offer, and to do so will cost you money, regardless of the results. If the land is not feasible to build on, the deal falls through but you're still out potentially thousands of dollars. I've had similar things happen to me on rentals and while it saves me money in one sense, it makes me want to vomit that I spent so much money and was right back where I started.
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Jan 4, 2014 00:17
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