First time RE investor

[resolution]

The price of the house seems too high for the amount of rent that you expect to get. How do you plan to make money on it? Are there any cheaper homes that you could buy that would give similar rent amounts? Or do you expect to make all your money from appreciation?

[phil5185]

Price if it were note REO today (275K)
Price I can probably get it for ($235K)

A friend is in business buying ROEs and reselling. Done about 30 of them is the last 2 to 3 yrs. His average refurb is about $25k - he is skilled at bidding only on houses that his crews are good at updating (otherwise the $25k would likely be $35k or $40k).

So I would guess that your cost is going to be about $275k either way, whether you buy a move-in ready or a $235k REO. BTW, with the move-in ready, the costs are inside the mortgage, but with the $235k REO + $35k you will have a separate loan on the $35k and it will be a shorter term, higher rate. Plus you'll lose a couple months of rent while the house is being made ready.

The reurb is quite a process, he buys houses in the 5 to 10 yr old range, about $200k. Has crews put in granite countertops, new SS appliances, ceiling fans, paint inside & outside, new floors/carpet, and any needed repairs. His crews, painters, and Sears appliance delivery are all going at once, usually takes about 3 to 4 days after the close. Then it goes to the realtor priced to sell. Moves them in about 3 weeks. So, in general, his $200k 'block' is tied up for 4 weeks. As soon a the money clears, he closes a 'ready' deal on new house that he has waiting - tries to 'turn' that $200k about 10 to 12 times in a year. If he can make $15k net on each house, he has a $150,000 yr net after taxes - and he has more than one $200k block of money 'turning' in parallel.

If you do decide to 'partner' to fund the LLC get a legal contract from a lawyer (not a do-it-yourself) - the terms & conditions will provide answers in advance to what if a partner dies, gets divorced, moves away, wants to liquidate his/her share, resolution of disagreement, yada.

[2kids10horses]

If you are planning on receiving $1300 in rent, you should be looking at $130000 houses.

One bathroom?

You should be looking at 3/2s.

Look in the neighborhoods that are working class.

[Tiny]

- Price I can probably get it for ($235K)
- Expected Rent $1300/month
- property tax ~ 275/month
- insurance $30/month

you'll need to come up with 20% down 47K, you're gonna need some money to get the house in shape for renting (I'm guessing 3-5K at the minimum) and you're gonna have a loan about 190K at 5.25% for 30 years = 1050. 1050 PI + estimate Tax 275 + estimated Ins $30 = $1355.00 You will be charging less for rent than the cost of your estimated mortgage payment... you haven't even figured in any leeway for the on going maintenance on the house.

Where's the 47K you are putting down coming from?

I think you are looking at too expensive of a house.
What kind of salaries/incomes are the usual for the neighborhood you are looking in? Can people there afford the rent you would be charging?

[Tiny]

SFH 3bed, 1 bath, dated but serviceable (built 1960's) 1300 SQFT

A 3bed/1 bath might not be that bad of a configuration... if most of the other houses in the area are similiar.
When looking in older neighborhoods at houses especially those built before the 1970's typically only had 1 bath. A updated older house will usually have a second 1/2 bath or full bath added... so a 3 bed/2 bath might mean the second bath is in the basement or it is a bath put in when the previous homeowner converted a porch into a 'room' or when they finished the attic space and added a bedroom or two. Just saying... lots of opportunity for creative plumbing and handyman specials.

[phil5185]

SFH 3bed, 1 bath, dated but serviceable (built 1960's) 1300 SQFT

In moist areas that means an old-2-wire electrical system with only about a 60 amp service = and no fault interrupters or other niceties. Modern houses have a 3-wire system with 150 amp to 200 amp service. So the wiring is heavy enough for modern goodies - a Geo Foreman hamburger grill, toaster, blender, AC units, Disposal, Dishwasher - most of those things were invented after 1960 - so the older houses are mostly designed for lights and a TV.

[Deleted]

Do you have enough disposable income to carry the 2nd mortgage in case it takes you a few months to find a suitable tenant?

[activeonlooker]

Rentals in a high COL area rarely cash flow if you finance the property. Make sure you are properly diversified with your investments. And, if you are looking for a tax loss, keep in mind that if you are high income, you won't be allowed to realize any losses on your tax return. You don't lose the loss, it is merely suspended until your income drops or you have other passive income. The phase out range of income is 100k to 150k. Beyond 150k, all losses are suspended, with little exception.

[Tiny]

my estimated cashflow is negative by maintentance/vacancy costs plus a few bucks.

It's more than just a few bucks.. you're financing 100% of the cost... my estimate was ONLY based on main loan.

If its a high cost of living area how come the Property Taxes and Insurance are so cheap?? My home is in a working class neighborhood with houses worth about what you are looking at (250K - 350K ) at the PEAK of the market - my monthly property Tax burden is $400 a month (on a house valued at less than 200K ) with $80 a month insurance. Is your Tax/Insurance estimate valid? If either of those goes up your cashflow is even more negative...

Can your budget cover the extra expense? What will you have to give up for the next 3 or 5 years to own the rental - since you'll need to use some of your disposable income to pay for it? Those are things to also think about.

[Deleted]

"how come the Property Taxes and Insurance are so cheap?

Looks like the Seattle area property tax rate is <$10 per $10000 of assessed value. Looks like they may have caught the prop 13 fever. Insurance seems ok compared to what I pay in CA. Remember that a lot of that "high value" is land value and not insurable.

To the OP,

The others have made good points. Additionally I'm concerned about your cash reserves especially since you're borrowing your down payment. What do you have as an EF? I set aside a 6 month EF for myself and another EF for each property DH and I own. (The investment of that EF is a whole 'nother subject which can be discussed later).

When you're first starting up you can make mistakes such as under estimating the time or the costs to rehab a place; overestimating your rents; missing the rental market for your prospective renters (e.g. family house and the house isn't ready until late September when school has already started). You get better at these things the longer you're at it but stuff can (and will) happen. Like any business, one of the greatest reasons for failure is under capitalization/cash flow problems.

And your estimates of 4% and 4% could be spot for an average holding period over 10 or 20 years. But the year to year numbers often won't work out that way. Market conditions may be that you see no increases over a period of time (for example my San Diego area house has had no rent increases for 5 years). Most of us longer term LLs actually price our properties a little lower than market to attract the best tenants; you want to build in that flexibility into your financial plan.

I hope you find this information helpful.

[Gardening Grandma]

I haven't responded because other have more experience with this than I do. But we do have a rental house in the Seattle area. The OP is right about the prices of homes. 250K is cheap!..... Our rental was purchased back in the 70's (built in the 60's). We replaced the wiring and plumbing back in 2005. It's in a great area and rents easily, BUT I don't think that a 3% annum rental increase is realistic. If it is, then we are underpricing our rental. We did not raise the rent from 2005 to 2009 (same tenant). When she moved out, we raised it 8%. We've kept it the same since. I know we rent a little below market - it gives us more applications to choose from, but assuming a 3% annual increase seems a little optimistic.

[Clever Username]

Think like a capitalist. Old school Adam Smith style.
It is only worth what the market will bear.

Sounds like no matter what the property costs, your working class families can only afford to pay $1300 in rent.
When you figured out the appreciation, is it because this demographic is getting 4% raises?
Becuase this hypothetical working class guy doesn't look like he'll be able to buy soon.
That means you'll be selling to other investors. And they're going to make offers based on what they'll be able to rent it back out for.

It's a snake eating its own tail.

Try a different view. Survey other landlords in your area. I'd bet they bought up these homes in the 80s and 90s. And based on what they've got into the properties, they're more than happy with the $1300 rent checks.

[Gardening Grandma]

Survey other landlords in your area. I'd bet they bought up these homes in the 80s and 90s. And based on what they've got into the properties, they're more than happy with the $1300 rent checks.

DH bought our rental in the same area in the 70"s. It rents for exactly $1300..... And, yes, we are happy to get that.

[2kids10horses]

boskone,

I am going to give you the BEST advice that is possible on a forum like this: IGNORE this board for real estate advice. We don't live where you do, and so conditions that make renting work for us, may or may not apply to you.

Seek out and join your local Real Estate Investors Association. (REIA). Every major city has one. Meet other landlords in your area. Find out where they have rentals, who their market is, how they find leads, their exit strategies, etc.

I've been landlording for 15+ years, and it's worked out very well for me. I now live off my rent. I also flip a few every year. But, when I first started, going to my local REIA was a great education.

Your plan may be spot on for your area. It may not be. By joining your REIA, getting to know other successful investors, learning what works and doesn't work in your area, is worth your time and effort.

Good luck.

[Gardening Grandma]

Gardening, who have your tenants been? Students, single moms, blue collar workers, college kids? Do you allow pets? I notice that most apartments don't allow pets, and i'm weighing allowing up to 1 animal with deposit as a differentiator to apartments.

First there were long time tenants (20 years) - a family. They did not take care of the place. DH refused to put any money into it while they were there. They moved out in 2005 and we had it gutted. New wiring, plumbing, all new kitchen, bath, flooring, did some major repairs. Then rented it to a single mom with 16 yr old twins. She had a good job and reliable, generous child support. And a cat. She was there 4 years. The next tenants were a pair of cousins. One was an x-ray tech, the other a mechanic. The x-ray tech was the responsible one (a "YM" type). The mechanic was younger and with no credit history. They were there for 1 1/2 years. They had a dog.
Last summer we were approached by a non profit that handles Sec 8 housing for disabled adults. They wanted to rent it for 3 autistic men in their late 20's and early 30's (it's a 3 br/ 1.5 bath). Part of the rent is directly deposited by the county housing authority and the rest is paid by the tenants. They have caregivers who supervise them - at the end of the month, the caregivers sit down with them, write out the chekcs and have the tenants sign them then the caregivers mail them in. The non profit handles any damage the tenants do (they've replaced a broken window, for example).

We weren't too sure about it, but it does seem to be working out. (I have a disabled granddaughter so am very sympathetic to these issues).

Yes we accept pets. The ad the PM runs states "Well behaved pets will be interviewed for consideration"..... We charge a pet deposit that is 1/2 the rent. The pets HAVE caused damage, but then, so do kids. And if we did not allow pets, why would people pay more for a house than apartment?

The most important thing (imo) is location. The house is in Shoreline, minutes from the freeway and 1 block from the bus stop, so an easy ride downtown. It's in a good school district. It's a very basic floorplan (daylight basement - called "walkout basement" in other parts of the country). It's the smallest house on the block. Most of the other houses on the street have been remodeled and enlarged.

While I understand Phil's point about a newer smallish house, you are right. In the Seattle area, the smaller homes in good locations are older. Built in the 50's, 60's and 70's. If you can find one for 250K and get in rentable condition, you will probably do fine. Houses are so expensive to buy but people need to live within a reasonable distance to work, so rental houses seem to stay rented here.

I've been trying to convince DH to refi the rental house and buy a second one, but we are retired and he hates debt of any kind and just balks.... If it were just me, I'd definitely do it.

[AgeOfEnlightenmentSCP]

My advice: DO NOT invest where you live, or find deals in your 'back yard' as the gurus teach.

Find the nearest, economically stable small market near you that has a kind of stable "economic anchor" like a college-- mind you, you DO NOT have to go to a college town, and even if you do, you don't have to-- nor should you, IMHO, get into student housing. The point is to go where there's a stable job market and costs of living are lower.

Your deal is crap. Compare it to mine-- first, yours:

SFH 3bed, 1 bath, dated but serviceable (built 1960's) 1300 SQFT
- in decent neighborhood, near lots of jobs/shopping/etc.
- Price at peak of market ($440,000)
- Price if it were note REO today (275K)
- Price I can probably get it for ($235K)
- Expected Rent $1300/month
- property tax ~ 275/month
- insurance $30/month

Now mine:

SFH 3bed, 1 bath, dated but serviceable (built 1920's) 1,100 SQFT
- in decent neighborhood, near lots of jobs/shopping/etc.
- Price at peak of market ($270K)
- Price if it were note REO today (?K) (I don't have any idea what this is? Is this the CMA of REOs in the area?
- Price I paid: $7,200 inclusive of all rehab costs.
- Price I can probably get it for ($40K)
- Rent I'm getting $550/month
- property tax ~ $1,873/YEAR
- insurance $19/month

[Gardening Grandma]

Find the nearest, economically stable small market near you that has a kind of stable "economic anchor" like a college-- mind you, you DO NOT have to go to a college town, and even if you do, you don't have to-- nor should you, IMHO, get into student housing. The point is to go where there's a stable job market and costs of living are lower.

OP, Have you considered the Bremerton or Port Orchard areas? They meet the above criteria (Bremerton has a lower COLA). The stable job market is the naval shipyards and Bangor..... both have easy access to downtown Seattle via the ferries.....

[Gardening Grandma]

May 5, 2011 15:21:37 GMT -5 alwaysbeoptimizing said:

Those would be interesting choices and I'll consider them. I'll look at Bremerton or potentially even Vashon. I guess i'm worried about doing long distance management to start with basically due to having a day job/etc, it would be harder to jet over there, versus driving 15 minutes after work to fix a small issue or clean the gutters/etc.

That would be the tradeoff - going further to do the landlording in exchange for a less expensive purchase...

[2kids10horses]

Woiuld buying a rental in these other neighborhoods get you a cash flow positive rental? If so, THAT'S the tradeoff I'd be looking for!

[AgeOfEnlightenmentSCP]

I was three hours away initially, now I'm 22 hours away. I pay $54 a month to a realtor to manage the property. $650 a year and I don't have to do anything. Now, granted things aren't going to get done the way they would if I was there- but I finally had to decide that "good enough" was alright so long as the numbers work.

[debtheaven]

Don't go for a mobile home. I'm not familiar with them personally, nor with your market. But from what I've read on the boards, they are like a car, they just continue to depreciate.

I have rentals, I haven't spoken up before because I am in a very HCOLA across the pond from you, in France, with much less income. We only buy 1BR apts because they are all we can afford so I did not feel I could give you any advice.

But I have read enough here to know that mobile homes just depreciate, so please think twice about that.

Best of luck to you!

ETA: Of course ignore my post about not buying a mobile home if the land it's sitting on is worth it!

[Gardening Grandma]

I'd also stay away from mobile homes if you want long term appreciation.

Bremerton IS very Navy dependent (if you rent to someone in the Navy, I'd be sure to get the name of their CO), but it's also convenient to Silverdale (lots of commerce there) and not that far from the Bangor sub base.

However, there are a lot of people in that area that commute to Seattle via the ferry. If you don't believe me, try taking an early morning boat from Bremerton to Seattle and take a look at the number of walk-on passengers. Or a late afternoon boat from Seattle to Bremerton.....
They live there because the housing is much more affordable

(ETA I had a close friendthat did that for years. She'd get on a 6:00am boat wearing sweats and carrying her work clothes and her mug of coffee. The women's room has a sit down makeup area. With an hour to dress, make up, eat a bagel and drink her coffee, she'd walk off the boat dressed and made up for work. Evenings were in reverse with a glass of wine. It's a way of life for a lot of folks. (I commuted from Bainbridge Island to Seattle for years before finally landing a transfer to Bremerton)