BiggerPockets

You left out the most important consideration - THE NUMBERS! What are the gross rents for the houses and what will the purchase price be?

Mike

Both are listed for $48k and REO's. We would offer a lot less for the smaller house (upper 20's) due to the amount of work it needs. At this point I'm leaning towards not even bothering with the smaller one just because of the work it needs and hidden problems we could find. The bathtub surround is sort of warped so the seal is broken down near the tub. I tapped on it and all this what looked like tiny wood chips fell out into the tub. I'm thinking rot or termites.

If we went with the larger home probably offer $35k. Not sure if the bank would accept that but doesn't hurt to try.

The smaller house could rent for around $550-650 based on research of this neighborhood. At $550 month we'd figure in $200 for tax/ins/repair. So $350 to the positive. (Not factoring in the cost of initial repairs because not sure the extent yet). The larger home could rent for $750-$850. Minus $250 for taxes/ins/repairs and that would be around $450-550 to the positive. Only paint and some carpet for this house. So repairs would be minimal.

Our offers wouldn't be contingent on inspections and would be cash.
I don't quite have a firm grasp of the 50% rule that I've seen you all mention and not sure how to apply it to homes that are purchased with cash? Is there a calculation for these type of buys since there isn't any loans involved? We've figured out that it would probably take about 10 years to pay ourselves back in full for our investment and then after that besides taxes/ins/repairs the rest would be 100% positive. But not sure how I should be calculating to factor in paying ourselves back for the initial investment right now so I have a better idea of what amount we need to have as positive income.

Thanks for the tip on contacting some PM's. That's a great idea because besides looking on Craigslist at the cost of 4BR houses in that area and the newspaper I don't have a lot to go on. I couldn't find any 4BR in that area in the paper and only found one (4br/1bath) available on Craigslist where they are asking $850 for rent. Outside of this area I saw quite a few 4BR for rent. So not sure if it's a good sign or not that there are a number of them in general but only 1 available in the area I'm looking at.

Sorry for the War & Peace novel sized post.

Kel,

The 50% Rule simply states that throughout the United States, operating expenses run 45% to 50% of the gross rents. It is absolutely critical that you understand operating expenses if you are to be successful in this business.

The larger home could rent for $750-$850. Minus $250 for taxes/ins/repairs and that would be around $450-550 to the positive.

Let's assume that the rents is $800 per month on this house. The 50% rule would tell you that the operating expenses would be about $400 per month. Operating expenses consist of A LOT MORE than taxes insurance and repairs. A few of the other operating expenses are vacancies, management (even if you do it yourself), advertising, office supplies, entity maintenance, capital expenses (not technically an operating expense), legal fees, evictions, lawsuits, utilities (even if only during vacancies), entity maintenance, etc, etc, etc.

Furthermore, even if you don't have a mortgage on the property, the money you spent to buy the property isn't free. It has an opportunity cost, which is the cost of the next best opportunity lost. In other words, that money could be making money and you need to consider that.

Here is how I see the larger house deal:

Gross Rents: $800
Operating Expenses: $400
NOI: $400

Debt (or opportunity cost of money): $35K, 30 yr, 7%: $233

Real cash flow: $167 (which is good)

This assumes that there is no rehab or initial maintenance needed on the property. As you can see, that's far from the $450 to $550 positive that you were talking about.

Good Luck,

Mike

Thank you guys for the input and explanation of the 50% rule.

I was thinking the same thing about the 1 bathroom. Anyone have a rough idea of what it would cost to put in a 1/2 bath? The main floor has room for one.

If you have to ask all of the above do not
get into rentals

If you do not know the numbers you are
going to get taken.

The 50% rule is not accurate

The $1000 ect ect expensse are to
high no where near that how do I
know I am do all kinds of remodeling
to my investments monthly

You better get your act together if
u are going to do this

SKI

SKI,

If I waited to get my act together....I'd never accomplish a thing in life. I'm not afraid of situations where I have to "learn as I go" even if it means making mistakes along the way. Hopefully it's a good sign that I'm here asking all of these questions of you fine folks in effort to avoid some of those mistakes.

:wink:

Kel, I have a bunch of rentals in Toledo. Here's what I can tell you. 2 bedrooms take a LONG time to rent, but you generally get tenants that are less transient. It can take up to a month to find a good tenant for a 2 bedroom.

3 and 4 bedrooms are in much higher demand, but because they are bigger, repair and turnover costs are much higher.

2 bedrooms are VERY difficult to re-sell. 3 and 4 bedrooms, if they are nice, will sell easily even in this market. I know you are buying rentals, but you may want to (or have to) to sell in the future and you want a property that you will be able to move.

UPDATE: Got a call this morning from our realtor that on Friday the listing agent received a FULL price cash offer on the house and the bank accepted.

So back to the drawing board :wink: I'm actually not dissapointed really because I had issues with the house as far as the size and the 1 bath.

Something else more ideal will come along I think. Though I will say that I'm not seeing the amount of new foreclosures listed like I was back in the fall. That would be a good thing though for the owners!

Great way to make first impressions Howard..

Kel,

Just for the future, a 4 bed will move quicker then a 3 bed and you are more likely to keep the tenant. Although be prepaired to deal with kids and the problems they cause.

Mamma Mia,

Here it is: http://fieldguide.reitactics.com/operating-expense-study-using-2007-data-summary

The data collected from Taz actually shows an "average" or "mean" range from 39% to 49%, so using a 50% OE rule would be very conservative and keep most situations out of trouble.

Will, that is factually incorrect. Both the average and median in all rent classes (anomalies removed) were between 46.1% and 49.95%. Since the 50% Rule states that throughout the United States, operating expenses run 45% to 50% of the gross rents, I'd say that the 50% rule is right on!

Mike