BiggerPockets

At $550 rent, estimated expenses would be $275/month. Clearly, though, if taxes are $200 and insurance is $50, that estimate is too low.

For evaluating the deal, you should assume 100% financing. That's equivalent to saying you're going to pay yourself the same 7% return on your down payment as you're paying the lender. That would make your payment $155/month.

Are you sure those taxes are right? That amounts to 10% of the value per year.

You want to be sure you have landlord insurance, not homeowners.

Property taxes of $200 a month or almost 10% as Jon pointed out is crazy high. Possibly they are based on the old tax appraisal that you can get adjusted down based on your purchase price. That;s one way to improve the cash flow and profitability.

Does the house need any work? Budget for that?

Hi Brett,

The difference between homeowners insurance and landlord insurance is that homeowners covers personal contents of the home whereas landlord insurance just covers the structure and some interior items that are considered part of the house such as appliances. It doesn't cover furnishings and belongings because your tenant would have renters insurance which would cover their own possesions. Hope that helps.
It could also lower your insurance cost by just covering your purchase price instead of replacement value.
Good luck.

Josh, not necessarily, I tried this a while back and the assessor said since it was an REO and a distress sale it wasn't a true indication of FMV. Jim

Hey Brett,

For me to even look at a deal, I use a standard 1% rule. i.e. 1% of the purchase price is the minimum rental rate. At at $25,000 purchase price, minimally you want $250 in rents - which you obviously have. Typically, if there are no repairs and the property is rented out in a decent area, 1% should be a break even cash flow. What's throwing off your numbers are 1, the taxes and 2, the monthly maintenance.

The taxes are mentioned in several posts above. As for the monthly maintenance, if there's no repairs, then your cash flow will be over $100. Of course, there are typically repairs in any rental property. A couple of ways around this is to have a repair clause in your lease agreement. i.e. see if your tenant will agree to cover minor repairs that costs less than $50. So if a light bulb goes out, they replace that etc.

In this market, what works best is actually a lease/option. If you can buy the property for $25,000, and it's worth $68,000, then sell the house on a lease with a purchase option.

There are several benefits to doing that. First, lots of people have bad credit who cannot qualify for a loan in this economy. So you can find someone who has a solid job with no credit to lease out to and give them time to repair their credit. Second, you can get a higher rental rate. You can charge $600 or even $650. Third, you can (and would) charge an upfront consideration payment - typically not less than 5% of the purchase price. So if it's worth $68,000, sell it on a lease with an option to purchase for $40,000 - $50,000. You double your money in a few years and they get a fantastic deal - win-win. 5% of $50,000 is $2,500 which is 2 years worth of your maintenance fee (only it goes right into your pocket). Next, because they will eventually purchase this, you can put in your lease agreement that they will cover all repairs under say $500. Any major repairs which may be needed for any reason, you would cover. This also saves you on property management.

Basically, lease options are great way to go in this market. Something to consider.

Either way, it looks like a solid property with potential.

Good luck.
Chaffee

Chaffee,
What's up man? When did you get here? Haven't seen you since CCIA ages ago. We have to hit that wonton place again you showed me. I can't remember the name but I do remember the taste...lol.

As far as the 1% rule, the rules have changed bro - especially in areas of houses under 50k. 2-5 is what you're looking for now as so much of this stuff is a high cost financing proposition. Not too many 30 year fixed mortgages at 15-25k.

Tim

How old is the house? Roof? Heating/Cooling, Kitchen/Bath?

Those are your major expenses in terms of maintenance. 100$ a month seems way too low as an estimate, the roof alone would be budgeted at close to 50$ a month.

Just Appliance/Heat/Cool replacement would seem to put you over 100. Are there carpets, how is the kitchen/bath, another
50$ a month there for a reasonable budget.

4 months rent for taxes is also high. 550 a month seems pretty low for that kind of tax bill, that's even lower then my depression area.

One potential would be to low ball the price, go all cash and self-insure damages with a liability policy.