Is this a good rental property?
San Antonio. Tx · Member since 2018 · 75 posts · 47 votes
Is this a good rental property?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3yYou should have split your money up and bought multiple properties. It increases the speed of building wealth, gives you tax deductions for mortgage interest, and other benefits.
If you buy one house for $160,000 then you only control $160,000.
If you put down $40,000 then you could buy four houses and you would control $640,000.
If the market increases 2% per year, in five years the one house would gain $16,652. If you had four houses, you would gain $66,608 in value.
There are so many more benefits to leveraging. I highly recommend you read some books on real estate investing to grasp this concept and accelerate your growth.
The DIY Landlord Book4.7247 Reviews
44 Replies
- Real Estate Agent · Miramar Beach, FL · Member since 2016 · 285 posts · 245 votes3y
@Mica Moore I would set aside 7.5% for repairs, 10% for capital expenditures, and 7.5% for vacancy.
Gross Rent = $1,600
Less-->Expenses: PM $160, Taxes $333, Insurance $167, Repairs $120, Cap-Ex $160, and $120 Vacancy = $1,060
Gross Rent - Expenses = Cash Flow of $540/mo, $6,480/yr.
However, you did not mention utilities. Is the tenant paying for all of them or will you be covering any? Add that into the calculation above if you're covering any utilities or deduct other unique expense you might have.
Assuming no huge issues, you should be able to get to that $10K in a little over a year and a half. Can't 100% give a diagnosis to whether it's a good deal or not. The Cash on Cash ROI is low, but you paid all cash so that kind of makes sense. Is it in a safe neighborhood in a growing area where there will be good demand from a strong tenant pool? Are there a lot of jobs in the area and is the economy healthy? Those are some other things to keep in mind that don't show up on the spreadsheet.
- San Antonio. Tx · Member since 2018 · 75 posts · 47 votes3y
Quote from @Marshall Leipprandt:
@Mica Moore I would set aside 7.5% for repairs, 10% for capital expenditures, and 7.5% for vacancy.
Gross Rent = $1,600
Less-->Expenses: PM $160, Taxes $333, Insurance $167, Repairs $120, Cap-Ex $160, and $120 Vacancy = $1,060
Gross Rent - Expenses = Cash Flow of $540/mo, $6,480/yr.
However, you did not mention utilities. Is the tenant paying for all of them or will you be covering any? Add that into the calculation above if you're covering any utilities or deduct other unique expense you might have.
Assuming no huge issues, you should be able to get to that $10K in a little over a year and a half.
Thank you. I wasn't sure how much to budget for non- recurring expenses. The tenant pays all utilities. I think the vacancy rate percentage would cover utilities since there is no mortgage.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
How much repair does it need and what can you rent it for/what is it worth after repairs are made?
- San Antonio. Tx · Member since 2018 · 75 posts · 47 votes3y
Quote from @Eliott Elias:
How much repair does it need and what can you rent it for/what is it worth after repairs are made?
It's 20 years old nothing major its in good shape. I image the roof and AC may need replaced in the next 5 years @10K each (estimated). Its probably not going to get much more in rent than it is now, its small square footage wise. It's in a popular neighborhood with good schools. So the demand should be stable and vacancy low. I got a good tenant in there now - just 1 person, so not a lot of people living there to destroy the property. Fortunately!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
The answer is no...sorry. This is a math problem.
First, the only cost to the REI for a property is the cash they spend. By paying all cash, you have paid full price. If a property cash flows, then the tenant is paying for the rest...not you...and they do it without question. You just took over their job, and are NOT saving money in the process. You are losing money because of it. Also, like any business, you don't start to make a profit until you recover all of your cost, so, with that in mind,...
Here are your numbers buying all cash:
1 - Your cost (cash) = $160k
2 - Your cash flow per year = $11,200
3 - Number of years to recover your cost and start to make a profit = over 14
Here are your numbers buying with a 20% DP:
1 - Your cost (cash) = $32k
2 - Your cash flow per year = $1080 (assuming 30 years/7% interest)
3 - Number of years to recover your cost and start to make a profit = over 30...so even worse.I won't touch a property unless my cost recovery time is less than 6 years.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
You should have split your money up and bought multiple properties. It increases the speed of building wealth, gives you tax deductions for mortgage interest, and other benefits.
If you buy one house for $160,000 then you only control $160,000.
If you put down $40,000 then you could buy four houses and you would control $640,000.
If the market increases 2% per year, in five years the one house would gain $16,652. If you had four houses, you would gain $66,608 in value.
There are so many more benefits to leveraging. I highly recommend you read some books on real estate investing to grasp this concept and accelerate your growth.
The DIY Landlord Book4.7247 Reviews - 3yNathan HoltPro MemberNewark Ohio · Member since 2022 · 63 posts · 51 votes
Quote from @Nathan Gesner:
You should have split your money up and bought multiple properties. It increases the speed of building wealth, gives you tax deductions for mortgage interest, and other benefits.
If you buy one house for $160,000 then you only control $160,000.
If you put down $40,000 then you could buy four houses and you would control $640,000.
If the market increases 2% per year, in five years the one house would gain $16,652. If you had four houses, you would gain $66,608 in value.
There are so many more benefits to leveraging. I highly recommend you read some books on real estate investing to grasp this concept and accelerate your growth.
I am always looking for new books to read, do you have any specific recommendations on this particular topic (or any other for that matter)
- Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes3y
I’m with @joe
@Joe Villeneuve and @Nathan Gesner
and I may add… the good news is you can borrow against this property and go get another with similar numbers. You could be super conservative and scale slowly but do get to two doors asap if at all possible. No one gets rich on 1 door and often grows to resent it, and 20 years down the road sells it for a discount just to be done with it (which has helped me get really good deals, but won’t help you, don’t be the 1 door person!) - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Nathan Holt:
I think "The Unofficial Guide to Real Estate Investing" explains this well, but I honestly can't remember if that's the book I'm thinking of or if it's a different one. Books aren't with me at the moment.
This video explains it well in 30 minutes:The DIY Landlord Book4.7247 Reviews - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesTwo. In my mind, It think they are must reads for all REI. I believe they are the two Bibles of REI, and over the years have come to the opinion that too many REI don't use what these books offer, or don't really understand how important they are to their success.
Quote from @Nathan Holt:
Quote from @Nathan Gesner:
You should have split your money up and bought multiple properties. It increases the speed of building wealth, gives you tax deductions for mortgage interest, and other benefits.
If you buy one house for $160,000 then you only control $160,000.
If you put down $40,000 then you could buy four houses and you would control $640,000.
If the market increases 2% per year, in five years the one house would gain $16,652. If you had four houses, you would gain $66,608 in value.
There are so many more benefits to leveraging. I highly recommend you read some books on real estate investing to grasp this concept and accelerate your growth.
I am always looking for new books to read, do you have any specific recommendations on this particular topic (or any other for that matter)
See below---------,|
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Geometry and Algebra. - Member since 2017 · 1 post · 0 votes3y
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesWhere's the "great" in this deal?
Quote from @Andra Spencer:
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
- Real Estate Agent · New Baltimore, MI · Member since 2022 · 2 posts · 3 votes3y
Quote from @Joe Villeneuve:
Where's the "great" in this deal?Quote from @Andra Spencer:
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
The "great" is in the lessons Mica will be learning from this one lol. No better teacher than experience. Congrats on your first property Mica!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesKind of like a catching pneumonia after taking a half hour walk in 20 below wind chill...in your bathing suit. You learned to not go out in 20 degree below without a coat on...or at all, and more important, you with (too late) you hadn't done it in the first place.
Quote from @Michael Greene:
Quote from @Joe Villeneuve:
Where's the "great" in this deal?Quote from @Andra Spencer:
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
The "great" is in the lessons Mica will be learning from this one lol. No better teacher than experience. Congrats on your first property Mica!
In the case of this property, Mica will learn it's a bad idea to buy a property like this,...and (too late), wish it hadn't done it in the first place.
There's much better, less expensive ways to learn. It's true you learn from your own mistakes, but it's cheaper (and more advisable) to learn from someone else's. - San Antonio. Tx · Member since 2018 · 75 posts · 47 votes3y
Quote from @Joe Villeneuve:
Kind of like a catching pneumonia after taking a half hour walk in 20 below wind chill...in your bathing suit. You learned to not go out in 20 degree below without a coat on...or at all, and more important, you with (too late) you hadn't done it in the first place.Quote from @Michael Greene:
Quote from @Joe Villeneuve:
Where's the "great" in this deal?Quote from @Andra Spencer:
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
The "great" is in the lessons Mica will be learning from this one lol. No better teacher than experience. Congrats on your first property Mica!
In the case of this property, Mica will learn it's a bad idea to buy a property like this,...and (too late), wish it hadn't done it in the first place.
There's much better, less expensive ways to learn. It's true you learn from your own mistakes, but it's cheaper (and more advisable) to learn from someone else's.I'm an accidental landlord, this house wasn't purchased with the intention of being s rental. I bought it a year ago my primary residence and planned to stay awhile. Plans changed and I moved out of state for family/job reasons - pretty spur of the moment. Had about 6 weeks to plan. I was fortunate that I had no vacancy, the tenant moved in 2 days after I moved out. It rented after only being on the market for 1 week. It all worked out and now I'm suddenly a rental property owner.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesRent means nothing to a REI. IT doesn't matter if a property rented in a day for $2M if there is little or negative CF. IT goes back to 2 of my posts above. The first one on what the actual cost is to a REI, and the importance of getting their cost back ASAP (not 15 years), and the other post was on what I know are the two most important books a REI must read and know.
Quote from @Mica Moore:
Quote from @Joe Villeneuve:
Kind of like a catching pneumonia after taking a half hour walk in 20 below wind chill...in your bathing suit. You learned to not go out in 20 degree below without a coat on...or at all, and more important, you with (too late) you hadn't done it in the first place.Quote from @Michael Greene:
Quote from @Joe Villeneuve:
Where's the "great" in this deal?Quote from @Andra Spencer:
@Mica Moore this sounds like a great deal, but make sure you save for vacancies, cap ex (capital expenditures) and taxes and all should be fine. Good luck!!
The "great" is in the lessons Mica will be learning from this one lol. No better teacher than experience. Congrats on your first property Mica!
In the case of this property, Mica will learn it's a bad idea to buy a property like this,...and (too late), wish it hadn't done it in the first place.
There's much better, less expensive ways to learn. It's true you learn from your own mistakes, but it's cheaper (and more advisable) to learn from someone else's.I'm an accidental landlord, this house wasn't purchased with the intention of being s rental. I bought it a year ago my primary residence and planned to stay awhile. Plans changed and I moved out of state for family/job reasons - pretty spur of the moment. Had about 6 weeks to plan. I was fortunate that I had no vacancy, the tenant moved in 2 days after I moved out. It rented after only being on the market for 1 week. It all worked out and now I'm suddenly a rental property owner.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
Your numbers (property management, taxes, insurance) are similar to mine but I didn't pay cash for my SFH in Indiana. It was my primary residence then I moved and rented the house out. I used much lesser values for cap-ex and vacancy. My rent is more than the 1% rule. Looking strictly at numbers, I should probably sell mine but I bought an upgraded house for such a low price $140,000 with a low interest so I'm keeping it and tenants are paying my mortgage down. Value is around $247,000 to $250,000 and in a nice neighborhood with good schools, primarily homeowners. Midwest historically has slow appreciation but I've had many recommendations by other investors to buy more in the Midwest, much lower prices compared to California which has appreciation but I'm not buying anymore properties on the West Coast. What has been the appreciation in that area? How much could you raise the rent each year? I don't know anything about San Antonio.
I agree with not paying cash for property. A lender advised me to take out a HELOC against one of my properties (San Francisco Bay Area) and pay cash for a future rental to avoid the high interest rates now and be favorable with sellers. Her reasoning is also if something went wrong, recession, non-paying tenants, etc, I could just sell it and get all money back. $300,000 to $400,000 is a big outlay of cash (for 1 or 2 properties). Are there ever situations where an investor would be better off paying cash?
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
A lot of information here, pick & choose what works for you!
Logical Property Management4.9459 Reviews - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo. The cash you pay is what your total cost is. The less cash you pay, the less the property costs you. It's really that simple. If you think it's OK to pay a higher DP in order to go from negative to positive CF, I assume (know) you failed Geometry when you were in High School. That "positive" cash flow is an illusion. All you'd be doing is paying all that negative CF upfront.
Quote from @Becca F.:
Your numbers (property management, taxes, insurance) are similar to mine but I didn't pay cash for my SFH in Indiana. It was my primary residence then I moved and rented the house out. I used much lesser values for cap-ex and vacancy. My rent is more than the 1% rule. Looking strictly at numbers, I should probably sell mine but I bought an upgraded house for such a low price $140,000 with a low interest so I'm keeping it and tenants are paying my mortgage down. Value is around $247,000 to $250,000 and in a nice neighborhood with good schools, primarily homeowners. Midwest historically has slow appreciation but I've had many recommendations by other investors to buy more in the Midwest, much lower prices compared to California which has appreciation but I'm not buying anymore properties on the West Coast. What has been the appreciation in that area? How much could you raise the rent each year? I don't know anything about San Antonio.
I agree with not paying cash for property. A lender advised me to take out a HELOC against one of my properties (San Francisco Bay Area) and pay cash for a future rental to avoid the high interest rates now and be favorable with sellers. Her reasoning is also if something went wrong, recession, non-paying tenants, etc, I could just sell it and get all money back. $300,000 to $400,000 is a big outlay of cash (for 1 or 2 properties). Are there ever situations where an investor would be better off paying cash?
- 3ySam McCormackBusiness MemberReal Estate Agent · Cincinnati, OH/NKY · Member since 2021 · 1k+ posts · 833 votes
Quote from @Joe Villeneuve:
No. The cash you pay is what your total cost is. The less cash you pay, the less the property costs you. It's really that simple. If you think it's OK to pay a higher DP in order to go from negative to positive CF, I assume (know) you failed Geometry when you were in High School. That "positive" cash flow is an illusion. All you'd be doing is paying all that negative CF upfront.Quote from @Becca F.:
Your numbers (property management, taxes, insurance) are similar to mine but I didn't pay cash for my SFH in Indiana. It was my primary residence then I moved and rented the house out. I used much lesser values for cap-ex and vacancy. My rent is more than the 1% rule. Looking strictly at numbers, I should probably sell mine but I bought an upgraded house for such a low price $140,000 with a low interest so I'm keeping it and tenants are paying my mortgage down. Value is around $247,000 to $250,000 and in a nice neighborhood with good schools, primarily homeowners. Midwest historically has slow appreciation but I've had many recommendations by other investors to buy more in the Midwest, much lower prices compared to California which has appreciation but I'm not buying anymore properties on the West Coast. What has been the appreciation in that area? How much could you raise the rent each year? I don't know anything about San Antonio.
I agree with not paying cash for property. A lender advised me to take out a HELOC against one of my properties (San Francisco Bay Area) and pay cash for a future rental to avoid the high interest rates now and be favorable with sellers. Her reasoning is also if something went wrong, recession, non-paying tenants, etc, I could just sell it and get all money back. $300,000 to $400,000 is a big outlay of cash (for 1 or 2 properties). Are there ever situations where an investor would be better off paying cash?
Geometry?
Sam McCormack Realtor - Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
@Joe Villeneuve There's no need to be insulting. I passed Algebra and Geometry fine with A and B grades. Many of us were raised to that all debt is bad and to pay off mortgages as soon as possible. Now I know that paying cash for a property isn't a good idea and to leverage debt to acquire more property.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesMy apologies...most REI may have passed it, but don't use it. As far as your comment on debt,,,that's very true,...however, it was never referenced to investment debt. This is why negative CF isn't good,...ever. Every time the REI has to cover the negative CF, it adds to the cost of the property, and pushes the time to profit further away. The debt on that investment becomes bad debt because the investor is paying it. Positive CF means the tenant is paying the debt, and the total cost to the REI is just the DP, which means the time to profit is as short as the time it takes for the cumulative positive CF to equal the DP.
Quote from @Becca F.:
@Joe Villeneuve There's no need to be insulting. I passed Algebra and Geometry fine with A and B grades. Many of us were raised to that all debt is bad and to pay off mortgages as soon as possible. Now I know that paying cash for a property isn't a good idea and to leverage debt to acquire more property.
- Member since 2020 · 671 posts · 937 votes3y
"If you think it's OK to pay a higher DP in order to go from negative to
positive CF... That "positive" cash flow is an illusion. All you'd be doing is
paying all that negative CF upfront."This is a really interesting point that I'd never really considered.
- 3yPolo VazquezPro MemberReal Estate Agent · McAllen, TX · Member since 2017 · 382 posts · 281 votes
You met the 1% rule of thumb! You are probably better cash flow than most investors. Congratulastions buddy! I lived in SA and know it isn't easy to find a home in the $160s that's in good condition.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
I appreciate the apologies. Thank you. Like the original poster, I became an accidental investor with the Indiana house. It was my primary residence then I decided to rent it out instead of selling it. My other properties fell into my lap so I didn't have to a do a big financial analysis. I'm looking for additional properties but don't want to make a bad purchase, especially at these interest rates.
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