Updated 18 days ago on . Most recent reply
LTR Profit Margins and Plan Feedback
Hello,
I am looking for some feedback for a plan for 2 LTR properties. I live in a 4 bed/2 bath house (in an area with a high volume of renters and low vacancy rates) and I plan to turn it into a LTR, buy a nearby house with my additional VA loan entitlement (larger, justified for an increased family size), and then rent that property out when I move in another year or more. I have met with my lender, my realtor, a reliable property management company (not doing self-managed), can pull the trigger at any point, and here are the numbers.
Current House (#1)
Purchase Price: $274k, Current Value: $295k, Equity: $40k, APR: 5.99%, Mortgage, Insurance, Tax: $2,005/mo
Future Rent Price: $2300/mo (low end - neighborhood range is $2300-$2500), Property Management: 8%, Various Annual Fees w/lawn and pressure washing: $1k
Estimated Initial Cash Flow: $25/mo, until (or if) I can refinance.
Future House (#2)
Similar numbers, able to offer slightly below asking price with seller's contribution to cover closing costs with 0% down, and have a slightly lower mortgage than at present. I estimate less than $500 to move, based on proximity and resources. Likely a similar cash flow or break even monthly, when it's a future rental.
Does this plan make sense, and what am I missing? How much should they cash flow at the start? Talk me into it, because I'm equally happy to continue my low-cost index ETF investing and call it good. Thanks for the input.
Most Popular Reply
#2 Starting Out Contributor
- Realtor
- Hanover Twp, PA
@Luke Hamlin, a few thoughts:
1. In principle your plan makes sense. House hacks can be a very good way to get into investing without a lot of money out of pocket and with really good loan options.
2. Current House #1, does NOT appear to cash-flow! I think you are only including obvious HARD expenses in your calculation.
3. You appear to be forgetting about Vacancy, Cap Ex, and Repairs/Maintenance. I budget underwrite 15% (of incoming rent) for these, some investors go even higher!
4. Are there any utilities provided by the municipality? If so, those are often included in rent if they are flat fixed price. The reason is that the landlord generally keeps those in their name because unpaid they generally can become liens against the property. If the municipal utility is based on usage like water then it would typically be billed back to the tenant.
5. Without doing any detailed math. You are probably around -$325/month cash-flow.
6. When looking at a house hack, the idea is to SACRIFICE a bit to get a good rental. The sacrifice is living in a house for periods of time that aren't the ideal primary residence for you BECAUSE in the end they will make better rentals than your ideal primary residence.
7. You mention a possible refinance on house #1. One thing to keep in mind with that calculus is the pay-back period. It COSTS money to refi, and how long will it take for the interest savings to pay your back for that cost.
Hint: You can't simply use the lower payment amount to determine this because you have re-amortized the loan stretching out the payments again on a lower principle amount.