Buying an living in a house where tenants pay morgage

10 Replies

Afternoon everyone, 

This is my first post in the community! I wanted to know if my plan was feasible. 

A little about me: I am an nontraditional undergrad student at the state school here about to finish my degree. I work full time as well so I have a steady income, enough to help me save for a house. The only thing that is holding me back from buying a property is because when I graduate in 10 months I don't know if I'll be hired by a company outside of town or even Texas. I've heard it is ill advised to buy when you plan on moving shortly after but If it comes to it, I'll just buy and hold and have a management company take over the property. That's all besides the point.

I am currently saving for a down payment on a house or duplex in San Antonio, Texas. Target cost of the house is going to be 100-125k. I will be saving for 20% of the cost of house to avoid PMI, 20-25K. The average room for rent in San Antonio are roughly $400-$500 depending on location. Using the Zillow mortgage calculator, my mortgage would come out to be $650 a month not including any other miscellaneous expenses.

http://www.zillow.com/mortgage/calculator/payment/...

The full breakout is as follows:

Expenses per month:

  • $458 - Property and Interest
  • $125 - Taxes
  • $67 - Insurance
  • $105 - Maintenance and Repairs (Based on 1% rule)
  • $25 - Advertising for tenants ($300 a year on the high end)
  • $128 - Electric  (rough estimate)
  • $30 - Water (rough estimate)
  • $70 - Google fiber

Total Exp.: $1008

This is an extremely rough draft but I feel like I've covered a handful of expenses with over estimating advertising costs to find a tenant. 

With total expenses at $1008, I would have to rent at $500 to break even. This is all contingent upon if the house I buy is at most $125k. How does it all look, are there other things I need to consider when looking at this purchase as a business investment? Any tips or advice would be greatly appreciated! 

Thanks!

@Logan Jung - Welcome to BP!  I do not know the details of the San Antonio market at all, but it looks like you have what you need, understanding that the specific property can have variances to your numbers.

Sidenote: My husband and I went to San Antonio last fall and loved it!  It is in our top 3 US cities

Sidenote: I am SO JEALOUS that you have fiber available to you!  You should be able to increase the rent if you install it for the building

@Logan Jung,

First off. Welcome to the BP community! I like you, am a new investor in San Antonio so its good to see new people in my area get engaged.

In regards to your situation, sounds like you have some great ideas. Some of the questions that I would ask you are: Do you have a plan? What are your short and long term goals, and what are the milestones that will get you to those goals? You then need to determine what choices need to be made, and what actions do you need to take to reach those milestones and goals. If you are not sure what your future career holds for you, then I would humbly advise that you determine what you want your end goal to be and work backwards from there. Once you have laid out your plan, I think you will have a very clear picture of what you need to do going forward.

But enough of that, lets talk about your deal!

Principal & Interest - $477 (assumptions: 125k price, 25k down, 100k mortgage @ 4% over 30 years) note: this will change if any assumptions change. Rates are going up.

Taxes - $280 (based on a tax appraised value of $125k) Note: For reference, I looked up a property with a Bexar county appraisal of $108k and the taxes were $2,924, over 12 months this comes out to about $244/mo.

Insurance - $67 (I think this figure is just about right. Of course this depends on how extensive your coverage is and with which insurance company you choose.)

Vacancy - $83 (based on a $1,000 rent rate and a vacancy rate of 1 month per year although it will likely be less, I'm being conservative here, I think)

Repair - $105 (I agree with you on this)

Misc - $100 (As with any business endeavor, most business people tend to be optimistic about what their costs will be. I am adding this in here to account for other expenses that may come up such as legal fees, HOA fees, etc.)

If you add all this up it comes out to $1,112. If you rented this unit for anything less you would be in a negative cash flow situation and you would literally have to put MORE of your own money to cover these costs. Not a position I would want to be in. Some people would disagree with me here, based on their long term strategy. Depending on the area you may be able to fetch more for this property, but that depends on a lot of factors as I'm sure you probably know.

As for the other costs that you are including in your estimate, I would not offer to pay for utilities, nor would I offer to pay for cable and internet. These costs are borne by the tenant as they will choose what level of service they desire. On a related note, Google Fiber is not yet available in San Antonio and is still only in the development stage. I honestly don't think it will be widely available until late 2016, but thats beside the point.

To answer your question on this deal, I would say your money will better serve you if you can purchase a property at a relatively good discount. This is the hard part. Scour the market to find that great deal. They are everywhere. Use the 70% rule as a guide, and you will have a lot easier time making money on the deal. Its rare that you can pay full retail price in an inflated market like San Antonio and make money worth the risk. Remember, your money is made when you buy, not when you sell. Good luck, and sorry for the long reply.

All the best,

Angel Cepeda, CPA

@Angel Cepeda , if you look at Logan's other thread, you will see where he says "Sadly, I still live at home with the parents" (presumably paying them some rent? Welcome to BP, Logan). He goes on to say "Specifically I am looking at buying either a 3 bedroom 2 bathroom house and renting out the two extra rooms or buying a duplex/triplex and renting out the extra houses" (so presumably won't mind paying a bit of his own mortgage to live in his own pad?).

Your figures show that Logan is likely to be out in his calculations by about $100/m (ie. needing to contribute a bit over $100/m towards his own mortgage even if he can get two renters who will pay $500/m each. Still, not too shabby?

@Logan Jung , you're well on your way. Enjoy the journey. Cheers...

I think you can cut the advertising. Craigslist is free.

My buddy has a 3 bedroom and he rents two of them. He pays half of the utilities, but does not sign up for cable or internet. That is on the tenants if they want it (they always do). The downside is that when he has a vacancy that means going without internet for some time. That has only happened once in the pas 5 years.

@Logan Jung

This is what I did when I was 20, still living in the dorms. I had $8k life savings and delivered pizzas 35 hrs a week. I convinced my father it was cheaper for me to buy a house than to live off his dime in the dorms. He agreed to co-sign on a loan. I bought a duplex for $70K on an FHA loan. At the time rates were around 7%. Still my PITI (if I recall was a little over $700). We had to put a little money into the property immediately (new lateral sewer line @ $4K). I rented out one side of the duplex for $650 per month, then got two roommates to move in with me on my side. I charged them $300 a piece per month. I was cash-flowing immediately. After two years of collecting rents, I repeated the process. At one point I owned 3 duplexes, and my full-time salary was only around $45K per year.

The strategy still works, the biggest cavaet being location.  In St. Louis, where I was, good duplexes and 4-plexes are very common. That is not the case here in San Antonio.  Also depending upon where you go to school, you may be priced out of the market.  For example if you go to UTSA, it's not likley you'll find a good duplex in that area for under $125K.   If you go to Trinity, UIW, or SACC, I suggest looking in Beacon Hill, Five Points, Government Hill, or maybe even Los Angeles Heights.  There are plenty of deals to be had in these central city neighborhoods.  

Good luck in the search.

@Seth Teel

Thanks for the solid advice. I actually work downtown, closer to the Pearl Brewery south of Alamo Heights so the neighborhoods you mentioned would be perfect! In your opinion would you recommend I start with a duplex or a 3/2 house? 

@Brent Coombs

Hey Brent,

Luckily I am not paying any rent and the only reason I say "sadly" because it isn't the most ideal living quarter. Without getting into much detail, my parents don't live the healthiest lifestyles. They are heavy smokers and aren't the cleanest. I have my room almost in a bubble from the rest of the house. The only time I spend at home is showering and sleeping.

As far the $100 out my pocket goes, I would mind making that payment. The only additional monthly payment I would be willing to make to the home/duplex/investment is my time. In theory, if I'm able to have a positive cash flow when I relocate for another job I can have be sure that the property won't hurt my pocket. 

@Brie Schmidt

Thank you for the kind words. However, I've traveled a bit myself and really love Colorado. San Antonio is diffidently up and coming and will always be my home.

@Angel Cepeda

I really appreciate you looking over the numbers. I wan't fully aware of the 70% rule, can you explain a little? When I'm shopping for a home, do I want to shop for properties that the 70% rule formula spits out or do I want to shop for properties within my target price range but then offer the seller the difference for the repairs to the house?

Also, although Google fiber isn't in town yet, how much do you pay for internet?

@Logan Jung Definitely a duplex to start.  Two units will reduce your overhead if you follow the method I described.  Not to mention, investing in any of the areas I suggested will surely net you some solid appreciation.  

@Seth Teel

So how would I go about looking for duplexes in these areas? Contacting an agent? Also, I've always been under the assumption that duplexes cost more than a house, am I wrong?

@Logan Jung  

I suggest working with an agent.  I have a good contact for you. Just DM and I will shoot you her info.  

As for your impression, I would never make blanketed assumptions in anything associated with real estate. The "exception" tends to be rule.  Either that or Murphy's Law will always pay you a visit. 

 Define you price point and area, then the search begins.  Your agent will be able to tell you if your parameters are viable.  There is a lot more that goes into real estate that just purchase price.  I'd rather pay more for a duplex that cash flows and appreciates than a 3/2 that has less cash flow and remains stagnant. 

welcome and ur titles says it all: u need/want a duplex. 

unless ur also open to just getting a SFH and renting out some of the bedrooms and sharing kitchen and possibly bathroom(s).

good luck wheeling and dealing in ur local turf; ur starting so young so dont rush - dont overpay for ur investment. 

maybe look at HUD and REO deals! are u handy?

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