Purchasing First Rental for $75K

[Devin Royal]

I have been searching for my first real estate deal for about 6 months now in the south Houston area near where I live. I am trying to get into buying and holding rental properties and I may have found my first deal but I am not sure of how good the deal is. We have secured financing for the unit and have money set aside for the minor renovations required. The unit is a 3/1 SFR that is almost move in ready after some touch up painting and a good cleaning.

We are hoping to purchase to property for $75K and rent it for a minimum of $1,000 a month. We own a similar property and have used what we are paying for taxes and insurance to calculate our monthly cost of $750 for a 20 year loan and the taxes and insurance. This leaves us with about $250 to set aside for any future repairs and investments. I realize that this does not fulfill the 2% rule, but i have not seen anything in my market that would make that return.

So my question is whether this will be a worthy investment or should i wait for something else? 

All responses are appreciated.

[Sharon Tzib]

The 1 or 2% rule is a screening tool only to help you decide if a property is worth a further look or not. You need to know what is reasonable in your area and not get caught up in a number. In Houston, 1% is about as good as you can hope to do in most cases, unless you are buying in sub par areas, and generally you need 20% down to achieve this.

This deal looks weak to me. After you factor in HOA dues (if any), property management, vacancy, maintenance and capex, I think you may be lucky to net $20/month in cash flow. You don't say how much you are putting down, but increasing that amount up to 20% if you haven't already and lengthening the term to 30 years could help improve the cash flow. Most investors I work with like to see between 6-10% coc for their long-term holds.

Also, please be aware that it will take longer to rent a one bath than a two, so pay attention to that vacancy calculation. Good luck!