Investing in SFR with 10% downpayment in Arizona

Mike M. · 2018-01-31T15:37:09-08:00

So I currently own my 3 bedroom townhouse in Scottsdale, which requires monthly debt service of $750 a month, not including a $150/month HOA fee. Given the location and market conditions I believe I can rent it out for $1,800 to $2,000 /month. That being the case I would like to find another townhome in Scottsdale, or Tempe area (by ASU) that can duplicate this process with.I have $30k saved up but am finding in my calculations that the margins are very thin if non existent... Based on a proforma estimate of a new property that I would purchase for $250k, of which I would finance $220k, with $30k down:$1800 rent/month or $21,600/yearRevenues+ Gross Income $21,600_ Less (10% Vacancy) $2,160= Effective Gross Income of $19,440Operating Expenses-Management fee (5% of EGI) of $972-Replacement Reserves of $1000-Home Warranty of $500-HOA fee of $150=Total Operating Expenses of $2,622NOI = $16,818 ($19,440-$2,622)Debt Service = $16,752---------------------------------------Cash Flow After Debt Service = $66DSC @ 1.00x with a 7.64% DY. Debt Yield while being low, would be mitigated by property location and asset type. ----------------------------------------------------------------------------------------------------------------------------------------------How can I find a way to make sense of a deal like this? Without collecting higher rents my only way to increase cash flow would be to put more capital into the deal. How would i know what average market rents would be in my area? Looking online I see numbers all over the board, from $1,400 to over $2,000/month. My goal would be essentially to 'rinse and repeat' what I have done now: buy a property, live in it for a year or two then rent it out after purchasing a third property.

Ryan Swan

Real Estate Agent · Phoenix, AZ · Member since 2012 · 640 posts · 457 votes

8y

Hey @Mike M. where is your townhouse in Scottsdale? I recently helped another BP investor purchase a townhouse in Scottsdale with the ultimate goal of renting it out (Hayden and McDonald area). Based on my research, $1800-$2000 is achievable for a 3 bed in Scottsdale, assuming your property's interior is updated. Finding rental comps is more time consuming than sale comps - I usually look at Zillow, Craigslist, and pull past rental info from the MLS.

Couple questions on your hypothetical deal numbers:

Vacancy might be a bit high, but this is highly location dependent. My rental properties in Tempe have a vacancy rate that is around 3% with diligent timing and re-rent planning on my part.
If you are local, why not self manage and save the management fees? It can be pretty straightforward with the right guidance and tools in place.
Are you including property taxes and insurance in your yearly debt service total?

As you're finding, it's tough to make a single family property cash flow in the greater Phoenix market when putting ~20% down. Your options are a combination of the following A) Decrease costs B) Increase rents or C) Put more money down.

Have you looked at condos as an investment option? I'm generally seeing that condos in the greater Phoenix market are generally that asset class that gets you closest to the 1% rule (rents/purchase price).

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Mike M.

OP

Denver CO · Member since 2015 · 69 posts · 9 votes

8y

Hey Ryan,

Thanks for the response, let me see if i can answer some of these questions for you:

1) I would self-manage, in my management fee of X% that really was going to be a write-off for myself for tax purposes.

2) I am including property taxes and insurance in yearly debt service, as this would be financed like a conventional mortgage where Principal, Interest, Taxes and Insurance are all in one payment. Had this been through a commercial lender on a commercial property i would have included taxes and insurance "above the line" in Operating Expenses(OE) as those are the standard on traditional RE term loan. Either way DSC would remain the same, but Debt Yield would decrease had i included taxes and insurance in OE.

Can you talk more about condo's as an investment option? And do you have any examples (Are you talking about 1 bed, 2 bed)? I have always been hesitant of condo's as i feel that a townhome attracts a broader audience - people that would consider a home, or consider an apartment. That being said, I am very open to hearing other success stories and ideas! Appreciate your time and thanks for joining the discussion!

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Joe J.

Rental Property Investor · West Lafayette, IN · Member since 2016 · 9 posts · 0 votes

8y

You can write off a “management fee” paid to yourself? Do you have a management entity as well?

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Wes Blackwell

Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes

8y

@Mike M.

My first thought when reading this plan is "Have you talked with a lender and made sure they'll lend on an investment property with only 10% down?"

20-25% for an investment property is an industry standard. While it is not mandatory, finding a lender who doesn't make it mandatory may be challenging. It's really going to depend on your overall financial situation. But that's the first thing I would start with to make sure your plan is feasible and a conventional lender will let your borrow on those terms.

Obviously there's ways around this with hard money loans, private lenders, etc. Although those will come with much higher interest rates. But if you're looking at a 30 year loan with traditional financing 10% down probably isn't going to cut it unless you're the underwriter's boyfriend ;-)

Using a loan calculator (like this one here) if you purchase a $250k property with $30k down at a 5% interest rate (decent ballpark for investor loans) with a 30 year mortgage and a $150/mo HOA fee (assuming you bought a property just like yours) then your monthly PITI + HOA would be $1778.92/mo

So by the time you throw in utilities, maintenance, CapEx, management, etc. you're negative.

@Ryan Swan is probably right about condos being the closest to the 1% rule, if only because the purchase prices are so much lower. Probably the most important consideration is a financially healthy HOA and making sure the complex isn't near their rental cap (limit on the number of units that can be rentals).

BUT -- the 1% rule is a bigger pockets metric, and really applies to $50-100k homes in the midwest. If you go to either coast, that metric is completely worthless. The only way to use it outside of those markets is to learn what the average is for the area and compare potential deals against that. For example, if the average in your market is 0.6% and you're looking at a property that offer 0.8%, it's probably a deal even though it's not at 1%.

The thing to consider about a $250k home vs. a $100k condo is the appreciation. 3% is 2.5 times as much added value on $250k as it is on $100k. Phoenix leans more towards an appreciation market than a cash flow market like Kansas City, Indianapolis, etc. Although it certainly offers much more cash flow than California.

One of the first things I noticed coming to Phoenix from another market is how creative developers get with the lingo... "Modern Luxury Apartment Homes" -- WTF is that? LOL! Is it an apartment? Or a home? And why is everything pushed as luxury?

So there's lots of blurring the lines and blending definitions on housing in this market, so I wouldn't worry too much about townhomes vs. condos. Phoenix lead the nation in population growth last year, so there should be more than enough demand no matter what type of property you consider.

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Ryan Swan

Real Estate Agent · Phoenix, AZ · Member since 2012 · 640 posts · 457 votes

8y

@Wes Blackwell I agree that the 1% rule is more of a concept that BiggerPockets pushes and not something I use in the Phoenix market. However, I think it is worth pointing out that you're more likely to cash flow with a mortgage if the rents approach (or exceed) the 1% rule. More desirable areas in the Valley are probably around .05-.07 right now, which is why @Mike M. is finding it hard to make a property cash flow with a traditional 20% mortgage.

@Mike M. I'm not sure you can pay yourself a management fee to manage your own property. Check with your CPA.

I'm generally referring to 2 bed condos near ASU. The higher demand leads to higher rents and a lower vacancy rate if managed properly.

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Paul W.

Gilbert, AZ · Member since 2016 · 15 posts · 5 votes

8y

Just looking at the numbers I'm having a hard time finding 3 bedroom condos renting for 1800-2000, that is for a 250k one. You might get that for a high end 400-500. For 1800-2000 you can get a nice 4 bedroom house. Although the SFR rental market is hot right now in that area, they aren't lasting long. South Scottdale is being flooded with new condos I don't expect the condo rental prices to go up. SFR is the way to go in that area just to have a property in this area. The McDowell corridor is getting nicer and prices just keep going up. Good luck.

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Investing in SFR with 10% downpayment in Arizona

Investing in SFR with 10% downpayment in Arizona

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