Rental property purchase

6 Replies

Hey BP! I wanted to ask the community something and get their opinion on it. So I’ve finally made the choice that I will not be attending college and rather just work and save up for my first rental property. My question today is should I consider the amount of money I make on my current job to match or be more than the mortgage payment? This is just an example but let’s say someone makes $300 a paycheck and the mortgage is $500 should I take risk on the rental property and trust it to help me pay the mortgage assuming it cash flows. Or should I play it safe and wait until my current job can pay for the mortgage even if the property is not being rented out. I’ve heard of leverage and good debt and bad debt but I would like to hear on what you all have done and what your experience was buying your first rental property. Thank you all in advance!

@Carlos Leyva it really has less to do with the size of your pay check, and more to do with whether or not the asset is really going to cash flow based on underwriting for real world expenses. I am purchasing a 19 unit apartment building in Berwyn right now, and I am not ever planning on paying for the mortgage payment myself! The income for the property does that. If you have underwritten expenses correctly, you should be fine. For instance, have you accounted for maintenance, CapEx reserves, taxes, insurance, water, trash, electric, gas and landscaping? If you have and it still cash flows healthily, then the deal makes sense and is low risk.

In addition, you should have adequate cash reserves. I think a good rule of thumb starting out is 3 months of expenses in the bank, but eventually you will want to save more (maybe 6 months?). This is similar to how good personal finance works. 

Not very experienced here, but that isn't the way you should be looking at things. IF is a very dangerous statement. What about the time where the unit might be vacant? What if a pipe bursts? An amount of cash flow every month needs to be allocated towards a new roof in 10 years, a new stove in 5, new fridge in 5, etc.... So even if you think you are cash flowing every month, you are likely in the red. 

@Alex Howard what you are describing is the underwriting process that all of us have to do as investors. Burst pipes, vacant units and leaky roofs can be accounted for mathematically, and this business is old enough that we do not have to re-create the wheel! I use the following to analyze properties in my area, and I am using these metrics right now on my 19 unit in Berwyn that I am in the process of purchasing. 

Maintenance-5% of the gross rents. 

CapEx (reserves)- 5% of the gross rents

Vacancy rate- 5% 

@Alex Howard you can attempt to be more nuanced, but you will find that these rules of thumb help a lot in screening properties. I will tweak these as I get deeper into underwriting a property, but for smaller properties this system works great.