Is my short-term plan good, bad, or crazy?

Question

I am looking for my first deal on a single-family home to rent out and personally manage.  I am planning on putting 30% down on a home around $100,000 - $110,000 with a 10-year mortgage that I can rent out for about $1100 per month.  I am realistically estimating $5,000 in get-ready costs.  My PITI should be around $900 - $1000 per month, thus leaving me with a positive gross cashflow of $100 per month.

I have a few questions regarding my plan:

1.  Will I be able to get a home with this plan or will I be completely locked out by cash buyers and large consortiums?

2.  How do my numbers look?  Is this a doable deal if I can make it happen?

3.  Any other thoughts are very welcomed.

Thank you!

Ned Carey · Answer

You are paying to much if you expect positive cash flow. Your example has the monthly rent at approx. 1% of the purchase price. Generally you should be at least 1.5 % of purchase price, much better is 2%.

If our PITI is $900 to $1,000 per moth and rents are $1,100 per month you will have solid negative cash flow.

If our PITI is $900 to $1,000 per moth and rents are $1,100 per month you will have solid negative cash flow.

Jeff S. · Answer

I would suggest buying all 3 or 4 homes right now. You will be paying higher prices and higher rates going forward.

Being self employed does lend to a need for conservatism. In the end you know how much you can risk. If extending yourself puts you at risk then by all means go slower ad buy 1 at a time.

Brian W. · Answer

Good question Arjun K..

The reason I'm looking for financing rather than just buy with cash is because buying with cash would take so much of my cash for the first house that it would be a couple of years before I could buy another for cash and I don't want to miss out on all the good deals to be had now.

However, I could get one property now, then another in six months, then another six months after that.  Going this route will allow my cash reserves to never dip below a certain threshold that I've deemed safe.

Thanks for your reply and thanks for reading and understanding what I wrote.  You are right on with how you interpreted what I'm trying to accomplish.  Thanks for taking the time to read and understand rather than simply skim over what I wrote and give a quick response.  I appreciate it.

Steve Babiak · Answer

Get the longest amortization that you can, and then make additional payments to principal along the way whenever you have cash to spare for that purpose.  Life happens, and you don't want to be tied up paying high amounts - especially since those basically subsidize tenants living in your properties.

Arjun K. · Answer

Brian W.   if I understand correctly, what you are looking for is the longest period of financing that terminates before you are slated to retire in 13 years.  hence 10YR financing is close to 13YR and that fits your goal.  and you don't really care about the debt payments since you are cash heavy, i.e. could even pay for property in cash today.. but you choose to finance because....?

If your main goal is to pay off property in 10YR, then a 10YR financing fits the bill.  That said, i woudl echo others who note a 30YR isn't that much more costly, but buys you a lot more flexibility if property is vacant.  Assumign you get a loan without prepayment penalties.. you can prepay the loan faster than 30 years if you want (and get remaining loan schedule recast / adjusted for your prepayments)

Brian W. · Answer

Thanks a lot for everyone's thoughts.

Here's why I'm considering a 10-year over a 30-year:

1.  I have plenty of cash to cover any costs that might come up that the rent won't cover.

2.  Carry costs on a 10-year are lower than on a 30-year.

3.  I'm trying to get as much cashflow as possible over the next 13 years as that is when I'm planning to retire.  So, I'll want all the properties paid off by then.

Any thoughts on this are very welcomed.  Again, thanks for everyone's feedback.  I really appreciate it.

Dawn Anastasi · Answer

Definitely go with a 30-year.  You can always pay it off early, but can't not pay it if you run into something unexpected.

Kelly N. · Answer

Brian,

I like your plan, but would suggest you consider the 30 year mortgage.  That way you can have cash flow while it is renting and it won't be the end of the world when it is vacant.  Take advantage of the low interest rates now, save the cash for repairs, improvements, other properties...

Kelly

Matt Devincenzo · Answer

Why the desire for a 10 year mortgage? with rates so low right now I think it would be best to lock in a long term low rate if at all possible.

I don't know if you've had an opportunity to look around here much yet, but read up on the 50% rule, which basically says 50% of gross rents will be eaten by expenses. I know it sounds like a lot but when you start thinking about it it makes sense (PM, taxes, ins, vacancy, legal fees, turnover ect)  so start doing some math with that in mind and you'll start to see what you need to look for in an investment property.

Is my short-term plan good, bad, or crazy?

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