We just collected first month's rent this evening! We screened and declined several applicants (even returned a deposit to hold for one declined applicant - took a lot of self control)and finally settled on some tenants that gave us the warm fuzzies and passed the background/credit/rent history/work verification with flying colors!
Here is the breakdown of the deal. Tell me what you think!
Low income working class neighborhood. Not a war zone! Safe at night.
Purchase price + Closing costs = 13,000 cash
Cost to renovate + Appliances= 6000 financed at 12% interest with visa
New central HVAC = 4000 financed at 14% interest with signature LOC at 5 years
Annual insurance = $500
Annual taxes = $600
My time to rehab = every weekend for 2.5 months
Rent = $550/month
Deposit = $300
Leased within one day of completed rehab.First months rent and deposit in hand prior to letting keys.
ARV hard to pin down but conservatively = 35K-40K in current market.
Congradulations on your disapline. I don't have that kind of self control and would have put the first one in there with a months rent and the deposite.
Therefore, I am not the buy and hold kind of guy.
Now, if you can put the $130 a month you will clear away for future cash calls, you will really be a hero.
Like I said; "I ain't that kind of guy".
So you're paying $720 a year on the Visa, $560 a year on the LOC just in interest?
$720 + 560 = $1,280 / 12 = $107 a month in interest + "equity".
$550 / 2 (50% expenses) = $275 a month
You aren't going to have much cash flow at all on this. You need to try to get a HELOC on that $35 - 40k to pay off the $10k. Get it around 4.5 or 5% interest and you'll cut that interest payment in half or better and you can also extend the terms of the principle payback (depends how "leveraged" you want to be and for how long). That should help you flow cash a little better.
You're meeting the 2% rule ($23k * 2% = $460 a month rent) so you'll be in pretty solid shape if you can get better financing terms. It will also improve your cash on cash position which right now is pretty poor...
With your $13k out of pocket, you want a 12 - 15% annual cash on cash return, you should be looking for $1,400 - $1,700 a year in free cash (beyond equity). With your current terms, you're likely less than half that!
congrates Brian, that looks like a great job done for a first deal!!!. have you shop around on insurance? $550 sounds high for the value of the property.
Good job, Brian! Like Nathan says, see if you can get that 14% and 12% debt refinanced or paid off quickly. What city/neighborhood is this?
Congrats Brian, Sometimes the first step is the hardest!
Thanks Jon and Mark! I agree with Nathan's analysis at the present, but I plan on having this paid and clear within 12 to 18 months using my paycheck. The analysis will look a little different then... I have considered using a HELOC to get into another property once I get comfortable with operaing my business now that I have tenants. Crawl before walk. But we are just ecsatic and it feels great to have some crisp Benjamins in our pocket!
Jon, this neighbornood is in the 76111 zip code. Its kind of a wierd neighborhood in that there are really old and also newer construction mixed residential neighborhoods and the neiborhoods are like little scattered pockets around otherwise industrial/commercial settings. There is an old grain tower less than 2 blocks from my property and we see horses being ridden down the (paved) street on the weekend? Haha! At first glance it looks kind of like a war zone, but upon closer inspection, it really isn't and we feel safe there at night. Although my wife and I might tolerate a little more than the upper crust of society would! I see a lot of potential for the area with my inexperienced eyes. It's certainly better than just to the west of Lake Arlington (76104 and 76105). Probalbly not the area for appreciation, but more for finding quality low income tenants to build cashflow without dealing with Section 8. Speaking spanish is a plus to broaden your quality tenant pool in this area.
BTW, If I did a HELOC, wouldn't there be points that would increase the effective interest rate significantly on a small loan? I haven't researched HELOCs yet, so forgive me if this is a naive question!
Great Job Brian
Way to get your feet wet. As for helocs,I'm not an expert, i will give my two cents. The points would depend on your credit score and or your lender. I would check into that if i where you. Also remenber that you can write off the interest on that loan. You can't with the loans that you have now.
Hope someone will correct me if i'm wrong????
Great first step into the Real Estate Investment world. As others have posted, your financing is not the best, although if that is your only choice, then it is what it is.
In most cases, interest on a Credit Card or a Signature LOC is NOT tax deductible. But interest on home loan mortgages are. You might be able to convince the IRS that the interest is a "Business Expense" but the hassle is not really worth it.
The value of the house is probably too low to get an actual mortgage but you should be able to get a 50% LTV HELOC on it. My last HELOC had zero costs, so I would shop around and find a good deal. My current interest rate on my HELCO is 3.99%. Even if you plan on paying off the CC and Sig loan in 12-18 months, you are losing at least $1,000 out of pocket vs a HELOC. PLUS, with the HELOC, you have an available cash source for your next deal.
Congratulations on your first deal, sounds a lot like my first deal back in 1982. Bought for $30K, put $5K in it, sold for $55K a year later, with the tenant in it, paying $600 a month.
Also, GREAT job on screening your tenant. Many landlords want to get that first month's rent so bad they forget that there are 11 more months in the average lease. I let in a marginal tenant earlier this year and my gut feelings were correct. They have been very late every month. Luckily, I demanded a TWO month deposit of $3,000.00, so I am covered, but what a hassle to get the rent between the 20th and 30th every month. Love the late fee but hate the collection hassle. Good tenants are like GOLD and bad tenants are like bovine excrement.
Brian - Quality Low Income Tenants is an elusive concept. Hope they stay that way but be prepared for roadbumps ... I personally stay about the 100K (ARV)for rental properties - It attracts the upper tier tenants crowd. I found that single moms and relocations are the best candidates.
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