I'm looking at a town home tomorrow. I am looking to rent to students, and it is in a great location, near the college market that I am targeting. My main concern at this point is getting it at a good price.
It has been on the market for 35 days and the seller is asking 116,900. The property value estimate (Zillow) is 111,000. Also, it appears that other similar properties in the area are a little lower than the seller's asking price. I think that I can increase the value of the property by doing some small tasks, such as landscaping the front and back yards, staining/replacing back fence and some upgrades in the house.
The market in the area is very hot right now. I want to move on something soon before students start signing their renewal contracts with their current apartments or before they have found other alternatives. Classes start in September. If I wait until August before I am ready to rent, I will likely not find tenants until at least December when the next semester starts.
I am new to this, so I am starting to feel a little anxiety and nervousness that I am making the right calls. Can anyone give me some guidance? If I can get this property for close to 'market', should I move on it?
Also, when renting to several individual occupants in what is traditionally a single family home, how are utilities taken care of? Is that generally something that would be included in rent? How about furnishing?
I know that I'm coming out here with a lot of questions. Thank you in advance for all of your replies. They are much appreciated.
You can't put too much stock into a zillow zestimate. I'd run the numbers past a reliable realtor or three first.
What are you able to rent it out for?
What does it rent for? How much are taxes? How much is the HOA? I would concentrate on whether you will really be getting cash flow rather than the value. HOA often kills the deal on townhomes.
I could rent for between 400-450/room based on the market. The cash flow appears to be there. Here is the basic monthly breakdown:
Rental income: 1,600
P&I (on 15 yr): 650
Realtor says that there is no HOA. I asked her to look into it. Assuming it was as high as 150, I would still have about 400 in positive cash flow. I'm estimating the rental income low and the expenses high.
Do not include utilities in rent, it will add extra expense for you. If they're in college most of their parents are prepared and willing to spend the extra $100-200 a month for their kid for these college expenses. I do not know much about your market but it seems you have an idea of how much the retail value, start with low offers and set a reasonable cap. Also as Brant said make sure you know the HOA fees and more importantly the rules. Is this in a town home community where people can vote on changes in rules? If so, be careful because if the majority is old folks they may be getting tired of the "noisy college kids" and vote to end renting rights. I saw this happen to my neighbor.
You are forgetting your Cap Ex costs. That is the one you put away each month for the eventual replacement of your roof and water heater.
at $116900, here is how I see your expenses:
Mortgage Rate 5.00%
Length of Mortgage in years 30 (extend this to 30 years)
Monthly Mortgage payment $470.66
Sewer and Water $-
Cap Ex and Ops $150.00
Mgmt Fee $160.00
Total Expenses $1,223.66
If you have not, ask your realtor to check on how many if any house like your have sold recently and for how much.
Do not be afraid to ask the realtor all that you can think of and have them get you the answears.
Why extend it to 30yr? I know that the monthly cost would be lower, but I would also pay more interest expense (generally comes with a higher interest rate) and I would build equity more slowly. Can you explain why I might do this?
Also, management fees are a non-issue, as I would be managing myself. Although I value my time, as the owner, I recognize this in the cash flows. How are you calculating 'vacancy'?
I will definately ask her about other homes that have sold in the area that are similar. Believe me, I have not been shy with the questions. She is getting plenty of emails :).
How do you do the @"name" thing?
As others have said, 10% of rent goes to maintenance you might even want to go higher with student rentals, 10% for vacancy.
purchase of 116k with 1600 rent, no HOA and reasonable taxes sounds decent to me. Whether that is decent in your market I don't know though. It needs no rehab to be rent ready?
If yout type @ and start typing out there name it will bring up a list at the bottom of the page.
@Travis Hintzel Type "@S" and wait a sec. Below the message body a list of thread contributors will pop up that start with "S", you can single-click on that entry and it will be placed in the message. Good luck! Please keep the post informed with the outcome.
It doesn't need any rehab to be ready to rent (that I am aware of). The sellers are still living there. There was recently a hail storm and their roof is being replaced by their insurance company.
What kind of offer should I make, based on what I have said? 116,900 is a little high in my opinion and I think that the 35 days that it has been on the market reflects that. Even looking around at what has been sold recently, this property should be at 108k-110k. I want to make sure that in about 3 years when I'm looking to sell, that I will be able to have appreciation in the property.
Congrats for taking some action. You will learn a ton by doing exactly what you are doing...evaluating deals.
I wouldn't get too married to any potential deal. You can start justifying why it's a good deal and possibly blind yourself to the realities. You can't lose money if you don't do a deal. If it's good enough to be Warren Buffet's #1 Rule, it's good enough for me. Unfortunately, two of my first three deals were break even or lost money. I'm glad I took action because I learned some good lessons, but had I been a little more patient I would probably be a few years ahead of where I am now.
IMO you do not want to start with a condo, especially if the numbers are borderline. As @Robert Zuccaro mentioned, HOAs can be very political (I know from experience, I was VP of a 100-unit HOA for years). It can be like trying to tap dance on quicksand. Knowing what I know, I would never purposely buy a condo/townhouse as a rental. Not to say that there aren't those that are doing it successfully, but you had better know what you are getting in to. For example, NEVER buy a property with an HOA without having an accountant examine the HOA's financials. Most are woefully underfunded...see special assessments, below.
HOA Pros: Not many:
1. Overall your insurance will be lower, since the condo/townhouse HOAs typically cover the structure from the paint inward...with some exceptions, like what if your tenant leaves the water running and it ruins the neighbor's unit?
2. HOA fees usually include water and garbage, exterior maintenance, amenity costs (pool, fitness center, meeting rooms) but your should confirm what is included and what is not.
Cons: Many already listed by myself and others. But here is a huge one:
Special Assessments. These fun potential surprises can come up unexpectedly in the thousands of dollar range or more, depending. If the HOA is not good at budgeting or a large unexpected expense comes up, guess who pays? My HOA had to do a $1,000 special assessment to cover legal expenses that arose because neighbors couldn't get along.
A better option might be to find a 1-4 unit. No HOA fees and no HOA politics, more control, less surprises.
One way to go about finding a good deal is to run the numbers on 1-4 unit properties that you want in the areas in which you are interested. Decide on a Cap Rate that you are happy with (typically between 10-15%+, depending on the area) then make offers based on the value that YOU (not the owner, realtor) put on the property.
Thanks Peter. I am trying to keep things in perspective and not get too attached as much as I can. I was leery of the townhouse because of the HOA dues also, but this one does not appear to have any. The realtor that I spoke to said that they may have at one point and no longer do, so they still call it a 'townhome'. I dont know how true that is, but I wont be getting into it without more info tomorrow. Thanks for the tips.
Can you (or any other members who would like to chime in) give me an idea of how to calculate what the property is worth? I am basically just looking at similar properties, which has been somewhat helpful. You mentioned setting 'Cap Rate'. Can you ellaborate?
Looking at what similar properties are asking for helps but more importantly is what have similar properties actually sold for. You can ask your agent for comps. There is no calculation that you can do.
Cap rate - is used for valuing multiunit properties. Rather than the value being based on the structure and others like it, you base it on the expected return. Net profit for the year divided by purchase price. If your net profit is 10k and purchase price is 100k then you have a 10% cap rate. You need to know what the expeceted cap rate is in your area to look for deals that meet or beat it. If you find a property that you can easily increase the net profit on then you will increase the cap rate and therefore the value of the building.
Just as an FYI -- I currently live in a townhome and it does not have an HOA. There are many in the area that do not. Townhome simply refers to a style of building where walls are shared - it does not require an HOA.
Okay, cool. Thanks @Brant Richardson .
Does anyone know any good websites where I can find out a more accurate room rental rate might be in my area? I am estimating from when I was a student at this college and could use some guidance. It would also be useful to be able to have a place to market these rooms other than on campus and through current student friends.
I would recommend you just walk up to the neighbors at that townhome and ask them how much the HOA fees are. Everyone knows it, only the Realtors don't.
I bought a town-home as my first home and it was same story until things were near closing...
@Travis Hintzel Google "rent-o-meter" and you'll find a well-polished site that offers market rent data, although I can't speak to its accuracy or timeliness. Maybe someone else can?
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