Buying my first rental property.
I am currently trying to get my feet wet with my first rental property, I have have looked at over 20 properties in the Denver, NC area. My budget is no more then 130k, I keep running my numbers for my profit margin, I know the 50% and the 20% rules. I currently have a house with 50k equity( owe 288) and I have a home equity line of credit of 25k (1% interest). I have another 30k invested in stocks and 8k in cash sitting in my LLC business account. My questions are as follows:
This question is for the following example of a 120k
- For people that have experience, would it be a smart move to violate the 50% rule by using a home equity loan, which would add lets say 250 dollars more to my monthly expenses giving me around 2-300 dollar profit a month, until my equity loan is paid off?
Any other advice for someone starting out would be appreciated! Thanks everyone!
Most Popular Reply
I've heard the 50% rule mentioned several times on BP but I haven't looked up the source. I assume that it refers to property expenses only and not to debt service. (When looking at multi family property I expect expenses to be 40-60% of the gross income; again, any financing expenses are not considered since I'm looking for a cap rate, which doesn't include them). Can someone clarify this?
@Richard Donofrio If you take the money out of the HELOC, your payment is $250? Is that principal and interest or just I/O? And you're saying, even with this, you will have positive cash flow of 2-300? Sounds like a really good deal.
It might be a good idea to forget the 50% rule for a minute (since that's a rule of thumb) and look at the actual numbers since this is your first deal and you really want to know that you're doing the right thing. Calculate all of your expenses (Make your best guess if you can't find more exact numbers). Make sure you include: Property Taxes, Insurance, Maintenance, Management, Utilities, and Repairs. (Don't include any debt service for this; we want to see how the property performs if you bought it with all cash). Use annual numbers. Subtract a vacancy factor (5% or more if that's normal for your market) from your annual potential rental income. Subtract your annual expenses. What you have left over is your net operating income. If you divide that by the purchase price you get your cap rate as a percentage. For a typical SFR rental, that might be anywhere from 2 to 15% depending on a number of factors. Is this cap rate acceptable for your investing criteria? (This only considers cash flow and not appreciation or principal paydown)
Now subtract your debt service from your NOI. Are you still making $200-$300/month? If yes, fantastic! If no, take a closer look and make sure it's still a good deal. If you pay down the HELOC quickly and you get the $200-$300/month it might make sense for you.
I hope this helps. Good luck!