Cost + repairs less than 1% with long term tenant - buy?

5 Replies

We are under contract for $68k SFH. Inspection came back and I estimate $15k repairs (which includes $5k for two trees to be removed hanging over the roof, and $5k for a back deck that is wood leading to concrete stairs - terrible construction). Appraisal came in at $76k and current long term tenants pay $650/mo - market is closer to $850-900. Tenants have been there 4 yrs and take care of the property - do simple repairs. I’ve read so much about running a charity vs a business, raising rents slowly, good tenants are like gold, cost of vacancy, etc. I’ve estimated their income/ exp and I think they could afford $850/mo, but they are already jaded from the prior landlords that pushed off maintenance issues This would be my first investment, and I can’t decide what to do. At market rent, after repairs, I would make 1%. But to retain good tenants and not have vacancy, I would be less than that. Our exit strategies are to sell it (super hot market here), or live in it (as it’s a place we would want to live anyway). I’m anxious to get my first property done with, but I don’t want to take a bad deal either. March towards the close or am I blinded by eagerness to get started?

Well, don't spend $5000 on tree work for starters.  If they need to be trimmed so they don't rub the roof, that should cost a lot less.  Maybe ask around on nextdoor or other similar groups for an affordable handyman or tree trimmer. 

If you want to eventually live in it, the current income becomes less important, but seems like you can get to 1% if you do some repairs and raise the rent.

If this is a buy and hold, the long term desirability of the neighborhood and big picture changes (is this neighborhood gradually getting better, or gradually getting worse?) will end up being more important.

@Patrick S. The neighborhood is gradually getting better, and our city is crazy desirable for the schools. Also our sister city (meaning about 5 miles away) has a company that is expanding like crazy and rentals (or any houses at all) are really difficult to find in either city. This is also a small private college town, so there’s no shortage of tenants now or in the foreseeable future. It’s a buy and hold situation so I agree, that does change the situation somewhat. I think if we price out the current tenants we will be able to rent it easily. I’m just nervous bc it’s my first one.

is it a one bath sfr? I have found good tenants in that price range to be a challenge, specially finding folks who dont smoke!, and if you want to live in it eventually you probably dont want smokers. $5k for the back deck?? seems really high. What else is on the inspection report, galvanised supply?,cast iron waste?,. Lots of stuff to be aware of especially on these 1940's  era homes. Your purch price and current rent are good especially in our market, so I would be very cautious about squeezing the current people if they really are "good" tenants. My biggest concern in your description is adequately accounting for the capex on the house. Do you trust the inspection report or was it realtor referral?

@Alicia Gates you approach it by looking at the numbers, not the people. If market rent is $850, you need to charge $850. If they can't afford $850, give them notice to move on so you can get it rented for market rate. You can be nice, professional, and even compassionate while still running it like a business.

If you keep rent $200 below market, you are essentially paying the tenant $2,400 a year to live in your rental. Do you really like them that much that you are willing to supplement their rent?

It's not about what the current tenants can afford, it's about what the market rate is and what you can rent it for. I like that you're thinking about several exit strategies and ideas. I'm always an advocate of taking rents to market rate asap, especially in places where it is easy to rent out. 

A couple questions: 

  1. What is current tenant lease situation? MTM? Several months left? 
  2. Can you ask the sellers to deliver the place empty? 
  3. Have you thought of living in it immediately while you improve it (to either rent at market rate or to resell)? A live in flip/rehab? 
  4. The 1% rule can be very deceiving. Is it 1% with tenants paying all utilities, doing yard work, etc? Or is it 1% with you paying more than just PITI?

Bottom line, listen to the side of you that is reminding you this is a business. I like to have a good relationship with my tenants, but not at the cost of the business. Also, if the tenants end up staying, I would educate them about not doing any repairs on their own anymore, and to contact you immediately with any problems. Embrace the process, and don't rush to get your first property "done with".