I have been looking into buying a rental unit. I have been reading and learning on these and other forums and have been playing with a spreadsheet for calculating cash on cash ROI and % profit, etc. The spreadsheet on BP forums is admittedly conservative but I am not a very optimistic person, and my past experience with renting out my SFH (sold now) has taught me to be conservative as well.
FWIW, I live near Southern NH, and Nashua NH has some good rental properties. However, when I plug in the numbers I see a 2% ROI with 25% down payment on 135K. Even if I buy the property with cash (I can't) I don't see very good returns - percentage wise.
Just for kicks, I tried buying a cheaper property in Cleveland OH with slightly lower monthly rent (Nashua is around 1100/mo, Cleveland is around 1000/mo). It still does not seem very lucrative. The only way it makes sense is if I buy a 2 unit property for, say 150,000 in Cleveland. But I am not sure how much duplex properties cost realistically - I am just trying this hypothetically.
So my question is, does it ever make sense to buy a 100K to 150K property to rent out at 1100 to 1400 per month as a single unit? The only way I see that working out is if you get lucky and have no repair costs and long term tenants with low turnover. Thoughts?
@Reggie Chau , have you ever been to Cleveland? You may wanna check it out before you jump in.
Also, if you buy local, you can pm & learn the ropes. If you buy in Cleveland, you will probably need a pm. No bad stories there. All pm’s are great! ;-)
You will want b/a properties to rent, otherwise you will have a new job. New job title: adult baby sitter. ;-)
Stay close to home w the lower numbers is the real way to go
Ditto what @Alan Grobmeier said. Buy local class B, self PM and select good tenants. That model started as a hobby for me and now it cash flows life.
@Reggie Chau Yes the single family model within those numbers works wonderfully. But to build real wealth at it you will want to buy these properties at a significant discount. For example, if the property would appraise for 135k, then you would want your "all in" to be about 100k which is slightly under 75% of the ARV. That way when you go to refinance the property you could get the majority of your money out of it and then your ROI gets into the 100% or more in returns.
But I need to explain more about the strategy that will explain better how the numbers work. We use what is called the BRRRLO strategy which is a combination of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method and the Lease Option model.
The lease option model minimizes expenses while maximizing cash flow over the length of the option period (during the time the tenant has the ability to purchase the property).
The tenants that do lease options tend to be much better tenants than regular tenants because they are looking forward to owning the property and because of that they tend to take care of things better than the average tenant. Also, because they pay a $3900 option fee to get into the property, they are more invested than a regular tenant. If done right, turn over and vacancy rates are usually really low along with maintenance because the tenants take care of most of their own maintenance. And you can collect a premium rent.
Here is an example 3 bed 2 bath property with rounded numbers for simplicity.
80k - purchase price
5k - closing fees on purchase, hard money costs, carrying costs for 3 months
15k - rehab costs
95k - bank loan at 70% ARV (its possible to get this done without seasoning if done right)
2k - closing costs for new loan
7k - total out of pocket
4k - option fee from tenant buyer
3k - money you have left into the property once lease out
$1200 - monthly rent
$650 - mortgage payment (5.5%, 20 years, 5-year adjustable rate)
$350 - taxes and insurance (the taxes in that area seem pretty high compared to other areas)
$0 - property management (since it is a lease option, management tends to be very low and if you get a good tenant buyer it should only take about 1 hour a month to manage)
$200 - monthly cash flow
$7200 - total cash flow for 3 years
$52,500 - profit at sale after 3 years (145k sales price - 91k loan balance - $1500 closing costs)
60k - total profit (really $59,700)
667% - ROI averaged over 3 years (60000/3000/3 years X 100 to get the percent)
This is how you can make a lot of money buying single family homes in the market that you are describing. It may look complicated at first but once you get the hang of it, it really is not that complicated. We have 45 lease option properties in Arizona that follow this pattern pretty closely and we teach and coach people how to do it at our monthly meetup groups. So it really works to create monthly cash flow while building up your net worth in markets where your total in is less than 150k and that number is around 75% or less of the ARV.
@Reggie Chau To answer your question, buying an SFR can make sense. 2 of my rentals in Cleveland are SFR's. BOTH are 2 percent rule. One is in a B-/C+ neighborhood.....the other is in a C neighborhood. Combined I did NOT have to spend $150,000 on those properties.
Great advice! I was just using Cleveland as an example for learning the numbers. Also, I am learning how sketchy the whole 1% and 2% rule is. I appreciate your advice to stay local and that is what I intend to do.
@Shiloh Lundahl thanks, I will keep looking.
@Brian Garlington thanks. I am more interested in buying a rental condo unit on the cheap in this area for now. My SFR tenant experience was not very good.