I'm new to real estate investing, and am very interested in a single family rental property currently owned by an aunt. She bought the home several years ago under a traditional mortgage, but pays a ridiculously high mortgage every month compared to how much the house rents for.
Put in a simple matter, she's fed up with the situation and has my immediate family (We live in the same town as the property, while she's living far) managing the house. It's in relatively good shape, hardly any issues, and the current tenant is very cooperative and responsible, he intends on staying for at least another 2 years.
I'm seeing this as an opportunity for my first buy-and-hold property. It currently rents for $650 monthly, while the mortgage is about $865. The principal for the property currently sits at about $86,820, with an Escrow balance of about $850.
This is obviously a very bad deal as it is; my question is what would be the best option to drop the mortgage every month in order to get a positive cash flow, either by refinancing the mortgage, or getting some other loan at a much lower monthly cost?
Any and all answers are greatly appreciated.
Refi, or raise the rent. Those are your only two options. $87k is about $450 for P&I. Don't know what your taxes are, but assume insurance at $50/mo. If you buy the property from your aunt at $90k, then you could potentially be cash flow for ~$50 per month with the same tenant. After you factor in maintenance, than might drop to $0, with the tenant only paying off your mortgage as a return.
Keep reading the blogs and forums on BP and you'll see a lot of references to the 1% rule, which means the rent received each month should be at least 1% of the purchase price of the home. In this case, if the market rate for rent of that home is $650/month, then you should pay no more than $65,000 for the home.
On the other hand, the market rate for the house may be much higher, and you're just giving the current tenant a great deal. If you could rent the house for ~$900/month, and purchase at $90k, it may be a worthwhile investment. Otherwise, I'd pass on purchasing the property.
I would, however, advise your aunt to refi, unless she's more concerned with paying down the balance on the mortgage for the next 8-22 years.
Thanks for the info Jack.
I'll see what can be done about the principal on that property, keeping in mind what I've read and what you told me.
It is hard to make money at 1% with a cheaper property like that. 1% doesn't leave you much for maintenance or repairs. Those would likely catch up with you over time. You would be better off looking for something else.
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