I am new to Real Estate investment , I have been looking for a deal for several weeks now and I think I found one , I would love to have your opinion about this. I don't have a good credit score because I went thru business bankruptcy and had few personal guarantee so it effected me personally etc. etc. I solved it but I lost my credibility and it will take several years to fix it.
I will purchase this place cash to generate passive income.
The apartment is $175K 2 Bed 1 Bath
HOA : $300 a month x 12 = $3600 a year
Tax : $1400 a year.
Insurance etc. :$100 a month x12 = $1200 a year
If I rent the place 12 months contract , it rent for $1,650 a month.
$1,650 x 12 = $19,800 - HOA,Tax,Insurance = $13,600 NET
If I rent the place month to month , it generates $2,400 a month.
$2400 x 12 = $28,800 - HOA,Tax,Insurance,Internet,Electric etc = $21,540 - $4,200 Management Fee = $17,340
If I do Vacation rental with Property manager cuts %30 and gives me %70 which is $25,000 After all the expenses.
The property value would go up to MAX $205K-$220K in 5 years.
I really will appreciate your opinion on this..
I really don't know anything about Vacation rentals so I can't comment on option 3.
As for options 1 and 2, are you really able to raise the rent 750/mo by going month to month? What kind of property is this?
For option 1... 300 HOA + 116 taxes + 100 insurance = 516/mo expenses. Do you have to pay for water/sewer/trash? Do the HOA fees include maintenance and Capital expenditures? Do you factor vacancy into that 1650 /mo income? I'm estimating closer to 1016/mo in expenses (if you manage) leaving you with 7600/year net. Which is only a 4% cash on cash return. I think you would be better off putting the money in a fund.
Option 2- IF you could realy get 2400/mo... same 300 HOA + 116 taxes + 100 insurance + 50 internet + 75 electric + 350 mgmt (your numbers) = 991/mo expenses. And again I'd have to ask about the maintenance/capex/vacancy. Assuming those expenses, 1581 expenses ish im guessing. Leaving you with 819/mo or 9828/year net. Which is 5.6% cash on cash return. Still think youre better off putting the money in a fund.
These are also just my rough numbers, but at least if it were me, I'd pass on this property and keep looking. Unless of course someone else can chime in on option 3 being viable
Hi @Mark B. , Thank you for your respond.. Yes the HOA includes the water,trash. This is a apartment complex 4 story total of 21 apartment in the complex.
I live couple blocks away from this apartment , I just purchased my single family 18 months ago.I am familiar with the expenses in this neighborhood.
For the option #1 the lease is 12 months so I won't have vacancy. So in my math it leaves me $14,800 after all the expenses , I will only need to pay income tax which I can deduct most.
Option #2 , for this option , I will have to furnish the house and offer Electric,Internet included price.The each room will be rented for $1,200 on this option which makes the $24,000 ( Short term students,Corporations)
I can always combine the Option 2 and 3 so I won't have any missing dates. In reality if you divide $1650 / 30 = it's $55 a day ,If I do vacation rental for $100 a night , I can be booked %95 of the time because of the location of the apartment. The closest vacation rentals 1 Bed goes for $120 - $160 a night.
As I will purchase this in Cash , the cash on cash will never make sense. If I would have a enough credit score than I would buy 3 of this apartments instead of 1 and i would than have the Cash on cash return %28 each apartment. I think the cash on cash return make sense when calculated on Mortgage.
in Cash purchase of $175,000 cash on cash return of %10 is $17,500 Net but even this amount will be subject to income tax.
If I invest this money to a business I can make around $80,000+ profit but it's not passive income. As I mention my credit score will be mess another several years but I can buy 7 - 8 of these kind of deals in cash I can generate $9 to $12,000 monthly passive income.
I am 29 years old and I have several ecommerce companies since 18 years old , I am kind of tired of dealing with business customers,problems,people and lies etc that going in the business so I want to invest my saving to generate headache free income so I can still make money and keep the headache free small businesses for fun that can generate me another $7K- $10K with out issue so I will be fine with $12K passive and $7-10K with small little issues income.
Again , I appreciate your help , Thank you for your quick respond again. Please correct me if I am wrong about cash on cash return.
Im hoping someone else comes in that's more experienced than me, but I don't see you accounting for what happens when an appliance breaks, or when you need to repaint the walls.
Also, vacancy is considered between tenants. So you'll have one locked in for a year, but it might take you a few weeks to a month after they leave before the new people move in. Between tenants you might need to "refresh" the place even by a thorough cleaning at the least.
I definitely think you're on the right track but at least using my estimates, I think you'd need to at least do option 2 for it to make sense.
Depending on your location, have you considered picking up a multi family? For 170k you should be able to get at least a duplex if not a triplex id think. Might yield more net income
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