How Much is Too Much for a Rental?

Question

How much is too much money to pay for a Rental house?

I'm looking at a very nice home in an exclusive neighborhood where the houses are quite expensive, and considering purchase and rehab for future rental property, but I'd like to hear some suggestions/advice from more experienced investors please?

Thank you in advance!

Lee & Linda

Account Closed · Answer

There is no magic number. If you are betting on appreciation, all you need is enough rental income to cover expenses. But for any decent cash flow or yield you are probably looking at $120-$150K max and even at those levels its hard to get better than 1% GMR ratios. Above that its negative cash flow territory. For example a $700K home in the Bay Area would only get $2800 or so in rent which would not cover PITI if you had 20% down.

On sub $40K houses you may get 2% or higher and in the 50-100K range you typically get 1.5-2%. Of course this depends on region, market etc but the above numbers apply in the typical investment markets discussed here. For me the sweet spot is the 50-100K range where the neighborhoods are not war zones but there is a large pool of permanent renters.

David Krulac · Answer

@Lee Linda

It depends on your local market.  What are the average & median rents?   Look at what others are charging for rents in newspaper & on line, Look at rentometer, Zillow, trulia, etc.

Around here an average 3 br is around $1,000 or so, I don't ever go over $2,000 or so.  The higher the rent the thin the market for renters.

A friend rents places short term to movie stars filming in town, he gets $5,000 or $6,000 a month, which includes furniture, utilities, fully equipped house and maid service.  And he's not rented every month either.

Lee Linda · Answer

Thank you, Mike Sattem, for the excellent suggestions. Do you know if (and where) I can get these pieces of information online, as the county Courthouse is quite a distance from my location?

I've been reading and listening to videos/podcasts every few minute, so I'm learning, but my personal "curve" seems very slow. I've read a lot about the benefits of having a good mentor, and would love that opportunity but two matters cause difficulty in this for me. One is that I live in a very small town and detached from some of the "clubs" and other opportunities to get to know other investors, and Secondly I read that, as in any relationship, it's important to give to the other person as opposed to always taking. I, however, have nothing to bring to the table which might be appreciated by the one mentoring me. Any suggestions?

THANKS for any and ALL help, advice or guidance you might be willing to share to help me get going!

Lee (& Linda)

Mike Sattem · Answer

Lee Linda,

Finding quality deals can be one of the hardest parts of Real Estate Investing. A few different ideas, all of which are detailed greatly in other threads on this site.

1. Look for junker houses with absent owners/landlords- This is a numbers game to me, and I have mailed many letters without response, but occasionally you can find a seller willing and able to make a deal.

2. MLS Expireds. -This is my bread and butter, as I already know the seller wants to sell, and I can handle the transaction myself. I can automatically deduct 6% off of whatever the old list price was as my new high offer as this is the same money in their pocket since they won't be paying a commission.

3. Probate/Bankruptcy Sales-To be honest I have only tried this once and it was such an emotionally challenging experience I won't do it again, however at the time I was young (24). Look for obituaries and cross-reference with tax records to see if an estate is going to have to sell "mom or dads house." The home most likely will need updating at a minimum, but more likely deferred maintenance as well. If the family is local they may be less willing to give the property away, but if all the kids live in other states often times they will take the money and call it good.

Just some ideas.Check out podcast 58 for some more ideas.

Lee Linda · Answer

Mike,

(Sorry about the delayed reply) -- Funny you say that. I was reading the same train of thought in a book I'm reading this morning. I think I've decided to just flip the prefab to get rid of it, and I should make a reasonable profit after refurb, but tell me please - how do I FIND these "cheap" deals on houses? I'm having no luck getting anything much below full market price. I still haven't learned this trick - obviously.

I so greatly appreciate y'alls feedback and insight.

Lee

Mike Sattem · Answer

Lee and Linda,

As a Realtor, and as an Investor, I would caution you about planning on appreciation beyond typical inflation. It does happen, but it sounds like your plan is caught in between two goals: either buy and hold investing, or flipping. I personally have never flipped anything (other than pancakes) however I have worked with several clients who do, and there train of thought seems to be start small. Find that junker house for cheap, so that if things go terribly wrong, you are only out $50-60K, instead of $200K. I do however have single family rentals, and work the largest property management company in Northeast Oregon, and I have found that craigslist could be a great resource to check local rents. See if you can find some homes in your area for rent, see what they are charging, and keep in touch with the landlord by acting as a perspective tenant to see how long it takes to fill the vacancy. Just some suggestions.

Lee Linda · Answer

Great insight guys!  I really appreciate the wisdom! These are some thoughts matching my own, but being somewhat new to this "game" of real estate investing, I like to kind of check my thinking. I've primarily stuck with the $50K to $100K houses too, but I saw a couple become available in a nice community and at first I thought "flips", but then again, the market is just starting the upward slant, and I'm thinking possibly if I buy, rent for a year or two, and then sell, that maybe I can reap the benefits of a better market. I haven't rented in this price-range before, and I don't know the benefits, drawbacks and much less the renters for this market. You've made some good points I hadn't considered, but let me ask this, if I may please...

This community isn't real old, the houses were, when it was built, in the $750K to $4M range, but presently they're selling at a little less than half that range. The market in my area just recently took an upward slant, and it's predicted to continue to go up, especially in that particular area because of a new Interstate "loop" being built nearby. However it's those 1, 2 or maybe 3 years of renting that I'm concerned about. I don't want to tie up that much capital in one or two houses if I'm going to find myself sitting on empty properties with no return. QUESTION;  I'd love to hear your thoughts, suggestions and advice as to what you'd do, or not do?

THANKS y'all, for sharing your much advanced experience and insights.

Lee (& Linda)

How Much is Too Much for a Rental?

Most Popular Reply