My wife and I are looking to start building a portfolio of rental properties and really are just trying to get a handle on the whole process at the moment. I was wondering if I gave a possible scenario if I could get some input form successful landlord/investors.
This will be for lower price rental property to get started so that we can see the process in action.
What if you had a chance to do the following:
Opportunity to purchase an older investment property (2 bed / 1 bath) in an average "c" neighborhood where home values are from 35K to 70K. The seller was willing to give you a 24 month $2,000 down lease for $400 a month and the property already rented in the past for the $550 to $600 range. If the selling price was at $35K and you were given the chance to secure financing over the 2 years and all of your payments over the lease paid down the note less 6% interest. Would this be a good deal to investigate for a first time property? In this scenario we would not have to secure financing for 24 months so it buys us some time.
I have run the numbers and it seems it would have a positive cash-flow after securing financing of around $200 to $250 after expenses. We would most likely have to put 10 to 12K into it up front on top of the 35K which would still have it a bit below market value.
35K + 12K = 47K all in
First 24 months
$400 + insurance, vacancies,etc = $600
Rental = $600
So for first 2 years or until I can finance I break even in a perfect world
After financing the deal at 5% to 6% over 30 years I would get something like the following:
$180 + insurance,vacancies, etc = $380
Rental = $600
So this would generate positive cash-flow of $220
Does my thinking seem legit on a deal like this?
Anyone have any insight? I may throw out some other hypothetical situations so that I can get my head wrapped around the process. I have ran businesses for years but there are possible loopholes in real estate that I may not be aware of until I walk through it with the first property.
Any thoughts are appreciated.
I'm not sure that I understand how you came up with numbers for "insurance, vacancies, etc." Probably since I think of those numbers in annual totals. Just thought I'd point out that factoring in property management might be wise and turnover costs. Those are two things I didn't see you mention in your post.
I rounded the turnover into the etc amount. I simply erred conservatively there to be on the safe side. Management would eventually come but not on one property.
Try the BP Rental Property Analyzer.
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