New to landlording, considering my first property (IL)

4 Replies

Hello everyone,

I am seriously considering becoming a landlord, and recently I started looking at the "starter" properties nearby. Found a three-unit property with the asking price of $150k, property tax of about $7700 (as of 2013), with all units rented out, bringing in a total of about $2100 in monthly rent. 

Monthly income (rent minus principal, interest, and tax) on this property comes out to be about $875 (assuming 25% down on the mortgage and 4.5% interest). 

Gross annual yield comes out to about 17% (annual income from rent divided by purchase price, assuming I buy it for the asking price).

I drove by this property though have not seen it on the inside. It looks decent, not great but not run-down either, matching its surroundings (low-rise apartment buildings). Also, local PD is literally across the street, so crime situation is probably in check (I have not yet looked at the local crime reports). The town itself is growing, albeit much slower than before the bubble burst. It has brand=new subdivisions, and decent-sized lake, an entertainment district nearby, and the "older" area (where this property is located).

My questions are:

1. What other numbers do I need to look at?

2. What do I need to look for in this property?

Thanks in advance for any and all advise!

Before you factor in your mortgage, see if it can cash flow. Assuming a gross rent of $2,100 per month means you will earn $25,200 annually. First, property taxes of $7,700 are really high. You need to look into that. That expense on its own represents 30.5% of your gross income. 

Using the 50% rule (which does not include property management or mortgage costs) there is only allocated 10% to property taxes. Adding in an additional 20% will create an annual NOI of $7,560. Out of this amount you will need to pay your mortgage, any property management fees and yourself. If you take out the minimum monthly profit of $100 per unit, you should earn $3,600 annually from this investment. This leaves only $3,960 to cover your mortgage costs which is only $330 per month.

Unless you can lower your taxes, this does not look like a viable opportunity.

Originally posted by @Ralph Hunter :

Before you factor in your mortgage, see if it can cash flow. Assuming a gross rent of $2,100 per month means you will earn $25,200 annually. First, property taxes of $7,700 are really high. You need to look into that. That expense on its own represents 30.5% of your gross income. 

Using the 50% rule (which does not include property management or mortgage costs) there is only allocated 10% to property taxes. Adding in an additional 20% will create an annual NOI of $7,560. Out of this amount you will need to pay your mortgage, any property management fees and yourself. If you take out the minimum monthly profit of $100 per unit, you should earn $3,600 annually from this investment. This leaves only $3,960 to cover your mortgage costs which is only $330 per month.

Unless you can lower your taxes, this does not look like a viable opportunity.

 Ralph, thank you for your feedback. Can you explain the 50% rule? Also, can you explain where did the $7,560 come from?

The 50% rule is used by investors to gauge the profitability of an investment opportunity. Rental units average a NOI (Net Operating Income) of 50% of the gross income. If you purchase a unit that can create a profit after subtracting 50% for expenses, any property management costs and then mortgages, then you will have a property that cash flows. Thinking you can beat the odds by lowering expenses just does not work. So stick to the 50% rule.

Here is how it affected this potential property. I have broken down the 50% rule so you can see where the expenses are allocated. 

$  2,100   Gross Monthly Rent

$25,000   Gross Annual Rent

- 10% Vacancy Rate

- 10% Property Taxes ($2,500 Annually)

- 10% Property Insurance

- 10% Repairs/Maintenance

-  5%  Owner Paid Utilities

-  5%  Capital Reserves

- 50% Expenses

$12,600   Expenses

$  5,000  - 20% Additional Property Taxes ($5,000 + $2,500 = $7,500)

$ 7,600  Net Operating Income

Out of this number you would subtract the annual cost of property management and your annual mortgage payments. What is left is your profit before paying income taxes. 

Ralph, great info, thank you for taking your time to explain everything. After looking at the numbers, this really does not look like a good deal, unless property taxes are lowered. I'll keep loooking

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here