Renting out a 350k house in Savage, MN

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Renting out a 350k house in Savage, MN

Christian Rasmussen
Lender · Saint Paul, MN · Member since 2015 · 26 posts · 7 votes

Greetings BP. 

I recently found a property located in Savage, Minnesota - and after a couple days of talking with the owners, they agreed to the idea of seller financing (AWESOME!). Normally, I would go through with this deal without thinking too much about it (well, of course I obsess over every deal...) - although this house is a bit different than anything I've done before. All my rentals are rented for $1,200 a month and under. I haven't tried tapping into the higher end rental market as of yet - and frankly it scares me a bit. I don't want a property to be sitting vacant for 3 months while finding a tenant. I also don't want to have sporadic renters (people flying in to Minnesota for business for a couple months or something like that). I've asked a couple fellow investors/agents and neither of them gave me a definitive answer. They both said, as I had assumed, that the rental market for high end houses in the twin cities is very slim, and I could find myself in trouble pretty easily by not being able to find a renter for a few months at a time. That being said, I'm a determined man and I get what I want....... =) 

So BP - I ask you. Any members in MN that have had success or have been unsuccessful trying to rent out higher end houses? Or any members from other cities that maybe have been through a similar situation? Any input is greatly appreciated. 

Looking forward to your responses,

Best,

Christian Rasmussen

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Alexander Lang
Rental Property Investor · Savage, MN · Member since 2016 · 202 posts · 61 votes
10y

Hi @Christian Rasmussen,

I generally tend to try and stick to the 1% rule myself at a minimum. I know the goal is to hit 2% of the purchase price on the rent but on higher end homes you really stretch that percentage due to the acquisition costs. What do you think you could rent for and what is the purchase price you agreed upon?

I'd say if you can figure that out with how much you are "buying it" for and what you can rent in that area that would be a start. I am currently living in Savage and can tell you that there is nothing under $200k (even the smaller 2-1's in downtown savage) and average prices are $215-250k making your 1% rule come in at roughly $2150 - 2500 a month in rent (possibly to break even). It is a very nice place  and neighborhoods are great, but on the higher end for sure like you mentioned.

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  • Alexander Lang
    Rental Property Investor · Savage, MN · Member since 2016 · 202 posts · 61 votes
    10y

    Hi @Christian Rasmussen,

    I generally tend to try and stick to the 1% rule myself at a minimum. I know the goal is to hit 2% of the purchase price on the rent but on higher end homes you really stretch that percentage due to the acquisition costs. What do you think you could rent for and what is the purchase price you agreed upon?

    I'd say if you can figure that out with how much you are "buying it" for and what you can rent in that area that would be a start. I am currently living in Savage and can tell you that there is nothing under $200k (even the smaller 2-1's in downtown savage) and average prices are $215-250k making your 1% rule come in at roughly $2150 - 2500 a month in rent (possibly to break even). It is a very nice place  and neighborhoods are great, but on the higher end for sure like you mentioned.

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  • Christian Rasmussen
    OP
    Lender · Saint Paul, MN · Member since 2015 · 26 posts · 7 votes
    10y

    Hey @Alexander Lang!

    Thanks for responding! The deal isn't set in stone by any means, it's just an option right now. The purchase price would be somewhere between 310 and 340. We haven't discussed price or terms yet. 5 bedrooms and 3 baths, 4,000 square feet (approximate...). It's a huge house - so I assume the amount of qualified tenants would be slim. That being said, I think if I structured the deal properly I could have a monthly payment of 2,800 (taxes included). I also think the house would rent around 3,500. So the cash flow is there if I can structure the deal how I would like to. That being said I'm worried about finding tenants for a house that costs $3,500 a month. I would imagine most people who have the money to pay $3,500 a month would have a house of their own (although there are potential circumstances...). Have you found it easy to find tenants for this price range? Or do you think it could be difficult? 

    It could cause me to lose the house if it stayed vacant for too long - and I can not have that happening. 


    Thanks again for the response

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  • Alexander Lang
    Rental Property Investor · Savage, MN · Member since 2016 · 202 posts · 61 votes
    10y

    Hey @Christian Rasmussen, that is a really good question. I know there are a few rentals in my area of Savage that rent for $2k+ and they have solid tenants that have families close to the local elementary school so they are probably going to stay there for a long time. Savage is a great city and based on the price of that property, I'd guess it is closer to Prior Lake than it is Burnsville (where the housing is cheaper) All the kids from Savage go to Prior Lake so if the property is close to the high school you may get lucky and pull a family moving in with kids that will go to that high school and thus some awesome longevity in that property. 

    But like you mentioned, a $2800 mortgage onto the mortgage or rent you are paying now is a dreadful thought. I would look at the area and its demographics for sure. Also look at your reserves. Things I think about are, vacancy and how long I can afford for this property to go without a tenant. 

    I personally like to budget 3-6 months worth of cash just in case this does happen where I market too high or am doing a renovation to the place and need some time to breath as renovations take place. 

    I think that in the Savage market you can find tenants if you are priced right for sure. Also don't worry so much about the 2 or even 1% rule when renting out a higher priced rental as it will be more difficult to hit those numbers in the beginning. I'm not saying to break even, but i'd just research the rent in the area if that is a major concern, see what is renting, and how your property would compare. If everything else is within the $3k+ range for rent for comps in the area, then you shouldn't have to flex on the rent to attract tenants. Maybe pull up craigslist and map out an area of two miles from this property and see what stuff is renting for?

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  • Brian Wagner
    Lender · Wayzata, MN · Member since 2016 · 26 posts · 8 votes
    10y

    I think your best bet on evaluating any transaction is to stay disciplined and focus on obtaining property where you can meet your cash flow targets.  Try to forget about the market value, what the property looks like and/or future appreciation unless you are looking at turning the property ("flipping").  Those things are great but cash flow is what pays the bills.  Run cash flow numbers and research online for other rentals in that price range to make sure you are confident in your assumptions and invest in a market where you are comfortable and knowledgeable.  Think about all possible expenses and be conservative as well as make sure you have the personal income/liquidity to support the property if it is vacant for an extended period.  It is good you are reaching out to others to hear what their experience has been.  Good luck!

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  • Marc Jolicoeur
    Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
    10y

    Personally, this sounds risky to me.    

    I think your pool of potential renters will be very small. Those that want a larger home have so many options. They can rent all the $3500 homes all over the metro with the best school districts and a great commute to work. They can rent all the $3000 homes, all the $2800 homes, all the $2400 homes and all the $2000 homes.  Heck, maybe they can rent a home for $3500 on prior lake with a dock for their pontoon boat.  Or, a house in Eden Prairie, Edina, or Minnetonka closer to the cool kids, best schools and all the amenities, and much better commute?

    You may attract a doctor or CEO moving into MN.... but why would he stay in Savage when he can live anywhere?

    Does the home have everything to justify such a high rent?    Granite, hardwood, new everything, appliances to appeal a chef, large deck or basement for entertaining, screened porch, 3-car garage, great neighbors, great schools?

    Savage justifies paying maybe $2200 a month in rent - not $3500.

    Marc

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  • Christian Rasmussen
    OP
    Lender · Saint Paul, MN · Member since 2015 · 26 posts · 7 votes
    10y

    @Marc Jolicoeur @Brian Wagner

    Thanks for your responses - I've done a bit more research into the market out there and I'm finding houses for $2,500 and under can have a quick turn around but I'm not finding much sustainability above that. 

    Marc - It's a ridiculously nice house, although your point is solid and you're right.

    Thanks for the input guys, 

    It was an idea and the possibility was tantalizing, but not worth the risk. I'll stick to my off market multi families! =)

    Cheers

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  • Brian Wagner
    Lender · Wayzata, MN · Member since 2016 · 26 posts · 8 votes
    10y

    Best of luck!

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