Purchasing a house to rent it out to people

Rehabbing & House Flipping
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Purchasing a house to rent it out to people

Sung Jin
San Mateo, CA · Member since 2016 · 3 posts · 1 vote

Hi guys!

My name is Jin (22) and I am here to learn more about real estate!

Despite not having knowledge regarding real estate, I am more than ready to dive into the world of real estate and learn what is necessary to succeed - that being said, I want to share my idea with you guys in order to find out whether the plan I have prepared is realistic or not.

I was thinking about purchasing a house, apartment, or condo with price range of 200,000 USD. I researched online that as long as I have a decent credit score (above 700), I am eligible for FHA's 3.5% down payment program. Also, by choosing fixed mortgage rate, I would be paying fixed payment on monthly basis.

Now, the question is, do you think it would be wise for me to do 10% down payment and purchase a property worth 200,000 and pay monthly mortgage of approx 1,000 and do 30 year mortgage plan? I do not plan on living in the purchased property, however, renting it out to people.

Here is an example:

I found a house in San Jose with 3 beds and 2 baths. the price up for the sale at this moment is 199,900. According to Zestimate, its original price was suppose to be 238,700. When i used estimate mortgage check to see how much I would have to pay if I were to put down 10% (19,900), I would be paying 804 for monthly payment. As I have mentioned before, since i will be renting the rooms out for people, I am thinking about charging approximately 800~1,000 per room. 

3 beds x 900 (per person on average) = aprrox 2,700 income. 

2,700 x 0.10 = 270 will be saved separately every month for maintenance in the house

2,700 - 270 - 804 - 200 (emergency fee) = 1,426 (remainder)

If what I have explained so far makes sense, would it be wise for me to take this plan into action?

I apologize in advance if my explanation is vague! Please help me by sharing your experience and knowledge!

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Corey Woodruff
Saginaw, MI · Member since 2016 · 161 posts · 67 votes
10y

FINDING PURCHASE PRICE:

You will find houses in the same general area of the house you plan on purchasing, and try to match them up as closely as possible to the house you plan to buy example: 3 bedrooms 2 bath 1300 square feet, kitchen similar. so if 5 houses in your area that are similar to the one you are buying are selling and have been sold at $175,000 and the one you are buying is 199,000 then that means you might be overpaying for that house in that particular area. you can find the prices of homes in your area by going on zillow realtor.com and by asking your local realtor. 

RENT EXPENSES:

50% RULE: general rule of thumb rule that investors use saying that 50% of your total monthly rent will go towards expenses and should not be counted as monthly cash flow( monthly profit)

EXAMPLE: $2000 RENT = $1000 IN EXPENSES

2% RULE: general rule of thumb rule that investors use saying that your monthly rent price should be 2% or more of your total purchase price(DISCLAIMER: this is a much harder rule to fulfill in certain areas and you should not buy or not buy a house based off from either of these two rules. they are just rules of thumb for guidance.) EXAMPLE : buying a house 200,000 your monthly rent should be 2% of 200,000 which is 2000 a month in rent 

CASH FLOW: This is your monthly profit AFTER expenses, mortgage, insurance and all other expenses are paid. 

EXAMPLE:

Rent: $2000

Expenses:

Mortgage $550

maintance, insurance, vacancy, cap ex, etc. (50%rule) $1000

TOTAL CASH FLOW(PROFIT) MONTHLY: $450 A MONTH

HOPE THIS HELPS 

good luck 

let me know how it works out

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  • Corey Woodruff
    Saginaw, MI · Member since 2016 · 161 posts · 67 votes
    10y

    make sure you put at least 50% of rental income every month away for expenses and maintance because you will have expenses like cap ex expenses(big cost items) that will need attention eventually and not saving for them could push you down the wrong road in this business and also dont put any faith in the zestimate on zillow. Do your own research by running comps in your market to find the actual retail price of your property. Dont rely on zillow to do your homework cause it could come back to bite you hard. 

    Good Luck 

    ABC'S OF REAL ESTATE by ken mccelroy READ THIS BOOK! it will fill in a lot of blanks for you

    1Reply
  • Sung Jin
    OP
    San Mateo, CA · Member since 2016 · 3 posts · 1 vote
    10y

    Hi Corey!

    Thank you so much for taking your time to answering my question!

    If it does not trouble you, can you tell me more about how I need to distribute rental income? what do i need to be more aware of?

    Where can I start my own research regarding the actual retail price of property?

    Thank you so much!

    Sung Jin,

    0Reply
  • Account Closed
    Jamesville, NY · Member since 2015 · 55 posts · 34 votes
    10y

    If you are not planning on living in the house, but renting it out instead, you won't be able to qualify for the FHA loan with 3.5% down payment. I believe they require you to live on the property for at least 1 year.

    It all depends on the bank, but you may be looking at more like 20-25% down payment with a more conventional loan.

    Also, I agree with @Corey Woodruff, save a lot more than you expect for expenses and maintenance and factor that into your initial numbers. I just had to replace a furnace that I thought I could get 5 more years out of, it was quite the expense.

    1Reply
  • Corey Woodruff
    Saginaw, MI · Member since 2016 · 161 posts · 67 votes
    10y

    FINDING PURCHASE PRICE:

    You will find houses in the same general area of the house you plan on purchasing, and try to match them up as closely as possible to the house you plan to buy example: 3 bedrooms 2 bath 1300 square feet, kitchen similar. so if 5 houses in your area that are similar to the one you are buying are selling and have been sold at $175,000 and the one you are buying is 199,000 then that means you might be overpaying for that house in that particular area. you can find the prices of homes in your area by going on zillow realtor.com and by asking your local realtor. 

    RENT EXPENSES:

    50% RULE: general rule of thumb rule that investors use saying that 50% of your total monthly rent will go towards expenses and should not be counted as monthly cash flow( monthly profit)

    EXAMPLE: $2000 RENT = $1000 IN EXPENSES

    2% RULE: general rule of thumb rule that investors use saying that your monthly rent price should be 2% or more of your total purchase price(DISCLAIMER: this is a much harder rule to fulfill in certain areas and you should not buy or not buy a house based off from either of these two rules. they are just rules of thumb for guidance.) EXAMPLE : buying a house 200,000 your monthly rent should be 2% of 200,000 which is 2000 a month in rent 

    CASH FLOW: This is your monthly profit AFTER expenses, mortgage, insurance and all other expenses are paid. 

    EXAMPLE:

    Rent: $2000

    Expenses:

    Mortgage $550

    maintance, insurance, vacancy, cap ex, etc. (50%rule) $1000

    TOTAL CASH FLOW(PROFIT) MONTHLY: $450 A MONTH

    HOPE THIS HELPS 

    good luck 

    let me know how it works out

    2Reply
  • Corey Woodruff
    Saginaw, MI · Member since 2016 · 161 posts · 67 votes
    10y

    did you understand all of that? make sure you have a solid grip on that info before you dive into real estate. Read the book on rental property investing by @Brandon Turner I think that is the title anyway.. that book is what got me started and it did right by me thats for sure. well written book that is packed full of info you cant invest without. 

    god luck

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Cash flow is NOT profit.

    0Reply
  • Gloria Mirza
    Real Estate Agent · San Jose, CA · Member since 2015 · 172 posts · 66 votes
    10y

    ummmm 50% rule?  That's ridiculous!!  If I own a 1,400 sqft house that cost $100k and rents for 800 a month in ohio would my expenses be $400 a month?  Now what if that same house was in San Jose and rented for $3,500 a month.  Did my cost of repairs just jump up to $1,750?  

    @Sung Jin I believe my expenses for a 1,400 sqft house are roughly $300-$500 a month.  It's hard to get good number since one offs like replacing a roof or a broken fence are hard to account for.  

    With regard to FHA loan, you can buy a 4-plex, live in one unit and rent out the rest and still be able to qualify for FHA. I live in San Jose and haven't seen any homes for 200k around here. Is this a condo with high HOA fees that possibly requires a lot of rehab work?

    1Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    10y

    if you are planning on using the FHA 3.5% down loan you have to live there for at least a year. In my opinion that is more than a fair trade off considering the low rate and low money down payment they require.

    In high priced markets like you're in or like CT where I am located it can make getting a start in investing a possibility where otherwise it may not be possible if they had to put 20-25% down. 

    1Reply
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