First investment rental property

18 Replies

I have recently graduated college and thanks to to all of the great people on here I am convinced real estate is the answer to a better life for me, meaning I could live comfortably from rental income when I have around 10 properties. I would like to start out by purchasing a single family home in the 100k-120k price range. As of now I am trying to save around $20k for a down-payment on a house in this price range. I am 25% of the way there and I feel that in a year I will have saved enough to place a down-payment. I have found a 3 bedroom home which is about 8 minutes from Cornell University and close to other schools. The seller is asking for $110k. I dont know the condition of the house but from the pictures it looks like it is in good condition. Three bedrooms homes rent for around $1500 a month in Ithaca, so that is the number I think I will be able to rent it out for. Because of a very large college student population the area has a vacancy rate of close to 0%. Below are some numbers I quickly estimated to see if this is a good investment. I realize that the property is going to be sold by the time I have enough saved to put a down-payment but I am just doing my research for now and trying to become good at analysis.  What do you guys think?. Is this a good investment?. Also is it accurate to assume that as a first time home buyer I will need to put down 20%?. I wish i could provide more information, but this is all I have as of now. Thank you all and I look forward to getting advice on this investment and any type of rental property advice!

Residential Income Property Analysis

Property Assumptions

Purchase Price$110,000

Down Payment$22,000

Loan Term15 Years

Interest Rate4.00%

Principal & Interest Payment$651

Closing Costs$0

Gross Scheduled Income (GSI)$18,000

Vacancy Rate7.00%

Number of Units1

Pro-forma Income Statement & Cash Flow

Gross Scheduled Income (GSI)$18,000

Less Vacancy$1,260

Total Actual Annual Income$16,740

Other Income (Laundry, Late Fees, etc.)$0

Gross Operating Income (GOI)$16,740

Annual Opertating Expenses

Accounting$300

Admin/Bank Charges$0

Advertising$0

Electricity$0

Elevator$0

Gas$0

Landscaping$0

Legal$200

Maintenance & Repair$2,000

Payroll taxes$0

Permits and licenses$0

Pest control$0

Pool$0

Property Insurance$440

Property Management$0

Real Estate Taxes$3,850

Security$0

Telephone$0

undefined$0

Tenant buyout$0

Trash$0

Water$0

Other$0

Other$0

Total Operating Expenses$6,790

Net Operating Income (NOI)$9,950

Annual Debt Service (mortgage payments)$7,811

Before Tax Cash Flows (BTCF)$2,139

Key Operating Ratios

Capitalization Rate9.05%

Cash on Cash (COC)9.72%

Gross Rent Mulitplier (GRM)6.11

Net Income Mulitplier (NIM)11.06

Debt Coverage Ratio (DCR)1.27

Expense Ratio (ER) Per Unit40.56%

Price Per Unit$110,000

Here is a link to the property:

https://ithaca.craigslist.org/reo/4827978957.html

   

One thing I've learned as a first time investor is to not always rush into a home. Ithaca is a great location, especially with the College and Cornell nearby. You may also be able to attract weekly or weekend rentals to a place like Ithaca (AirBnB, etc.). Why do you list closing costs as 0? In the current soft market you could offer lower than the 110K and make some money going in. Set a price that is a good deal for you, and if it doesn't work out find another property. Making money going in is always a great way to start. Good luck!

Originally posted by @Bradford Myatt :

One thing I've learned as a first time investor is to not always rush into a home. Ithaca is a great location, especially with the College and Cornell nearby. You may also be able to attract weekly or weekend rentals to a place like Ithaca (AirBnB, etc.). Why do you list closing costs as 0? In the current soft market you could offer lower than the 110K and make some money going in. Set a price that is a good deal for you, and if it doesn't work out find another property. Making money going in is always a great way to start. Good luck!

 Thank you for the advice!. I listed closing costs of 0 since I assumed I would be able to negotiate on the property and that would make up for the closing costs. I should have put a number down to make it more clear for the readers. Ithaca does seem like a great place to invest, but a big problem is the high property taxes. I do agree that one of the best things to do is to negotiate really well. Can you explain to me what a soft market is?. Also do you have a preference as to investing in the syracuse university area or in Ithaca?. I was reading an article online that talked about how syracuse can provide great returns for rental property investors since home prices are fairly low and rent prices are good. Thanks.

Originally posted by @James Wise :

@Yuriy Bindas 

welcome to the site.

 Thanks and I look forward to gaining enough knowledge to make a great first investment!

I don't have a lot of experience with renting to students, is that who your targeting I assume?  I try not to even rent to people with kids, but I don't say that obviously.  110k for a 3br in a college town?  I better be able to eat off the floors and not have to do anything to it.  Id make sure the parents are going to co-sign leases, there is a ton of people on this site who have college town rentals, im sure they can give you a ton of tips. 

I noticed that you said you want to get 10 rentals, from a glance it looks good, but speaking from someone who has over ten (self managing - which I need to change soon), it can get daunting. 

Are you handy at all?  Can you find a cheap one to fix up, maybe a seller finance deal?  Just a suggestion.  By taking a look at the numbers, annually (while paying a mortgage) you're going to making around 4-5k?? Sound right?  Long term wise, could be a decent rental, but the repair and maintenance may be a little higher than what you estimated.  Tenants trash stuff, and not to stereotype, but college kids wreck stuff a lot (coming from a college kid who wrecked stuff a lot).  It's a bit close for me on the numbers, but that just my opinion.  You can still make a little bit of money, and obviously appreciation.  However, for immediate cash flow, theres not enough here for me. 

A soft market is a buyers market when supply outnumbers demand. Good deals are to be had. The first half of 2015 is a great time to buy, since interests rates will be closer to 5% by the end of the year. I agree the house should be bought with little maintenance, especially in a great place like Ithaca.

Syracuse is a tough place to figure out. The area with the deals isn't close to the University, but the city is littered with distressed properties.

Originally posted by @Justin Escajeda :

I don't have a lot of experience with renting to students, is that who your targeting I assume?  I try not to even rent to people with kids, but I don't say that obviously.  110k for a 3br in a college town?  I better be able to eat off the floors and not have to do anything to it.  Id make sure the parents are going to co-sign leases, there is a ton of people on this site who have college town rentals, im sure they can give you a ton of tips. 

I noticed that you said you want to get 10 rentals, from a glance it looks good, but speaking from someone who has over ten (self managing - which I need to change soon), it can get daunting. 

Are you handy at all?  Can you find a cheap one to fix up, maybe a seller finance deal?  Just a suggestion.  By taking a look at the numbers, annually (while paying a mortgage) you're going to making around 4-5k?? Sound right?  Long term wise, could be a decent rental, but the repair and maintenance may be a little higher than what you estimated.  Tenants trash stuff, and not to stereotype, but college kids wreck stuff a lot (coming from a college kid who wrecked stuff a lot).  It's a bit close for me on the numbers, but that just my opinion.  You can still make a little bit of money, and obviously appreciation.  However, for immediate cash flow, theres not enough here for me. 

Hello Justin,

I really appreciate your advice!. I am targeting families, at first I was undecided but after some analysis I decided that the higher revenues from renting to students would be offset by higher vacancy rates.  Your advice about repairs caused by students has convinced me that , perhaps later when I get more experienced with rental units I will try my luck in student housing.  Can you tell me what is most daunting about self managing your own rentals?. What is a typical day like running a business like this?. 

My biggest problem is that I am not very handy and I have almost no experience in fixing homes. I hope I would be able to find an independent contractor who would charge reasonable rates when things go bad. I don't know what types of repairs to expect and how much this would eat away from my cash flow.  

4-5k is what I think I will make from a property like this per year. I have been browsing the craigslist in Ithaca and I have not been able to find any housing in good condition under 100k. I believe the large student population drives the home prices up, but rental charges are higher. So it seems like its a zero sum game. I will continue researching for good deals on properties but I dont expect to be able to find an investment that gives me more than 5k in cash flow in this area. Even though the cash flow in my local area is probably less than in other places I want to start investing locally. What type of cash flow do you aim for?. Thank you for all of the great advice you provided!. Now I feel like I am better prepared to get a good return on my first investment. 

Originally posted by @Bradford Myatt :

A soft market is a buyers market when supply outnumbers demand. Good deals are to be had. The first half of 2015 is a great time to buy, since interests rates will be closer to 5% by the end of the year. I agree the house should be bought with little maintenance, especially in a great place like Ithaca.

Syracuse is a tough place to figure out. The area with the deals isn't close to the University, but the city is littered with distressed properties.

 Thank you for the response!. I do agree that rates will have to rise soon. I appreciate the advice and good luck with your investing. 

Couple of things: why a 15 year mortgage? 30 year is going to give you a much cheaper monthly payment, and there's nothing stopping you from paying extra if you want to pay down the loan sooner, while if you commit to a 15 year you don't have the option to pay less and have the loan term automatically extend. 

Secondly, if you're going to live there and owner occupy, you already have enough money saved. You can do conventional financing with 5% down and FHA with 3.5% down. Speak to some lenders and figure out which programs appeal to you.

Thirdly, there's a time in everyone's life when they don't know how to do even simple household repairs. Luckily, we live in the future, and youtube/google will teach you 95% of everything you need to know. Start small, and remember that the worst case scenario is that you'd have to throw in the towel and call someone out to come fix it if you can't, which is exactly the same as what would happen if you didn't attempt it at all. So long as you're careful and use common sense I believe most people can and should tackle most minor repairs/upkeep themselves, at least until they know what it entails.

@Yuriy Bindas  , when I say daunting I do not intend to deter you from adding tons of properties, I mean I always want more.  Also, I DO NOT do things perfectly and always ask for advice (on here a lot too).  You'll find with multiple locations that when its going good, it awesome.  Then on the other hand sometimes it seems like the perfect storm, one thing after another.  In my opinion, the good outweighs the bad for sure.  If you try to learn as much as you can from people's mistakes and ask for advice, it may save you headaches.  Don't let people's opinions (uniformed utterances) cause inaction on your part... Bottom line is YOU still have to make a move.

Im in the process now of hiring a secretary for the first time ever, I wrote about it on another post.  I am letting tenants slip too much on late payments because I do not have the time to deal with all of them.

As far as return, its case specific because for me my properties vary in monthly returns.  I know my sfh's average 7-10 and duplexes average around 15-20.  Some of them drag me down too, but that's where I prefer or at least have fallen into that range.

If you are still looking at buying a rental property feel free to message me. My company helps new and seasoned investors purchase investment properties. Sounds like you are on the right track to get started. We also finance a portion of the sale so you dont have to deal with banks. I love rentals and got started as a landlord 3 years ago, now I help others achieve what I have! 

Originally posted by @JT Spangler :

Couple of things: why a 15 year mortgage? 30 year is going to give you a much cheaper monthly payment, and there's nothing stopping you from paying extra if you want to pay down the loan sooner, while if you commit to a 15 year you don't have the option to pay less and have the loan term automatically extend. 

Secondly, if you're going to live there and owner occupy, you already have enough money saved. You can do conventional financing with 5% down and FHA with 3.5% down. Speak to some lenders and figure out which programs appeal to you.

Thirdly, there's a time in everyone's life when they don't know how to do even simple household repairs. Luckily, we live in the future, and youtube/google will teach you 95% of everything you need to know. Start small, and remember that the worst case scenario is that you'd have to throw in the towel and call someone out to come fix it if you can't, which is exactly the same as what would happen if you didn't attempt it at all. So long as you're careful and use common sense I believe most people can and should tackle most minor repairs/upkeep themselves, at least until they know what it entails.

 You are correct that 30 years is the better loan term. I was thinking that If I financed for a shorter term I would be more focused in paying off the investment faster. After reading your post it makes sense to do a longer loan since that option does exist where I can pay down the loan sooner. 

I dont plan in living in the property, because of this I believe I will not be able to do conventional or FHA financing. It looks like all I can do is wait and save for the 20% or higher down-payment.

I would like to learn how to be more handy with home repairs and perhaps through rental properties I will gain skills in this area. Thank you for all of the advise and good luck with your investing!

@Justin Escajeda It looks like you are getting great returns on your duplexes. One more question for you. Are late payments an issue that is going to come up very often. I assume this would be a bigger problem when renting to low income/lower end units. Thanks.

@Yuriy Bindas  , late payments are an issue for me with about a 1/3 of my tenants.  It is mostly my fault, due to my lack of firmness on prompt payments.  Ive let people slide too much, as well as not giving notices, starting eviction process, consistently accepting late payments without late fee, etc.  I am really trying to change this over the next few months with the help of a secretary I am hiring. 

90% of my tenants are low income, and yes, my higher income tenants do not typically pay late.  However, I do not have enough experience with higher end tenants to confirm the stereotype, even though Im thinking that its true.  Tenants can go bad regardless of what walk of life they come from, but ive really only seen it in low-end tenants because that's mostly all I have.

I just commented on another thread that you posted asking the same question. Check that thread out to get my full response.

But in a nutshell, do not buy this house. I have been an investor in Ithaca for many years now and I know the town and the market well. This house is a loser. Location location location has never been more true than in Ithaca NY. If your house is more than 5 minutes from the Commons you may as well own a house in Africa.

Originally posted by @James Klafehn :

I just commented on another thread that you posted asking the same question. Check that thread out to get my full response.

But in a nutshell, do not buy this house. I have been an investor in Ithaca for many years now and I know the town and the market well. This house is a loser. Location location location has never been more true than in Ithaca NY. If your house is more than 5 minutes from the Commons you may as well own a house in Africa.

 Thanks for the response James. Its great to hear advise from someone so close and who has experience in this area!. I did not think that it would be that difficult to rent out that property, since 8 minutes from the commons seems pretty close. Thank you for steering me in the right direction. The problem is that from my research over the past two months I have not been able to find properties in good shape that are under 150k in downtown Ithaca. I just figured a little further from the commons would mean homes cost less and rents should be a couple hundred less. My thinking is that if the price is right almost any house will rent out. How much do you think a landlord would be able to charge for a property like this?. Would it be possible to rent this house for something like $1100-$1200?. I feel that even though the cash flow is lower the investment for this property would be around $30-50k less than a similar property downtown.What kind of cash flow should I expect if I invest in a  3 bedroom $150k property downtown?. Can you tell me how you started out investing?. I am new to  real estate and would love some more guidance on how to get started in Ithaca. Thank you again!

Yuriy,

I am building brand new high end energy star duplexes down the road from this on Wiedmaier Court in Ithaca, NY (Corner of Burns Rd and Rt. 79.). I just finished 1 duplex this past August and am starting construction of the next 2 duplexes this month. All 6 units are fully rented through July 2016. Yes location is very important. I feel that delivering a much higher quality product for a slightly lower to same price will attract people that still want to be close but don't want to live in a run down house with a slum-lord that will not fix anything unless they could get fined by the city. Ithaca College and Cornell demand for rentals is slightly unusual as well. Marketing is very important along with timing. Students are securing and locking in leases 10-12 months ahead of time. As much as my colleagues and myself try to educate our tenants on this, there is still a few that choose not to renew because its too early. Then 4 months later, they find themselves with no available housing for the next year (unless they want to go to the 8-10min out range, which they don't). You have to advertise to the market at the correct time to hit the bulk of the students. If you miss this window, your pool of renters is greatly reduced. Like James said earlier, you need to look at what is available out there and find a niche that is not available and go after it. Also, do your research. There is a housing shortage currently which is driven mainly by the the Cornell grad student enrollment increase. 

No way would you rent that for $1200. MAYBE if you included all utilities and water but I wouldnt hold my breath. That would not be a safe investment.

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