Buy & Hold Rental strategy for cash flow

11 Replies

Hello all:)

I briefly wanted to share what my brother (Jonathan) and I are doing in starting our real estate investing careers and would like advice and input from BP community.

Jonathan is currently serving active duty as a Marines officer in Camp Pendelton- San Diego, CA.

After renting for about a year (Approx $1500/month) he decided to use his VA loan and purchase a home.

He purchased a condo in Oceanside CA:

  • Sale price: $437k, $0 down with VA Loan
  • 4 bdrm, 3.5 baths
  • Mortgage, Taxs, Insurance, & HOA : $3k

He is renting 3 bdrms @ $1k each which covers all his expenses.

In return, he is living for free and keeps his BAH (Basic Allowance for Housing- $2700) 

We think we may have found a Niche.

We were thinking of purchasing a second property with the following criteria:

  • $400k - $550k 
  • 4bdrm, 3.5 baths
  • Down payment: 20% $80k - $110k
  • Rents: $1k/room 
  • Renters will be strictly Military Officers 
  • Cash Flow $1k
  • ROI (Cash on Cash) 10 - 12%

Due to the Military community in Oceanside, we wanted to capitalize on this need for housing strictly for them. We also think that targeting this specific group of individuals (Fiscally responsible) creates a common bond in the household.

What do you guys think of this strategy? Are we missing anything? Tips and advice are all welcome.

Thank you in advance!

@Michael Bangsal Looks like you and your brother are making it work in an expensive market, good on you guys for being creative! That being said, I like your concept but for a strategy I would caution about fair housing laws which you will likely be violating if you officially "only" lend to military officers. I don't know the ins and outs of the fair housing laws, especially in Cali but would advise to seek expert advise on this issue and possible ways to create a tenant criteria that suits your needs/comfort levels. You do not have to be exclusive to military officers to gain top notch "professional" tenants...especially tenants that may stay longer than three years ;) Best of luck and Semper Fi!

Superficially it appears that he is living there free and therefore saving $1K/month. However, you have not allocated anything for vacancy, maintenance, and cap expense. It is fairly common in San Diego with the very low vacancy rate to use 5% of rent for vacancy ($4k * 5% = $200/month) and to have actual vacancy rate below 5%. I have little experience on condo maintenance and cap expense costs but if this were a SFR house I would allocate $500/month for maintenance and cap expense of a house of that size. A condo obviously is much less so maybe $200/month. So it looks like $600 of savings over renting the room at $1K. That is a great return on a virtual $0 cost unit.

Using the exact same numbers for the potential purchase to pick a value in the range and to minimize re-work. $437K purchase would result in $87,400 down that with closing costs will likely cross $90K (So we will use $90K). $600/Month * 12 = $7200 (note if 4 rooms are rented under same scenario the expected profit would be slightly higher than the $600 calculated on 3 rooms rented). $7200/$90K provides an expected return on cash of 8% (not the 10-12% calculated without including vacancy, maintenance, and cap ex estimate). It is not impressive. However, historically San Diego has great appreciation both rent and market. Finding units with positive cash flow in San Diego is not easy. And finally this 8% return is without accounting for equity pay down. Equity pay down is a tricky subject because it is not as easy to access as monthly cash flow but it still should be counted in some way in the estimated ROI.

I like the plan.  I would never choose this much work for an 8% return (S&P 500 historically has done better and is more passive) but the 8% does not include equity pay down.  In addition, historically there is outstanding appreciation in San Diego (both Property and rent appreciation).  So historically you would have experienced return from the appreciation.

Good luck

@Nathaniel Cherubini

Thank you for taking the time to put your input into the situation. I'm taking notes and will look into "Fair Housing Laws"

What do you think about renting each room to different tenants? 

Tempted to say the model only works because your brother lives there. I wouldn’t expect the same results elsewhere. Lieutenants have used crashpads for the history of man it seems. But all it takes is a serious girl friend or one drunk exchange and poof, another “room” to turnover. You move in someone who doesn’t click, poof another guy or two moves out. Next guy deploys. Wash rinse and repeat. You’re basically buying a four room frat house. If that’s what you want, go get em!

Have your brother look me up in the GAL if he wants to talk.

-Seats

@Michael Bangsal I tried this strategy with a good friend of mine in San Diego. We partnered and bought a house together and rented out the other rooms (and garage/basement) to friends, while we lived in the other two rooms. We also were basically living for free. Our numbers were very similar to yours. To @Will Wiggins point: this was great as a young, single Lieutenant. Then the market crashed in 2007/2008 and the value went down significantly. Then my partner took orders to Norfolk, VA. Then I got married and my wife actually moved into the house with me....with my other roomates...because we couldn't afford to live in the house by ourselves. Trust me, this is not a good strategy for a newly married couple!! Then, I was forced take orders to Texas. So, now my partner and I own a very expensive house in San Diego, neither of us live there, and are still renting out the house to military guys, and managing from afar. The rents covered the mortgage (PITI), but as others have already pointed to, there are many other expenses besides the mortgage, taxes, insurance, and HOA. After all expenses were calculated, we were each losing about $500 a month. My partner then decided to get out of the Navy and go back to school. So, now we own a very expensive house in San Diego, which is underwater because we bought at the top of the market cycle, are losing $500 a month, and my partner no longer has a job. He finally had to cut bait and ask for me to either buy him out (which I couldn't do), or we take a loss and try to sell; we decided to take the loss and sell, via a short sale.

I tell you all of this because we are at a very similar market cycle to 2005 when we bought. Don't make the same mistake I did! Make sure the rents will cover all of your expenses: mortgage, taxes, insurance, HOA, maintenance, capital expenditures, vacancy, and property management. In Southern California, this is hard to do! Hope that helps.

Michael, i dont have alot to add, but i would say soak in all of the information from the rest of the BPers on this forum, really great info being posted here to help you out. Keep us posted wih your decesions going foward, id be interested to see how everything works out for you.

@Dan Heuschele

Thank you for your input! You make good points that ill discuss with my brother.

From my military experience, I agree with @Will Wiggins .  This seems to be a decent arrangement for the time being due to its low cost but I would not be taking on 400k+ debt to try and turn over rooms in a dorm-style house.  Also, in theory the whole "military officers only" is a great thought.  But as mentioned you may run into fair housing issues.  I think that having your brother at the house to be the in house manager is good.  But what if he has to deploy?  I wish you the best of luck but be mindful of the potential pitfalls of this strategy.  

@Tyler Dunlap Thanks for taking the time for your input - All great points to consider to say the least. I actually had the same thoughts, we're doing it with one house now and its interesting what others have to say about the strategy.

@Michael Bangsal I'll agree like others, this can be a good and profitable niche which is easier to manage due to your brothers residence there. When not living there you are essentially renting a multi unit building, with all common amenities.  So you will have the same issues as a 4 plex, but now you will deal with even more tenant on tenant issues like a tenant complaining that another doesn't pick up their clothes or clean the dishes or pull their weight or whatever.  Which leads to more turnover as others have suggested.  I am on the same page as @Tyler Dunlap that I wouldn't incur that amount of debt for this investment, but that's just me.

I will say don't let our opinions change your mind if you've got a plan.  I'm not sure how post placement works in the Marines but in the Army you usually know a few others getting stationed at the same post as you around the same time.  You also usually know a few that get posted there a year ahead of you and a year behind you.  Operating this type of rental business you can capatalize on this.  Offer all current tenants some amount (couple hundred dollars maybe?) if they find a tenant that passes your screening that will begin renting in a defined amount of time after they or another tenant moves.  This will reduce your vacancy and reduce the amount of work you or your brother need to do to fill the vacancy.  Just one suggestion to help make this more viable, hope this was helpful.

Michael,

Side note, who is paying the utilities when your brother moves?

Is he going to self-manage from around the globe?

V/r

Kyle Beauchamp

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

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

Start here