My First Rental Investment

17 Replies

I have stumbled across BP a week ago and is amazed at how we as a community so willingly share our real estate experiences and opinions. Needless to say, I wish I had found this site before I bought my first rental property this February. I want to provide the numbers to the community and see if you guys and gals can provide me with some inputs. First of all, I am a 35 year old passive investor located in Houston, TX that has a demanding day job. I am not handy at all when it comes with home repairs or maintenance. My goal is to have 5 to 6 rental properties in 5 years as a source of side income but have no plans of quitting my day job anytime soon. With my current job, I can save about $3500 / month which can be used to invest in future rental properties. Below is the a condo I bought near my work this February.

Area: Near Texas Medical Center in a very nice safe neighborhood with good schools.

Property Type: 860 sq ft 1bed/1bath Condo.

Cost: $81000

Remodeling Cost: $6000

Finance Term: ALL Cash

Currently Rent: $1000

Maintenance Fee: $285 / month

Property Tax: 195 / month

Repair Budget set aside: $50 /month

Cash Flow: $1000 - $285 - $195 - $50 = $470

Cash on Cash Return: ($470 * 12) / $87000 = 6.5% (approximate)

My question is if this is a good investment to own. After reading the discussion forums here, most investors are looking for deals close to 20% Cash on Cash return so my investment looks pretty bad in comparison. What I like about this rental is it is very very easy to rent, it literally got snatched up the first day my realtor put it up for rent. It is easy to manage as it is a condo and the maintenance fee covers all the external maintenance of the property. If you feel this investment is not a good one, please provide some alternative way to invest this capital. Thank you guys for taking the time to analyze my situation and any input is greatly appreciated.

Dave

Hey Dave! Welcome to BP and the wonderful world of REI. Yes, I think all of us wish we'd known about BP before our first investment :)

The reason your returns are so low is because you paid all cash. If you had gotten a mortgage, with 20% down for a 30 year term at 5% interest, your payment would have been $343.51, and you still would have been cash flow positive. I assume insurance is included in you maintenance fee, and that you are self-managing, since you didn't mention those costs.

If you had leveraged, you could have probably bought another three properties. However, if your goal is to own your properties outright (the age old debate on BP - to leverage or not to leverage), then I guess in 29 months you will be purchasing your next property.

I'm not a fan of condos because of the uncertainties surrounding the HOA's (rate hikes, unreasonable members, etc.), but I hope it works out for you.

Sharon Tzib, Real Estate Agent in TX (#653488)
832-745-8657

David,

Whats hurting you is all the fee`s on that condo. Look for properties that dont have that cost...say a SFR or a vacation rental in a good place .Looking at your numbers you have pretty high costs and a low return. Work in the future to increase your rents.

On cash or levered... I like the cash. No one in cash was hurt in the downturn a few years back...no one. The levered folks were creamed and cash guys like us cleaned up on their misfortune/greed. You have posts all over BP of more more more. You get a few good properties and your set. Stay with what your comfortable with is the main thing. Its not rocket science to run a calculator.

Hi, @David Zhang - Welcome to BP! SFR is definitely the way to go. Happy hunting!

Best,
Ryan

@David Zhang as others have stated, your fees are what is making this deal unattractive to most. I'm on the side of the fence with the leveraged guys and I also don't agree that all the leveraged guys got hurt in the last downturn. I don't recall rents crashing to the floor during that downturn so it's just like a stock, you don't lose anything till you sell at a lower price. I could honestly care less what my properties are worth right now vs five years ago vs five years from now. I'm not selling so it's a mute point.

I did not have nor do I currently have any properties under water. I leverage at 75% LTV and keep a lot of reserves that never get touched. If your an all cash guy, that's great and you own your property free and clear. With that being said, all your saving is the interest portion of that payment. You still have taxes and insurance and the principal was your to begin with.

Not trying to ramble on, just giving you a different perspective to consider from someone who loves leverage and would never do an all cash deal if it can be avoided. And even if I did, I would later do a cash out refinance anyway.

Best of luck to you!!

@Sharon Tzib is 100 percent right. Do the math with a mortgage and your cash on cash returns will be much much higher. That's leverage at work. One of the key differentiators in real estate is that you get to use leverage. Leverage is what makes money. You get a return on on an asset that is worth 4 times (25 percent down) the amount initial outlay instead of a return on the initial outlay alone. With $6k in remodeling costs, I don't think you will have a problem with getting a conventional mortgage because the property seems free of major defects at that remodeling cost.

As others have said, paying cash you get effectively the Cap rate of the property which in this case is 6%. For me, there are easier ways to earn 6% on my money than dealing with HOAs, tenants etc etc. The only reason to do that deal is in a highly appreciating market. For cash flow investing, my personal goal is min 10% cap rate (i.e return on a all cash purpose) but with leverage thats more like 15-20% COC. I am sure you can find similar deal in Houston on SFRs as well.

Originally posted by @Anish Tolia :
As others have said, paying cash you get effectively the Cap rate of the property which in this case is 6%. For me, there are easier ways to earn 6% on my money than dealing with HOAs, tenants etc etc. The only reason to do that deal is in a highly appreciating market. For cash flow investing, my personal goal is min 10% cap rate (i.e return on a all cash purpose) but with leverage thats more like 15-20% COC. I am sure you can find similar deal in Houston on SFRs as well.

@ANISH TOLIA Seriously Anish, where would you get your cap rate comps for a condo? If you don't know what the market is paying for an income stream how would you know if you are overpaying or not? Would you show how you calculated NOI on this property?

Thank you all for your insights. I knew the return on my cash was somewhere near 6 to 7 percent when I was contemplating whether to buy this property. At the time I wanted my first rental to be super conservative as I gain experience. I did learn a bit about the process of remodeling, how much and how long it takes to remodel. I also find that there are a lot hidden expenses when it comes to real estate. I had to pay a month of rent ($1000) to the agent to have her listed in Houston's MLS. If I were to financed my property, in the best scenario I might cash flow around $200 per month. That means it will take 5 month of cash flow just to have the property rented. I just feel like these cost are significant when using leverage, any hiccups in terms of vacancy or unexpected repair will wipe out an entire year worth of cashflow. I think the bottom line is that I don't understand the market all that well and that's why I am being extremely conservative. I will try to find a property without a hefty monthly maintenance fee but those town homes are all new builds in the 250000 to 500000 range if I want to be in the Texas medical center market. I am speculating it won't be easy to rent property at the $3000 to $4500 range. All older townhomes and condos in the area have significant maintenance fees.

Originally posted by @David Zhang:
Thank you all for your insights. I knew the return on my cash was somewhere near 6 to 7 percent when I was contemplating whether to buy this property. At the time I wanted my first rental to be super conservative as I gain experience. I did learn a bit about the process of remodeling, how much and how long it takes to remodel. I also find that there are a lot hidden expenses when it comes to real estate. I had to pay a month of rent ($1000) to the agent to have her list it in Houston's MLS. If I were to financed my property, in the best scenario I might cash flow around $200 per month. That means it will take 5 months of cash flow just to have the property rented. I just feel these costs are significant when using leverage, any hiccups in terms of vacancy or unexpected repair will wipe out an entire year worth of cashflow. I think the bottom line is that I don't understand the market all that well and that's why I am being extremely conservative. I will try to find a property without a hefty monthly maintenance fee but the townhomes that fit bill in the area are all new builds in the 250000 to 500000 range if I want to be in the Texas medical center market. I am speculating it won't be easy to rent property at the $3000 to $4500 range. All older townhomes and condos in the area have significant maintenance fees. Single family homes are out of my price range unless I venture into high crime, bad school areas which I want to stay away from.

"Single family homes are out of my price range unless I venture into high crime, bad school areas which I want to stay away from."

@David Zhang what is your price range? If it's similar to this purchase, then from the updates my realtor sends me, there are plenty of homes in the $85-100K range in the top rated Cypress-Fairbanks school district that rent for $1150-1200 minimum with annual maintenance fees of about $250-500, depending on the community.

I think you need to find a realtor who will expand your horizons and show you the other options out there. No need to go to high crime/bad school district areas in Houston to find cash flowing single family homes. Most of the homes sell for about .96-1.01% of list price as well, so no need to get into a bidding war. Now if you pay all cash, those prices may be higher by the time you've saved up enough.

Property management fees like one month's rent for lease up is pretty standard, that's why when you buy an investment property, make sure you include a 10% vacancy factor and a 10% property management factor to cover these types of situations.

Sharon Tzib, Real Estate Agent in TX (#653488)
832-745-8657

Thanks Sharon, I will study the cypress Fairbank area to see if it fits my criteria. I went on har.com and saw most homes on sale are already option pending. Something must be attracting buyers to buy there. I am a bit concerned that it's pretty far out from the city center and I wonder if the rush hour commute will drive renters away.

Hey David. Here's Cyfair's Chamber of Commerce page - a good place to start:

http://www.cyfairchamber.com/

Then talk to some Property Managers in the area - find out what the vacancy rates are there, as well as the profile of the typical tenant. I think you will find many tenants actually work and/or go to school in and around Cypress and the 290/45 area itself and don't solely rely on employment in Houston city center proper. Also, find out how long a typical rental takes to fill. You can even do that yourself by watching Craigslist, etc. Obviously, you want an area where rentals are being snapped up quickly.

Also, talk to your realtor and find out if they can provide you with the renter vs. homeowner numbers for the area. This kind of research should satisfy any doubts or concerns you have. Good luck!

Sharon Tzib, Real Estate Agent in TX (#653488)
832-745-8657

You can save more a month than most people make in a month. That's a great start in any plan.

Welcome @David Zhang and welcome to BP! Congrats on your first property. I'm in agreement with @Sharon Tzib on the low numbers due to cash purchase instead of leverage.

One way to save some money is to market the property yourself instead of having an agent. Stick a sign in the yard, postlet and greensheet and you're good. That's all we've done and never needed to lose first month's rent.

We too stay away from condo for the fact that we have no control of the building. Too many variables for our liking.

Did you have insurance somewhere included in your numbers?

@Cuong Le, since it was a cash purchase, I didn't buy insurance and it wasn't mandatory. The condo covers all external repairs so that's why I didn't buy any insurance. After reading the analysis here, I will look for single family residence for my next rental. I think I will have to go to the suburbs outside the beltway to find houses between $100000 to $150000 which can rent between $1000 to $1500. I suspect any home that rent higher than $1600 will have a harder time renting.

@David Zhang :

 Hi David,

I just discovered this thread and I wonder if you have bought your second property yet.  Just curious.

-Randy

not yet I am trying to get my second tenant in.  But the purchase has been good for me so far, I will look for another single family house next year

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