Analyzing propoerties to live in, then rent out for cashflow.

Real Estate Deal Analysis & Advice
10yFollow

Analyzing propoerties to live in, then rent out for cashflow.

Ben Kirchner
Durham, NC · Member since 2016 · 125 posts · 42 votes

I wanted to get some advice/opinions from with some experienced minds here.

I plan on purchasing a new home as a primary residence this year.  The idea would be to then move into a new primary residence, and rent out old residence.  The plan would be to do this for the next 3-6 years.  Reason for doing this would be to purchase new property for low money down (5% each) and get a lower interest rate.  

So when looking at my new residence, I'm looking for something that would cashflow right now, so it will when I end up renting it out. I'm working with a realtor to feed me properties from MLS that fit the criteria of: 20 minutes from my work, 2+ bed/2+ ba. I've been looking at the properties fed to me and basically lookign on Zillow's Zestimate to see what they have it as truly worth, and rentometer to give me an idea of what it would rent at. Would there be anything additoinal or different that may serve me better as analyzing potential cashflow on a purchase?

Also, I'm unsure if I should be leaning more toward on fixer uppers or turn key properties with my goal.  I would have some extra money to fund some fixing.  I've thought of narrowing my search as well to filter through properties, and perhaps become more marketable for tenants?  3+bed/2+bath? single family homes? Newer developments (newer hvac, roof, etc...)?  I'm also unsure of what price range to shoot for, to best suit future tenants.  I live in Durham, NC.  The income per capita is $27,748, which includes all adults and children. The median household income is $48,241

When it comes down to it, the cashflow is what I'm looking out for.  The house will only be my residence for a year.  If anyone has experience with this strategy, and could share their first hand experience, I would appreciate your input.  Also, any advice on analyzing properties to cashflow would be appreciated as well.

Thank you

Ben

0Reply
28 views

Most Popular Reply

Jamie S.
Investor · Durham, NC · Member since 2016 · 23 posts · 27 votes
10y

I have been renting out houses in Durham, NC for awhile now.   Something to consider is the large number of universities in the area.   Choosing something close to Duke, for example will greatly increase the demand for your property and the pool of available tenants.   Buying something outside of this area will drastically decrease demand.  Durham is also 'spotty'.... there are some great deals but they might be one block too far from a higher renting area.  You have to drive around to check out the neighborhood carefully.  

I would ignore the median income listings... Durham has a huge number of medical residents, business school people, law school, etc that are staying here for short terms.  These are often the best tenants because they are here for 2-3 years and would normally not be renting.  These folks want nice, clean, low maintenance houses with some perks like stainless in the kitchen.   They tend to be concerned about safety of the neighborhood and access to recreation.  Decks are popular since these folks are more likely to have parties than kids.  I look for bright, sunny, homes with simple exteriors to appeal to a younger audience. 

  Typically when trying to determine potential future rent what I do is look on craigslist at similar properties that are listed for rent (bedrooms, sq. footage) to the one you are thinking of buying.  This is what you will be competing with when you try to rent it.  I also look on Airbnb at properties that are fully booked and see what sort of rates they are getting (long term would be lower but you can weed out overpriced rental listings this way).

You can also look at what an apartment is going for in the area and take an average... you can typically get a bit more for a single family home.

In durham I would look at houses in American Village, Forest Hills, Woodcroft in that order if you want a sure bet. 

good luck!

2Reply
See this reply in the discussion

20 Replies

Jump to latestLatest
  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    10y

    You could find a local facebook page for rentals in your area.  Search classifieds for rents.  If you see for rent signs, call and ask what the rent is.  When you get the rental prices for the homes, you can then look at public records and see what the home last sold for (sometimes).  From there you can calculate a safe rental rate by % of home's market value, or sqft.  You may also find that 3/2 homes not only rent for .5% (of value) higher but also have a better resale value.

    Be sure you calculate PMI into your cashflow estimates as well. If you're looking into fixer uppers, I would suggest looking into buying HUD houses during the OO period. You'd could get some serious deals if you plan on house hopping every year.

    0Reply
  • Matthew Minor
    Residential Real Estate Broker · Durham, NC · Member since 2015 · 19 posts · 6 votes
    10y
    Ben, looking at local rental listings is a great way to get a feel for what is going in the area you're looking at. Rentometer is pretty good but when you want to dig deeper, see what else is on the market. Rentometer uses currently rented properties and they could be lower than market value if the renters have been there at a fixed rate for several years. And concur, 3/2's are much better value and your resale will be much quicker. Bigger market looking for that. And lastly, if you buy turn key, you'll likely have to get it below market value to turn it into a cash flow property a year later. That is rare. You'll have better luck finding something with some minor improvements needed, like flooring, countertops, paint. Add the value the year you live there and you'll have a much better cash flowing property when you rent it/sell it. Best of luck! Matt
    0Reply
  • Sarah Ziehr
    Real Estate Broker · Chicago, IL · Member since 2015 · 531 posts · 266 votes
    10y

    Your broker should be analyzing the actual rents and market rents to make sure the building cash flows before you make any appointments to view the property. 

    Zestimate is garbage, get your broker to send a cma and cash flow analysis that takes into account expenses. 

    If you are going FHA, there are also loan limits and rent requirements you need to be aware of. Your lender should tell you and your broker what these are for your area.

    1Reply
  • Jamie S.
    Investor · Durham, NC · Member since 2016 · 23 posts · 27 votes
    10y

    I have been renting out houses in Durham, NC for awhile now.   Something to consider is the large number of universities in the area.   Choosing something close to Duke, for example will greatly increase the demand for your property and the pool of available tenants.   Buying something outside of this area will drastically decrease demand.  Durham is also 'spotty'.... there are some great deals but they might be one block too far from a higher renting area.  You have to drive around to check out the neighborhood carefully.  

    I would ignore the median income listings... Durham has a huge number of medical residents, business school people, law school, etc that are staying here for short terms.  These are often the best tenants because they are here for 2-3 years and would normally not be renting.  These folks want nice, clean, low maintenance houses with some perks like stainless in the kitchen.   They tend to be concerned about safety of the neighborhood and access to recreation.  Decks are popular since these folks are more likely to have parties than kids.  I look for bright, sunny, homes with simple exteriors to appeal to a younger audience. 

      Typically when trying to determine potential future rent what I do is look on craigslist at similar properties that are listed for rent (bedrooms, sq. footage) to the one you are thinking of buying.  This is what you will be competing with when you try to rent it.  I also look on Airbnb at properties that are fully booked and see what sort of rates they are getting (long term would be lower but you can weed out overpriced rental listings this way).

    You can also look at what an apartment is going for in the area and take an average... you can typically get a bit more for a single family home.

    In durham I would look at houses in American Village, Forest Hills, Woodcroft in that order if you want a sure bet. 

    good luck!

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Carful with your plan to buy as personal then rent. If your lender catches on you will get your mortgage pulled.

    If it works look for singles that have or you can add a legal basement suite otherwise it is near impossible to cash flow a single family.

    0Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    10y

    I appreciate the input.  Right now I'm doing a lot of analyzing properties at a computer desk.  I plan to walk through the properties, but want to efficient with my time, and realtors time, and do what filtering I can.  

    @Matthew Minor

    That's a good point on the turk key/fixer upper differences.  As I stated above, I've been looking at zestimate to get an idea of true property value.  I'm not sure everything that goes into a zestimate, but I'm assuming they are basing it off of what other properties in that neighborhood are selling for.  Therefore, if a property is priced far below a zestimate, is that generally a good indicator that the property needs some fixing up?  Perhaps that should be a tool of narrowing my selection of places to walk thru.

    @Justin Fox

    Are you referring to https://www.hudhomestore.com/Home/Index.aspx ?  That wasn't even on my radar, and I'm a unfamiliar.  Are these basically forclosed houses up for auction?  Do they differ from other forclosed properties in any way?

    Big thanks for the help!

    0Reply
  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    10y

    Yes they are foreclosures at least the one I dealt with. I ended up not getting it because the OO requirements. If I were willing to hop around though, definitely would have went that route.

    @Thomas S.  They'll pull it even if you stay 1+ years?

    0Reply
  • Matthew Minor
    Residential Real Estate Broker · Durham, NC · Member since 2015 · 19 posts · 6 votes
    10y
    Ben Kirchner Bottom line up front, zestimates are worthless. They do not take in account local market, condition of house, and design. Redfin is far better, quicker, accurate in general. Pulls data straight from MLS vs Zillow from third party service hub that can delay days to get listings uploaded. Redfin is a difference of an hour or two at most. Their estimate is not very useful either. But on Redfin you can look at sold in last 3,6,12,18 months to see what closed in the area you're looking at and put in criteria to match the specs of the prospective property you're looking to buy. That is the best way because you can look at pictures of the other sold listings to ensure you're comparing apples to apples when deciding a good offer price. And if you work with an agent, they use their personal market expertise and all this data directly from the MLS to do this for you.
    1Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    10y

    @Jamie S. 

    Thanks for the suggestions.  I've looked in Woodcroft but not the others mentioned.  With students, do you typically do 1 yr leases?  I was thinking Durham is the perfect place to rent to medical residents and students, but know one investor who is doing 9 month leases, and having the property vacant in the summers.  It works for her, but certainly not ideal for me.  

    @Greg 

    @Thomas S.

    I've been very upfront with my loan officer of my intentions of buying, living there one year, and moving on.  She said there is no issue.  She said in time I may have to justify why I'm moving.  Reasons could be as simple as "I don't like my neighbor."

    0Reply
  • Jamie S.
    Investor · Durham, NC · Member since 2016 · 23 posts · 27 votes
    10y

    Durham is a great place... rents are nearly as high as raleigh but housing prices are significantly lower.   Durham kind of gets a bad rap but once they run out forest to plow under in the outlying areas I predict proximity will trump negative opinion.   I've started buying land in the area instead of houses.

     I don't usually rent to undergrads, too much wear and tear with the extra occupants.  Plus they tend to be clueless about air filters and basic maintenance.   I usually sign a 1 year but I will let them out of their lease generally... I just nicely ask that they try to move out in either may or august (when university programs start).  I ask for a $200 cleaning fee on moveout if they go early and that they accommodate showings while they are home to get back their deposit.   Most folks have stayed 2+ years.   I haven't had any of the properties near Duke vacant for more than a week or two in the last 6 years or so. 

    I haven't had any issues switching from a primary residence to a rental... the mortgage company doesn't seem to care as long as they get their check.  Your mortgage has been sold 3 times by this point anyway.   Local mortgage broker told me as long as you intended it to be your primary residence on the date of move-in it's ok to have a change of plans.  The insurance company does care so call them right away.  

    0Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    10y

    @Ben Kirchner  -- Thank you for starting this thread. The smartest thing you did is to put yourself out there --unfiltered--to ask for help. I'm very concerned --for your sake -- about a couple things you said. Sometimes the tone of emails can be mis-construed...please take this as a local investor/broker trying to give you some pro bono advice for how to proceed.

    1. Zillow. If you are taking Estimates as the gold standard of values, you may as well go to Vegas and put all your money down on one hand of blackjack. You'll have more fun and better results.

    2. Rent Estimates. You can start with the desktop public rent info (i.e. Rent-O-Meter), but you'll need to find someone who can provide specific rent info that is pertinent to your situation. That will be a local landlord, property manager, or possible a niche broker in that area. Not all properties are alike--you also need to consider how close the property is to a bus line, as an example...

    3. BP provides GREAT Tools to crunch the numbers (it's on the Tools bar--drop down and play around with the appropriate calculator.

    4. I actually like your idea of looking at 2 / 2s instead of 3 / 2s. While the conventional wisdom is the 3 / 2, that also has SO MUCH MORE competition for the purchase.

    5. Unless you are self-funding with cash, I would get out in front of the issue of how you are going to fund the purchase. It may be trickier than you think to get a conventional loan on the second property. You'd hate to spend all of your time finding the right property and then learn you are not a performing buyer.

    6. Wanting to live in the property and then rent it creates a potential trick bag. Are you going to fix it up for your standard of living or a future tenant's standard of living? What if those standards are different?

    Warm regards,

    Adam

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    10y

    @Ben Kirchner I would not get in the habit of using the zillow zestimate as a way to determine a property's value. 

    If there is a property you are interested in after you go look at it ask your realtor to run comps of actual sold homes in the same area as your subject property. This will give you a much more accurate picture of what your subject property is worth. Also, on zillow you can search sold listings and those are normally accurate. That may be another way to determine value. 

    Not sure about NC but in CT the zestimates are usually way off and to many people treat them as gospel.

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    If it is available you may also want to consider a duplex. 

    As far as doing home improvements or not, it is a question of your time and skill in that area.  How many hours a week to you work?  Do you travel for work?  You could also consider getting a 203(k) loan, it allows for reno to be built into the mortgage.   

    0Reply
  • Dawn BrenengenBusiness Member
    Moderator
    Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Ben Kirchner I bought two of the five rentals I have as primary residences.  It's great because the interest rates are better and I could put a lot less money down on the homes.  I think it's fine to use Zillow and Rentometer as a quick and dirty way to decide if a house deserves some further investigation, but really, your agent should be able to tell you, "hey!  Check this one out.  It's priced low for the area and would get X in rent"

    Podcast Guest on Show #101
    0Reply
  • Hunter Letchman
    Investor · Emerald Coast, FL · Member since 2013 · 45 posts · 11 votes
    10y
    I don't think they can pull the loan if you're there over a year, it just may be difficult to get financing for future properties. There are a lot of options for financing, especially when you look for lenders that are not banks, but don't fit the private/hard money profile.
    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I do not know your market, but here are a few pointers that worked for me in mine:

    Buy a fixer ... your sweat equity will give you an additional short-term profit (though it will be an unrealized profit) in addition to the cash flow when you turn it to a rental. This not only gets you extra profit under plan A (rental) but also provides you with a profitable plan B (sell) if you need or choose to. Rolling your sleaves up and doing the work yourself will teach you an important aspect of the REI business as well as save you some money. You will still need to research ahead of time what materials cost so that you can assess if the discount you are getting on a fixer adequately compensates you for the material cost and your time that will be needed to fix.

    I personally don't care for newer homes. In my market I find much better value in older (but not too old) homes. My sweet spot is 1980s-1990s ... these can still be nice B-class neighborhoods, new enough to have modern construction (no lead paint, no asbestos), they less likely to have HOAs (or HOA fees), they are old enough to be "cosmetic fixers" (dated finishes in paint, floor, trim, fixtures, etc. that are easy to fix and add a ton of value by fixing) but not usually old enough to have major issues to other home systems (structure, electric, plumbing, HVAC, water heater, roof, etc. ... stuff behind the walls that take a lot to fix but don't add as much value per cost), and they have larger lots (remember, the long term value is in the dirt, the house itself is an improvement on the land and depreciates in value, just like taxes say). The old adage about buying the smallest, ugliest, least expensive house on a nice block is also a good one, so long as you can fix these deficiencies and get an adequate discount to compensate.

    Don't trust Zillow. Zestimates are less than worthless. Don't blindly trust your buyer's agent either. Trust but verify. Become your own expert in the market you are looking ... look at every listing on the market within a farm area. Network with every realtor in that market. Go to every open house there. After awhile, you will get a good feel for what things cost and will therefore be able to instantly spot a good deal and pounce quickly and with confidence. In fact, once I obtain this level of market expertise, I don't even use a buyer's agent. I put my offer in through the listing agent. I give them what they want (to double end the deal), and they give me what I want (a smokin' deal). Every realtor you meet, tell them that this is what you intend to do and that they should call you if they have any great deals on XYZ (your requirements). Finding a great deal is a numbers game ... View 1,000 properties, offer on 100, close on 1 type of thing.

    Lastly, when you are ready to roll into your next investment, if you can pull the timing it is better to do it in a down market. Most retail home buyers are trapped in a particular part of the RE cycle ... they have to sell to get the money to buy. This means they might sell high, but then they have to turn around and buy high into the same market. Or they may be able to buy low, but they have to sell low 1st. With house hacking, you can buy low then a few years later sell your rental high. Or better yet, buy low, buy low, buy low, and never sell ... try to collect them all :)

    Good luck! 

    0Reply
  • Ben Kirchner
    OP
    Durham, NC · Member since 2016 · 125 posts · 42 votes
    10y

    @Jamie S. and @Dawn Brenengen

    I spoke with a local property management company to ask some questions regarding the local renters market.  Being that you have experience renting in this area, I'd love your take as well...

    Is there a price range most in demand for renters?

    His answer was houses from $200-250.  I was thinking lower.  Particularly for my first investment, I don't want to be on the hook for that mortgage for any vacancy time.  

    Any features/amenities that renters look for or pay more for?

    His suggestion was being pet friendly and having a fenced in yard.  I was curious to what other amenities you saw marketable in this area.

    Areas he said were most popular were Southpoint, Duke, and UNC.  I figured this much.  He said a general rule of thumb for pricing rent in these areas are .80-95cents per square ft.  I really would appreciate your input, particularly on the price range for renters.

    Thanks

    Ben

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    10y
    Originally posted by @Ben Kirchner:
    ...  

    @Matthew Minor

    ...

    As I stated above, I've been looking at zestimate to get an idea of true property value.  I'm not sure everything that goes into a zestimate, but I'm assuming they are basing it off of what other properties in that neighborhood are selling for.  Therefore, if a property is priced far below a zestimate, is that generally a good indicator that the property needs some fixing up?  ...

    @Justin Fox

    ... 

    Well, since Zillow does not look at the interior of any property, it really has no idea of the amount of rehab a property will be needing. So don't think of using Zillow in that manner. What Zillow could give you is a list of nearby properties that have sold somewhat recently - so if the sold comparables that Zillow gives you seem up to date within that area you might find this aspect of Zillow useful. The Zestimate is not a good substitute for proper valuing of property; it might be useful for relative comparisons to see if property A should sell for more than property B.

    A few years back I read something that criticized Zillow; it showed actual photos of two houses located close to each other. One was fixed up, the other was missing a part of the roof to the point where vegetation could be seen growing through the roof. One guess as to which had the better Zestimate :)

    You had mentioned median income, and somebody else mentioned to ignore median income in that location. I am not local to the area, so I can't say whether to use the median income or not.  But if you are going to use it, then it might help to identify what portion of the population might be able to afford the rent. With typical rental criteria requiring monthly income to be 3x the monthly rent, divide annual income by 36 to get an idea of what monthly rent amount will "fit". If typical rents aren't below that, you have a smaller tenant pool, and could be more difficult to find a tenant. Now, median income also varies by neighborhood / zip code, so some areas can support higher rents than others. Just some ideas on how to use median income ...

    0Reply
  • Jeremy Simpson
    Investor · Durham, NC · Member since 2016 · 10 posts · 1 vote
    10y

    I agree with not trusting Zestimates. They Zestimated a property of mine for $190K and I had an appraiser come out and the value was only $145. Another property they have Zestimated at $221 and again an appraiser said $200. My advice is don't trust Zestimates. Has anyone had a Zestimate come back accurate? My wife and I were wondering if they purposely over inflate trying to get you to list your house with them. Kind of like a false promises thing.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    If your present lender is OK then you can start but may hit a wall financially in the future.

    I would suggest you buy multi plex units to insure cash flow. If you do single family how many negative cash flow properties can you afford and how do you expect to continue to have your bankers support going forward. SFH are extremely difficult to cash flow and a vacancy can and does bankrupt many investors.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free