Am I Doing This Right?

Question

There is a property on Fannie's website in my area. List price of $39,900. Rents in the area comp out at $1000 median, so let's assume a low number of $900. Light fixer that doesn't look too bad, so figure $2K in paint and repair worst case. Assuming an offer of $35,000 is accepted, with repair, total price to be $37,000 and a Fannie down payment of 3%.

Monthly Rent: $900
Expenses: $450
NOI: $450
Debt service ($37,000 @ 7% for 30 years): $239
Income: $211/mo.

Even with rent at $700/month, doesn't this still produce a $100/mo? Am I missing something?

Monthly Rent: $900
Expenses: $450
NOI: $450
Debt service ($37,000 @ 7% for 30 years): $239
Income: $211/mo.

Even with rent at $700/month, doesn't this still produce a $100/mo? Am I missing something?

Ryan Moore · Answer

Great advice everyone. Thank you. I will certainly nail down the expenses if I see myself going forward.

The property is a SFR, 3 bed/1 bath. Even with a few months vacancy, at about $250 a month debt service, it's not too scary!

Corey Demuth · Answer

you could try searching on craigslist for rentals in your area, then contact the rentors and just tell them your situation and ask if they have a lot of difficulty collecting full rent from tenants.

just bear in mind that some might be pretty close-minded, and give you a line of crap talking about how horrible it is, just to scare you away from moving into their area and thus increasing the competition.

Jon Holdman · Answer

From the simple analysis, this looks like a good deal.  What the other folks are warning you about is that there could be other factors that make it less attractive.

First, you need to figure out if that's really a good price.  Yes, it works as a rental, but if you can buy 10 similar properties for half the price, you're paying too much.  I see this a lot with deals that are pitched to long distance investors.  Assuming you're local, and know the local market, this shouldn't be a problem.

Second is that you need to figure out if there is a market for the rentals.  If there are for rent signs all up and down the street, you may have an issue.  There are lots of small apartment buildings in my farm area.  Some are for sale at pretty acceptable prices.  But every one has a sign saying "move in special" or "first month free".  That's a sign there is a vacancy issue.

This sounds like a SFR, so expenses will probably be under 50%, well under, hopefully, when its occupied.  But they will jump to over 100% when its vacant.  Even though your vacancy is 100%, many of the expenses continue, and in fact go up because you pay the utilities.  So, be sure there's a market.

Assuming its a good price relative to other properties, and that you can get it rented, it sounds like a great deal.

J Scott · Answer

It does, but in some cases (depending on the location/property), vacancy rates can be so high that the "50% rule" turns into 60%, 70%, or even 80% because vacancy and rent loss are so high...

Just something to look at for...

Eliott G. · Answer

The biggest concerns as I see them are:

- Rehab costs are possibly more than $2K, something unforeseen can bee $5K
- Vacancy - lost rent is a killer
- Who pays the utilities...these can be brutal if you have to pay them all.
- Management costs or the cost of your time to manage

J Scott · Answer

Yes, the numbers seem to work...

But, remember the 50% rule is just that -- a rule of thumb.  It's not a magic formula that works in every situation...in fact, sometimes your expenses are MORE than 50%.

Take a couple minutes to list out your expected expenses (and their amounts):

- Vacancy (talk to other investors in the immediate area and see what kind of vacancy rates they are seeing)
- Rent Loss (how much do you plan to lose due to concessions and non-paying tenants?)
- Taxes (you should be able to get this from you local tax assessor website)
- Insurance (call your insurance agent for a quote)
- Maintenance (what kind of condition is the place in?  What type of location?)
- Property Management (will you use a PM or do it yourself?)
- Utilities (will you have to pay any?)
- Advertising (how will you advertise for tenants?)
- Lawn Care (will you cut the grass yourself or hire someone?)
- Etc...

If the 50% rule works, that's a good indication of whether the deal will work, but don't stop there...but a bit more thorough just to be sure...

Corey Demuth · Answer

the "50% rule" is supposed to include vacancy costs as i recall

Nick J. · Answer

I'm sure MikeOH and Jon will come on here soon, but I don't see anything wrong other than your not closing it.

seems like a winner to me