I found a house in the Youngstown, OH area - one of the better parts of town for $9k. The home needs about $10k in work and the comps in the neighborhood range from $33,300 to $64,900.
If I pay cash for the home and use my credit cards to purchase materials and do the work myself, I figure I can make it rentable for about $6k and spend my two weeks vacation doing the work.
Rents in the area are around $500 per month and the property taxes are about $380 per year.
My plan would be to buy and hold.
Any advice please?
the 10k to make repairs, what type of repairs are these? i mean if you're going to be renting it, do you really want to put all that time and money into just for a tenant to destroy it all?
i assume you're buying it all cash.
how far are you from the area?
Here are the cons: the house is extremely cheap. Why is this you must ask yourself, are there more unforseen problems? If you yourself are not a professional contractor, probably get a home inspection first.
You forgot you will be paying homeowners insurance and if its for rental purposes the rates are somewhat higher than if owner occupied.
If you do not live in the area you will need a property manager. This will absorb 7-10% of your monthly rent take. I strongly recommend a reputable property manager if you do not live very close, basically within the same town. If you have a manager you will need to provide addtional money (which is usually taken from the rent cut) for misc services and repairs which is going to be common on a older house that is not being totally remodeled, such as fixing leaks, changing filters (tenants are usually lazy in DIY areas), and other minor nuisance repairs that can happen at any given time.
Pros: Even if you spend double what you anticipate for repairs you are still below the lowest price comp range and may have some equity. You will have no mortgage and only a credit card bill to pay down which is not really much. You will have some good positive cash flow when its rented. Even if its not rented the home is basically free and clear, so you will not struggle financially if its vacant. Historically real estate appreciates, your strategy buy and hold should be successful overall IMO.
i am also in a similar situation as you, where I have found a cheap property for about 15k, but I do not know what type of repairs need to be done yet.
I would also like to see what other have to say about this scenario.
well, I purchased the house and actually got it for $7k. I had a local handyman visit the property and took photos and estimated all the repairs that are needed and he came in with a total of $6200 for interior and exterior painting, clean-up, refacing kitchen cabinets, and updating the bathroom.
He is going to be starting work within the next 2 weeks. He also knew a local property manager that charges 10% and estimated the home should rent for $550 with no problem at all.
so here's the breakdown of the actual deal:
7k - purchase
1k - closing
6k - repairs
14k - total invested
$6600 - annual gross rental income
$600 - management fees
$1000 - any unforseen repairs
$600 - property taxes
$4400 - estimated net income
I would suggest a couple of things, Redstar. First I would start by making sure the handymans bids are in writing and that you have a written contract with him that is very clear. Don't let youself get jacked up. I've seen this happen repeatedly.
Second, make sure you're not just covering up problems and that you're actually fixing them. The last thing you want to is cover them up and to have to spend twice as much because you didn't do it right the first time. I agree with noobdog1. Don't do too much and let a tenant trash it, but do it right so that it doesn't get worse.
Third, if you can pull out a mortgage against it after the work is done and the property still produce positive cash flow. If it will and you can pull out some cash against it, take out enough to cover what you have in and do your next deal once you've got the first property rented and set.
I hope that's helpful. Let us know how it pans out.
As far as the contractor goes - I think I got really lucky and found a truly honest one. When he went to the property he took a video camera and a digital camera - he pointed out everything that needed work and explained it on video - for instance the bathroom floor was showing some signs of wood rot. He pulled back a piece of the vinyl tile and lightly pushing down showed how the wood just broke apart. He also recommended repairs on some of the things I was simply just going to replace completely. He runs every expense by me and gives me the good, better and best options and he documents it all and emails pics and video clips as he's working on things - Plus, his labor rate is extremely good - a flat day rate.
I know some people may be asking why his rate is so good - well, at least I know I was wondering. Without me even asking he explained to me that his main business of building decks is extremely slow in the winder months so he works with a property manger then to keep food on the table. We work around his schedule for the most part and that's fine with me.
The home had a couple of windows that I was going to completely replace and did not really like the way the replacement windows I was looking at looked so modern - my contractor completely rebuilt the old window, put in new glass panes, stained and sealed it and keep the original look - at the price was exactlly the same as a low-end vinyl window.
Very, very happy with him!!!
That's great news! I'm glad to hear you've found someone you can depend on to help you. If he's as good as you say (and I'm not saying he isn't), it may even be worth your time to give him a little bonus for taking care of you at such a good price. When you've got someone who is good and honest, hang on to 'em.
Glad to hear of the success so far. Keep us updated.
14k - total invested
$6600 - annual gross rental income
$600 - management fees
$1000 - any unforseen repairs
$600 - property taxes
$4400 - estimated net income
$4000 Cash Flow / $14K = 25% and that's excellent. Find more deals like that. :mrgreen:
Watch your rehab expense... if it stays as low as promised verbally then you will be in great shape. Congratulations!
how did the final product turn out?
I would be planning for a few things to go wrong during the year as well.
Here are a few that I have experienced:
Roof suddenly started leaking ($1600 to repair just that section)
Fridge went on the fritz (Replaced it - $460 includes delivery and setup)
Furnace motor went bad ($400)
Plumbing issue #1 ($220)
Plumbing issue #2 ($300)
Plumbing issue #3 ($245)
I haven't been able to get any tenant ever to do any lawnmowing or snow removal, so I was thinking of farming that out also...
Basically what I am saying is that you should be financially prepared for any problems that pop up, that's all. I am not a naysayer, just a cautious property manager (well investor, actually).
Sounds good!
UPDATE
The work is almost done on the house. We did some things that most would not consider for a rental. For instance - in the kitchen we were just going to repaint the cabinets, put new hardware and new faucet. Which would have been fine, but we actually wound up installing new cabinets, the prebuilt ones that Lowe's stocks, and put on a new lamintate countertop, sink and faucet. Also put in new appliances. We used a 12x12 stone tile on the floor instead of vinyl. In the bathroom we actually did the tub/shower surround in tile instead of buying on the the ready-made tub walls. And used a nice ceramic tile on the floor and lower part of the walls. All new fixtures in the bathroom. New carpet in the bedrooms, hallway, living and dining room.
The property manager did a walkthrough yesterday and said the house should rent fast because of all the improvements.
NOW THE BEST PART:
We made an offer on another property that is right around the corner. It has a brand new roof, new siding, trim and rain gutters - but needs a new kitchen, bathroom and flooring.
The paint is actually peeling away from the plaster on the walls and ceilings, but the plaster itself is still in good shape.
They wanted $9,900 for the house, we offered $6500 and they accepted this morning.
where are you investing? buffalo new york? ohio?
just curious.
that sounds awesome. i mean you put the work into it and it sounds like you did it right. now rent to the right tenant who will keep it livable and at least minimally respect YOUR property.
hey that was a pretty good guess by me huh! lol
In some areas... well, you could say that was true :lol: For the most part though no, it's not like that at all.
RedStar,
Congratulations! This was an excellent deal. However, there are several things that you should know.
First, you are WAY OFF on your cash flow analysis. Operating expenses not only include management, repairs, and taxes - not even close. Operating expenses also include advertising, vacancies, insurance, evictions, legal fees, court costs, lawsuits, capital expenses, damage done by tenants, etc, etc, etc. In fact, if you do a little research, you will discover that throughout the United States, operating expenses run 45% to 50% of the gross rents. That includes paid management and paid management.
Second, it is unwise to do too much with the rehab, especially with low income rentals (which is what you have). Tenants in these low income rentals are very hard on the property. I have several dozen rentals here in Ohio and I NEVER put new appliances in rentals. That's just a waste of money. A bad tenant can destroy (or steal) your appliances in no time. I would strongly suggest going to the used appliance store and buying appliances that look new for 1/3 or 1/4 the price. I typically buy stoves for about $65 and refrigerators for about $100. I just replaced a refrigerator destroyed by a tenant this week. The same is true of the flooring. Stone tile in a low income rental? That won't last a year.
Be sure that you screen potential tenants. Most low income tenants will have bad credit, but you should be sure to do a criminal background check. We eliminate about 75% of the applicants for either previous evictions or criminal history. You can't throw a rock in Ohio without hitting a crack dealer.
Again, I'm not trying to cut down your deal. It is a VERY GOOD DEAL! Buy all of these that you can and in no time you'll be a full time rental property owner. However, be sure that you understand the realities of the rental property business so that you don't needlessly throw away a lot of money. I would suggest immediately joining your local REIA. Ohio is blessed with some of the best REIAs in the nation!
Good Luck,
Mike
BTW not all Ohio rentals are crackhouses, but no doubt that's what you get in the low income areas. I.e. if your rent is less than $500 (2 BD 1 BA) then that's what you should expect.
Well, I got a renter set to move in on March 15. Single working mom with 2 kids, and the property manager, who is also a police officer in the area, knows her from one of his other clients - she had a great rental history 6+years in the 2bd, 1ba home she is moving out of for a place a little larger. She was very excited about all the updates in the house and I'm pretty confident she'll take care of it.
I guess I got lucky??
MikeOH - Thanks for the information on rehabbing. We are about to start on the second property and I'll be using your suggestions for sure.
re: the stone tile we put in the kitchen of the first house...it was actually on special at lowes for .68 sq. ft and for a 10x12 kitchen we needed only 120 sq ft - plus one day to put it all in so $150 for labor plus other materials ($85) for a total of just over $300
Vinyl 12x12 tile would have been about .50 sq ft plus labor and would have run a little over $200 total. and I think vinyl tile scars more quickly than the ceramic (stone) tile.
The appliances I put in were floor models from Lowes and I go the fridge for $328 and the stove for $259 - I should have gotten used appliances and I'll probably use that option next time. But glad I put new ones in for this rentals since she seems like a good renter and signed a 1-year lease.
BTW, the renter also had a great employment history (6 years as a groundskeeper at YSU) as well as her rental history.
Overall, I think I made a great first deal - had some nice suprises with the property having new siding, trim, roof and raingutters. And a couple bad ones when just before closing someone had went in a stole the eletrical panel and most of the copper wiring from the basement. But, by having a contractor that is versed in many areas helped alot because he rewired the entire house for less than $1000 and it was up to code. The bathroom was comletely gutted down to the joists because of the subfloor showing signs of rot - I thought this was going to cost alot more than what it actually did and my renters got a great bathroom with all new fixtures.
We'll see how the second property goes now....
You have done very well indeed, congratulations and I wish you continued success!