All Forum Posts by: Jim D.

On low-priced properties like this, you need much higher rent-to-price ratios in order to make the numbers work. The reason is that all the fixed expenses like repairs and capex make up a much higher percentage of your monthly rent than they would on a house that rents for $2,000.

BTW, the example you gave above would technically be closer to a 1% property, because you're taking out a loan based on a value of $60k and it would rent for just $550.

This is somewhat minor, but one thing that can help your numbers is if you purchase it as a primary residence and live in it for a year before renting it out. The reason is that the bank gives you around a 0.75% better interest rate on a primary residence. 

What is the rent to price ratio on most of the stuff you are seeing? (i.e. a home that will rent for $1,000/month and costs $125,000 would be a ratio of 0.8%)

I budget those costs in my initial estimates, but in reality I've had just over 1% vacancy in the last 5 years so it's not an actual cost I have to deal with (they're in a very good rental market). For now, I self manage, so yea you'd want to add that one in too.

You seem to be running the numbers correctly. Sounds like you might need to look outside of town, or at a different property type. Have you tried looking at multi-family units? In some markets those have better rent ratios than single family homes.

You're thinking about it all the right way. You'd probably want to add job and wage increases/decreases into your macro analysis, as those are the supply of money to pay for these houses.

Here's a question I have on the same topic: if interest rates go up significantly, it will reduce demand from buyers. However, another side effect might be that those who own homes now do not want to sell them, because they're locked in at 3.5% and don't want to switch houses and get a new rate of 5.5%. So I could in theory see it reducing supply by some degree as well. 

It's been a very long time since we've had increasing interest rates... anyone have any thoughts on this?

If you buy properties that rent for well above your mortgage payment, as Kyle detailed above, then part of that spread goes into your reserves every month. That's what makes up your reserves--you shouldn't ever have to contribute to it (except maybe right at the start to start off with a balance). 

For example, I have a house with a mortgage of $1,700. My utilities cost about $100. The rent is $2,500. I set aside $300 every month into my reserves for repairs/capex, and still have a monthly profit of around $400.

You'll go for several months sometimes and not use any reserves, and then have a big repair and spend a lot. But as long as you estimated well as Kyle detailed above, it will be self sustaining AND leave you some profit every month.

Perhaps you could see if one of the tenants would be open to doing "cash for keys" contingent on you buying the property first? The bank may not love it, but just an idea.

If you time the market right and it only drops in value 15% before you buy in again, you'll probably do just as well to hold because you'll incur around 8% in selling costs, and make no return while sitting on the sidelines (assuming you don't invest the money productively elsewhere).

If you are confident the value will soon drop more than 15%, then sell it.

If you think the value will be stable or generally upwards, refinance it and buy another.

I tried to explain this concept to a family member once, and it was like trying to nail Jello to a wall.

The simplest answer is to calculate what your additional interest expense will be due to the refinance (say an additional expense of $3,000 per year), and compare it to what your annual return will be from what you do with the money. If the second number is higher than the first, then it makes sense to re-allocate your equity.

Just make sure, of course, that you remain cash-flow positive after the refi, and that you're comfortable with the risk level of the new investment.