Originally posted by Jon Holdman:
So, really the way to say this is that you have no debt, just $700 in monthly expenses that you run through your card. A lender would (should, who knows since it changes day to day) look only at the current balance and the minimum payment. So, you're much better off than it seemed from your first post.
The deal you describe is an awful rental. Seriously, do some reading in the rental property forum about expenses. They're much higher than you think. Here's how I'd evaluate that deal:
Gross scheduled monthly rent: $1500 ($750 per side)
Expenses: $750 (taxes, insurance, maintenance, vacancy, etc., etc. Read the sticky thread in the Rental Property forum)
NOI: $750:
Payment: $1019 ($170K, 6%, 30 years)
Monthly loss: $319.
If you get the rents you expect, its not quite so bad because of the higher rent from your roommates. When you have all the spots filled, and you actually get the rent, you'll be in good shape. But every now and then you're going to have a vacancy, or have some big bill (e.g., furnace, water heater, sewer line). And if things go really bad, you can have a much bigger bill. Be sure to read the sticky about the "possibly drug dealing tenant". That poor person can't even live in her part of the duplex because her tenant is threatening her. Shes spending thousands of dollars in court to try to get the guy out. That's the sort of thing you have to be prepared for.
If $170K is the going rate for $1500 in rent, I'd recommend not bothering. Properties like that are losers from the get-go. Realistically, you CANNOT pay more than about $110K for $1500 in rent and that's just to break even. If $170K is the retail price (i.e., you can buy those easily off the MLS), you must not pay that if you're serious about this business. You have to find a much better deal. They're out there, but they take work.
Look for someone who will sell to you with owner financing. That's how I bought my first house south of Houston many years ago.
Fannie Mae rules require rentals to be on two tax returns before they will count the income. Other guidelines may allow you to count the rental income sooner. The forumla is net rental income = (75% * rent) - PITI. That gets added to your other income for calculating DTI. So with $1650 in rent, you get $1237 - $1268 PITI = -$31. Banks will consider this break even.
Thank you very much for your advice. I really appreciate it! I feel your numbers may be a little off. Here's my view on it (I did the expenses a little differently):
Rent (roomates and other side of duplex: $1650
Expenses- Vacancy (at 1 month vacant for each spot per year: $137.50
Maintenance (at about $3500 total per year): $292
PITI: $1320 ($164K loan with 3.5% down, 6%, 30 years)
Advertising/cleaning for vacancies: $84 (out of $1000 annually)
Monthly loss: $183.50
But wait! I'll also be living here for free. That saves me the $400 in rent I pay every month. So it's actually $216.50 in my favor to buy the duplex, no?
A few questions: Am I right to expect 1 month vacancy per 12, or is that too little? Also, is $3500 maintenance per year too little?
Edit:
According to my calculations, my expenses are $337 (taxes and insurance) + $137.50 (vacancy) + $292 (maintenance) + $84 (advertising/cleaning) = $850.50, which puts my expenses at 51.5%, MORE than what you had.
Not breaking down my expenses now, and just using yours would create this scenario:
Expenses: $825
NOI: $825
Payment: $983.50
Loss: $158.50
Rent Saved: $400
Overall Profit: $241.50
GOOD, right?!
