Rental Property

Any one interested in discussing rental property strategies and finances?

I own a few single family homes, and a close associate has several.  Always looking to share ideas, help newbies, and tell some of our horror stories.

Scott

Scott, when you go to buy an investment property, do you use the formula 100 x rental price to get the top price you would pay to buy the place?

100X monthly rent is not enough profit.  Although markets vary.  If you are in a high appreciation market (where is that now..lol) you may go that thin.  In the midwest with little appreciation, you can use a rule of thumb of 150x.

Scott

Will post later on how I evaluate a property...wife calling for dinner!

Edited 1 time(s). Last edit at 02/22/2007 08:13AM by caddman.

Here is how I analyze my rental purchases:

1.  Home must be in an area I would not be afraid to sleep in myself. (lol)

2.  Home must be at least 30% undervalued vs. comps.

3.  Repairs to get the home to appraise for comps must be under $2500 in materials.  (I do the work, or have some cheap contractors)

4.  Rents in the area must about 1.5% of purchase price or no less than 1% of new appraised value.

5.  Buy home cash, or find someone to front the money.

6.  Do repiars, advertise, interview prospective tenants.  Don't overthink this...are the people clean?  Ask to see pay stubs.  If you say they can afford the rent, then they can.  And yes, the will have a BK, and debt.  Their lives will be a wreck compared to yours, etc. (lower end rentals...$700/month)
 
7.  Get an 80% LTV cash out refi.  Payback your investment capital.  Pocket remaining proceeds for working capital.  P+T+I should be about 80% of what you collect in rent on a 20 or if possible 15 year mortgage.


Here is an actual example of one of my homes.

Purchased repo from VA for $42,000.  3br, 1 Bath, small ranch with 1 car attached garage.  Slab home, so simple construction.  Small town 20 minutes from Indianapolis.  $1800 in repair materials.  Appraised for $75,000.  Cash out refi for $60,000, 20 years 6.25% (at the time).  Payment is $600/month.  Rent is $700/month.

So I net $100/month in cashflow, $150/month in principal paydown (increasing every month), any appreciation (not counting on a lot), and net about $9000 after closing and misc costs from the refi.

By doing the cash out refi you can basically precollect rent for your expense cushion, boost your working capital, and you benefit from the present value of money.  But don't be stupid with the capital.

The numbers will be slightly different for each market, but the ratios will roughly be the same.

Scott

Cool and exciting.

Scott this is all outstanding stuff. Did you read a book to come up with what you've written so far, or did you find this out by trial and error?

I picked the brain of a gentlemen who although a newbie himself, was well along acquiring 6 properties.  His brother-in-law was his mentor with about 100 properties.  I did my first deal, found a good property and started.

While looking for my second home I became good friends with a mortgage  broker who also has several properties.  He taught me how to look at financing and cashflow differently.  Get  a mentor familiar with real estate in the are you are looking.  And get somebody with several years experience.  Too many do it for a couple of years and then can't make it.

For example:  The first home I picked up from the VA for $42,000.  I put down 10% and financed the rest with a 20 year mortgage.  We about $1800 in materials and cleanup.  The M+T+I was $525 a month.  The home rented for $700.  To analyse,  I had $6000 out of pocket, and clearing $175/month.  So my yield was 35% annually.  Sounds great huh?

Well, lets do this.  The home was in a decent neighborhood and would appraise for $75,000.   If I refinance for 80% of value, I could cash out $60,000.  At the time I could get another 20 year note at investor rate at 6.25%.  The new payment is $599.  I still pocket $100 per month.  But I put back in my pocket my original $6000 in costs, covered $1800 in closing and netted about $14,000*.  Now since my NET OUT OF POCKET was now $0, what is my return on the $1200 cashflow?  INFINITE!

Pluss if I do have a repair, I have cash to use and not get upset that I now have ruined X number of months cash flow for the repair.

Scott

*(Previously posted that I had 9k net back.  I had 2 homes that I refied and the net was 18k.  For the first post I split the net.  After going throught the paper, I pulled out the numbers for my first, it netted 14k, the second was 4k)

Edited 1 time(s). Last edit at 03/19/2007 09:12AM by caddman.

Scott,

Great stuff.  Thx

What about... shudder.... VACANCIES?

I've just about settled on REITs (and only COMMERCIAL ones) as my RE investment.   Granted, no leverage, but about the same return (sans headaches) of actual cash ownership.

?????

Vacancies kill your cash flow!!!  No doubt about it.

So the few rentals I have are 3 bedroom, single family homes.  Why?  HIGH DEMAND!!!  Always a family that can't get it together enough to own, but do not want an apartment.  One of my homes has a couple with 4 kids.  They have been there 2 years with no end in sight.  Just signed a new lease on another for a guy who wanted to sign the lease for 2 years (normally I only require 1 year) if I would drop $20 off the rent.  Sure!!!

When this one opened up, I had about 25 calls from simply a sign in the window and the local "paper" with a circulation of about 500...lol.

When someone moves out you will lose about 1 month's rent at a minimum, usually 2.  That is why lenders will only count 75% of rental income, and only if you have 2 years experience as a landlord for calculating income purposes.

Scott