Do these numbers make sense? First rental

[Ian K Laszlo]

Greetings,

I'm looking at a house selling at 136k. It's owned by a landlord who is occupied by three tenants who are serious on staying/renting.  Seller agreed on selling house for 128k. This house is not listed on market, and the seller is trying to work with me the best they can. 
I like the tenants, they're all clear money wise and lived at the house for three years. 

Best loan I could acquire is 6.8% at around $1150 a month. I'm considering covering the closing cost by loan making the total mortgage around 134k. 

Rent would be $1350 a month split by three people being $450/person/month. Renter pay utilities. 

House is great shape with only minor paint/drywall dmg. Otherwise very nice. Three bedroom, 2 bathroom. Renovated basement. Foundation/electrical good. City water and sewer. New roof, hot water tank and furnace. Decent two car garage with a fenced in backyard. 

Down payment $4500
Yearly cashflow $2400
That would be 54% return on my money.

If I took off $100 a month for the common repair, cashflow would be $1800 = still a 40% ROI

Me: I have good credit (750).  I live in a very small home currently owned and paid off. (1000sqft) No debt. I got a little over a years income saved. 

 I've been looking at houses since 2020 when I was preapproved for a 3.5% interest rate. I didn't buy than, which I do regret considering the rising expense in housing and mortgages. Now I have the opportunity to buy in my opinion a nice property. I can not find something like this house at this price $128k no where near me. It's all $150k+ and in massive need of repair. 

My goal is to rent this house out for the foreseeable future, then if I develop the need for more space (stating a family) I can move into this house. This could be a couple years from now. If loans go down, I refinance. If they go up than I'm grateful I bought when I did. 

 It scares me to think that if I don't buy this house I will somehow be locked out of homeownership. (just a fear; worst case scenario) Which is a big deal to me considering I can't live with anyone in my current house. Unless I sold and lived in some 2 bedroom paying renting, which I'd like to avoid. 

What are your thoughts ? Is this a bad idea? 

[Jon K.]

Quote from @Ian K Laszlo:

Quote from @Jon K.:

Hello @Ian K Laszlo, don't worry too much about what you may have missed out on in the past because it doesn't matter any more. Best time to plant a tree is 20 years ago, second best time is today.

So for this particular deal I think you're missing some things. Your estimated down payment is roughly 3.5% so I'm assuming you intend to use an FHA loan to purchase this property. Unfortunately, you won't be able to use such a loan unless you're living there. FHA loans are for owner-occupants only, so you're likely going to have to come up with a 20% down payment plus some closing costs. I recommend talking to some lenders, tell them what you intend to do (purchase a property to use as an investment) and then discuss your options.

That being said, even if your down payment was only $4500, your cash flow calculation doesn't take into account maintenance, capex or vacancies. You mentioned accounting for maybe $100/month for maintenance (common repair). You also need to account for capex (a new water heater every 8 to 10 years, new hvac systems every 10 to 12 years, new roof etc). And vacancies: when tenants move out, you'll miss 1 to 2 months of rent while you place a new tenant as well as the cost of turninv over the unit. I suspect when you add those things in you'll find that this particular deal may have a negative cash flow.

That being said, is $1,350/month the most you could get for this property? Are the current tenants paying a reasonable market rate or is there room to raise the rent without a major renovation?

 $1500 per year is possible with the current tenants, but I don't think that income is sustainable or fair market wise. I doubt I can get new tenant to agree to that rent. The current tenants were paying way below market rate at $900/month split between the three of them. 

You're correct. The cost of maintenance, capex and vacancies would be more that $100 set aside. I guess my problem is cash flow never being enough. I'm not sure how people run into deals being a first time landlords with 4k yearly cash flow to start after every expense considered.  

Problem is It might not be the best time to plant tree (today), somehow I feel in 2 years I might regret that. Will never know until then. 

I will say this: I would never buy a property that didn't cash flow well based on today's numbers because I think it is a recipe for disaster to do so. I want a minimum of $250/month per door AFTER all expenses including property management or I won't touch it. And you can still find that with today's interest rates but it takes more effort and being more selective in terms of markets. That is my personal criteria, only you can determine what numbers make sense for you.

Never forget that the point of investing is to make money, not to own real estate. There are also many ways to make money in real estate, not just owning rentals. You should deploy your capital in whatever way you can that will give you the best returns within the bounds of your personal risk tolerance.