Buying an living in a house where tenants pay morgage

[Logan J.]

Afternoon everyone, 

This is my first post in the community! I wanted to know if my plan was feasible. 

A little about me: I am an nontraditional undergrad student at the state school here about to finish my degree. I work full time as well so I have a steady income, enough to help me save for a house. The only thing that is holding me back from buying a property is because when I graduate in 10 months I don't know if I'll be hired by a company outside of town or even Texas. I've heard it is ill advised to buy when you plan on moving shortly after but If it comes to it, I'll just buy and hold and have a management company take over the property. That's all besides the point.

I am currently saving for a down payment on a house or duplex in San Antonio, Texas. Target cost of the house is going to be 100-125k. I will be saving for 20% of the cost of house to avoid PMI, 20-25K. The average room for rent in San Antonio are roughly $400-$500 depending on location. Using the Zillow mortgage calculator, my mortgage would come out to be $650 a month not including any other miscellaneous expenses.

http://www.zillow.com/mortgage/calculator/payment/...

The full breakout is as follows:

Expenses per month:

• $458 - Property and Interest
• $125 - Taxes
• $67 - Insurance
• $105 - Maintenance and Repairs (Based on 1% rule)
• $25 - Advertising for tenants ($300 a year on the high end)
• $128 - Electric  (rough estimate)
• $30 - Water (rough estimate)
• $70 - Google fiber

Total Exp.: $1008

This is an extremely rough draft but I feel like I've covered a handful of expenses with over estimating advertising costs to find a tenant. 

With total expenses at $1008, I would have to rent at $500 to break even. This is all contingent upon if the house I buy is at most $125k. How does it all look, are there other things I need to consider when looking at this purchase as a business investment? Any tips or advice would be greatly appreciated! 

Thanks!

[Angel Cepeda]

@Logan Jung,

First off. Welcome to the BP community! I like you, am a new investor in San Antonio so its good to see new people in my area get engaged.

In regards to your situation, sounds like you have some great ideas. Some of the questions that I would ask you are: Do you have a plan? What are your short and long term goals, and what are the milestones that will get you to those goals? You then need to determine what choices need to be made, and what actions do you need to take to reach those milestones and goals. If you are not sure what your future career holds for you, then I would humbly advise that you determine what you want your end goal to be and work backwards from there. Once you have laid out your plan, I think you will have a very clear picture of what you need to do going forward.

But enough of that, lets talk about your deal!

Principal & Interest - $477 (assumptions: 125k price, 25k down, 100k mortgage @ 4% over 30 years) note: this will change if any assumptions change. Rates are going up.

Taxes - $280 (based on a tax appraised value of $125k) Note: For reference, I looked up a property with a Bexar county appraisal of $108k and the taxes were $2,924, over 12 months this comes out to about $244/mo.

Insurance - $67 (I think this figure is just about right. Of course this depends on how extensive your coverage is and with which insurance company you choose.)

Vacancy - $83 (based on a $1,000 rent rate and a vacancy rate of 1 month per year although it will likely be less, I'm being conservative here, I think)

Repair - $105 (I agree with you on this)

Misc - $100 (As with any business endeavor, most business people tend to be optimistic about what their costs will be. I am adding this in here to account for other expenses that may come up such as legal fees, HOA fees, etc.)

If you add all this up it comes out to $1,112. If you rented this unit for anything less you would be in a negative cash flow situation and you would literally have to put MORE of your own money to cover these costs. Not a position I would want to be in. Some people would disagree with me here, based on their long term strategy. Depending on the area you may be able to fetch more for this property, but that depends on a lot of factors as I'm sure you probably know.

As for the other costs that you are including in your estimate, I would not offer to pay for utilities, nor would I offer to pay for cable and internet. These costs are borne by the tenant as they will choose what level of service they desire. On a related note, Google Fiber is not yet available in San Antonio and is still only in the development stage. I honestly don't think it will be widely available until late 2016, but thats beside the point.

To answer your question on this deal, I would say your money will better serve you if you can purchase a property at a relatively good discount. This is the hard part. Scour the market to find that great deal. They are everywhere. Use the 70% rule as a guide, and you will have a lot easier time making money on the deal. Its rare that you can pay full retail price in an inflated market like San Antonio and make money worth the risk. Remember, your money is made when you buy, not when you sell. Good luck, and sorry for the long reply.

All the best,

Angel Cepeda, CPA