Burlington Township, NJ · Member since 2016 · 52 posts · 14 votes
Hey all,
I would greatly appreciate it if anyone could let me know if the home I recently purchased will end up biting me in the butt!
So here's some backstory: I recently closed on a twinhome (just one side) for a total of 210K. I financed using the VA loan for 0% down at a 3.75% fixed rate. It was a total of $2,100 out of pocket for closing costs and my monthly mortgage bill will be $1,500 (included taxes and insurance, no pmi for va loan). I plan on moving out after a year (due to va loan restrictions) and renting this home out.
I see a similar twinhome on my block renting for $1850 (it was recently updated inside), Zillow estimates rent at $1650-1800, and it estimates the home value at $165k(another home recently purchased on my block sold for ~$197k. I hope I provided everyone with enough information, any advice, or input on whether this was a good or bad deal is appreciated!
Hey John, I think the deal is really tight personally. I shoot for (as we all know) 1% min, which would have put you around $180k purchase price. LTV also affects the deal (higher pmt if you are financing more than 80%). Is there an HOA fee, and if so what does it cover?
This deal may be better as your personal residence, and trying to find something with a better spread for a rental. $300 a month doesn't leave you much for vacancy, maintenance, mgmt, cap ex, etc.
My last deal was $129k purchase, put 20% down and just signed a lease for $1.5k/mth for example.
@Kevin Phu the home I purchased is well kept nothing to do except eventually change the linoleum flooring and laminate countertops, half the garage was converted to an office (permit was used), and they have an over the range microwave, were I just have an exhaust fan. The other home has a nicer deck and granite countertops and nicer floors (unsure of material).
If your total costs are $1500 and the rent you can get is 1850 , it seem like an ok deal. Most rents go up over time, as should the value of the home, but your mortgage wont, so over time, this will become a better deal. Make sure to keep it updated to get maximum rents. ANything you can do while living there will help your bottom line.
@Christine Kankowski Thanks! Are their any calculations or strategies you use to make sure it's truly a good investment?
I've heard of the 2% rule and a few others but they kind of confuse me still.
Hey John, I think the deal is really tight personally. I shoot for (as we all know) 1% min, which would have put you around $180k purchase price. LTV also affects the deal (higher pmt if you are financing more than 80%). Is there an HOA fee, and if so what does it cover?
This deal may be better as your personal residence, and trying to find something with a better spread for a rental. $300 a month doesn't leave you much for vacancy, maintenance, mgmt, cap ex, etc.
My last deal was $129k purchase, put 20% down and just signed a lease for $1.5k/mth for example.
@John Jimenez remember, all of those "rules" are simply just guidelines. You need to run all the numbers and see exactly what it comes out to be. Have you used the BP calculators? Those are very easy to use and break all the numbers down for you.
@David Kenny thanks for the Advice! I was also kicking myself for not negotiating better...fortunately there are no HOA fees. Would you mind telling me how much you account for vacancy and cap ex? I'm planning to manage on my own since it will be my only rental (to start).
@Kevin Phu I have not used the calculators yet since I have been staying at a no Wi-Fi Cabin with only my cell phone providing me internet access (BP doesn't work well on my phone)
I guess another reason for this hasty purchase was that I needed somewhere to live so I soludnt have to pay the ridiculous 2100k rent I'm paying to accomadate my wife two cats and myself.
No problem John, more importantly you jumped in which is the hardest part!
Vacancy: 1 month or 8% of rent
Cap Ex: I have a breakdown of major components, estimated useful life, and the cost to replace. For example, HVAC $4k over 15 year life is $22 a month. I do this for all major components.
@David Kenny you're right it really would be tight to rent this out, I guess I also have to see how much everything changes while I live in this property for the next year to year and a half.
I really liked how you calculated the cap ex I will definitely have to add that to my notebook of useful things and use it in the future.
Good stuff John! To @Kevin Phu's point, the general % rules are a guideline to see if its even worth looking into. Then you can get into the details and budget cap ex and other items specific to that property to get a really good idea of how it looks. Good luck!
Agree with David, with all those things considered along with operating expenses like landlord/liability insurance, property tax, certain utilities if you can't push them off to tenants and so on, if those expenses paired with your reserves and PM expenses can't work with the extra ~$300/month after mortgage payment then you'll have to come out of pocket. That's the bad news but, the good news is that you're in this deal for $2100 and a little bit of rehab work, at 0% down you could potentially refi the VA to a 20% down which will lower your monthly payment and make it work but, you'd have to do the math to see if it actually works or if it's even worth it. There are rule of thumb calculations like (the 2%, 1%, 70% rule) and then there's analysis based off current and realistic detail, use the first to find yourself deals fast and use the second to make sure you have a solid deal. I'll be looking for your updates on this, hopefully it will work out!
No problem John, more importantly you jumped in which is the hardest part!
Vacancy: 1 month or 8% of rent
Cap Ex: I have a breakdown of major components, estimated useful life, and the cost to replace. For example, HVAC $4k over 15 year life is $22 a month. I do this for all major components.
@Lionel Li thank you for the tip, I didn't even consider refinancing. Do you think it would be better to just stay in this home and use that 20% as a down payment towards a duplex using something other than an fha or va?
Once again thanks to everyone for all the information!
Look at it this way, you only put $2100 down for a house, and you got an awesome interest rate! Hopefully its a 30 year fixed loan? As a rental its tight right now, but in a few years when can get higher rent you'll be in a good position. There is so much good info here on BP. Take some time to listen to a few dozen podcasts and read the forums and blogs over the next year and you'll be much better prepared when you buy your next rental, good luck!
@Account Closed your today purchase is not very good. The minute you factor in management (usually 10% of gross rent), maintenance, capex, or vacancy you end up in the red. Pretty much any 2 of those means you are losing money the day it becomes a rental. On the brighter side, you are living there for a year. Rent out the rooms to others (either long term or short term) and save the cash flow for your next purchase. If your place appreciates you can get out of it later, or you can keep it as a primary and have cash to buy a rental that works. My first purchase was very similar. It slowed me down, but I was able to learn so much that maybe it actually let me move faster and smarter, just with a little less cash.
Great job getting started. It's all about moving forward!
@Nolan Martineau thankfully it is a 30yr fixed mortgage rate, and thank you for your input!
@Bryan O. Thanks for the encouraging words!
I believe I've decided to stay in this place for a year or more (since I can comfortably afford it) depending on whether or not the rent goes up, and save up down payment for a duplex !
Thanks again everyone for your kind words of advice
There is *always* going to be a better deal. Don't beat yourself up over something you can't change. I'm amazed you got essentially a no-money-down deal in 2017! I would live there more than a year before renting, you can always sell it if you don't think its going to be cashflowing later, but will you get that sweet VA deal again (I presume not)?
@Russ Draper hello! I will be able to get the va loan again, I believe I'm allowed to have two va loans at once, or sell this one and use the va loan again!