Investing in SFR with 10% downpayment in Arizona

[Mike M.]

So I currently own my 3 bedroom townhouse in Scottsdale, which requires monthly debt service of $750 a month, not including a $150/month HOA fee. Given the location and market conditions I believe I can rent it out for $1,800 to $2,000 /month. That being the case I would like to find another townhome in Scottsdale, or Tempe area (by ASU) that can duplicate this process with.

I have $30k saved up but am finding in my calculations that the margins are very thin if non existent...

Based on a proforma estimate of a new property that I would purchase for $250k, of which I would finance $220k, with $30k down:

$1800 rent/month or $21,600/year

Revenues

+ Gross Income $21,600

_ Less (10% Vacancy) $2,160

= Effective Gross Income of $19,440

Operating Expenses

-Management fee (5% of EGI) of $972

-Replacement Reserves of $1000

-Home Warranty of $500

-HOA fee of $150

=Total Operating Expenses of $2,622

NOI  = $16,818 ($19,440-$2,622)

Debt Service = $16,752

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Cash Flow After Debt Service = $66

DSC @ 1.00x with a 7.64% DY. 

Debt Yield while being low, would be mitigated by property location and asset type.

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How can I find a way to make sense of a deal like this? Without collecting higher rents my only way to increase cash flow would be to put more capital into the deal. How would i know what average market rents would be in my area? Looking online I see numbers all over the board, from $1,400 to over $2,000/month. My goal would be essentially to 'rinse and repeat' what I have done now: buy a property, live in it for a year or two then rent it out after purchasing a third property.

[Wes Blackwell]

@Mike M.

My first thought when reading this plan is "Have you talked with a lender and made sure they'll lend on an investment property with only 10% down?"

20-25% for an investment property is an industry standard. While it is not mandatory, finding a lender who doesn't make it mandatory may be challenging. It's really going to depend on your overall financial situation. But that's the first thing I would start with to make sure your plan is feasible and a conventional lender will let your borrow on those terms.

Obviously there's ways around this with hard money loans, private lenders, etc. Although those will come with much higher interest rates. But if you're looking at a 30 year loan with traditional financing 10% down probably isn't going to cut it unless you're the underwriter's boyfriend ;-)

Using a loan calculator (like this one here) if you purchase a $250k property with $30k down at a 5% interest rate (decent ballpark for investor loans) with a 30 year mortgage and a $150/mo HOA fee (assuming you bought a property just like yours) then your monthly PITI + HOA would be $1778.92/mo

So by the time you throw in utilities, maintenance, CapEx, management, etc. you're negative.

@Ryan Swan is probably right about condos being the closest to the 1% rule, if only because the purchase prices are so much lower. Probably the most important consideration is a financially healthy HOA and making sure the complex isn't near their rental cap (limit on the number of units that can be rentals).

BUT -- the 1% rule is a bigger pockets metric, and really applies to $50-100k homes in the midwest. If you go to either coast, that metric is completely worthless. The only way to use it outside of those markets is to learn what the average is for the area and compare potential deals against that. For example, if the average in your market is 0.6% and you're looking at a property that offer 0.8%, it's probably a deal even though it's not at 1%.

The thing to consider about a $250k home vs. a $100k condo is the appreciation. 3% is 2.5 times as much added value on $250k as it is on $100k. Phoenix leans more towards an appreciation market than a cash flow market like Kansas City, Indianapolis, etc. Although it certainly offers much more cash flow than California.

One of the first things I noticed coming to Phoenix from another market is how creative developers get with the lingo... "Modern Luxury Apartment Homes" -- WTF is that? LOL! Is it an apartment? Or a home? And why is everything pushed as luxury? 

So there's lots of blurring the lines and blending definitions on housing in this market, so I wouldn't worry too much about townhomes vs. condos. Phoenix lead the nation in population growth last year, so there should be more than enough demand no matter what type of property you consider.