Getting Started In Real Estate

[Tyler Boltz]

First I'd like to describe a little about myself. I'm 2 years removed from graduation and work as a manufacturing engineer that is looking to get into REI in the near future. Over the past few months I've been researching on Bigger Pockets and listening to the informative podcasts. I'm contemplating the best approach to start gaining real life experience in the RE business.

Right out of college, I rushed into purchasing a completely remodeled SFH. Due to lack of experience, I don't believe I received the best deal but paid around market value at the time. I financed using a rural development loan and had the sellers pay the closing costs. I actually received money for purchasing the home! My question is, would this be a good home to start renting out and managing if move out in the next few years?

The home is located in a semi-rural town an hour west of the Twin Cities in Minnesota. I paid $160,000 for the house with zero down with a monthly mortgage just over $1,000. Using Zillow, the house appreciated from $160,000 to $180,000 in less than two years. Looking at comparable rentals in the area, I believe I could rent the house for $1,300-$1,400 a month. This would fail to meet the 1% rule and most people use a rule higher than 1%. However, this is already my primary residence and determining if it is worth holding and using it to gain experience as my first rental property.

Cash Flow Analysis:

1. Rent: 1300
2. Principle: 256
3. Interest: 503
4. Taxes and Insurance: 301
5. Vacancy: 65
6. CapEx: 65

Cash Flow: $110

Since I already own property, I will use ROE:

ROE=110*12/ (180,000-156,000)= 5.5%

This does not include any appreciation. Is it smart to include appreciation in your ROE analysis? Zillow estimated the value of the property appreciated $20,000 in two years. As mentioned early, the property is located in a semi-rural town and the population has remained mainly stagnant (pop. 14,000) in the past 10+ years. I don't want to rely on appreciation but if I assumed 2% appreciation the ROE would be:

ROE=(110*12+180,000*0.02)/(180,000-156,000)= 20.5%

This wouldn't be a property I would have purchased for a rental property (I believe there are better in the area) but since I already own it, is it worth holding on to?