To buy or not to buy?

Question

Am looking at a 2 bed, 1 bath SFH that is currently owner occupied.

asking price is $189K

Taxes are $4000

Looking to put $75K down.

It is very close to where I work and from all appearances looks like it is in pretty good shape. My goal is to rent the property to build equity and rental income. There are very few SFH's for rent in this area. A realtor advised me that this house could rent btw 1800-2000, but I think a more realistic rent would be 1400-1600...

Any advice? I do not currently own any other real estate other than my home.

Joel Owens · Answer

Those taxes are an absolute killer. I would really look at the past 10 years how much those taxes have gone up yearly to get my ratios. The taxes might go up annually at a faster clip than you can increase rent eroding returns further. You need to also get a  5 to 10 year historical rent analysis to see declines, gains, or flat levels.

Dumping 75,000 in for that kind of return is really not good. Some areas are spec areas and not rent areas. At almost 200,000 and 1,500 in rent you are at 750 in rent per 100,000 or purchase price (not good at all).

In rent areas for cash flow you should be able to almost double that or better. Your area might just be a spec area. Not excited about a 1935 vintage building. So many things behind the walls and everywhere else that can eat your returns alive for years to come.

Knob and tube wiring, unpermitted additions, foundation issues, galvanized plumbing, mold, radon, asbestos, lead based paint, etc. Do not go by your agent and verify everything as well.

Simon Campbell · Answer

Though a lower payment sounds like a way to increase your return, it is not always so with investment properties. The cash you put as a down payment will be locked into the property and is not easily accessible. HELOCs on investment properties are hard to get and money out refi's even worse.

Using bank leverage to maximize your cash on cash return leaving liquid assets to use on other investments is often the technique used by experienced investors. What happens when you have 40% equity in an investment and a more profitable one passes you buy. You would wish you had saved some of your cash.

Darren Sager · Answer

I would have ruled it out the moment you said 2 bed and not 3.

Edward Burns · Answer

Good luck, I hope the property is what you want.  Please keep in mind by time you add up all the operating expenses (not including mortgage payment) you are probably looking at almost $1000/month.

Brock Siebert · Answer

The actual taxes are $4038. Welcome to NJ!

The down payment would leave me with reserves to cover unexpected costs and vacancies. Roof is newer, no idea about HVAC, it has window units for AC though. I don't think going any higher than $160K makes this house a "good" buy!

I am going to try and do a walk through his week and get more info!

The price was dropped 10K after being on the market for 6 weeks, so I think that they are willing to move on the price, how much is yet to be determined.

Edward Burns · Answer

No in my opinion increasing the down payment will not significantly help.  If the rental value is on the order of $1600/month, I would not be buying the house at any higher than $160,000.  The killer on the deal to me is the $4000/yr in taxes.  Check to see what the actual taxes ($4K seems like an estimate) are by going to the county assessors web site (most counties have the information available online).  In addition how old is the Hot water heater, how old is the HVAC system, How old is the roof?  If you have to replace major units soon, it affects the value of the deal.

In addition, you need to have 3-6 months cash reserves to cover both this mortgage and your primary mortgage.

Brock Siebert · Answer

1- Why are you targeting a 2/1?

I don't know what you mean by this question.

2- Why are you putting so much down?

I was looking for a lower payment should the unit be vacant.

3- Why are you trusting a realtor for rental amounts (props for second guessing him/her)?

I also looked at local listings, it seems like the rent would fall more in the area of 1500+/-

4- What's up with the house? Age? Finishes? Neighborhood and target market?

Seems like it is in decent shape, not spectacular, but paint and new carpet will go a long way. built in 1935, neighborhood is all SFH, some rentals some owner occupied, mostly 30+ age people, some older individuals looking to not upgrade and sell out instead.

Brock Siebert · Answer

Would putting $5000 more down make it a better situation.

All the equations so far, I assume, are using the asking price. I don't think going in higher than 170K is a likely situation although it does not change the numbers by much. The main reason I like this property is so much is the location to my place of employment and ease of "watching over" my investment!

Jeremiah B. · Answer

Based on what you provided - this feels like a clear "no thanks."

With that said, your post left me with more questions then anything else.  For example:

1- Why are you targeting a 2/1?

2- Why are you putting so much down?

3- Why are you trusting a realtor for rental amounts (props for second guessing him/her)?

4- What's up with the house?  Age?  Finishes?  Neighborhood and target market?

Edward Burns · Answer

@Simon Campbell

You are correct if you go by the 50% rule, but in this case his expenses will probably exceed the 50% rule.  Just taking the property tax ($333/month), vacancy ($160/month), Property management ($160/month) equals over $650/month with nothing for repairs or capital expenditures or insurance.  So $800 per month in costs (not including mortgage) will not work in my opinion.

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