Help me run these numbers on a buy-and-hold rental please?

Question

I don't want to fall into the trap of buying because I feel I have to, but that said I've got cash sitting around drawing 0.01% that I need to do something with and this seems to be the best in my area, other than a distressed property I'm planning to snatch up if the current under-contract falls through.  And no, I'm not interested in investing in other markets right now.

This is on a small 3BR currently listed at $120k.  Built in 1980, renovated in the last few years and move-in ready, doesn't need renovations at all.  Comps are real hard here since it's a small town, but on the same street a similar house but brick outside instead of siding sold for $105 last september and was listed originally at $115.

I believe I can get $850 rent without any problem - probably $950, based on local market rents.  It would be my first deal and I don't have a mortgage currently, so I've got traditional financing pre-approved at 4.8% with 25% down.

Here's what my numbers are looking like:

Mgmt fee:  $75 (going to manage myself)Maint: $50 (renovated in the last 3 years)Replacement reserve: $50Taxes: $113Insurance: $110 PI: $377 (assumes $95k purchase)Total:  $775 (not counting vacancy)

My spreadsheets show a cap rate of 5.7% and COC of 3.49% with vacancy included.  I'd like to think things will end up being better - less maintenance fees and less vacancy, but I'm trying to consider a reasonable worst case baring something like sewer problems.

The town has a medical school, and students have a hard time finding places to rent - there's a crappy set of apartments near the school that rents a tiny 3BR for $800.  Run-down 3BR houses in town tend to rent for $800.  Most med students I know with families end up driving twice as far as this house to find something to rent for $950 or less.  I've been told by students that the average a student pays for rent is $600 (2BR) to $1000 (3BR).  I also have an "in" with the students and should have no problem finding tenants.

It's certainly not a home-run, but the numbers are better than any other property on the market here I've seen.  Given there's houses selling for $160k that are currently rented at $800, nothing else gets closer to the 1% rule.  The others that the numbers might work better on are 100 year old houses that appear to have serious structural issues that I don't want to try to tackle as a first property.

Tony Maro · Answer

So as an update I found a 3BR 2k sqft on two lots in town listed at $40k.  It's in need of about $30k of finishing work (upstairs doesn't even have drywall, for instance.)  ARV should be around $95k.  I caught it the first day it was on the market and offered him $35k cash which he accepted.  Got a contractor and a renter lined up already.

We're supposed to close this week but then the title search came up with two judgement liens on the property that I'm told total more than I'm paying.  His attorney is trying to help him get those settled for less so we can close.

Anyone have any experience with this sort of thing?  What are the chances we'll actually close?  The agent is of course telling me this won't be a problem and expects a week delay at worst.  My closing attorney said he still has it on his calendar but that "it might not close."

Andrew M. · Answer

Yeah I agree this one isn't a winner. But you still have a few options. Has the house been on the market for a while? Maybe you can get the price down. Have you thoroughly shopped around for a mortgage? Maybe you can get a lower rate or qualify for a lower down payment. FHA loans can go as low as 3.5% down. Is adding some kind of accessory dwelling an option? Maybe a basement apartment or an apartment above a garage (depends on zoning laws too).

Tony Maro · Answer

Joe, thanks - both sites show no listings.  Charleston (and Beckley) are different markets and a ways away.

Timothy - I haven't considered that actually.  I'll check into that.

Joe Pitrolo · Answer

Check auction.com or hubzu.com

I've just gotten several 3 beds in Charleston for 30 k and renting easy with Hud for 800 mo. These homes also have equity of over 50 percent

Tony Maro · Answer

I was afraid that was going to be the consensus.  I think I'm trying to bleed a turnip.

No, there aren't any multi-families on the market.  It's a small town in West Virginia (well, small for the rest of the country but pretty big for here.)  Average household income in our county is $33k which means rents can't go up much, either.  We have a temporary shortage of housing due to the floods last year, when around 120 homes were destroyed in our county.  Unfortunately this means there's very little on the market, but doesn't justify higher rent prices because the local economy just doesn't support it.

I'll keep looking.

My other option is to go out a bit more rural, but I don't understand the market and those houses will be much, much harder to sell when I decide to get rid of them.