Did I overpay on my rental?

Question

Hello everyone,

Recently I purchased a 3/2 single family in the Midwest where I am stationed. My plan is to rent the home out once I PCS to a new duty station. A fair rental price in my market is $1200-$1300/month, however, homes of similar size in my market are typically not renovated (mines is). PMI comes out to $800 and that doesn't account for a property manager, cap ex or repairs. How can I improve my situation? Should I attempt self managing to save on that ten percent? Please help!!

Anthony Wick · Answer

I'm not sure how anybody can give an opinion based on what little we actually know. What was the purchase price of the house, for starters? 0% down with VA loan, or 50% down, would certainly make a huge difference. You could self manage from long distance once you get transferred, but that is a lot harder.

Are you single? Married? Live alone? Here's what I would do. Rent out the other two bedrooms to fellow military personnel. When you transfer, rent out the third bedroom. So now you're renting out all 3 bedrooms to hopefully trustworthy people. Then, pick 1 of the 3 to manage the house for you for an agreed upon discount in rent (that would be less than paying a full on PM).

Erik W. · Answer

@Dominic Dominguez, hi and welcome to BP!

Since you used the phrase "PCS to a new duty station" I assume you are full-time, active duty military.  I know this because I just retired in June 2019 with 23 years in Army National Guard, and while I didn't do what you're doing I know the lingo.

I am not a fan of leaving a trail of rental houses dotted all over the CONUS.  You gain no economics of scale with onesie twosie deals that you constantly have to keep track of.  If I were you, I would sell the house and concentrate on moving to your new destination.  You'll have enough to worry about adapting to your new CO & team.

Btw, you may not like to hear this, but both conventional wisdom and my calculator say do not buy a house unless you intend to live there for at least 3 years, or you will lose more from transaction costs and repairs to spruce up a house to retail sale condition than you will ever gain from appreciation by owning the home.  Active duty military, almost by definition, isn't a good career for a homeowner.  Now if you're willing to take the financial hit every 2-3 years when you change duty stations, by all means, continue to buy house....but don't think of them as investments.  The odds are they will under perform.  Most houses that we would buy for ourselves do not make good rentals.  Too much $$$ for too little rent.

I recommend renting for now and saving your dollars so when you get out you can purchase property where you end up living in your encore career.

Nicole Heasley Beitenman · Answer

The first deal is all about experience. The stories you hear of investors making $50k+ or $800/month cash flow on their first deals are NOT the norm.

PM should be built into your numbers whether you plan to self-manage or not, especially since you're military and, I'm assuming, could be relocated and forced to hire a PM. I always recommend self-managing your first rental so you know what the job entails and therefore have some experience to rely on when evaluating PM's. But eventually, you'll probably have to bite the bullet and hire a PM.

Give yourself a pat on the back--you took action, a step which many never take. Use those mistakes to make the next deal better!

Dominic D. · Answer

Thanks for the reply! I didn't even consider setting up multiple interviews with a property manager in order to review their contracts. I appreciate your help!

Dominic D. · Answer

Thanks for the advise Bob! I've been meaning to find a local investor club. I just returned from being overseas for over a year. Hope all is well.

Carl Millsap · Answer

@Dominic Dominguez I was in the same boat at one point so here are my lessons learned.

1. I would start a fund now for CAP-EX / repairs....$100 per month so when you PCS you'll have $ set aside when those items come due.

2. Interview multiple property managers, get a copy of their agreement and then set a second meeting based on questions / research about their agreement.

3. Set a limit on how much they can spend for repairs before it requires a call / authorization from you. I set mine at $100 because you don't want any surprises.

4. Don't be afraid to get a 2nd or 3rd quote independent of what the property manager gives you. My manager quoted me $4500 for repairs after a tenant moved out. I got the work done for $1200. I had everything done on the list they provided.

5. It's possible to self manage but consider if deployment is a real possibility, and what you would need to do in that situation.

Since your property is renovated and others aren't I'd attempt to get more $ i.e. $100-$200 more per month. If it doesn't rent at the higher rate drop it $5-10 per week until it rents.

John Morgan · Answer

@Dominic Dominguez

Self manage it and save a ton. I manage 9 of mine and it’s super easy.

Ricardo R. · Answer

@Dominic Dominguez it probably wouldn't be a bad idea to self-manage until you stabilize. I don't know if you mean PMI or if you meant PITI (principal, interest, taxes, insurance) --- But just some napkin math here... if your PITI is $800/mo. and your rent is $1,250/mo. then expect to cash-flow @ $225/mo. after all expenses are accounted for, again this is a basic analysis. A PM would likely charge you 10% on a management fee but would likely run more like 12-14% of the monthly rent after all other factors (tenant placement, etc.) that's about $162/mo. for management which would leave you about $63 in cash-flow. Because you're in the mil it may still make sense depending on your situation as you would still be benefiting from equity pay down and over time your rent rates should increase, not to mention you would be freed up to do whatever else you need to.

If you're active duty which it sounds like you are... consider a PM... and focus on services provided not so much on price... sounds gimmicky but trust me... it's a service based business... 6% or 10% or 15% of what?... of services, so your focus should be there... what can the PM provide.

Alex Olson · Answer

@Dominic Dominguez Do you have any friends and family in the are that can be trusted to watch over your property? If you can get contacts lined up, you won't have much of an issue managing a SFH from a distance. It is not hard as the tenants do all of the work to it. Just as long as you have tradesemen lined up.

Bob B. · Answer

IF this is your first rental I would probably use a good management company for the first year or so until you have time to learn the ins and outs of being a landlord.  Join a local investors group and find a good mgt. company.  Keep learning from BP and then self manage. You won't have a lot of cash flow now but its will get better. Congratulation on your first purchase.

Did I overpay on my rental?

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