How am I doing?Bought a fixer, fixed her, found first tenant

Question

Hello, I love this forum and the sage advice.  I'll try to be short and to the point.

Purchased for $310k, 3400 sq ft beautiful brick home with separate entry/laundry/kitchens.  It was a bank REO.  Upper level has world-class city view.  Basement suite is large, but no view.  23,000 sq ft lot, likely can be subdivided but not yet certain.  Sought-after area (close to new mass transit center).  Great deal on the house but the market for flip is bad, like everywhere.

Paid $101k out of pocket to buy it (high down payment) got 5.65% 30 yr loan, monthly mortgage $1570.  So far put exactly $30k into new roof, electrical panel, appliances, cabinet, carpentry, etc.  I am done putting money into prepping the house.  I have made two mortgage pymts as well.

Have been very picky about selecting a renter.  Most people had cats or bad credit, or both.  Found a bright, educated, solid-employed, newly-married Mormon to rent the upper level.  I believe he will be the perfect tenant. No pets and very respectful.  $1200/mo.

There is strong interest in the basement suite at $850 but I have stopped advertising it because I want to get upper level guy moved in, and settled for a few weeks, before getting basement moved in. I am certain I will get $850, there is very little avail in the area especially at that price.

So here we are.  About $135k has gone in, $1570 goes out each month, and I have $2050 coming in.  I know someone said 50% of revenue disappears from expenses, which is debatable.  A very close friend has 16 rental homes here in the area, he says vacancy is 100% all the time (never shortage of tenants) low turnover here, and low expenses.  But who knows.  I guess you can all call me crazy now but in 30 years it's mine and I do not like the stock market.

How about this deal.

Account Closed · Answer

That's just about as good as you are going to do in Washington.

2 suggestions for the extra lot to make the deal better.

Split it off and build another rental on it.

or

Split it off, sell it. Apply the amount you get to the mortgage and refinance the smaller amount to make your monthly payments much smaller. That gives you a larger comfort zone, economically.

It sounds to me like a very good choice for a property to buy and hold

Lynn Z · Answer

What are your new taxes going to run?  Not last year's but from here on out? And insurance?  Is your mortgage payment quoted PITI or just PI?

I have a family member with 30 apartments since the 1970's and lots of houses.  Their vacancies alone (not maintenance included) rant $13,000 last year.  Get that puppy rented up with good tenants and an iron clad year's lease.  Visit quarterly to check filters to preserve your equipment and write that in your lease.  Also put in that you plan to begin showing the apartment a month before the lease ends and that will help reduce vacancies.

No one I know realistically considers a zero% vacancy rate.  Banks take off 25% of your rental income just for fun so you should account for some vacancy.

Mr Good · Answer

THANK YOU very much for your responses, and particular thanks for generously outlining those figures Mr Wheatie.  It feels great so far to be involved with this, making the jump.  I shopped hard and feel good about what I have now.  Any other comments highly appreciated.

Matthew Marcelissen · Answer

Congratulations on getting started!  I would suggest staying away from mentioning religion while describing your tenant.  I'm sure you didn't mean anything by it, but it's a stupid way to get in trouble with Fair Housing laws.

Matt

Dean George · Answer

helluva a reply boys, especially wheatie.

I think the point Tim made is paramount here.  You've got the rubber on the road.  If you step back and look at the deal, and hear what others have to say, you are going to learn just a boat load about where to go from here.

There are two sides to every deal, and it's cool that you're on your way within the confines of what works for you.

Timothy W. · Answer

You did the right thing by starting.  Most people don't take that step.  Your number are close to the first property I bought in Chicago.  It doesn't work long term for cashflow but it was the best I could get in the area.  I'll be honest though - it was a learning experience and knowing what I know now, if it's as desirable and area as you say it is I would probably sell for some profit to reinvest and get better cashflow elsewhere.  But that's me and I got tired of crappy cashflow on my Chicago property.  That being said, you are to be congratulated for starting.

Edit:  Talked to my dad about this the other day.  Twice he took some poorly cashflowing property with subdivisible lots for the purpose of selling off the lots and the property seperately and made a good profit from those tansactions.  It seemed that subdividing off the vacant land didn't take any value away from the property.  I'm editing my suggested exit strategy above to subdivide and sell if possible.

Jon Holdman · Answer

By leaving the basement vacant for "a few weeks" while the upstairs tenant "gets settled", you're giving up (assuming three weeks) $588 in rent.  Over a year, that amounts to $49/month, or 2.4% of your gross scheduled rent.  Why?  Get that sucker advertised and filled!

OK, lets be generous and assume your expenses, including vacancies, insurance, taxes, and all the other stuff mentioned in other threads is only 33%.  That's actually the lowest number I've heard anyone use, and that was from someone with a very vested interest in getting people to buy.  By my calculations, your taxes and insurance are $310/month, or 15% of the rent.  We've already found another 2.4% with the three weeks vacancy in your basement unit.  At 33% for expenses ($676/month) with a P&I payment of $1260, your cash flow is $113/month, or $1360 in the first year.  You have $131,000 invested, if I'm reading correctly.  So your cash on cash return is 1.04%.  Way too low in my book.

You imply you want to keep it 30 years, and have it paid off.  So, lets look at the investment over that period, too.  Over 30 years, you WILL have to put on a new roof (or two).  You will install new furnaces.  You will have some other damages or major expenses.  You will paint numerous times. Houses are just not built to last 30 years with no maintenance.  But, lets again be generous and assume you do all the management yourself, do as much of the maintenance as you can, and have no troubles with tenants.  So, we'll continue to use to very optimistic 33%.   Lets take a wild guess and assume inflation is 3%/year for the next 30 years.  We'll bump up the rent, expenses, and house value by that amount.

After 30 years, the house is worth $752,451.  Your total cash flow collected over that time is $355,385.  So, the $131,000 you invested has turned into $1,105,475.  That's an impressive, but it equates to an annual return of 7.4%.  The actual return is a bit higher, because you're getting some of the money each year.  If I assume you take the cash flow from each year, and put it into CD's paying 5%, your annual return is 8%.  You could certainly do worse.

If your expenses really do end up being 50%, you still don't do too bad.  You end up with $901,546, almost all from the value of the property.  You have six years of negative cash flow until inflation turns you positive.  Then it takes another seven years to make up the losses.  You return is somewhere between 6.6% and 6.8%.

With 33% expenses, after its paid off, you're generating $3433 in cash flow.  With 50%, you're generating $2562.  If your expenses really are running 50% (or, you're tired of being a landlord) you can sell it, and invest the proceeds in CDs at 5% and get $2,884/month.

The fallacy here is in trying to predict what the next 30 years are going to be like.  Could turn out we have 30 years of great prosperity, and things go much better than this.  Could turn out the peak oilers are right, and we're all living in huts and growing our own food.