Buy rental for cash, then what?

Question

So I found a property that will rent for $500 and I can buy for 30K cash.

My problem is that I then will have 30K + 5K (repairs) tied up for a couple years until I could do a cash-out refi.  There is no way to figure "cash flow" if I don't have a loan.  At this point, do i just figure 50% of $6000 annual rent ($3000) and consider this a 3000/35000 = 8.5% annual return?

I assume it would be stupid to get a secondary market mortgage for such a small purchase price due to all the fees, etc.

Thoughts?

Jon Holdman · Answer

Agree 100% with Will on this one.  Rental property is a HUGE pain in the backside.  A CD's fridge never breaks and spoils your tenants food while you're on vacation (a recent thread).  Its heater never goes out on the first sub zero night of the year when repair techs are in short supply (my own experience).  It never bugs out without paying the rent.  It never needs a new roof or sewer line.  8% is the expected best case if you do everything right.  Yeah, maybe you get lucky for a while and have good, solid tenants in place every month, but that's just luck, not a business plan.  I want to see returns a lot better than that for real estate.

With $100K, you can make hard money loans to rehabbers and be north of 10% for a LOT less work and risk than rental property.

Now, like I said, if there's some additional upside, the 8% might just be part of the story.

Jon Holdman · Answer

I agree with your math.  Your cash flow is $250 a month.

This isn't much of a deal, IMHO.  8.5% is just too low unless there's some other upside.

Account Closed · Answer

you could work on the relationships witha local bank or 2...maybe they'll give you a cashout sooner than you had hoped..or maybe they'll give you a line of credit after some time, cross collaterized on your free and clear property...then you could buy another..best of luck

Steve Babiak · Answer

For some lenders, the rental income has to show up on two tax returns before they "count it" as part of the income being produced.

Jon Holdman · Answer

Its the cash out part that can be a problem.  If you buy with hard or private money, and do a rate and term refi, and you have good income and good credit then you may be able to do the refi in six months.  Doing even that in under six months may be problematic.

If you're willing to use the purchase price you can probably do it quicker.  You might find a lender would would also include actual, documented repair expenses.

I've been told by multiple sources that ALL FDIC insured banks must wait at least one year before they can do a refi based on a new appraisal.  I was able to do one where a local company (Cherry Creek Mortgage, good folks) did the loan.  They turned right around and sold it to ... Chase.  Go figure.

Cash out is where things get tougher.  Lack of documented income (i.e., you need the income from the property to qualify) gets sticky.  Bad credit (under 720, I've been told), is a problem.

Jessica Breed · Answer

Just a quick question - why two years on the cash out refi?  If I understand the lenders I have spoken with correctly, if you have renters and decent income/credit you should be able to get a loan sooner.   Maybe not for After Repair Value, but you should be able to pull our 70-75% of your purchase and repair price almost immediately.  As far as refinancing for ARV, I have personally found banks that say they will do it in 6 - 12 months, but I know people here on BP are getting the full value even quicker.

Tyler McCracken · Answer

You never mentioned the After Repair Value -assuming your not paying retail.   Just assuming you are at a wholesale value -lets say 70% ARV than there might be some 20% (after realtor & misc. fees) of appreciation to gain -right?

So that being said, one could justify just holding for a year would lower your tax basis (assuming the tax law doesn't change) rather than flipping for a short-term gain.

If your into rentals one has to remember it can be a long-term game (investment).  Lending will come back.  -If you know how to identify & buy a good rental property then this is certainly a time to lock in your inventory.

Give more details on the deal?  What's the ARV?  What's you goal with the property?  with your investments in real estate?

Mike McKinzie · Answer

While I understand the pain of owning rental property, I also know how to do it without ever, NEVER, getting a phone call, showing property or even looking at it.  My record so far is owning a house for 12 years and NEVER seeing it (bought for $51,000 at an FHA auction, sold it for $110,000).  I sold that house, having never even been in the city while I owned it.  Currently, I have owned a house for 3 years, and have yet to see it.

Would you call that a "Passive Investment?"

With that 3 year investment, I invested $20,000.  I make $111 a month or $1,332.00 a year.  That is a 6.66% return (not counting tax benefit).  While not great, I don't spend 10 minutes a YEAR on that investment, my "net cash to owner" is automatically deposited into my bank.  I bought the house from the builder so repairs have been very minimal.  I think I have replaced one sprinkler head so far, $35.00.  I will most likely sell it before major repairs start showing up, and I project  $20,000 to $40,000 profit, somewhere around the 10 year mark.

While I can't live on $111.00 a month, this is one of my newer rentals.  It does show that owning rental property can be very passive.

I have managed 100 properties myself and know what it takes.  NO THANK YOU!  I hate collecting rent, fixing leaking faucets, etc..  I would rather be out finding more property.

Don Konipol · Answer

If there is some reason to believe that the value of the property will increase significantly in the future, then getting a 8% return on your money while the asset is appreciating can be a good deal.

Buy rental for cash, then what?

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