Burlington, ND · Member since 2014 · 4 posts · 0 votes
So, I am looking at getting my first rental property. I decided to go in Jacksonville, FL.
I understand adding insurance and everything into my figures, but what about unexpectd costs?
It is a duplex, but only one side is for sale. I am still looking at other properties but I will use this one for my example. Here is the details.
The property is 109,000 asking price.
Mortgage is $600
I can get about 1050 For Rental
That is a cash flow of $450.
How do you account for the unexpected costs? Do I just make a differant back account and put $50 in it each month incase the stove goes out or somthing? But that is not enouph. I do not plan on using my cash flow, and I will just put it in savings anyway for more property later.
I have not looked into insurances in that area yet either, is there a certain insurance you need as a property owner that is renting out?
Utilitites will be the renters responsibility.
I hope that was not to confusing.
Also, If anyone is in jacksonville, Florida area or purchased there before, I would love to hear from you!
Rental Property Investor · Stuart, FL · Member since 2014 · 280 posts · 68 votes
12y
To answer you question in short, I see 5 - 10% rent should go to unexpected repair and major catastrophe costs.
However, to be conservative, you want to make sure you dedicate half the value of your rent (50% rule) to cover all expenses, not including mortgage. For your case you can look at a conservative cash flow as:
CF = Rent - 0.5*Rent - Mortgage
CF = 0.5*Rent - Mortgage
CF = 0.5* (1050) - 600 = -75.
Your case does not meat the infamous 1% rule, which states your monthly rent should be 1% of purchase price. (ie. 0.01 * 109,000 = 1090 = Rent).
If you want to neglect these rules, your deal might be too marginal to make any profits.
Engineer · Jacksonville, FL · Member since 2013 · 182 posts · 66 votes
12y
Tyler,
Numbers don't look great. I have a simple spreadsheet that I will be glad to share that calculates a ROI on a cash basis. If you need more help, I can do detailed investment analysis for your buys that includes Internal Rate of Return on both pre and post tax basis. First one is for free...
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
Many folks on BP swear by the "50% rule" that says that, over time, 50% of your income will go to expenses. By which they mean expenses other than the debt service portion of your mortgage payment. So, tax, insurance, repairs, property management, legal costs, landscaping and everything else under the sun.
Most people are shocked to hear this, and think it's a gross exaggeration. And you may get lucky for a few years but eventually you'll be replacing furnaces, water heaters, appliances, roofs, or have an expensive eviction to pay for.
If you can find a property that is able to cash flow using the formula -- Gross rents divided by 2, minus debt service -- then you're onto a pretty sure bet.
There is a very good explanation of this in the "Ultimate Beginner's Guide to REI" which you will find under the "Learn" tab at the top of this page.
Rental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes
12y
It's possible to purchase half a duplex? I have never heard of such a thing!
As far as insurance goes, minimums are required if there is a mortgage to protect the mortgage holder, which agents can help you sort through. Otherwise the level of coverage depends on the level of risk you are willing to take. We find that insurance costs vary a lot and change quickly, so we shop and re-shop rates frequently. If a property is uninhabitable at purchase due to needed rehab, insurance will cost more the first year.