Rental Option

[Javar R.]

Hey BP,

Debating which route would be more profitable as a rental property.

Option 1 is a cheap 3br townhouse with HOA in need of new floors in a great neighborhood. Option 2 is a 3br house in a slow market with minimal updates. I don't know which to buy. What is the ideal purchase for a possible long term rental with the challenges of ever selling either?

[JD Martin]

Neighborhoods are king where I live in terms of renting property. How expensive is the HOA fee, and would you pay it or the tenant? When the property is vacant, that is an additional expense you will have to eat. What are the possibilities of the other neighborhood coming up in value?

Based on the limited information you posted, and just between these two, I would have to go with the townhouse, so long as the HOA fees were reasonable.

[Jane A.]

Cheapest property in good neighborhood may work better in general. But could you please provide us with some numbers

[Linval T.]

@JD Martin- Well, it depends! What are the HOA and taxes, plus other costs?

You will need to share more info with us to get, so that we can provide a reasonably good response.

Thanks

[Javar R.]

Thanks for the response. The townhouse is around 75k with HOA fees of $215-225. The house is on the outskirts of a booming town which borders raleigh. The house is 100k and more rural than urban but still a reasonable commute to the city. As I stated in a slow area with potential for renting buy not flipping/selling. I agree question is a bit broad and limited on info but I'm trying get a understanding how to evaluate rental properties.

[JD Martin]

Originally posted by @Javar R.:

Thanks for the response. The townhouse is around 75k with HOA fees of $215-225. The house is on the outskirts of a booming town which borders raleigh. The house is 100k and more rural than urban but still a reasonable commute to the city. As I stated in a slow area with potential for renting buy not flipping/selling. I agree question is a bit broad and limited on info but I'm trying get a understanding how to evaluate rental properties.

I try to evaluate properties by figuring out the widest appeal to the most people. For me, in my area, that means 2-4 bedroom houses, 800-2000 SF, $500-$1000 in rent, in the city limits because of the school district (the county schools are much, much worse around here) and the close proximity to the biggest employers - the college, the hospital system, the VA. Anything outside these parameters narrows the window down considerably regarding the ease of renting the property. I also go for properties that have sound basics but may need considerable cosmetics. It is amazing to me how lazy owners are, that cannot do basic things, like paint a hot pink room white, to appeal to the most buyers, but that works in my favor because anything I look at ends up marked down because of these things. I won't get into anything that needs a new foundation, significant structural element repair/replace (rotted joists, collapsing walls), full-bore electrical rewiring, or has other issues that cannot be easily remedied - shared driveways without dedicated easements, located next to a housing project or landfill, etc.

Will you absorb the HOA fees as part of the rent or have the tenant pay it directly? Is development moving in the direction of the rural house, or is it marooned in a no-growth area?

[JD Martin]

PS: houses with significant HOA fees are hard to make positive cash flow unless rents are booming, you get the house for a song, and you finance little to none of the deal. If your 75k townhouse can rent for $750, and you are not financing the deal, the rough numbers in my head sounds like it could work, but if you lop $100 off the rent and add some financing, you are going to be running some lean figures.

[Chris Martin]

Originally posted by @Javar R.:

Thanks for the response. The townhouse is around 75k with HOA fees of $215-225. The house is on the outskirts of a booming town which borders raleigh. The house is 100k and more rural than urban but still a reasonable commute to the city. As I stated in a slow area with potential for renting buy not flipping/selling. I agree question is a bit broad and limited on info but I'm trying get a understanding how to evaluate rental properties.

Regarding "The townhouse is around 75k with HOA fees of $215-225. The house is on the outskirts of a booming town which borders raleigh." I guess that could be Morrisville, Cary, Garner, Knightdale, or Wake Forest. Those HOA numbers seem high. I'm guessing you get Pool, tennis court, clubhouse, ... maintenance for siding and roof? water? trash?

Make sure you know what the fees cover. And it's a safe bet is that those fees will increase in the future.

[Jerry Johnson]

@Javar R. the HOA on the town home is high to start with and the going rent in that neighborhood minus "all" expenses should help you determine if it meets your minimum cash flow goals. On the house, determine also if the cash flow is within your goals and get a honest answer to the question " Is this area for this type of rental easily marketable?"   I'm not sure where you're looking in Raleigh and surrounding areas, but I'm positive you will be able to find good deals with those purchase price numbers.  Good Luck!

[Henri Meli]

Purchase price looks good. Any expenses after purchase to make the house rent-ready, besides the new floor? Make sure you know all your after purchase expenses. Will you be managing the property yourself?

Use Zillow or others to see how much comparable go for rent in the same neighborhood. When it comes to SFR, I always prefer to purchase in good neighborhoods. If the house has to sit for a bit, you loose quite a bit very fast.

Good luck.

[Javar R.]

@Jd Martin  @Chris Martin and @Jerry Johnson Thank you for your insight. I do think the HOA fees are high despite the inclusion of pool, tennis, trash, water and lawn. The area for house is in fact Knightdale/Wendell but purchasing is not reliable enough for a flip which is why I'm considering renting. I believe greater cash flow will come from renting house. I guess cash flow within a small margin of profit renting may not be worth the effort unless the numbers are favorable. This has been a huge boost to my confidence. Thank you all for your help