1st SHF Rental up and running, now what?

Question

I've landed my first tenant, moving in at the end of the month. I thought I'd kick out the details to everyone and get some opinions on an intelligent way and when to start expanding.

Bought a single family HUD home in mid Feb for $72,000 which includes closing costs. Market value in the sub division suggests a reasonable expectation of $115k - $120k ARV.

What I have in it:
$14,400 in down payment
$4500 in rennovation, advertising, and referral fees
$1365 in mortgage costs - PITI (3 mo @ $455)
$490 in 3 months of utilities

Total expenses = roughly $20,700.

Income: The lease signed at $1025; giving a positive cash flow of $570 per month ($1025 - PITI)

Given this, it will take me a minimum of 3 yrs to break even on this puppy...all said and done, I'm pretty happy about the investment at this point.

Here's where I need some advice-- What's my next move to get the next property? I'm tapped out as far as using my own money to buy the next and leveraging the first home is the only option.

Line of credit on the home, refinance (what are the rules for waiting to refi?), sit tight and let the rental generate enough income for the next purchase?

Jon Holdman · Answer

What's your goal? Are you trying to live off your rentals? Generate long term savings? Speculating on appreciation? I'm in a similar situation as you. My goal is long term savings. I'd like to try to acquire one house per year. Another member, Rich, has suggested buying one house per year, pay them off in 20 years, then refinance each one as its paid off. As long as you're refinancing at break even (after ALL expenses, not just taxes and insurance), then the properties are self supporting. You can live off the refi proceeds. Let your kids inherit the properties at a stepped up basis. Other than needing to shorten this to 10-15 years (tough!), this seems like a good plan to me. Personally, I have no illusions that I would buy the 40+ properties I'd need to live off the cash flow.

Michael Rossi · Answer

Jerry, There are LOTS of ways to buy rentals besides simply going to the bank for the money - owner financing, lease option, land contract, sub-2, etc. What I would NOT do is refinance the property you have, thereby destroying the cash flow you have. There is NOTHING better! Today was Monday here in Ohio also, but it was raining so I simply took the day off. I'm planning to work on my rentals tomorrow - but it might rain then also and I might be motivated to take another day off! Unless you love your job, it's definitely worth a few years of very hard work to get out of the rat race! Come on in - the water's fine!

Jerry Rode · Answer

The primary goal is long term savings, basically just want someone else to pay for the property I own for the time being. I expected to fork out quite a bit of money to get the first one going, but from here on out the first home and any additional need to be relatively self-sustaining. I'm 25 yrs away from retiring and would like this to be my primary retirement fund. In addition, I've got the 401k and a decent salary, but it's not providing the life style that I find enjoyable. So the secondary goal is to provide interim cash flow along the way. At this point in time, I'm with you and can't see myself ever playing with the 30-40+ rentals it would take to replace my salary, but that is a really tempting thought to be self employed managing my own properties, and not sitting here on a Sunday afternoon realizing that Monday morning is just around the corner! :)

Jon Holdman · Answer

Rent -- PITI is NOT your cash flow. Read in the Rental Property forum. A better estimate of your cash flow is (rent * 0.5) - P&I. I'm guessing your P&I at $345, so a better estimate of your cash flow is $167 a month. Given your investment that's a 9.7% cash on cash return. That's on the low end for a rental, unless there's some other upside. If you're wanting to refinance with a new appraisal, you'll have to wait at least six months and maybe a year. Sounds like you want cash out, so figure on a minimum of a year. If you can find a lender who will go 75%, and the $115K number is a good one (appraisers will tend to use the lowest reasonable comps these days), you could get a $86K loan. After costs and paying off your existing $57,600 loan you'd have about $26K back. At 70% you're at an $80K loan and you'd get your money back. May be tough to find a lender to do this loan, though. Banks REALLY don't like cash out NOO loans. At the 75% loan, you've completely killed your cash flow. At 70%, its down to $29 a month. If you're managing it yourself, you're earning what you would pay a PM. That's about $100 a month when its rented, and saves you $500-1000 when you have to fill a vacancy.

Jerry Rode · Answer

Jon, You are absolutely right, given the 50% rule, my cash flow is on the lower side. The $570/mo is definitely the best case scenario and doesn't reflect the reality of vacancies, repairs, etc. My gut tells me to sit on this for 6 months to a year and look to buy another property towards the end of next winter. Get it rehabbed and rented around the May/June timeframe, similar to this one. Would still like to hear other's opinions if they care to be shared! Thanks.