Buying Rental Properties

[Shawn Walters]

Hey all,

I became an accidental landlord by moving around quite a bit. I own three homes in three different states, one is my current residence and the other two are my former primary residence's and am now renting them out. Have had good tenants for the most, but they are both on the upper end of the rent price ranges (2600 & 3500/mo).

I'm now getting into the rental property game for future passive income at lower house prices. I'll be hiring a property manager to manage them. I've put in several offers on homes - short sales, foreclosures and a few normal sellers. 90% of them so far have not come down to the price I am willing to pay, and the short sales I won't hear back on till who knows when. Most of them are priced $125-$250k.

I'll be paying cash. My "goal" is to get about a 6.5%+ return on my cash each year, which includes the following:

- rental rate at about .085%+ of purchase price (the 1% rule doesn't work here probably because prop taxes are so low...unless I bought $50k homes in the ghetto). I also take average rents for similar houses in that neighborhood, look at DOM and subtract about $50 to arrive at my rent price.
- 100/month for repairs and maintenance
- Equivalent to one month's rent for vacancy/turnover etc
- Insurance costs + 10%
- HOA costs + 10%
- Taxes + 10%
- Management fees of about 9% of gross rent (fee will decrease with more properties)

and after all expenses - (rent x 12 - expenses/ cash invested) my goal is about 6.5%.

So a couple questions:

1) Is a 6.5% return on my cash (all cash purchases) a fair number to shoot for? Too high, too low etc?

2) How important is curb appeal to price ratio? I'll give you an example - there are two homes in the same neighborhood that I like - one is $10,000 more but is much better looking on the outside. My cash flow numbers on them are about 6.58% on the "ugly house" and about 6.3% on the nicer looking house. Is it worth buying the nicer looking house at a lower yield for hopes of more steady rents/possible higher appreciation.? Or do I need to look at it just like a numbers game and purchase the homes that provide the best return?

Thanks!!