Is this worth looking in to?

Question

I'm looking at purchasing a single family property as a possible rental and as my first deal. Here are the details:

1. Asking price: $33,000

2. 2 bed, 1 bath, built in 1900

3. Current tenants are paying $375/month, but similar properties in the area are renting for $450 to $500 or more.

4. I would like to speak with the landlord to find out about the current tenants and to talk about the possibility of owner financing, and I would like to get some kind of application and list of previous residences from the current tenants, but the real estate agent says I can't speak directly to either of them - I'm still learning about the etiquette involved. How do I approach this?

5. If I did purchase this property and take on the current tenants I would not want to maintain the $375/month rate. How could I go about increasing it while giving proper consideration to the needs of the current tenants?

6. What other considerations do I need to be making, and if this is worth pursuing what would be the best way to proceed?

Thanks for taking the time to share your thoughts.

-Matt

James N. · Answer

Don't start your tenant/landlord relationship on the wrong foot.  If they have a lease, you will have to honor it.

Don't pressure the tenants, do this instead.

The issue you have is that the tenant are paying below market value.  There are two side of that transaction.  The current landlord had agreed to the $375/month.  Ask him to pay for accepting the sub par rent.  Explain to him that the rent is below market and it affects the value of property.

Ask the Seller to give you $1,500 credit ($500 mkt value rent - $375 current rent) x (12 months).

Problem Solved: You get your equivalent of market rent and the tenants won't resent you.

Matthew Pipkin · Answer

I'll check out that property and keep looking around my area. If anything looks like it might have potential I'll post again.

Thanks, again!

Aaron Montague · Answer

@Matthew Pipkin

I'd buy this place for $12500.  It would give me a ~$128/month cash flow and ~20% ROI (cash on cash).  Using the same numbers above.

Jean Bolger · Answer

You're welcome! I think most of us just find it fun to look at different scenarios and play "what if"

As far as  a target number, I see  "at least $100 a door" thrown around a lot here on BP. But that is usually for multifamily properties. For a single family I know I would want more just to feel secure. It's really hugely individual and of course, it has to be in relation to what your cash investment is. If you have put down next to nothing then $100/mo looks great! If you've made a substantial  downpayment, then maybe not. Do a search on "cash on cash return" and you find tons of threads here that might be interesting.

good luck!

Matthew Pipkin · Answer

Thanks, Jean. Good find. Actually, I'm not particularly attached to the one I used as an example on this post. I mostly just needed an example to run the numbers on and then post on here to get some feedback. Reading posts about what people have found in other areas is helpful, but I wanted some honest insight on a property in my own area. And what I have gained from this post alone has been tremendously invaluable. I have been truly impressed with the generosity of those like yourself on this website in that you contribute so much of your own time to educate those like myself who are just getting started. I hope one day I can pay it forward.

One more question - about what should I shoot for having left over from the rent after mortgage and all other expenses have been paid? I remeber reading an answer to this question before, but I'm having trouble digging it up at the moment.

Jean Bolger · Answer

I just did a quick look at Parsons KS on realtor.com. I'm wondering, why does this particular house interest you?

Why not, say, this one:

http://www.realtor.com/realestateandhomes-detail/1221-Ward-Ave_Parsons_KS_67357_M86510-26835?row=1#modal_PhotoGallery

These 50's houses are a lot easier to maintain, plus it has AC and a garage (tenants like those).  And its one third the price.

Not that I'm recommending you necessarily want to run out and buy it just based on that, haha! 
	But it does seem the one you're looking at may be overpriced for the area

Matthew Pipkin · Answer

Wow, great info. This has been hugely helpful.

Jean, I think the wording in my last post caused a little confusion. What I meant was that the total monthly payment for principal, interest, taxes, and insurance combined would be about $262/month. Still, I liked your analogy. Cracked me up.

However, after seeing the numbers that Aaron ran (thanks, by the way) it still looks like this property doesn't have much to offer. My problem is that the town I'm in is primarily low income, totals about 12,000 residents, and is the largest town for more than an hour's drive in any direction, so the numbers I've given are unfortunately about as good as I've seen around here.

I've talked to a couple local landlords who seemed to be making a decent profit in spite of the numbers not being so great. Maybe there are some other numbers I've left out that might make investing here profitable? Maybe a different approach? I'm willing to be patient as I start out. I want to get off on the right foot.

Aaron Montague · Answer

I'd have a monthly Operations and Cap Ex budget of at least $150.  That plus $100 in profit leaves you with next to nothing to work with for P&I and other expenses.

If you could get this rent up to $500/month BEFORE you buy it, it might worth it.

I ran the numbers and it really doesn't look worth it to me.  With 25% down and 4.75% rate, I see your cash flow at about $48/month and an ROI just under 6%.  I come up with the following expenses:

Mortgage Rate 4.75%

Length of Mortgage in years 30

Monthly Mortgage payment $129.11

Taxes $47.33

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $150.00

Insurance $54.92

Mgmt Fee $40.00

Vacancy $30.00

Total Expenses $451.36

Jean Bolger · Answer

$105 in known expenses, plus $262 in estimated mtg payment = $367 in costs... before reserves, vacancy, etc. 
	 You can see why I was saying this is slim. It's so slim that if it stood sideways you wouldn't see it unless it stuck its tongue out.

If you apply the "50% rule" then even at your best scenario ($500/mo) you're still negative cash flow.

Matthew Pipkin · Answer

Thanks for the feedback so far. And, James, thanks for that tip - I'll definitely keep that in mind as I move forward.

Also, I definitely plan to honor the current lease agreement, I just wondered how to approach raising the rent when the lease was up, or how I can check the background of the current tenants so I know whether they are reliable.

Here are some of the other numbers that I was able to track down today:

Insurance: $692/year through one bank that I talked to

Taxes: 567.76/year for 2013

Using these numbers and an online mortgage calculator I came up with $262 for the monthly mortgage payment for a conventional loan. (I assumed around 4% interest.)

The county appraised the house on 1 Jan 2013 at $25,000.

I'm not aware of repairs being need at this point. I plan to get an inspection to check on this.

I'm still looking into what utilities I might have to pay.

If owner financing is not an option I have some cash set aside that I could use for a down payment on a conventional loan or personal loan.

Is this worth looking in to?

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