Is this a good deal on a rental house?

Question

Hello,

I was offered a 2 bedroom one bathroom rental house through my mother for 50-55K in florida. The home was built in 1956 and had a new roof put on it 2006. It has 918SQF of living space along with a 216SQF unfinished garage. There are currently tenants living in the property that have lived there for 7 years paying 1000 per month.

I live in the northeast but have many family members that live in the area (within a mile) of the home who could collect rent etc. I am wondering what I should consider when I go down to look at the property. This will be my first rental property. If you guys could help generate a list that would be great!

Thank you.

Adam Smith · Answer

@Conner S.

This is a hard question to answer without knowing more details.  The first questions that come to mind are:

• It meets (or is really close) to the 2% rule which is rent being 2% of the purchase price.  Which could be good (can't get this in my area).  Search 2% rule and you will find a lot on BP.
• Use the rental calculator on BP to figure in all of your costs and rents. You really have to nail down all costs associated with a rental and who pays for them.  For example, does the current landlord pay for all utilities?  I have heard that depending on the area in FL, the taxes and insurance can be really high.  Is the property located in a flood zone?
• What is the condition?  Does it need a lot of work? Updating?
• Are the current tenants really paying $1,000/month?  Some landlords have the rent in the lease as higher than what the tenant actually pays.  Typically, I have seen this as the rent is listed as $1,000 but they give a discount to $800 if they pay on-time (or close to it) or sometimes the tenant just pays less than the lease on a verbal agreement because it looks better on paper to the landlord and banks.   Not saying this is the case (or the norm) here but something to keep in mind.  Get actual rents or maybe talk to current tenant.
• Being a long distance landlord involves a lot more than just collecting rent.  There will be issues that come up with repairs, late payments, tenant turn over, etc....you name it and it could happen.  This could be more than your family signed up for (maybe not though....don't know your situation).  You could also look at a local property manager but make sure to factor in the costs.

There are a lot of things to consider when becoming a landlord and even more when you will be a long distance landlord.  It can be done but you just want to know every detail and how you will handle certain situations.  Take some time and search "long distance landlord", "2% rule", "FL evictions", etc. on BP and you will have more information than you can handle.  Call local insurance companies for insurance quotes, look up property taxes on the property (you said it was currently rented but be careful of homestead discounts).

After a long winded post I guess the answer is that more information is needed before you can decide if it is a good deal.

FYI-we have looked and ran numbers and talked to multiple landlords for 4 years before we bought our first (local) rental, and it has been great!!

Stay motivated!

Adam Smith · Answer

That is great that you have family in the business....sorry I didn't know that before my last post.  As far as a checklist, I don't think BP has one (or at least that I have found) but if you search for it on BP I have seen posts on what to look for.  Personally, I would look first at the larger (and more expensive) items like the roof (you mentioned it was newer), HVAC, electrical, plumbing, drainage around the house and any signs of settling.

The only one I can speak intelligently about this the drainage because I am a Civil Engineer.  It is very important that all water from downspouts and the grade around the house slopes away from the home.  Hopefully, the grade drops 1' vertical in the first 10 horizontal feet around the house on all non-hard (concrete) surfaces.  Obviously, concrete walks or patios will not slope that much but a good 2% slope is what I look for.

Spent some time in FL but never looked for property so not exactly sure if this is the standard there.

Good Luck!

Conner S. · Answer

Ricardo - I don't understand your thoughts on it not appreciating much. If the property is going to be purchased for 45-50K less than homes are selling on the market, not foreclosure market. Wouldn't I experience instant appreciation?

Are you referring to the value of the property if an investment was made to renovate it?

Conner S. · Answer

The total house square footage is 1416SQF including the garage, utility, open porch and garge. The living space is 918SQF

Ricardo S. · Answer

I believe it's alright deal. Depends upon your exit strategy. Keep in mind it is not gonna appreciate much. Also it is not even 1000sqft. it might limit your options of tenants or buyers in the future. might have hard time to cash out refi.

Conner S. · Answer

Hello,

I have looked into the county property appraisers website and have got a lot of info. I found a house across the street that is 808SQF and is surrounded by other houses. This comparable house has a car port compared to the one I am looking at having a small enclosed garage. Also the one I am looking at like i said previously backs up to a large open park. The property I am looking at aesthetically is much nicer looking from the front. I will post pictures shortly to show.

The 808SQF house across the street recently sold in a foreclosure auction for 69K. Based on this information alone I think it is saying a lot about the value of the deal I am looking at.

This is the home I am considering.

This is the property that sold for 69K

Any thoughts are appreciated!!

Adam Smith · Answer

Where in FL is the property located?

I have never had a contractor look at a home before we purchased it but we have always had a home inspector inspect the home.

My personal opinion is we will always have a home inspection done by a licensed inspector.  My wife is a realtor so we know some good local ones.  Some people (like my co-workers) might not agree with this but I look at it as cheap insurance.  For a typical home inspection in my area it is ~$350 plus another $150 for a sewer scope.  We have done this for the two personal homes we have had and the one rental.

The one downside is that it is my experience has been that inspectors are knowledgeable in all areas but masters of none.  If they see a crack in the foundation they may say it is possible settling and you should have a structural engineer look at it.....if there seems to be a problem with the furnace they will tell you to have it checked out by a HVAC professional.  An example that happened to us on the investment property is the inspector said the roof looked old and showed some damage so we should have a roofing contractor look at it.  We called a local roofer and he looked at it and said he would certify it for 10-years.  This is a contractor that if he would have said it needed replaced he could have had a chance to win the work (we would have gotten three (3) bids).  At the end of the day, I like the reassurance that it was inspected and have the report with pictures to use in negotiations of the purchase price.

An inspector could give you approximate prices (or range of prices) on fixing certain items but a local contractor should be able to give you his price for the work.

Hope this helps!

Conner S. · Answer

Thanks Adam.

Would you recommend that I have a contractor look at the home? I know they have property appraisers. I really just want someone sufficient in looking at all these different items and give me an idea of the condition and or the time frame of replacement. Do you have any idea what an appropriate fee for something like this would be?

Thanks again for the help!

Conner S. · Answer

Wow, thanks everyone for all the information. It really helps. My largest concerns out of all of what you have said is the condition, maintenance it needs and the utilities. I know the house is not in a flood zone (thankfully) and the current taxes are not based on it being the primary home.  I have a large family down there that is already in the business. I know they can handle the routine maintenance and rental collection but have thought about property management.

I looked at one house in the neighborhood that is currently under contract for 90k. Similar square footage but the main difference is the house I am considering backs up to a park. This house for 90k was surrounded by other homes.  Also this house for 90k was renovated in 1983 and I am not sure if the home has been renovated or when it was.  The only reason I am getting it for a lower price is because it is in the family.

Is there a checklist anywhere of items in the home I should review for condition? i.e Hvac, roof etc.

Is this a good deal on a rental house?

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