Where to go from here? Unplanned expenses on mid-range rental

[Account Closed]

After the great success of my first property, I moved quickly on to my second. The house is in a neighborhood that I would classify as an island of B surrounded by a sea of C. I knew the house would need work but the price plus what the ANTICIPATED work was supposed to cost was something I was comfortable with.

Bought the house for 104k, 20% down, interest rate was 4.875. Put ~5k of work into it. Also there was a form from the HOA that was part of the deal stating that certain thing would have to be done after I took ownership. One of those thing was – re-sod the entire lawn.

Then the issues began. It sat empty for close to five months after the work was done. We had showings and applications, but nobody we felt comfortable getting into the house. We anticipated rent at $1200 but finally got it rented at $1150 to someone that is likely to stay for a number of years.

With the help of the PM we managed to push off the resod until this year, but in talking w/ the PM, he recommended putting a sprinkler system in, and putting up a fence. The combination of the two would pacify the HOA and alleviate the potential for future resods based on the tenant having good excuses for not caring for the lawn. (The tenant pays all utilities) All of this work cost around 12k last year.

So I’m into the house for roughly 38k including the other work and the down payment.

Rent is 1150

P&I w/ insurance and taxes escrowed $699

PM: 1150

HOA 300/yr (oh yea and a one-time assessment of $490 in January

Expense budget 1000/yr

Where would you go from here? There aren’t many comps in the neighborhood, but I’m guessing it could sell for around 130-140. The appraisal came in at $110. 

[David P.]

@Account Closed use the property analysis spreadsheet/web link "Analyze" above to help determine if this is a good deal.  A good deal is something that makes you money - X per month.  Now I roughly figured 10% management fee on top of your expenses and it appears you are making $228 per month.  Now if your total out of pocket is $38K is 7% a reasonable return on your money with someone else making the mortgage payment and managing the property?  Only you can decide that and the risk associated with the deal.  

Even though you have them in the property you can raise the rent - lets say $25 per month after the lease has matured.  That amount will probably cover your increase in insurance and taxes so you need comfortable with 7% return over the life of the property.  Having vacancy for a period of time will also decrease your return as will capital expenditures so hopefully the $1K is good enough to cover your costs.

As others said, this may not be the best investment but only you can decide that and what your minimum target return will be.  This is why each and every property I review I run the property analysis before and after - it sometimes changes my exit strategy as well!

Good luck and I wish you success!