Purchasing 4 low income rental properties analysis and discussion

[Brice Hall]

Hello everyone!

As the equity market gets more and more unpredictable i'm looking at putting money in real estate rental properties. This will be my first deal and venture into real estate. As i am living in NYC currently, it's difficult to find the right deals at the right prices here. Things are pricy, international investors park so much money here and thin out the margins and taxes and CAM fees are through the roof, and i don’t like the idea of speculating on appreciation. With that being said, i've witnessed what i perceive to be some people making pretty good returns with low income properties in my small hometown, so i’ve decided to take a much closer look. Please see below for a complete overview of the deal I'm analyzing. As i progress, i will make this into a full diary so hopefully others can learn from all of your insight and feedback to what i present

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Looking to purchase four well maintained, single family low income rental properties located in low income neighborhoods. Properties are all up to date, need no rehab, and are within 5 miles of each other. Three of the four properties are currently occupied by paying tenants (waiting for rental payment verifications).

More about the location and demographics:

The counties population, as of 2010 was 66,501

The properties are located within city limits, which has a population of 36,837

(In year 2000, 35,318 people. The population has and continues to slightly decrease)

Nearest majore metropolitan area (1 million +) is 47 miles away.

Median household income is $34,288 (it was $33,124 in year 2000)

Estimated median house or condo value in 2012 was $78,505

Median gross rent in 2012 was $664

Unemployment rate: 5.9%

Median age is 37.3

Under 5 years - 2,431 - 6.6%

5 to 9 years - 2,225 - 6.0%

10 to 14 years - 2,129 - 5.8%

15 to 19 years - 2,308 - 6.3%

20 to 24 years - 2,739 - 7.4%

25 to 29 years - 2,812 - 7.6%

30 to 34 years - 2,687 - 7.3%

35 to 39 years - 2,486 - 6.7%

40 to 44 years - 2,614 - 7.1%

45 to 49 years - 2,830 - 7.7%

50 to 54 years - 2,706 - 7.3%

55 to 59 years - 2,309 - 6.3%

60 to 64 years - 1,936 - 5.3%

65 to 69 years - 1,301 - 3.5%

70 to 74 years - 1,006 - 2.7%

75 to 79 years - 848 - 2.3%

80 to 84 years - 771 - 2.1%

85 years and over - 699 - 1.9%

Single-family new house construction building permits:

2009: 3 buildings, average cost $133,200

2010: 5 buildings, average cost $229,200

2011: 22 buildings, average cost $107,300

2012: 2 buildings, average cost $60,000

Housing Occupancy:

Total housing units 15,066

Occupied housing units 12,868 - 85.4%

Vacant housing units 2,198 - 14.6

For rent - 816 - 5.4

Rented, not occupied - 31 - 0.2

For sale only - 263 - 1.7

Sold, not occupied - 48 - 0.3

Homeowner vacancy rate 3.4%

Rental vacancy rate 12.9

Properties:

Property A - 2/1 - 640 square feet - $25,000

Property B - 2/1 - 1040 sq ft - $22,000

Property C - 2/1 - 1070 sq ft - $20,000

Property D - 3/1.5 - 1248 sq ft - $22,000

Properties all well maintaned and rented, or rent ready. Details below:

Financials

(Properties pass 2% rule and look good after 50% rule)

Asking Price:                                 $89,000

Gross rental income                      $22,800

Expenses:

Insurance (1.2% of value)              $1,200

Taxes                                             $2,400

Vacancy (7.5%)                             $1,710

Maintencance (10%)                     $2,280

CapEx (10%) $2,280

Property Mgt (10%)                      $2,280

HOA $0

Total Expenses                              $12,150

ROI 13.6%

Questions, Thoughts, and Concerns

The following are some questions and conerns i’m currently internalizing. If anyone can shed some insight, i’d be greatly appreciative!

1)I need to be an absentee owner. However, there are no real property management firms in the area, but there are a handful of indivudals/handymen who look after properties for other owners. Thus is it possible to find a qualified property manager at a price that makes economical sense? Perhaps i can find another local landlord, and see if he or she would like the added income of managing additional properties. I’ve chosen the area due to it being my hometown and having friends and family in the area.

2) OR, would you immediately recommend staying away from absentee owning low income properties? I understand screening tenants, expecting great turnover, higher maintenance, etc. With that being said i question whether it’s more of a job than an investment? Would i need to be physically present for evictions or any other matters?

3) Neighboorhoods could further deteriate, making the houses unapealing to renters. However, there is currently no new developments in place in the town, low inventory, and high demand for rentals. I don’t expect any appreciation, but how far could low income properties depreciate?

4) I presented demographic information because i do think there could be longer term risks with small towns like these. People migrate instead of renovate, people are moving off to larger cities, the population is aging (leaving less people who may likely rent), and the population is decreasing. Anyone invest in a similar environmnent and disagree?

4) Does it make sense to pay cash for a deal like this, with the low interest rate environment. In other words, should i use my good credit and cash to take advantage of the low interest rates in order to take advantage of leverage. Along with having interst payments that are tax deductible. Or perhaps seeing about owner financing, or if someone else has a more creative way of funding it that could make more money long term?!

5) The expenses in my financials are rough estimates. Could these be far off for such properties?

Thank you all for taking the time to read.