What do you think about this deal?

Question

I'm looking at a single family house that will rent for $550 per month. House is listed at $25,000. 3 bed 1.5 bath 1300 sq. ft.

If I pay the asking price and get a 30 year fixed @ 7% with 20% down, I'm looking at a $133/month mortgage payment.

I figure expenses will look something like this:

Mortgage payment - $133
Property tax - $200
Homeowners insurance - $50
Maintenance budget - $100
Vacancy budget - $50

So....

Rent - $550
Total expenses - $533
Cash Flow = $17

Can anyone advise me on a way to make the property cash flow $100 per month? Any tips?

Account Closed · Answer

How old is the house? Roof?  Heating/Cooling, Kitchen/Bath?

Those are your major expenses in terms of maintenance. 100$ a month seems way too low as an estimate, the roof alone would be budgeted at close to 50$ a month.

Just Appliance/Heat/Cool replacement would seem to put you over 100. Are there carpets, how is the kitchen/bath, another
50$ a month there for a reasonable budget.

4 months rent for taxes is also high. 550 a month seems pretty low for that kind of tax bill, that's even lower then my depression area.

One potential would be to low ball the price, go all cash and self-insure damages with a liability policy.

Timothy W. · Answer

Getting the taxes lowered is totally up to the local municipality.  That's something you need to be talking to the tax folks in your city about.  You won't find the answer online.

Timothy W. · Answer

You know Brett, I just got to thinking.  Have you offered the seller 12k for the property?  I know what it's listed for but try it.  Get over the shame of low balling and see what it can do to your numbers.

Tim

Timothy W. · Answer

Chaffee,
            What's up man?  When did you get here?  Haven't seen you since CCIA ages ago.  We have to hit that wonton place again you showed me.  I can't remember the name but I do remember the taste...lol.
            
            As far as the 1% rule, the rules have changed bro - especially in areas of houses under 50k.  2-5 is what you're looking for now as so much of this stuff is a high cost financing proposition.  Not too many 30 year fixed mortgages at 15-25k.  
            
            Tim

Chaffee-Thanh Nguyen · Answer

Hey Brett,

For me to even look at a deal, I use a standard 1% rule.  i.e. 1% of the purchase price is the minimum rental rate.  At at $25,000 purchase price, minimally you want $250 in rents - which you obviously have.  Typically, if there are no repairs and the property is rented out in a decent area, 1% should be a break even cash flow.  What's throwing off your numbers are 1, the taxes and 2, the monthly maintenance.

The taxes are mentioned in several posts above.  As for the monthly maintenance, if there's no repairs, then your cash flow will be over $100.  Of course, there are typically repairs in any rental property.  A couple of ways around this is to have a repair clause in your lease agreement.  i.e. see if your tenant will agree to cover minor repairs that costs less than $50.  So if a light bulb goes out, they replace that etc.

In this market, what works best is actually a lease/option.  If you can buy the property for $25,000, and it's worth $68,000, then sell the house on a lease with a purchase option.

There are several benefits to doing that.  First, lots of people have bad credit who cannot qualify for a loan in this economy.  So you can find someone who has a solid job with no credit to lease out to and give them time to repair their credit.  Second, you can get a higher rental rate.  You can charge $600 or even $650.  Third, you can (and would) charge an upfront consideration payment - typically not less than 5% of the purchase price.  So if it's worth $68,000, sell it on a lease with an option to purchase for $40,000 - $50,000.  You double your money in a few years and they get a fantastic deal - win-win.  5% of $50,000 is $2,500 which is 2 years worth of your maintenance fee (only it goes right into your pocket).  Next, because they will eventually purchase this, you can put in your lease agreement that they will cover all repairs under say $500.  Any major repairs which may be needed for any reason, you would cover.  This also saves you on property management.

Basically, lease options are great way to go in this market.  Something to consider.

Either way, it looks like a solid property with potential.

Good luck.
Chaffee

Michael Rossi · Answer

The difference between homeowner's insurance and landlord insurance is the type of property they cover.  Homeowner's insurance covers owner-occupied property.  Landlord insurance covers rental property.  If you have homeowner's insurance on a rental, you are NOT covered!!!

Good Luck,

Mike

Jim Doine · Answer

Josh, not necessarily, I tried this a while back and the assessor said since it was an REO and a distress sale it wasn't a true indication of FMV.  Jim

Josh Green · Answer

a quick answer to your question is: yes, you could possibly get the taxes lowered. since there would be a sale, the house should be re-assessed for tax purposes.

Larry Seith · Answer

Hi Brett,

The difference between homeowners insurance and landlord insurance is that homeowners covers personal contents of the home whereas landlord insurance just covers the structure and some interior items that are considered part of the house such as appliances. It doesn't cover furnishings and belongings because your tenant would have renters insurance which would cover their own possesions. Hope that helps.
It could also lower your insurance cost by just covering your purchase price instead of replacement value. 
Good luck.

Curt Davis · Answer

Brett,

The only way you will get this home to cash flow $100 per month will be to get a higher rent and that will most likely not happen. Keep in mind, if the numbers do not work, just look for another one. Do not get attached to the home.