Military move (personal home turned into rental property)

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Military move (personal home turned into rental property)

Ed Florack
Valdosta, GA · Member since 2016 · 2 posts · 0 votes

I'm moving to Valdosta, Ga in mid to late September and am looking to purchase my first property. My assignment lasts approximately three years. The goal is to purchase a single family home for my family, and then turn it into a rental property after I leave. My problem is trying to figure out how to analyze the deal vs. renting knowing that I will live in it for three years and then turn it into a rental or try to sell. Do I project my cash flow based on equity, loan pay down, etc based on the property status in the future (3 years out?)? I'm also having some trouble determining market value for the home because the neighbourhood is relatively new and their don't appear to be any homes rented out currently in the development. Zillow is estimating it at 1200 and the overall average for the city proper is less than that. The home is a newer 4 bed 2 bath at 1911 sqft, built in 2013, and is currently being offered at 184,000 w/ 3.5% mortgage and 10% down on a VA loan. My realtor said I might be able to walk it down to 179,000, but that's it. This is comparable to most of the homes in the neighborhood, on the low end, but not substantially lower than normal. I used dealcheck, and am not showing a positive ROI until about year seven with no positive cash on cash return until year 21. Is there a way to account for the 3 years of home ownership? Should this affect my numbers at all or no?

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  • Anton Ivanov
    Rental Property Investor · Rio Rancho, NM · Member since 2013 · 314 posts · 816 votes
    10y

    Ed,

    Your equity or loan pay-down (which are inversely proportionate) in 3 years will not affect your cash flow in this case. Your loan payments won't change until you pay off the loan or refinance and how much the home is worth or how much of the home you actually own do not affect cash flow either.

    The factors that will affect cash flow in 3 years will be rent (which could be higher if the rent in the area goes up) and operating expenses (which could increase due to inflation).

    I was in a somewhat similar situation a few years ago, except I bought a duplex and live in one of the units. I analyzed deals as if I was buying them strictly for investment, so I calculated the cash flow I would have if I bought and rented it out right away. I don't believe it makes much sense to attempt to predict cash flow in 3 years because a) it will not be much different than it is now and b) it's based on assumptions that you can be wrong about (like rent appreciation).

    Nobody can tell you what the real market value of the home is. I think your best bet is to use a collection of sources, trow out the outliers and average it out. You can look online, but I would focus on recent comparable sales or ask 2-3 realtors what they think they could sell the home for.

    I suspect when you run the property analysis through DealCheck, you are seeing negative COC and ROI because you plan to use a VA loan with no or little downpayment. I could be wrong and the home may just not cash flow. In either case, you should look at the current year analysis and look at factors that are reducing the cash flow, COC and ROI.

    Perhaps the home can't be rented for that much, but is a "hot" neighborhood, so the prices have been driven up faster than rents. Perhaps the taxes are high. Perhaps you may need to put down a larger down payment if you want the home to cash flow more. It's hard to know for sure without looking at the actual numbers, but I hope this helps!

    Anton

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  • Jason Mayer
    Investor · Hahira, GA · Member since 2016 · 1 post · 1 vote
    10y

    Ed,

    I'm from Valdosta, and am very familiar with the market here. I don't want to be Mrs. Debbie Downer, but in my opinion the property you described wouldn't be a good investment at all. In Valdosta in general, and especially out towards Moody AFB you will not see any appreciation in value at all over the three years you're here. As far as selling in 3 years, you would almost certainly be in a loss position after paying closing costs to buy and paying a Realtor to sell. 

    If selling in 3 years isn't a good option, turning it into a long term rental would be the other option. Moody is a great area for rentals, but I definitely wouldn't want to pay $180k for a house that will rent for $1,200 per month. Around here, we basically use the 1% rule - if the monthly rent is 1% of the purchase price, you've got a pretty good deal. Granted you probably won't get quite that high on a nicer house, but you can do better than the house you mentioned. Don't try to add value to the home or account for living in the house for a couple of years. If this will be a true rental in 3 years, treat it like it's a rental property when running pro formas and deciding whether to buy it or not. 

    I would recommend trying to find a house that might need a little work, or even a foreclosure out towards MAFB (somewhere just off of Bemiss Rd.) that you can get around 70-80% of market price for that neighborhood. This is the only way you'll have a good exit strategy. There are tons of "accidental landlords" around MAFB from folks who bought homes and are underwater when they leave. Feel free to PM me - I'd be happy to talk to you if you have any questions specific to this area. 

    Jason

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  • Ed Florack
    OP
    Valdosta, GA · Member since 2016 · 2 posts · 0 votes
    10y

    @ Anton, thanks!  I'll do a little bit more digging on the rental prices for a similarly priced home.  

    @ Jason, thanks for the intel.  My conclusion has also been that appreciation is basically a non-factor in the area.  Most of the homes I have spotted have not increased in value in the past 10+ years.  I'm trying to play the balancing act between finding a home that suits my wife (i.e. newer kitchen, hardware, fixtures, open floor plan, etc.) vs finding the perfect "rental" deal for future use when I inevitably get a new assignment.  If it were completely up to me, I'd be pursuing a foreclosure or similar property with an eye for some sweat equity to increase future rents but it has been a tough sell to date.  My plan, tentatively, right now is to try to pick this home up provided they come way off the price and set up for a long term rental down the road.  I might pick up a secondary, strictly investment property to cut my teeth in the rental business in the next year.  It's definitely more daunting not being from the area.  I'll PM you some more details this week about the situation, if you don't mind.

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