Thinking About Making Offer On SFR

[Beau Barry]

My plan is to never sell and keep forever for rental income. My goal is to buy, pay off, then duplicate over and over. The home is 4 bed/2 bath/2 car 2006 year built 2,000 sf block. Purchase price $115,000 and I estimate rental income of $1,100 a month. Taxes are $2,000 a year and insurance is $500. Figure I'll put down 25% so the property cash flows. With a 7% interest rate and estimating 10% a year for maintenance/repair should result in a net income of 10.1% ROI per year. What do you all think? I'm more concerned in making less ROI and having homes in better/more quality neighborhoods.

[David Beard]

It is a good question that Scott poses regarding what the house was worth around 2006. Probably won't return to that number, but it will likely move back in that direction. So this cap app will be gravy to you.

OK, sounds like you are wanting the relatively trouble-free experience of renting nicer homes to a middle-class people. This is perfectly fine. If you buy at $105K, gross rent for $1,100/mth, long term vacancy/expenses of $500/mth, put $3K into the make-ready, have $2K in closing costs, finance 75% at 3.75% for 30 years (the rate today from amerisave) ....

You will have a cash-on-cash return of right at 9.0%. Factor in the principal reduction and your ROI climbs to 13.6%. Then... factor in the tax benefit from writing off the depreciation, and your true pre-tax ROI climbs to 18.6%. And this is BEFORE even considering the likely gains in market value growth that you will see. That could realistically add another 3 to 4 percentage points onto your return. So let's just round it and say that you will probably see a 20% return on this investment.

Not shabby at all in a world of <1% CD's! And you own a home that should give you a much better landlording experience than the vaunted "2%/mth" properties. And I guarantee it will be a hell of a lot easier to sell than the lower end homes, should you have that need, and its value will be less volatile.

You said right up front: "I'm more concerned in making less ROI and having homes in better/more quality neighborhoods." So this home fills the bill. But you really need to try and negotiate the price down to where the 1%/mth is your max dollar. And place a rental advertisement in CL to test the waters and see what kind of response you get.