All Forum Posts by: Joe Splitrock

I think your numbers look reasonable. We have homes that are a similar profile although a different part of the country. The 50% rule is pretty good for a quick estimate. Of course repairs and expenses will vary depending on the property type and age. For example in a single family home you are most likely having the tenants pay all utilities and take care of lawn/snow. That would not be the case in multifamily. Also age of the property and repair condition play into this. In my houses the repairs are generally very low dollar and uncommon. That being said when something does happen, such as a furnace or water heater, the expense will be large. 

Your situation would be better if you had a down payment on the house. Typically on a rental you would have 20% or more down payment, so your numbers would then change drastically. That being said, it is great you have no money into the house. My first rental was purchased with no money down, so I always joked when people asked about my ROI that it was infinite. In your situation, I would make sure you have money set aside for repairs. I would have $6000 cash in the bank to cover major repairs. The money would also cover rehab if someone trashed it and it needed paint and carpet. It would also cover 2-3 months vacancy in the winter time (unlikely but you never know).

The other factor here is if you plan to self-manage, which I always recommend for a first rental. It will save you money and help you learn the business. If you are hiring a management company, don't expect any cash flow. That will eat up your 10% projected profit. 

The good news is if you are in a good area, over time rents will raise. Ten years from now this investment will cash flow better as rents increase. In my area rents have raised 20% from where they were ten years ago. In the mean time your tenants are paying for the house. You will have depreciation tax benefits, which saves you money in addition to your calculations. This seems like an opportunity for you to get started.  Good luck!

@Patrick L. thanks for pointing out the other costs. That is a good point that their all-in number ends up being more than just the loan amount. 

@Account Closed I had thought about offering no inspection contingency and I have a good track record of closing on deals, so I could make it trouble free for the bank. I would be willing to offer a good chunk of money for earnest money, but my wife sees too much risk. Her thought is just in case we need to back out for some reason. My feeling is that I am putting the money down anyway. 

If anyone knows which podcast it was, I would love to have a listen to it.

Thanks everyone for the input. I assumed the 2% was a rule of thumb, but wanted a sanity check, since I am so much below it. I really try to invest in areas with fewer rentals. I have a long term value strategy, but my cash flow isn't as high as other investors. It may be time to diversify. 

 This is a good way to look at it. Our best deals were with offers we felt were really low and in one case our realtor almost refused to deliver the offer. 

I wish I would have sold some of my stocks at their peak and set the cash aside for real estate. I see the downturn causing even more people to look at real estate investing as an alternative to the stock market. I think it will drive more people in, which will fuel prices that will ultimately cause a correction leading to a downturn in the real estate market. I am thinking of sitting on my cash and waiting for a buying opportunity. 

I was listening to an old Bigger Pockets podcast and they stated as a rule of thumb that rent should be 2% of property value (or maybe it was purchase price). I have homes worth $160K that rent for $1100. I have seen comparable houses listed as high as $1200 rent, but still that is well under 1% of the property value. Is anyone else in this situation? My properties are nice single family homes and the tenant handles all utilities and lawn/snow, so I only have repair and tax/insurance as costs. 

I have been around long enough to know that one sign of a pending crash is that most people walk blindly into it, which is probably the underlying point of your post. People don't want to miss out on an opportunity. You will hear rationalization such as, "it is different this time." 

I am firm believer that it all comes down to supply and demand. This is localized from the standpoint that demand increases as people move into an area. I think what just happened with oil is great example. As prices drove up, it increased production and new sources. At the same time causing people to reduce consumption. Falling prices hurts those with the highest production costs first. In multifamily, at some point there will be too many apartments and vacancies will increase, eventually causing rents to fall. At around the same time, people unable to pay higher rents will move in with relatives to save money or look to buy a home if they can afford it. Supply and demand will not stay in sync forever and that is when the correction occurs. The problem is predicting exactly when the tipping point will occur. There will be a catalyst - some market factor will push it over the edge. 

@Kurt Price I would recommend you start watching the MLS for property listings. You can also use Zillow to research sales and tax values in your target areas. I would start watching Craigslist daily to see what rent values are. Watch which properties rent quickly versus the ones that stay up there. You can look for local groups or an investor friendly realtor to network and learn. I am also a firm believer in driving around and getting to know the area.

@Gloria Mirza I like your solution because if they have to pay some money it will make sure they are more careful in the future. 

I am looking at investing in a bank owned property. It was last sold two years ago for around $150K and they were trying to sell it for $185K. The house is beat up and the appliances are all gone including the dishwasher and range hood. Clearly the house is not in prime condition like it probably was two years ago when it sold for $150K. I am assuming the bank loan was less than $150K. The agent told me the bank just wanted to get out the money they had in it. I questioned how they could have more than $150K into it and he just said market appreciation. Our market may have gone up around 8% in two years, but with the condition and missing appliances, I cannot get to their listing number. Is it is common for banks to try to profit from foreclosures? If I submit an offer is there anything I can do to increase the likelihood they will accept my offer? I am thinking of sending a cover letter detailing what I think the value is in current condition. Would that help the bank rationalize my offer as fair? If my offer is higher than what they are owed, are they likely to take it or are banks using foreclosures as an income stream?