All Forum Posts by: Justin Sheppard

Hi Everyone!

I'm getting very close to purchasing my first residential rental property. I'm getting a bit stuck on the number crunching though, and thought I'd see what you all are doing in regards to percentage of gross rental income being set aside for maintenance, cap-ex, management and vacancy? I've been using the BP calculator, which gives some guidance, but I'd like your real-world feedback.

I'm looking to invest in a newer build duplex in a b class neighborhood, but I'm also considering an older single family home in a c class neighborhood.

Look forward to hearing what % of your monthly rental income you all are setting aside for vacancy/maintenance/cap-ex/management. Having never done this before, I want to be conservative with my numbers, and your feedback will help me get a better handle on what I should be factoring into my calculations.

Many thanks in advance!

Justin

@Victoria Hill

I have no experience in regards to lots, so can't really contribute here. If agricultural land was your goal, I could definitely add some value.

Good luck!

Justin

@Victoria Hill

Hey Victoria,

Are you thinking of raw land as lots, or as agricultural farmland?

Justin

@Patrick Oehm

Hey Patrick,

I’m a Canadian realtor and I specialize in farm and ranch properties in Saskatchewan.

I think the first step would be to find a few agents in your state that specialize in farm and ranch real estate. They should know rental rates in your target area, and have access to recent comparable sales to help you have a better idea of the price per acre for the type of land you are looking for. Up in Saskatchewan, grainland sells for a larger premium above pasture/cattle land. Not sure how things are in Kansas, but a realtor who specializes will be able to tell you. Another option would be to take a drive out in the area you are looking for, and knock on some doors. Get to know rental rates directly through the local farmers, and possibly find yourself some leads for a property directly with a seller.

I’m not sure how things are in Kansas, but in Saskatchewan, under typical sale scenarios it is very hard to get a property to cash flow if you are putting 25% down. The best scenario is usually to break even where the rent covers the mortgage and taxes (insurance will be very low or non existent if you buy bare land, but if you purchase buildings you will have higher insurance to consider).

Hope this helps.

Take care!

Justin

@Henry Lazerow

Thanks for the response, Henry! I've been taking a look at some townhouse opportunities where the numbers seem to work better than single family.

@John Erlanger

Hey John,

Where did you see that I’m looking to invest in $50K to $100K properties? The scenarios I laid out were around $400K for a house and $175K for land.

@Gail W.

The price per acre here in Saskatchewan is quite a bit lower than your neck of the woods, primarily due to legislation that is extremely restrictive of foreign ownership of more than 10 acres of land. The highest price per acre for high end grain land has been $4,200.00 per acre, and that land was within a few miles of the capital city. Overall, the average is around $2,000.00 per acre here in Saskatchewan.

 Hey John,

Great questions, see answers below.

1. I can negotiate either a cash rent agreement on a per seeded acres basis, or I can negotiate a crop-share joint venture if it is in an area with a farmer that I know and trust (higher risk, higher reward with crop share).

2. I'm looking to invest within an hour radius of my home city of Regina, SK or Saskatoon, SK. Travelling to see the land a few times a year would not be an issue. I also don't think that any respectable farmer would pay $8,000.00 per year to use the land as a dump, considering farmers are renting the land to make money. 

3. Do you mind elaborating on how depreciation is a benefit? I suppose if you are putting a certain amount of rent money towards cap-ex over time, I can see what you are saying. The benefit to land is that there is no cap-ex to save for, which to me is a large benefit in farmland ownership.

4. I would be buying and holding for the long term (20+ years, likely to pass onto my family when I'm no longer around), so closing costs aren't really a concern for me. If for some unforseen reason I had to sell, I currently have my license to sell real estate here, so I could potentially save all realtor fees if I was able to broker the transaction myself, and Sellers legal costs on land are very minimal.

5. Farmland in general is definitely not low demand, so I'm not sure what you are getting at here. The world definitely isn't getting any less hungry, and you can't build more farmland (like you can build more townhouses, for example). The supply is truly finite. Saskatchewan supplies the world with a tremendous amount of food, and I can only see the demand for this land growing as populations grow across the planet over time, which equals more mouths to feed.

Hey John, thanks for the reply! I understand that the 1%-2% rule is a valuation tool. My question is more so trying to find out areas where the 1-2% rule is currently attainable, and I used the local examples to show how things are in my province. To answer your question, I'm considering investing in land due to the ease of management and little-to-no depreciation on land. That and also the fact that, once it is paid off, it is pure cash flow with no costs aside from taxes. I'm curious, can you recommend some areas where you are finding residential opportunities that are hitting the 1% to 2% rule? I've been told a few times that non-coastal mid-west cities in the USA are good for this, but I'd be interested to hear your thoughts.

Take care!

Justin

Hi Gail, thanks for this great feedback. I agree, its like trying to compare apples to oranges. Similar to your area, finding good tenants is a very easy task here in Saskatchewan (assuming the land is of average quality or better). I like the idea of having cash flow, which has me leaning towards putting more in as a downpayment on a land purchase in order to generate some positive cash flow. You also can't beat the fact that, as long as your tenant is doing a good job, there is no depreciation happening to the dirt. I'm curious, what is the price per acre in your area for average quality grain producing land?

Take care!

Justin