Would you buy this rental property?

[greedy4chips]

Yesterday I found a rental property that I think is a great opportunity. Most gurus will suggest you must have a cash flow of 1% of the asking price or it isn't worth it.

The property is listed for $54,900 for a 2 unit duplex. 96 years old but looks decent and has a rental history of $525 lower unit and $325 upper unit. With 20% down ($11980) we would have a monthly payment of $271 + taxes and insurance.

This would be our first rental property and going solely on the numbers we cannot go wrong...

Does it need work? Most likely. but I think given its rental history and profitablility the work would be paid for by the profits.

If you have ever owned properties could you please advise us on the legitimate earnings possibility of this property. We realize there are always pitfalls and problems that arise. I just feel that given the numbers and a potential maximum profit of $400 + the principal portion of the loan I feel fairly safe.

I have the money for the down payment in CDs and a way to fund the 20% through home equity loan until the CDs are matured (to avoid penalties that amt to more than the interest on the loan) to repay the home equity line immediately within 2 months.

$12,000 (down payment) at a return of $400 per month + principal earned just seems to good to pass up versus 5.5% on a CD. I know I could make more on stocks than a CD but it is more for freedom to choose what to do with it versus tied up in a 401k or mutual fund. We are happy with the amount of money in there now.

Opinions welcome and TIA!

View property here...http://www.realtor.com/FindHome/Home...2&lnksrc=00002

[34saving]

1) You're paying heating, electricity, water, and sewer. In Wisconsin on a house that old you better figure that will cost you a couple hundred a month. (BTW, as luck would have it, tenants are hardly ever frugal -- esp. when somebody else is paying the bill.)

2) Why does the current owner want out? Are these tenants "problem" tenants? How long are the current leases? What are the terms of the current leases? How are the rents/vacancy rates around? (IE, if these people leave is it likely you'll be able to find new tenants?)

3) Is this close to where you live or will you be an "absent landlord"?

4) Who's doing the normal everyday maintenance (mowing, etc.) If you are, you better plan on the time and/or expense of that. If they are, there better be a plan in place for when/if it doesn't get done.

5) Is real estate in this area appreciating? If so, at what rate?

[greedy4chips]

Originally Posted by 34saving

1) You're paying heating, electricity, water, and sewer. In Wisconsin on a house that old you better figure that will cost you a couple hundred a month. (BTW, as luck would have it, tenants are hardly ever frugal -- esp. when somebody else is paying the bill.)

I called the realtor and they expressed the same concern when I asked why it is still on the market.

Originally Posted by 34saving

2) Why does the current owner want out? Are these tenants "problem" tenants? How long are the current leases? What are the terms of the current leases? How are the rents/vacancy rates around? (IE, if these people leave is it likely you'll be able to find new tenants?)

The property is not the greatest place in the city and the whole area does have other rentals, but there seems to be a good supply of renters for these type places. that can always change for the worse.

Originally Posted by 34saving

3) Is this close to where you live or will you be an "absent landlord"?

4 miles

Originally Posted by 34saving

4) Who's doing the normal everyday maintenance (mowing, etc.) If you are, you better plan on the time and/or expense of that. If they are, there better be a plan in place for when/if it doesn't get done.

Upper unit renters do the mowing and snow removal for a $25 reduction in rent per month. That is completely fine with me!

Originally Posted by 34saving

5) Is real estate in this area appreciating? If so, at what rate?

Yes, but currently the market seems to be swamped with interest rates on the rise so I would think this property would appreciate slowly. Around 400 homes for sale currently between for sale by owner and through realtors.


By paying the utilities, I think this property will end up being an average investment and not an opportunity to get started in the landlord business.

[b4freedom]

If you're buying a property with tenants already in it you should ask for a few things not otherwise listed above:

1)Proof of rent payment from the tenants for past year. Who cares what is being charged, it matters what is being paid.

2)Proof of deposit. If the renters made a deposit, they'll want it back when they move out. Make sure that you get it from the current owner.

3)If the family has children or are elderly, beware.

[greedy4chips]

Good tips b4freedom! I have an appointment to see it wed afternoon and I will certainly look at it from the negative side.

Payment history is my main concern along with length of tenants current stay. Longer the better IMHO.

[34saving]

The way it looks to me you'd be lucky to cash flow $150 a month.

$850 - $25 lawn/snow -$270 P/I -$100 tax/insurance (seem high? Remember you're not owner occupied and you're going to want an excess liability policy) -$300 utilities = $155 cash flow assuming 1) You never have any time vacant. 2) You don't have any maintenance. 3) Your tenants pay on time all the time. 4) You have no closing costs you've forgot to factor in. Now, under the right circumstances the tax advantages and appreciation might overweigh 1-4, but it doesn't sound like you have a lot of confidence in either . . .

[CheaplyClever]

I did rental once- in a military town- military rentors. What a nightmare. I will never do that again.

[greedy4chips]

Originally Posted by 34saving

The way it looks to me you'd be lucky to cash flow $150 a month.
...but it doesn't sound like you have a lot of confidence in either . . .

Thats why I asked, because I knew someone could help get through the clutter. I did not notice the utilities were landlord responsible until I called the realtor. The realtor.com link had it in there, but our local homes for sale section in the paper did not.

$150/ month would be fine if it was a brand new duplex or similar type investment but certainly not for a fixer upper quality place.

Thanks everyone for your replies!

[LuxLiving]

In my reading on this subject which is all I've ever done so there's that qualifier - it tells me that it isn't necessarily always what the present tenants are paying that you need to consider.

What are the prospects for being able to raise the rents after you get in and do a bit of sprucing up??? IOW, what will the market bear???

What kind of backup cash flow do you have to make the payments if you're vacant for awhile?

[greedy4chips]

I agree with you Lux. When I looked at the property last wed. I could only see the negatives and expenses of sprucing it up!

Not being in the rental business I could not see how/why anyone would rent this place for the listed rates. The units were very small and rundown, but what can you expect for $54K.

I have an uncle who has over 40 single family rental properties and a background in custom home building. He got out of the home building and now owns a movie theater that him and his wife love running.

His opinion is too look past the faults if they can be spruced up and remember it is a long term investment. Over the years you will raise the rent and if all goes well make a nice retirement income by having several paid for units. His properties bring in over $20k per month in rent and will be fully paid for when they are retired. Not a bad retirement package for someone who put very little of his own money in purchasing the homes.

[LuxLiving]

Also Greedy, would you be the one doing the physical sweat equity or would you be hiring painters and such?

If a few buckets of paint and some elbow grease are all that's needed that is one thing. But if you're going to have to hire skilled workmen, roofers, carpenters, tile-layers, etc., then you must allow much bigger $$ figures in your calculations.

You could of knocked me over when we were given a bid of $5850 to paint the inside and outside of my fil tiny little house! SHOCKED I tell you. Guess we've been out of the fix-it up market for too long, last I remember a painter would ask for $600 to paint the outside of a house!

I had a friend who did rent houses years ago - he'd look at a property with a realtor and then if truly interested he'd schedule another day that he could get in the property and he called for all of his construction/painting contractors to meet him there at a certain time and get bids for repairs BEFORE he'd even make an offer on the house. Too costly to repair? - no go!

[greedy4chips]

Sweat equity...no way! I realize the value of doing it myself, but this does not outweigh my laziness!

[Ima saver]

I thought this was the way to make money too. I bought 3 different rentals. What a headache. The kid would flush a toy and the toilet would back up. One called at 2 am and said they had no heat. My dh went over to work on it, there were out of heating oil. It was one fix up after another.
They never paid the rent on time. They purposely distroyed things. We said no dogs, they had 3 who messed all over the floor.
When we finally got them out, the house was overrun with roaches. One guy I had to take to court to get him out. When the house sat vacant, vandels broke in. We finally sold all three of them and took a big loss, over $20,000 on one of the houses.

[Sivart5]

I currently own three duplexes, I had two other properties also that I have sold over the past year. In my opinion, when the interest rates were so low, a lot of "good" renters bought homes.

Last weekend a tenant called me about three things at once:Steps on the deck needing repair - Spent last Sunday over there fixing them.
Tree out front rotting and losing large branches - will cost $300-$400 to remove.
Bats are getting in the basement - Estimates so far to remove them is $700-$1,000.

Every time the phone rings, I cringe. Seems a renter is calling me every other day for some reason or another. Be very sure you want to be spending your time and money, at some times very unexpectantly.

If you are up for the challenge, it may be a good investment, you never know.

[tgavin71]

My husband is keen to get an investment property. I am not. And because I control the money it is not gonna happen. All investments have their disadvantages but to me property has too many variables. Yes for some people it does work out but the stress and worry would be too much for me. We have our money in shares and mutual funds. I don't follow the stockmarket so don't get freaked out if one of our shares goes down for a day or so.

[b4freedom]

I know that you’re using 6.5%, 30 yr mortgage for your calculation. But, if it’s an investment property, nobody will give you 6.5%, 30 yr mortgage. The rate you’ll get will be 1.5% to 2.5% more then an owner occupied rate. If you’re lucky, you’ll get 7.5%. But, for this purpose, I’ll assume 8%. Assuming you put 20% down, you’re monthly mortgage will be $322.27.

Because I don’t have other, real numbers, I’ll use the numbers other people quoted (except for the mortgage above):

Mortgage $322.27
Taxes/Insurance $100.00
Discounts for lawn, etc. $25.00
Avg. Monthly Utilities $300.00
Total Expense: $747.27

All of these things should be known before you buy. If you don’t know, or can’t find out with 100% certainty, don’t do it. Never walk into a business deal partially blind. It’s that little thing you don’t know that will kill you.

If you had no tenants, could you afford to pay $747.27/month to cover your expenses?

You really need to base your occupancy on 11 months of the year*. Tenants move out, you have to fix up, repaint, etc., and then find new tenants. This typically takes a month. So, multiply $747.27 by 12 and divide by 11. That’s $815.20/month. $815.20/month is how much you’d have to receive in rent to just cover your KNOWN expenses.

If you collect $850/month and your expenses are $815.20/month you are left with less then $34.80/month.

What is your annual rate of return with $34.80/month?

Your initial investment is 20% down, $10,980. But, you also have to add in your closing costs. What will that be? For the sake of argument, let’s assume its $2500. So, your total initial investment is $13,480. Your annual net will be $382.80 ($34.80 x 11months*). That leaves your rate of return at 2.84% (382.80 / 13480).

*Remember, you lose 1 month for do to turnover. If you don’t have turnover, then you can count that as an added bonus at the end of the year. However, as a business rule, you should always figure in the lost revenue due to turnover.

And then, of course, are the UNKNOWN expenses. What will they be? Will $34.80/month cover that? I highly doubt it. And let’s assume that you fix everything. 1 phone call a month to fix one small problem probably isn’t even worth your time at $34.80. $34.80 probably isn’t even worth the paperwork and the headaches. A part time job paying $6/hour for 6 hours a month would pay more.

You’re rate of return would be horrible. 2.84% is below the rate of inflation. Leaving your money in CD’s would be better.
Now, some could argue that in the long run it may be worth it. This may be true, but is it worth finding out? In my opinion, I’d say no.

If you want to become a landlord, keep looking, eventually you’ll find one that’ll work in your favor. My friend finds properties and rents them out. He typically will look at 500 properties before he’ll find one that is worth it. And then ½ the time it still doesn’t work out. But the ones that do are paying very well. As a general rule, he says don’t take anything that nets less then $500/month. One thing can go wrong and eat up that $500/month faster then you know it.

I think in two years, mid-2008, you’ll see the market flooded with good deals. So for now, I’m keeping my money in the bank and waiting until then.

[Ima saver]

I found a better way to make money is to buy land. I bought 5 acres for $20,000 in Florida. I put it up for sale and got $35,000 on it. I held the mortgage and made 8% interest in it for several years. I stipulated that no trees could be cut except for clearing of the house. They made payments for several years and then paid me off in full.
I would rather take a chance on land than a rental property!
I soldmy last one for $14,000 at an auction. I paid 35,000 for it in the 1980's!

[JBinKC]

I did the rental property thing for a couple of years and was immediately grossing 27% of purchase price in rent without paying for any utilities and I still thought it wasn't worth it. You get lots of turnover and your dealing with higher risk people who simply don't care about the property.

If you think the price of the property is low with a high chance for a nice capital gain move into it live there for two years then sell it. It would then be classified as a tax free transaction.

Also is it by chance this rental unit is in Milwaukee?

[greedy4chips]

Originally Posted by JBinKC

Also is it by chance this rental unit is in Milwaukee?

Stevens Point WI

I have a friend who built (yes actually swung the hammer) his house. He did have people come in and do the electrical, plumbing, drywall, etc. Basically anything you can see. His house appraised at 75k over his cost. We talked about them selling in 2 years for the tax free income. Well his wife said she did not want to do that. It just was not worth it to her. Well 2 yrs later his house is now almost 100k of profit potential and as a teacher he really, really, really wants to sell it and do it again while he was off this summer...no go said the wife.

If I had a better back I would do it myself. Physically I could not handle the work. Financially, I could see doing it.

[msnln]

I own three rental properties I had bought between 1995 and 2000, and they have been best investments as all of them more than tripled from my purchase prices. When I bought them, though, all of them were cash flow negative or break even at best. During the 90's housing prices were still depressed and people called me crazy for investing in real estate and sellers were basically begging me to take their properties off their hands. But that is what contrarian investment is all about.

In any case, current cash flow is not as important as the location of the property and the outlook of real estate market. Cash flow will eventually catch up. You want to purchase properties in best neighborhood you can afford and get the best agent in town to get the tenants for you. Last thing you need is a deadbeat tenant who will run your place down and not pay agreed rent. Typically, people who look to live in nice part of town have the means and know the importance of paying their bills. RE agent should run credit and employment checks before presenting them for you to consider. My agent does this very well and I have not had one single problem with any of my tenants. As matter of fact, one tenant made improvements to the property and when she moved out, insisted she will paint and renovate the place as she wants to leave it “in original move-in condition”. But after she moved out, I found out she had installed brand new light fixtures and made other small enhancements to the property.

Over the past 10 years, all I had to do was change three refrigerators, one electric heater (wall attached) and paint half dozen times. Market is obviously important because what you make from appreciation of property will be much more than few bucks you make off rent payments.

I have some concerns about your idea, though. First, the market has topped and is on decline. In NY region, between the peak of the market in late 80s to trough of mid 90s, the market fell about 30%. Secondly, you have not done any due diligence on the tenant. As B4 said, you need to verify that tenants are any good.

I would wait 4-5 years for markets to come down before considering rental property investment.