I need info on purchasing a rental.

[Bright]

I am not really sure what I am doing here so I am looking for a little help. The house is small and built in 2003. Basement rooms are roughed in as is bath but not finished. House is pre-inspected by the same guy we used for our last two homes.It is in great shape. Asking price is $134,000 but we are not willing to go over $115,000. Taxes are $2500 a year. Fully fenced yard. This would rent in our area for $900 to $1100 in my opinion. The agent that has been showing us homes says $1200 and my numbers are conservative. We would be paying cash. Our personal home is paid off and we have no debt. We are also looking at any rental purchase as something we ourselves may move into when we decide to downsize.

I'm hoping someone can help me out with some rules and guidelines for knowing if a prospective rental is a good deal as far as a $ maker etc.

[rennigade]

Search around. There are more than enough threads related to rentals. Just a recent one has a lot of useful info in that will help you.

[Bright]

I actually did do a few searches here and Google but thank you for your trite answer to search. I do not understand the 1% rule and a lot of info applies to people who are financing the purchase. We will be paying cash. I simply do not know quite honestly how to do the equation to figure out the profit, risk etc. I need it explained like I am 5 as I told the guy that helped me understand what I was doing with our other investments. I may be fantastic and being thrift and saving up nice sums of cash but I am a newbie on this subject.

[AnotherReader]

Before you write any checks, you should do a lot more research. Bigger Pockets is one place to look. The real estate section over at the Mr. Money Mustache site is another. There's a reading list at the top of that section. There's a thread here from a few days ago that shows an operating statement.

The one percent rule comes from that being the necessary rental rate to receive any decent cash flow from a single family residence. Over time, the rule of thumb is that you will spend 50 percent of your rental income on expenses, including vacancy and collection losses, taxes, insurance, property management, repairs and maintenance, and capital improvements. So if you collect 12 percent in rent, spend 6 percent on average, you net 6 percent in cash flow, again on average. You may do better or worse in any given year.

If you leverage your money by borrowing at less than 6 percent, you may boost your rate of return. However, you take on the risks of borrowing to do so.

You also need to think about the risks of owning rentals. You can save yourself a lot of headaches by proper tenant screening. There's a really good blog with a lot of information and war stories by someone that has owned multiple rental properties for many years. It's www.nononsenselandlord.com. You may also want to purchase an umbrella liability policy that will protect you if you are sued because of a problem at the rental.

Make sure you get verified rental comps to determine market rent. An unverified statement from a real estate agent or a gut feeling is not enough to write a six figure check.

There is a lot more to consider, but a trip to the library with your reading list in hand would be a good place to start.

[Reggie]

Rent/cost of the property should be greater than 1%.

1100/115000 = .0096

I wouldn't do it. There just isn't enough margin in it. I like to be closer to 1.25%.
The good thing is that it's newer and the taxes are fairly low but it's still too tight.

I would read everything I could and research the markets all around me if I were you. How long are rentals staying empty, what are average rates? Crime rates? What expenses do property owners pay...water, trash??

What does the rest of your portfolio look like? How much in stocks, bonds etc?

[ACarboni]

Rent/cost of the property should be greater than 1%.

1100/115000 = .0096

I wouldn't do it. There just isn't enough margin in it. I like to be closer to 1.25%.
The good thing is that it's newer and the taxes are fairly low but it's still too tight.

Thanks Reggie as I was also quite unaware of 1% rule.

[Bright]

Thanks to everyone that responded. Sorry I didn't get back here to thank you earlier. We ended up finishing a purchase at the title company Friday. A perfect home hit the market right down the road. They were willing to take a low ball and close fast as they were transferred.