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Re: Would you buy this rental property?
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.
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.
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