Officially Saving For Rental House

[myrdale]

My "truck fund" savings account has now been officially repurposed for a rental house. With the money I deposited in the account this morning I now have $4k total. I know it doesn't sound like much, but it is a start, and I will grow it.

The plan is to save enough to purchase a cheap house with cash, and then pay for the needed rehab with cash, with the end goal of renting it out and rolling the proceeds into another house to do the same. I am thinking of purchasing in the <$20k range and about the same in remodeling, doing most of the work myself.

I've been inspired from watching a couple of different channels on YouTube, Homemade Home and Graham Stephan being the best.

I am probably two years off from actually making a purchase, so there is no rush and plenty of time to plan.

In general, is it a workable plan? Of course locations and markets have a lot to do with it. Does anyone have any experience on purchasing cheap houses and remodeling them for rentals?

[Fishindude77]

Everyone has to start somewhere. If you're a handy person that can do all of the maintenance, repairs and remodeling work yourself, and have time to do this stuff it may work out okay.
The thing about owning only one single family rental is that a single expensive repair item such as a roof or HVAC system can negate any profits from a year or more worth of rental. That's why most people own several units, and that is what makes multi family units more attractive to landlords. Might be wise to consider looking for a duplex or multi-unit structure, and / or purchase a big structure and turn it in to two or more units?

Good luck, whatever path you choose.

[ua_guy]

Based on current events, anyone who owns a rental property should factor in long stretches without any rental income from those properties. I highly doubt this is the last pandemic we will see in our lifetimes.

On the remodel stuff, it probably depends on what caliber of rental you're going for. The big one is preserving the structure. The roof needs to be good, water needs to run downward and away, and remove as many consumable things as possible, i.e. swap carpet for durable flooring in high traffic areas. You don't want to have to replace that stuff after a tough renter, and you definitely don't want emergencies while the tenant is there. Deal with it up front to save yourself the trouble later.

[myrdale]

Might be wise to consider looking for a duplex or multi-unit structure, and / or purchase a big structure and turn it in to two or more units?

I do like this idea. I suspect it would be a greater return on the investment, all depending.

[myrdale]

Based on current events, anyone who owns a rental property should factor in long stretches without any rental income from those properties. I highly doubt this is the last pandemic we will see in our lifetimes.

On the remodel stuff, it probably depends on what caliber of rental you're going for. The big one is preserving the structure. The roof needs to be good, water needs to run downward and away, and remove as many consumable things as possible, i.e. swap carpet for durable flooring in high traffic areas. You don't want to have to replace that stuff after a tough renter, and you definitely don't want emergencies while the tenant is there. Deal with it up front to save yourself the trouble later.

I've been aware of the current evictions moratoriums, but I hadn't really considered the chances of these re-occuring in the future. I can't start to wrap my mind around how the government expects someone to run a rental with tenants who can't or refuse to pay.

On the caliber of renter, I'd say probably the middle of the road. Obviously I wouldn't want people drug dealing out the back door or changing their motorcycle oil in the living room. At the same time though I have to accept that no one is going to take care of my property as well as I do.

I've heard the composite floors today are tough as nails. I think carpet is out all the way around.

[Petunia 100]

I've been aware of the current evictions moratoriums, but I hadn't really considered the chances of these re-occuring in the future. I can't start to wrap my mind around how the government expects someone to run a rental with tenants who can't or refuse to pay.

On the caliber of renter, I'd say probably the middle of the road. Obviously I wouldn't want people drug dealing out the back door or changing their motorcycle oil in the living room. At the same time though I have to accept that no one is going to take care of my property as well as I do.

I've heard the composite floors today are tough as nails. I think carpet is out all the way around.

If you accept Section 8 vouchers, you are guaranteed 90% of your monthly rent, pandemic or not.

[Jluke]

I would read up on the website Bigger Pockets

[bjl584]

I would read up on the website Bigger Pockets

Agreed.
Read Brandon Turners book too.

sounds like you are doing a classic BRRRR strategy.

I've been searching for rental property myself.
The market is tough right now.
If you can find a fixer upper, that is about the only way to make money.
You certainly won't do it turn-key from the MLS.
In all cash your carrying costs will be low, so you should be ok assuming you buy in a decent area.
Good luck and let us know how it goes

[Fishindude77]

A landlord friend of mine says ....... your rentals need to be nice enough to charge a high price, so you can keep the riff raff out.

[kork13]

A landlord friend of mine says ....... your rentals need to be nice enough to charge a high price, so you can keep the riff raff out.

This sounds terrible, judgemental, coldhearted, elitist, and all of the negative ways one can describe it. That's all true... But honestly, I tend to agree, because it is the reality of rental RE.

Lower value homes (with lower rents) do tend to offer higher ROIs that a higher value (higher rent) home. In VERY general terms, I might draw the line within 10% of median home value for an area. Lower value homes are also (obviously) easier to get started into, and also have greater demand. All of these factors naturally lead most new RE investors to go in after the low value homes. However, you have to recognize that those lower-end homes offer higher ROI because of the much higher risks involved. Low-income renters (on the whole) have significantly higher incidence rate for late/non-payment of rent, eviction, tenant turnover, crime, damage/poor upkeep of the home (though this is partly the fault of inattentive owners), and property value appreciation can be muted in lower-income neighborhoods. All of these factors cost the owner time & money.

In my limited experience as a landlord & in discussion with many landlord friends/acquaintances, higher value homes allow the owner to enjoy greater satisfaction, less stress, and lower risk...especially once the home is paid off. It's a balance, because they/we do often accept 7-10% IRR vs. 10-15+% IRR on those rentals. A friend of mine bought/owned a few little fixer homes like you're referring to in Minnesota ($30k-$50k value range), and while collectively he earned a good return off of them, they consumed his time & efforts, and he often had problems with some of those factors I mentioned (and more).

So my advice is simply to go into it with your eyes wide open. Talk to some current landlords and/or property managers for homes in your market in the rental segment that you're targeting, and make sure you understand (and are prepared for) everything that comes with it. Also, build up a hefty "rental emergency fund" (I hold no less than 6 months' rent) beyond what you need for the purchase(s), because you'll need it....regularly.

[myrdale]

This sounds terrible, judgemental, coldhearted, elitist, and all of the negative ways one can describe it. That's all true... But honestly, I tend to agree, because it is the reality of rental RE......

So my advice is simply to go into it with your eyes wide open. Talk to some current landlords and/or property managers for homes in your market in the rental segment that you're targeting, and make sure you understand (and are prepared for) everything that comes with it. Also, build up a hefty "rental emergency fund" (I hold no less than 6 months' rent) beyond what you need for the purchase(s), because you'll need it....regularly.

I've heard similar sentiments from other people I have spoken with.

I've heard a bit about putting the due diligence in on the application side / enforcing a strong lease / routine inspections as well.

[riverwed070707]

Yay for more real estate investors here! Your approach is certainly doable but *very* conservative. Do you have a decent income currently? Are you generally debt averse? If it were me I’d save up the minimum down payment (usually 25% of purchase price) plus repair cost and finance the purchase, then save up the rent to go put 25% down on the next one. What will the value be after renovation?

[riverwed070707]

sounds like you are doing a classic BRRRR strategy.

Traditionally BRRRR involves refinancing after upgrades are made to leverage sweat equity to make your next purchase. Unless I’m reading wrong OP is planning to pay cash, then save up to pay cash again. Will be a much slower ROI

[myrdale]

Do you have a decent income currently? Are you generally debt averse?

Yes and Yes to both questions. Looking at my previous habits, I can save about $15k per year outside of retirement. I am starting to really grind down my budget to see how much more I can get that value up. I'd like to start with as little debt as possible. On the bright side, I am not in a hurry. House prices have skyrocketed in my area, and my assumption is that this bubble will burst in a couple of years. Hopefully at that point I will be in a position to act. In the mean time it is just saving and research.

[bjl584]

Yes and Yes to both questions. Looking at my previous habits, I can save about $15k per year outside of retirement. I am starting to really grind down my budget to see how much more I can get that value up. I'd like to start with as little debt as possible. On the bright side, I am not in a hurry. House prices have skyrocketed in my area, and my assumption is that this bubble will burst in a couple of years. Hopefully at that point I will be in a position to act. In the mean time it is just saving and research.

Depending on how much work you want to do you can still find good deals off market. It's tough to find anything on the MLS as far as long-term rentals go.
forsalebyowner.com is a good site to check out for private real estate sales.
check Facebook Marketplace too.

You can also just drive around your area and look for abandon homes. Find out who owns them at the courthouse and contact the owners.
A guy I know just did that. He is rehabbing a duplex and ended up chatting with a guy across the street who was in an out of a house.
Apparently he was doing some remodeling but ran out of money and interest. So, the two struck up a deal and he was able to buy that place too.
He is a contractor, so he does have the advantage of having the tools and skills to do the work, but you get the point.