scenario..

[JMan]

Hi all.  First post here so go easy on me

Looking for some general advice by some more seasoned investors.

My purchase scenario is this:  1st time investor.  Foreclosed single family property to be used as rental.  List price is 55% of last home sale (2006) and 2009 assessed value, property is in good repair (new heating/cooling) nothing stands out as having to need replacement or work.  Should be easy-ish to rent.   My biggest question mark is that profit margin might be too slim.  After rent covers the taxes and home owner's insurance on the property the montly "profit" would be ~$270-$300.  With that in mind, it will take 12-13 months to recoup my initial cash investment.

A home resale, if/when the market gets back to its 2006/7 numbers could yield a $20-30K profit.

I know these probably sound like small time figures and thus I'm wondering if this would be a savy first deal.

Thanks for any insights.

[Bluemoon06]

Most people make the mistake of using the rent they want to get instead of the rent that is being gotten.  You can’t get more rent than what the house will bring.  Make sue you use a realistic rent number.  Everything you can influence up to and including walking away from the deal.  Negotiate everything else down.

With that said, what are the numbers?

[JMan]

Yeah, for rent I'm using a figure that is $50 less than what my reasearch on rental comps is - just to be somewhat conservative.

Here are the numbers, before any negotiating (as you suggested):

List price: $33,900 (850sqft - 2b,1ba)
2009 Assessed: $55,000
2006 Sale price: $54,900
2008 Taxes: $670/year or $55/month
Home Insurance: $500/year or $41/month (ballpark)
Mortgage: $200/month (Homepath.com REO financing)
Mortgage + Taxes + Insurance: $297/month
Rent: $575/month
Profit after taxes + insu.: $277/month, $3,330/year
Cash Investment: $4,000 (10% down, closing, misc)

[JMan]

*bump*

[Dave T]

With only 10% down, expect to pay an additional $30 (ballpark) per month in mortgage insurance. 

Your monthly expenses should also include

• advertising costs -  some would say marketing.  How are you going to get tenants and how much will it cost you to advertise your vacancy
• leasing fees - will you pay a referral fee if someone brings you a tenant?  Even if you don't, you will have out of pocket costs to show the property (gas for the car, at the very least).
• legal fees - will an attorney draft your lease agreement, and then review it each year to incorporate new state, county, municipal law?  How about evictions, will an attorney represent you in court?  There are court costs as well to file for eviction
• repairs - you say the property appears to be in good shape, but eventually something will break.  You need a repair allowance even if the only thing you do during the year is change the locks when you acquire the property, and again when each tenant vacates
• vacancy - you should allow at least one month vacancy each year.  When tenants vacate, a new tenant does not move in the next day.  Call a few professional property management companies in your area and ask what the typical vacancy is for a property they manage in the same neighborhood.
• utilities - what utilities will you have to pay during your vacancy periods and how much will that cost you?
• replacement reserve- you need to start saving for the time when you will have to pay for a major system replacement.  A new roof, new carpet, new furnace or AC, and large appliance replacements each can wipe out several months of cash flow, so start saving now
• management - who will manage your property?  If you are going to use a professional property management company, how much will they charge?  Even if you manage the property yourself, there is still a cost.  You have to respond to tenant issues, inspect the property, supervise repair work, collect rents, and pay the certified mail postage costs that come with the business

If you add realistic monthly allocations for each of these expenses, I bet your property will be a negative cash flow for the price and the market rent.  I think that you either need to get the price below $25K (and put 20% down) or get the rent up to around $775 before you can expect to see a positive cash flow.

BTW, in real estate jargon profit is what you get when you sell the property.  Cash flow is the net income (or loss) the property generates while you are holding it as a rental.

[furnishedowner]

JMan,

You are getting some good, hard advice.  I recommend also looking up the "50% Rule" using the help/search options on this site. Then sit down with a calculator and do the numbers again.

Bottom line, it's your decision.  You know the local area and the possibilities that the property has more than anyone.

I recommend getting a property inspection or a contractor to walk through it as a contingency.  You will want to know NOW if it 's gonna need a new $5,000 heating/cooling system.  You will want to know the worst possible case.

Investing in real estate has risks.  And profits come only if you take those risks.

Furnishedowner

 

[JMan]

Thanks folks for the straight talk.  I'm one the fence but will be taking this advice into consideration.