Getting ready to buy my first rental property!

[Sexxxy_Beast]

Hello everyone,

I've been a long time watcher of the forum, I've been interested in REI for many years now but when the market crashed I got cold feet.  I was interested in flipping houses, but that's not realistic nowadays.   Now homes are selling for far below their mortgage rates, 2-3 times lower, it seems a good time to buy rental property.  

Me and my brother are very close, we live in the same house share finances, own the same business, etc.  We have over AU$450k in an Australian bank account (it's at a 1-1 ratio with the dollar now).   The interest rate there is 5-6%.  We make about $23k a year total.  We also own a business that we net $40k annually.  However we don't spend money like water, we live well below our means.

The plan
*I already live/own a duplex but pay $2600 per month on it.  Refinance it first to allow me to save an extra $1000 monthly.

*Find 1 rental property SFH between $50- $150k that can be rented out at at least 1% of it's selling price. (reason for a SFH is that it's easier to sell if we want to get out).  We ideally want a property that's bad enough that no mortgage company would touch it.  My best friend is a contractor with connections to a lumber yard (free wood), he's very very cheap.

*Purchase property with our savings.  (it's extremely difficult to buy a property that your not going to live in)

*Use a qualified property management company to rent the house out at first so that we'll learn the ropes.

*If all goes well enough, we can take out a loan against the property we purchased to buy a second home or use more of our savings to buy additional properties.

The benefits over the Australian savings account are as follows 5% interest isn't permanent, it can change anytime.  The property here not only would get us more return now, but the rent would have our investment paid back in 10 years.  The downside is the Australian savings is much more secure in theory.  However Australians are getting into the same real estate bubble that we had here and I feel that it's only a matter of time before the market there collapses.  In Victoria, the cheapest homes go for $300k, and up from there.

If money was left in Australian savings at 5%, 10 year projection $733002
If money was invested in rental property: 10 year projection $945000  (assumes no inflation, rent increase or maintenance.

***The business we're in is renting construction equipment, we've been at this for 2 decades and just "make a living at it".   Were on call 24/7, there's no vacation time in this business.  We once took a cruise and all hell broke loose when we got back.  We deal with about 300 customers a month, 10-15% have trouble paying/we never get a dime but there's almost nothing we can do about it.   We drive a combined 60 hours a week which increases the chances that we'll be involved in an accident. We'd ideally want to deal a business that deals with just a few clients, something that hopefully they won't be bothering us on a daily basis, and something that we can finally take vacations and enjoy our life.

[nemmert]

You're going to have issues getting answers because you're in a far different market down on the other side of the world...  I'm guessing many of us don't know how things work there.

In the US, 1% rent will just break even.  On average, long term, expenses will consume 50% of your gross rents.  With a 25% down payment and a mortgage for 30 years @ 5% (very solid rate terms if you can get them), your mortgage payment with interest will consume 40% of your gross rents.  That leaves a VERY thin 10% margin.  An example would be putting $25,000 down on a $100,000 home and getting $1,200 cash a year out of it, a 4% cash on cash return.

You'll have to educate us on things in your world.  Do you guys pay property taxes?  What sort of interest rates and terms do your banks offer?  Are you making a cash play (high leverage to maximize cash flow) or an appreciation play (cash out at sale)?  What sort of fees do Property Management companies charge there (around 12% of Gross here which is included in the 50% expenses)?  How do your personal taxes work, can you deduct depreciation value from the rental ("creates" cash even with 0 cash flow due to tax savings on other earnings)?

A lot of people look for 2% rents, on higher end properties you can drop that number lower... I tend to look for 1.5 - 1.8%.  Of course all of this is based on the extremely low mortgage rates in the US right now.  Your mileage may vary.

[Sexxxy_Beast]

I made this Excel sheet...
http://www.putlocker.com/file/4B57CA287DC84B56


Im in California, I mention the Australian money because over there the interest rate is much more than here, perhaps someone would say that I should keep my money in the savings account there then spend it here.

Let's keep in mind that I can maintain the property myself, I know how/where to get cheap materials, etc.

I read that a good CAP rate is 8%  I am finding that alot of the properties I'm looking at have this rate on my excel sheet.

What I've been doing for a few weeks is to put properties I'm interested in on the Craigslist rental search at 1% of the sales price to see what kind of response I get.  Some properties get around 18 replies in 2 days, on the low end I get 8 replies, is this a lot or not?

examples:
$129k property in crummy area, rent $1300 (18 replies)
$141k +10k repairs in decent area, rent $1550 (8 replies)

I was planning on either using my money to buy the house outright, this way I can get properties that a mortgage lender wouldn't touch, get a much better deal and retain all the mortgage payments on the property.  I could also get a loan on a decent property, and if this works out, I could pay it off and make not only rent income but save all the interest that I'd normally pay.  I could then use the property as collateral on more properties or buy more with the rest of my Australian money.

[Real Estate Seller]

Why take on a headache renting properties when you can buy and flip a deal and move on to the next one.

[Sexxxy_Beast]

Well the market right now is right for rentals, the rents are high and the mortgage rates are low.  It's much harder to sell a home right now though I could try!

What do you suggest I do with my money then? 

[charlieh]

If you can pay cash or mostly cash then rentals can be a great way to go.  Flipping houses right now is scary.  If you are financing them you can easily put yourself in a situation where you are stuck with property that wont move.  Renting is more stable.
As you mentioned financing is cheap assuming you have access to it, and with so many people unable to obtain financing rentals are hot.  Is this likely to change anytime in the near future?  I personally can't see that happening so in terms of the rental market continuing to go strong you should be heading for a stable income stream assuming you are priced reasonably. 
Becoming a landlord though is a real responsibility.  As a landlord with two rental properties currently, I have been stuck with non payers, and large maintenance issues so just be aware of the time/financial commitment you are getting into. 

[Estrogen Hostage]

I hate to misdirect the question here - but you can get 5-6% in the bank in Australia?

Is there anything to keep me from putting money in an Australian Bank and getting that kind of rate? What has the Australian Currency been doing?