Landlord Costs - My first property

[wildride]

Hi Everyone,

I have been looking around for about two months now for my first investment property. When I am trying to figure out the cash flow for potential properties I am using the costs below, am I missing anything?

Mortgage Payment ($280/month)
Taxes ($3,600/year)
Insurance ($1,600/year)
Reserve Fund ( Repairs, etc. ) ($150/month)

I would be managing the property myself. Rent income would be $1500 a month (I believe a heavily discounted rent from the areas going rate.)  Also what kind of figure should I be using for Insurance, ballpark? I was using $1,600 a year in my current calculations of a two unit ( 3 bedrooms/unit )property that I would be paying around $60,000 for. That is the one variable I was not sure of.

Any other general advice would be helpful, I am still in college, but looking to pick up my first property ( My father is a developer, runs in the blood I guess). The house is about a 4 minute walk from a growing state campus.

From my calculations I should have a positive cash flow of anywhere from $400 - $850 a month, depending on conditions. The only other doubt I have is why someone else hasn't jumped on this house, their are a lot of investors that own 30 - 50 properties each in this smaller town.  

I would appreciate any advice.

Thank you,
Matt

[NoMoneyDown]

Taxes, insurance, and other things vary from state to state, county to county, and even property to property.  Other things to consider (note: they may not be applicable all the time): Vacancy loss, HOA fees, Rent tax, Pool service, Advertising, Home warranty, Supplies, Accounting/Legal.  When figuring deeper (for personal/biz taxes), don't forget depreciation and loan interest write-offs!

[kdhastedt]

If your numbers are correct:

PI = $280
Taxes = $300
Insurance = $133.33
Reserves = $150 (includes maintenance)
Vacancy (5%) = $75
Management (8%) = $120

Total Expenses = $1,058.33

Income = $1500

Positive Cashflow = $441.67 ($5300 a year)

For me, this is a definite "BUY".

A couple of questions:

(1) Why is the mortgage P&I LESS than the monthly tax amount (Wisconsin?)?  This is highly unusual!

(2) Is there a reason that the insurance is so high?  Is this derived from an actual quote or an estimation?  I pay between $250 and $280 a year for insurance on each of my SFR rental properties...$1600 a year seems extreme.

(3) Where can you buy a property with a sub-$300 payment that rents for $1,500?  Also very unusual.  I pay about $300-350 per month (or so) on each of my properties and get $650-750 rent.

I try to get AT LEAST $125 a month ($1500 a year) positive from each of my properties...this property cashflow is strong.

As for "management" -- I always figure management into my calculations (even though I manage myself)...if you manage it yourself, you need to be paid for your time and effort (if you work for free, I have some sheetrock taping and some priming/painting that needs to be finished!) and if you ever need to have the property managed professionally (injury, sickness, want to go fishing, etc.), you have the costs already built in!

You should also figure a "vacany" rate into your calculations.  I use 5%...this gives me 18 days per year to get the house ready for the next tenant, etc.

If these numbers are true, I recommend that you buy as many as you can find!

Keith

[wildride]

Thanks for the replies.

"(1) Why is the mortgage P&I LESS   than the monthly tax amount (Wisconsin?)?  This is highly unusual!"

Well I am using a 30 year fixed  mortgage in my calculations to play it conservative. This will also allow me to cover a few payments up front if I can't find tenants right away.  I would be putting down about $15,000 also.  The property is also within a village so taxes are semi high. ( The real taxes are $3,280, I am using $3,600 to be on the safe side).

"(2) Is there a reason that the insurance is so high?  Is this derived from an actual quote or an estimation?  I pay between $250 and $280 a year for insurance on each of my SFR rental properties...$1600 a year seems extreme."

Insurance was an estimate, I had no idea about this one. As you can see I figured all my expenses high in order to allow for a cushion.  The house would only be insured for about $60,0000.

"(3) Where can you buy a property with a sub-$300 payment that rents for $1,500?  Also very unusual.  I pay about $300-350 per month (or so) on each of my properties and get $650-750 rent"

This town seems to be a cash cow. There are about 6 -7 people that pretty much control the offcampus housing and commercial buildings around here. The town is built around a college that is growing at a good clip.  It is a two unit building, with 6 bedrooms total. I am figuring on rent of $250 a person, I need to fill the place fast and the semester has already started so I am at a disadvantage. On top of that the house is run down, but good enough for college housing for sure. This rent is well below the average renters pay around here. The majority pay $350 - 420. The low rent will also allow me to get a year lease instead of just a two semester lease I am guessing.  I dont have steady income ( still in college) so this place needs to pay for itself all the time.

I guess I am mising closing costs from my expenses, along with tax preperation and Corporation filing fees.  This is my first home purchase ( 20 years old) and I am just skeptical I guess, thats why I havn't jumped at it yet. I am very worried about something going wrong with the property up front and having to try to cover the costs ( I can get the work done at cost, but it would still be a lot).  Why would anyone sell a property this cash flow positive, something must be wrong with it.

Whats everyone think?

Thanks,
Matt

[kdhastedt]

Matt,

<<Why would anyone sell a property this cash flow positive, something must be wrong with it.>>

Not necessarily, owners sell for some many reasons (good or bad) that I've stopped trying to figure it out.  Sometimes I come right out and ask, "Why are you selling?".

Lots of times people are ill, moving, or just sick of dealing with landlording issues (I could see that with college kids!  LOL -- no offense!)...

If I could find $60K house that generate $1500 a month, I would buy all that I could find!  I pay about the same and get betwwen $650 - 750 a month.

As long as there are no real huge maintenance issues (needs total refurb, needs all new plumbing and electrical, etc) and the numebers are accurate, I would recommend "BUY".  Looks like a winner to me!

When dealing with the tenants, do you plan on writing separate rental agreements for each room?  If so, this could prove to be a bit of an adminstrative hassle.  Also, make sure that if it's a college kid, you get a parent to co-sign.  My son is 22 and as responsible a kid as you'll find and I had to co-sign for his college apartment this term!

Keith

[Pip]

Sounds like a great deal!

I would recommend getting an inspection done on the property, especially because its older and probably not taken care of very well.

If nothing else, this will give you some piece of mind!

I would also recommend, as kdhastedt said, get a co-x from the parents for college kids, no matter what. In the college town I just got out of, this was standard for any student rental, as was a year-round lease minimum--no exceptions. At least there, it seemed like no one worried about the year lease too much (pay me later instead of pay me now!), so you could probably charge only slightly less than the guys doing semester to 6 mo leases and do fine.

Another thing that went on in this college town as a standard, that I haven't seen or heard of anywhere else was a strange form of "sub-leasing." Basically, if your tenant decides to get out of the lease(like over the summer break, or example), they don't just give notice and pay a month ahead and go. They stay on the hook and keep paying until either you find--or the x-tenant refers you--a new tenant, or their 1 yr lease runs out. It's not really a true sub-lease because you would have the new tenant sign a new lease. There was, of course, a fee for the x-tenant to get out.

I think it's a great idea, and virtually eliminates your vacancy rate, but may be hard to pull off in most markets. But yours sounds like the college town I came from, pretty much a rental monopoly/oligopoly, so it might fly.

[wildride]

Thanks for the replies, any advice helps.

I am going through the house tomorrow with a guy from our family General Contracting firm. Even if it needs some rehab I can get it at cost, which gives me a slight advantage.

I think I am also going to ask the Town Inspector to come through to make sure I can get a Certificate of Occupancy.

I plan on writing one rental agreement for each unit at $750 each ( If I see next year that I can get market rate rent then it will be $1,050), I want people in there that know each other. I will most likely be getting the parents as co-x. Thanks for the info on the sub lease pip. Any other hints about renting in a college town?

This town definatly is an oligopoly when it comes to off campus housing rentals. The 6 or 7 owners get together every month to play cards and decide if they should raise rents or not lol.

Thanks again.

[wildride]

Well I learned my first lesson. The property was under contract by the time I called my real estate agent to make an offer on it. It wasn't on the market more then 15 days.

Live and learn to make an offer faster on a property that is $1000 cash flow positive at market rent.

Thanks for all the help anyways.

Matt

[kdhastedt]

I've had a couple like that even in the slow sales amrket that I'm in (sales are slow but rentals are "smokin' hot!)...

You have to stay on top of new listings and be prepared to "pull the trigger" quickly on the good deals!

Better luck next time...

Keith

[darrenjzy]

bummer,

i'm 23 and in college(returned after a mass layoff) and was deriving a nice bit of motivation from this story.  Way to go, you ruined it for me :crying5:

[JeffInCT]

Don't despair. There will ALWAYS be another property and each experience will only make you smarter.