Let's see... I had told you about the two houses I was getting very close to purchasing over the last month. One house was going to be a rental the other one I was debating whether to rehab and resell it or keep it as a rental.
On the rental house I spent quite a bit of time really crunching the numbers to see if it would make a goo investment which is after all the purpose of it all. In order to do this I try to project the expenses that I will incur as the owner. These include:
- Vacancy - I assume that in between tenants I will loose one month of rent per year for 10 years. This works out to be 8.3% of total annual income.
- Maintenance and Repairs - I assume $1,000 per year.
- Taxes and Insurance
- Mortgage payment - I plan to buy this with a 30 year fixed mortgage at about 5% interest rate, that requires 20% down payment
- Administrative costs - $250 per year
- Property Management - this is an important one that I missed at the beginning and my friend J Scott from 123Flip reminded me about. Although I don't intend to hire a PM there is a reasonable probability that I might in the future, especially if my rental portofolio increases so I might as well consider it. This comes to 10% of annual property income.
- Capital Improvements - yes the house has been recently rehabbed but still it is an old house and there were items that were not new. So over the next 5-10 years I would have to spend money to fix/replace some of these items like windows, plumbing, electrical, doors, fixtures, drainage, HVAC, etc.
So when all the numbers where crunched the Cash Return on Investment, the holy grail of income property, was at 13-14%. This was not going to work.
Remember that owning rental properties and being a landlord is not a walk in the park. It requires work, patience and a certain hassle factor. If I am going to put myself through the work of being a landlord I need to make a better return than 13%. Heck you can make 10-12% in the stock market fairly easily and don't have to put up with half the crap you do as a landlord...
The 2d property, the one I wanted to consider for rehab, turned out to have a fairly high repair budget. Once I got the property under contract my trusty GC and I went over there and did a thorough inspection. We uncovered quite a few surprises including termite and mold damage in the crawl space plus a shifting pier that needs to be rebuilt:
...and main support joist that has been eaten by termites/ants over the years:
Nothing that cannot be fixed but when we added up all the repairs, the price that I am buying and most importantly what I can sell it for then this deal will not work either...arghhh!
So I went back to the bank that owns the house and asked them to lower the price. To which they swiftly responded...NO.
This is very frustrating by now because I have been looking at houses and trying to find the next project for a couple of months now. However I had to resort to experience and lessons learned from House #2 that no deal is better than a bad deal!
The lesson here is that the next time you run into one of these real estate speakers that tells you how easy it is to make money in real estate you show them your middle finger and run the opposite way.
In the meantime the hunt for House #9 continues...
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…thanks, my friends.