Income property

Obadobadope · Post by **Obadobadope** » Sat Mar 10, 2012 12:56 am

Hey all,
I know there are a few lurkers here who own income property. I have about 10 grand sitting in cash, and I'm seriously considering taking a mortgage to buy a 2-unit (or more) property. Basically if I can overcome my housing expense, I can retire. I would initially live in one unit, and rent out the other(s). Then possibly rent out my unit if things go well. Since the value of the house will probably equal or exceed my entire net worth, my main concern is to make sure it is profitable. To that end, if you could point me toward any online resources, or answer some of these questions, it would be greatly appreciated.
I will know how much my mortgage and taxes cost, and I will know how much rent I expect to bring in. I'd like to fill in the other unknown costs.
Depreciation: here in Minnesota, I see a lot of homes that are still around that were built over 100 years ago. Whole neighborhoods exist with primarily these super old homes. They still rent out for decent amounts. Brand new homes seem to cost about 3-4 times that price, so is it fair to say a house depreciates at 1% of its value per year?
Maintenance: I know maintenance costs vary greatly year to year, and from one house to the next. So if we assume everything is in good order (no upfront maintenance)... what's the average yearly cost for a typical 2000 sqft house? Anyone who owns a home at all, not necessarily income property, could answer this one. Any kind of ballpark figure, in dollars, or percentage of home value would be appreciated.
Insurance: Again, ballpark yearly figure for Minnesota (about as safe as it gets in terms of natural disasters and fires).
Property Management: Say I don't want to deal with finding tenants, answering their maintenance calls, evicting them if necessary, etc. etc. - how much would it cost to outsource this to a property management company?
Thanks!

chenda · Post by **chenda** » Sat Mar 10, 2012 1:53 pm

This link has some very interesting discussion about this:

http://www.mrmoneymustache.com/2011/10/ ... 50-2-rule/
Essentially the 50% rule says as a rule of thumb that in the long term half your rents will be needed to cover all your expenses e.g. vanancies, maintenance, tax, insurance, management etc etc. The 2% rule states that the rental market should support a monthly rent of 2% of the purchase price (+any refurbishment costs - in your case for both units combined)Finally, you should ensure the property is cash flow positive by at least 10%-12% if you were using 100% financing. If this property ticks all these boxes, you've definitely got a great deal.
The age of the property is irrelevant as far as depreciation is concerned in the long term. In my area there are houses built 500+ years ago which today are worth literally millions. What matters is how well it was initially built and how well its been maintained and modernised over the years. And of course its location.

Obadobadope · Post by **Obadobadope** » Sat Mar 10, 2012 9:42 pm

Thanks Chenda. That's exactly what I needed.

SadieGlass · Post by **SadieGlass** » Wed May 23, 2012 6:06 pm

wow, I just spent all morning at www.biggerpockets.com after finding it in the article above

secretwealth · Post by **secretwealth** » Wed May 23, 2012 10:37 pm

Since this has been dug up, I absolutely can't imagine finding a property anywhere that rents monthly for 2% purchase price. I can rent out my apartment in NYC at 1.3% purchase price, and that is an amazing feat for the city. The rent for a decent 1 bedroom condo in most metro areas is maybe $1,000 on average, but how can you find a 1 bedroom condo for 100k in most markets?
I imagine that 2% rule could work for single family homes more easily, but is there a big enough market to rent houses?

celliott · Post by **celliott** » Thu May 24, 2012 12:50 am

That 2% rule will vary greatly even in the same market. My income properties (all single family dwellings) Average 1 1/4%.
However, these were all fixers and while I base the above on the purchase price + repairs, you could never do that buying at market (although there are exceptions to every "rule"). Read on...
I find the older, smaller houses bought at a good price fetch some of the best rental rates if properly maintained. I have a small 420 sq. ft. studio house I paid 10k cash for that currently rents for $400.00 p/mo. It pays for itself every 3 years or so. Sweet deal. When I bought that one, it had already been remodeled and was sitting on the market with no takers.
As to depreciation, you depreciate the value of the structure for 27.5 years. Get the tax record and you divide the purchase price by the value of the land (non-depreciable) and the value of the Improvements (the building). With those percentages in hand, multiply the Improvement % by the purchase price, and divide by 330 months (27.5 yrs) to arrive at a monthly depreciation expense.
I find that setting aside 10% of gross rent for ongoing maintenance and 8% for vacancies assures I don't have shortages. Don't dip into that maintenance/vacancy fund, it will ALWAYS come back to bite you!!! Seriously.

Ego · Post by **Ego** » Thu May 24, 2012 3:36 am

http://realestate.patrick.net/ is great resource for real estate in general, though it is somewhat skewed toward California.

JohnnyH · Post by **JohnnyH** » Tue May 29, 2012 10:56 pm

This is probably a stupid question, but figured one of the landlords on here might know.
Say I have lived in my primary residence for 24 months and want to convert it to a rental. If I convert it to a rental on month 25 can I start deducting improvements/repair and still pay 0 capital gains up to $250k right?... Or are any improvements void, despite it being a rental?
In summation: does it make any sense to wait until the primary residence is a rental to buy expensive materials/commit to costly repairs/renovations?
So sick of the labyrinthine US tax structure, cursed time vampire cluster f... More and more I see it ending in me renouncing citizenship. /end rant

JohnnyH · Post by **JohnnyH** » Sun Oct 28, 2012 7:16 pm

Zillow has added free foreclosure listings(!)... Quite a few auctions in my area, that are strictly cash only. Virtually no retail buyers, but does attract cash whale cowboys C):{
Who I've seen bid auctions well over the original listing price just to prove a point to some guy they just met! XD

mikeBOS · Post by **mikeBOS** » Mon Oct 29, 2012 4:09 am

I've been to a handful of auctions and the properties always seem to go for 2 or 3 times what they go for in the regular MLS listings. In fact, I attended an auction for one of the houses I bought and it was bid up over $70k. Then I saw the property in the MLS six months later and I ended up buying it for $25k. Not sure why the auction sale fell through but it's a good example of the price differences.

JohnnyH · Post by **JohnnyH** » Mon Oct 29, 2012 5:54 am

I'd call it an absolute waste of time if I hadn't got a few deals.
Go* knowing you're wasting your time and with a max bid number under 70% of list. /repeat.
*calculate the cost of going: gas, time off work, annoyance, so on.

arebelspy · Post by **arebelspy** » Sat Nov 03, 2012 1:07 am

JohnnyH's advice should be tweaked. Bid 70% of ARV-costs. Not list. List is irrelevant. Many times they list for what the fist lien is, meaning if a house has a mortgage of 250k and is worth 100k, they list at 250k. Make sure you don't bid 70% of that.
mikeBOS, what you probably saw was the lien holder bidding up to the amount they owed. If no one outbids them, they take it back over and then resell traditionally as an REO (which you then purchased). The sale didn't fall through, it went through the normal foreclosure process.

mikeBOS · Post by **mikeBOS** » Sat Nov 03, 2012 3:08 am

@arebelspy Maybe so. I've seen auctions where the original lien holder bids their lien. But I've seen others where bidding wars appeared to get out of hand. But I'm just guessing from reading the crowd.

susswein · Post by **susswein** » Fri Apr 05, 2013 4:56 am

My advise would be to buy a triplex or fourplex, live in one of the units yourself, and do all your own management/repairs. Doing this you won't be even close to the 50% rule mentioned above. Over the last 6 years in my 4-plex I've been averaging closer to 20%, and the other 3 units are covering all building expenses including utilites and paying the mortgage, so my housing is free.
Three reasons to focus on 3-plex and 4-plex properties:
-per unit they're generally a lot cheaper than duplexes

- anything over 4 units puts you into a commercial loan

- if you have a vacancy in an owner-occupied duplex you're out 100% of your income. If you have a vacancy in your 4-plex you're only out 33% of your income.

JohnnyH · Post by **JohnnyH** » Fri Apr 05, 2013 5:39 pm

I've definitely come to appreciate density in rentals. Rentals within walking distance, that you can always keep an eye on are so much more desirable than those you cannot.

grendel · Post by **grendel** » Mon Apr 08, 2013 11:13 am

I just don't know what to make of the 2% rule and 50% rule. To me it's like saying "Make sure your dividend stocks produce 10% annual dividend and are never in danger of decreasing the dividend." It would be great but where can I find a property like that??? Perhaps this is a sign all the real estate I have looked at in the past 8 years is overpriced... but it seems quite possible to make a modest profit on some properties, just a smaller one than the rules imply.

JohnnyH · Post by **JohnnyH** » Mon Apr 08, 2013 3:57 pm

@grendel: With the effort and risks involved compared to passive investments, I really believe these are good baselines. I'm not touching a house for less than 10% return.
The best returns are where the houses are priced low, but the population and economy are stable/growing...
I just grabbed the HUD fair market rent 2013, for a 3 bedroom the range is $2701 in Honolulu to $691 in various counties in Kentucky. So:

HI: $2701/mo - $552,100* = 2.9% return after 50% rule

KY: $691/mo - $69,993* = 5.9% return after 50% rule

*2009 avg from citydata, actual returns would now be significantly lower do to housing comeback.
I'd bet in HI expenses will be in the 33-66% of rent range, but in KY they'll be in the 10-30% range... Extreme examples but you get the idea: rents are determined by income not housing costs. Desirable, densely population areas with high competition, low growth and many government interventions are where the worst returns are in my experience... But if you get a few uneventful decades and the market explodes you hit a tiny jackpot; sell your rental and retire.

secretwealth · Post by **secretwealth** » Mon Apr 08, 2013 4:51 pm

I agree with grendel. Those numbers are pretty much impossible to achieve--a 10% return isn't so difficult to get, but the 2% rule is a very high bar.
Here in NYC that would mean getting a one-bedroom condo for $200,000. hahahahahaha

Seneca · Post by **Seneca** » Mon Apr 08, 2013 5:10 pm

Yeah, that's the problem with RE rules of thumb. It's the same problem in the Silicon Valley- a $700,000 house will rent for $2200-2500, tops.
I've only casually been watching as we're not ready to buy rentals yet, but the Boise area is much closer to those numbers.

JohnnyH · Post by **JohnnyH** » Mon Apr 08, 2013 5:23 pm

Yes, 2% rule is tough. Even 1% is tough in most places... To meet 2% you have to either do significant work, and/or avoid retail MLS market.
The highest ROIs are definitely on the bottom end... Maximum Return Slumlord, coming this Fall to the Learning Channel.