“Will This Property Make a Good Rental?”

Sometimes even savvy investors fall in love with a property, but before you commit to purchasing, please please please do a property analysis to help you make an informed decision. There are two basic ways to make money with rental properties: 1) cash flow and 2) building equity. Most real estate investors focus on cash flow, but if you are committed to long term investing, you should also look at how equity will build over time.

Many new real estate investors (REIs) only look at the projected mortgage versus the rental rates for their area. This can be a costly mistake. There are many factors REIs should consider before deciding to purchase a property. What is current mortgage rate for an investment property? (As of the date of this post, I am told it is approx. 5.725%.) How much cash will you need as a down payment? (Again, as of this post, most mortgages for investment properties require 20% down.) What are the property taxes for an investment property? Depending on where you live these can vary drastically from owner occupied to investment properties. What does mortgage insurance cost for rental properties? How much should you set aside monthly for Maintenance (broken water faucet) and Capital Expenditures, aka CapEx, (new roof or new HVAC)? These will vary depending on the age of the home, but typically run between 5-10%. How much are the property management fees (if you are not self-managing)? These also vary by company but generally fall between 8-12% of the rent per month. And finally, are you accounting for vacancies? We normally recommend a 5-7% vacancy rate depending on the history and location of the property.

As you can see already a lot more goes into REI accounting than just the rent minus the mortgage equals the profit. Let’s look at a fictional house that is on the market for $105,000. It is in an area where the monthly rental income is $1,350. We will make assumptions as indicated in the paragraph above: Purchasing as an investment property with a 5.725% rate, 20% down, and you are planning to do some minor upgrades (paint, light fixtures, etc.) for $5,000. So with down payment, estimated closing costs and minor repair costs, you are looking at $30,000 total cash needed, which brings your loan amount to $84,000 for a 30 year fixed rate loan.

For simplicity sake, we will estimate the following monthly expenses: Mortgage ($488.87), Insurance ($83.00), Property Taxes ($166.00), Maintenance at 5% ($67.50), CapEx at 5% ($67.50), vacancy at 5% ($67.50) and we found a really cool new property manager who is offering 8% to all clients who sign management agreements during their first year of business ($108.00.) Your rent is $1350 and adding up all the expenses, the total monthly expenses are $1048.37, which leaves you with $301.63 per month in cash flow. Most seasoned REIs will tell you they want to see at LEAST $200 in cash flow per month on a property. So after conducting the rental property analysis, this looks like a solid cash flowing property.

What makes this fictitious (but completely plausible) $105,000 single family home an even more attractive to me is the equity gained over time. Assuming 2% property value increase (which in all reality is closer to 3% in our current housing market), this home will be worth $394,839 at the end of the 30-yr mortgage getting you a solid annualized total return of 9% if you sell the paid off property. An average 401K return is 5% to 8%, so to me, this looks like a solid long-term investment as well.

As you embark on your real estate investment journey, we would love to be of service to you. Racine Properties, LLC provides FREE Real Estate Analysis on properties you are interested in purchasing. As you will see in future posts, we believe it takes a TEAM to create successful real estate portfolios. We’d love to be a part of YOUR team!

How to fund your first rental property

“I want to buy my first rental property, but how do I pay for it?”

It is REALLY easy to get caught up in the excitement and anticipation of owning a slew of rental properties and quitting your W2 job and traveling the world when you have enough properties to give you financial freedom. Whew! But how do you get from here to there?

Hopefully, you started by doing your homework and defining your goals and developing your real estate investment strategy. If you have done those things and narrowed down the market where you would like to make your purchases, then the next step is to figure out how to fund your first purchase. There is a myriad of options for you to consider, but I will briefly highlight some of the most popular ones for new investors to use. (And then you can do more homework to dig into the ones that interest you!)

Inheriting property. Many people inherit property when a family member passes or when it becomes necessary for them to live with family or in a care facility. If this describes your situation, then work with a property manager to prepare the property for renters (stay tuned for Blog #5 in this series) and boom you have completed the first step to building your real estate portfolio!

Cash. If you have been building your savings and are ready to use it to start building your real estate portfolio, then you may want to use your own cash to finance the purchase of your first property. By working with a realtor, a wholesaler, or directly with property owners (FSBO) you can negotiate the deal, pay cash, use a lawyer to close the deal and then rent it out. Many real estate investors do this and then acquire a mortgage on the rented-out property and use the equity in their property to purchase subsequent properties.

House Hacking. If you do not currently own ANY properties, you can purchase your first property (single family or multifamily) using a low-down payment FHA or VA loan programs. For 0-3.5% down you can purchase a property and live in it yourself. The important thing to know…you must live in the property for at least a year. If it is single family at the end of that time, you can stay in it or purchase another property and rent this one out. If it is a multifamily property, hopefully you place tenants in the other unit/s and can use the extra income to make a down payment on another property.

Seller-Owner Financing. Finding seller-owner financing today might seem like hunting for unicorns, but it IS out there…you just have to look for it. Be prepared to provide a down payment and to possibly have a shorter loan period with higher interest rates. I also would highly encourage you to have your own lawyer to represent you in reviewing the mortgage document and deeds of trust.

Other people’s money. Many new investors seek out a seasoned real estate investor for mentorship and guidance as they grow their portfolios. As relationships are built and your reputation and networks grow, you can seek private investors to fund your real estate purchases. This is a good option for people who are really good at finding the deals but don’t have the cash or credit to fund them. Approach other investors who do have the cash and use their money for either a percentage of the return or agreed upon interest with repayment.

Regardless of which method you use to acquire your first rental property, the key to becoming a successful real estate investor is to buy your first property...so START now!

Finding the "Perfect" Rental Property

“How Do I Find the Perfect Rental Property to Invest In?”

My Dad owned rental properties for most of my adult life. How did he find them? He was an HVAC technician and his customers loved him. Most of his rental properties fell into his lap through relationships he made while out on job sites. He was known for his incredible work ethic, his fair prices, and his winning personality. Because he always took the time to get to know his clients, he often found out about homes being put up for sale before they ever hit the MLS. Unlike my Dad I have spent the majority of my adult life moving every 2-3 years while serving in the military and don't yet have the network my father built over a lifetime of working in the same community. So whether you are like me and are building your network in a new area or if you have lived in the same area your whole life but never focused on building a network, we can still find the right properties to add to our real estate investment portfolios!

Define Your Criteria. Do you know where you want to start buying properties? Are you interested in a certain city or a certain neighborhood? Do you want to purchase single family or multi-family properties? Or do you want to focus your portfolio on downtown apartments and townhomes or lakefront properties? Having a solid idea of the type, location, and size of properties you are interested in will be extremely helpful in narrowing in on properties that fit your criteria. This will also help you to articulate your criteria to others who are helping you in the search process!

Drive Around. Drive around and get to know every single street in the areas where you are interested in investing. You will notice the homes that look a little less updated than their neighbors. You may notice homes that appear to be empty. Often as families are deciding how to take care of aging parents and grandparents there is a time where their homes will sit empty while decisions are made. Write down addresses as you drive around and look up the owners’ information on the county tax assessor site. Direct mail and/or cold call the owners of the properties you find and ask them is they are interested in selling their property. During your drives you will also likely come across For Sale By Owner properties that are not even advertised on the MLS.

Build Your Network. It is a GREAT time to buy and sell homes in the Greenville and Easley housing market areas. Interest rates are low, and a lot of people are moving to our beautiful area. Finding a diamond in the rough to turn into a rental property can be exceedingly difficult for individuals looking to build their real estate portfolios. Spend a little time building your network with like minded people. Maybe an opportunity you find isn’t the right one for you, but it is perfect for another investor in your network. Find a real estate agent you trust to create a search for properties that fit your rental property profile. They have unlimited access to the MLS and are often GREAT networkers who find out about properties before they are even posted on the MLS. You can also search your area for Wholesalers. Wholesalers are known for finding gems that never hit the market and with a little hard work you can turn these properties into lucrative rental investments.

Check the Numbers. Before you fall in love with a particular property, conduct a rental property analysis. Racine Properties, LLC provides Rental Property Analysis as a free service to our clients. We will compare you investment (both the loan and any renovations), the after repair value, the rental income, the monthly expenses and provide a detailed report of the Return on Investment and/or the Cash on Cash Return on Investment (CoCROI). Please please please run the numbers before you spontaneously purchase what you THINK is the perfect rental property.

Whether you are lucky to invest in a neighborhood where you have already built a great network or whether you have to work hard to find properties that will earn you the highest CoCROI, with a little time and hard work I am sure you will find the perfect rental property for your first real estate investment or to add to your existing portfolio. Next week we will explore ways to fund your current or future rental property investments!