Rental Property Advise – Piggington's Econo-Almanac

This topic has 15 replies, 4 voices, and was last updated 13 years, 3 months ago by EconProf.

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June 17, 2011 at 12:46 AM #18872

boyle_heights
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There is a 2 unit property on my block that came on the market for $165k. The front house is a 2/1 and the back house is a 3/1. I currently rent a 2/1 for $700. In this area 3/1 rentals go for $900-1200.

I was planning on moving to a rental closer to work since I cannot afford to buy in LA’s westside. However, the possible income had me considering this property. Would this be a good purchase? Assuming I put down 15% down? I would consider living in the front unit for 6 months but prefer moving closer to work. I realize 20% down, or 25% for a rental, would be ideal. Since I was planning on waiting to purchase I used the cash I had to pay off my remaining school loans and paid off my car.

Thanks in advance.

June 17, 2011 at 7:30 AM #704268

NotCranky
Participant

I have good friend from Boyle Heights.When he was starting off he did the same thing you are talking about with his first purchase. When he started a family he rented both units,which were cash flowing well, and moved into a nice suburban home . He has several rentals now. Lots of headaches with them too …but he is doing pretty well.

The sacrifice you make by living in one as opposed to renting or buying yourself a nicer private place is a great hedge, your cash flow will be very good. I think it will work out well for you.

June 17, 2011 at 7:30 AM #704363

NotCranky
Participant

I have good friend from Boyle Heights.When he was starting off he did the same thing you are talking about with his first purchase. When he started a family he rented both units,which were cash flowing well, and moved into a nice suburban home . He has several rentals now. Lots of headaches with them too …but he is doing pretty well.

The sacrifice you make by living in one as opposed to renting or buying yourself a nicer private place is a great hedge, your cash flow will be very good. I think it will work out well for you.

June 17, 2011 at 7:30 AM #704953

NotCranky
Participant

I have good friend from Boyle Heights.When he was starting off he did the same thing you are talking about with his first purchase. When he started a family he rented both units,which were cash flowing well, and moved into a nice suburban home . He has several rentals now. Lots of headaches with them too …but he is doing pretty well.

The sacrifice you make by living in one as opposed to renting or buying yourself a nicer private place is a great hedge, your cash flow will be very good. I think it will work out well for you.

June 17, 2011 at 7:30 AM #705105

NotCranky
Participant

I have good friend from Boyle Heights.When he was starting off he did the same thing you are talking about with his first purchase. When he started a family he rented both units,which were cash flowing well, and moved into a nice suburban home . He has several rentals now. Lots of headaches with them too …but he is doing pretty well.

The sacrifice you make by living in one as opposed to renting or buying yourself a nicer private place is a great hedge, your cash flow will be very good. I think it will work out well for you.

June 17, 2011 at 7:30 AM #705464

NotCranky
Participant

I have good friend from Boyle Heights.When he was starting off he did the same thing you are talking about with his first purchase. When he started a family he rented both units,which were cash flowing well, and moved into a nice suburban home . He has several rentals now. Lots of headaches with them too …but he is doing pretty well.

The sacrifice you make by living in one as opposed to renting or buying yourself a nicer private place is a great hedge, your cash flow will be very good. I think it will work out well for you.

June 17, 2011 at 2:50 PM #704330

montana
Participant

Based upon my valuation with the basic assumptions that you provided (165K, 15% down, 1.7K in rents) along with very conservative future revenue and expense assumptions, along with a five year sell scenario, I can get an IRR of 11-12% which includes a passive activity loss yearly and positive cash flow, but, I can’t seem to get the capitalization rate north of 8% without really knowing the area that you are considering and the condition of the property. Most investors require a higher capitalization rate, but if you manage the rents properly and keep your expenses in check (including managing the property yourself if you are able), you can get that capitalization rate closer to 9%. Good luck.

June 17, 2011 at 2:50 PM #704424

montana
Participant

Based upon my valuation with the basic assumptions that you provided (165K, 15% down, 1.7K in rents) along with very conservative future revenue and expense assumptions, along with a five year sell scenario, I can get an IRR of 11-12% which includes a passive activity loss yearly and positive cash flow, but, I can’t seem to get the capitalization rate north of 8% without really knowing the area that you are considering and the condition of the property. Most investors require a higher capitalization rate, but if you manage the rents properly and keep your expenses in check (including managing the property yourself if you are able), you can get that capitalization rate closer to 9%. Good luck.

June 17, 2011 at 2:50 PM #705018

montana
Participant

Based upon my valuation with the basic assumptions that you provided (165K, 15% down, 1.7K in rents) along with very conservative future revenue and expense assumptions, along with a five year sell scenario, I can get an IRR of 11-12% which includes a passive activity loss yearly and positive cash flow, but, I can’t seem to get the capitalization rate north of 8% without really knowing the area that you are considering and the condition of the property. Most investors require a higher capitalization rate, but if you manage the rents properly and keep your expenses in check (including managing the property yourself if you are able), you can get that capitalization rate closer to 9%. Good luck.

June 17, 2011 at 2:50 PM #705169

montana
Participant

Based upon my valuation with the basic assumptions that you provided (165K, 15% down, 1.7K in rents) along with very conservative future revenue and expense assumptions, along with a five year sell scenario, I can get an IRR of 11-12% which includes a passive activity loss yearly and positive cash flow, but, I can’t seem to get the capitalization rate north of 8% without really knowing the area that you are considering and the condition of the property. Most investors require a higher capitalization rate, but if you manage the rents properly and keep your expenses in check (including managing the property yourself if you are able), you can get that capitalization rate closer to 9%. Good luck.

June 17, 2011 at 2:50 PM #705529

montana
Participant

Based upon my valuation with the basic assumptions that you provided (165K, 15% down, 1.7K in rents) along with very conservative future revenue and expense assumptions, along with a five year sell scenario, I can get an IRR of 11-12% which includes a passive activity loss yearly and positive cash flow, but, I can’t seem to get the capitalization rate north of 8% without really knowing the area that you are considering and the condition of the property. Most investors require a higher capitalization rate, but if you manage the rents properly and keep your expenses in check (including managing the property yourself if you are able), you can get that capitalization rate closer to 9%. Good luck.

June 17, 2011 at 6:43 PM #704378

EconProf
Participant

We really need a lot more info before giving you much advice. What is the neighborhood like? Are you in it for the cash flow or is there much appreciation potential? Rent control? Are you ready to become a landlord–handyman skills, thick skin, flexible hours, legal savvy, detail oriented? A lot of newbies underestimate the job.
In your favor is today’s remarkably low interest rate environment, especially as an owner-occupier of 1-4 units. The rate jumps for apts of 5 or more units, giving you a competitive advantage.

June 17, 2011 at 6:43 PM #704472

EconProf
Participant

We really need a lot more info before giving you much advice. What is the neighborhood like? Are you in it for the cash flow or is there much appreciation potential? Rent control? Are you ready to become a landlord–handyman skills, thick skin, flexible hours, legal savvy, detail oriented? A lot of newbies underestimate the job.
In your favor is today’s remarkably low interest rate environment, especially as an owner-occupier of 1-4 units. The rate jumps for apts of 5 or more units, giving you a competitive advantage.

June 17, 2011 at 6:43 PM #705066

EconProf
Participant

We really need a lot more info before giving you much advice. What is the neighborhood like? Are you in it for the cash flow or is there much appreciation potential? Rent control? Are you ready to become a landlord–handyman skills, thick skin, flexible hours, legal savvy, detail oriented? A lot of newbies underestimate the job.
In your favor is today’s remarkably low interest rate environment, especially as an owner-occupier of 1-4 units. The rate jumps for apts of 5 or more units, giving you a competitive advantage.

June 17, 2011 at 6:43 PM #705217

EconProf
Participant

We really need a lot more info before giving you much advice. What is the neighborhood like? Are you in it for the cash flow or is there much appreciation potential? Rent control? Are you ready to become a landlord–handyman skills, thick skin, flexible hours, legal savvy, detail oriented? A lot of newbies underestimate the job.
In your favor is today’s remarkably low interest rate environment, especially as an owner-occupier of 1-4 units. The rate jumps for apts of 5 or more units, giving you a competitive advantage.
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