still a good time to buy rental property?

[Echoooo]

Price has gone up but is it still a good time to buy rental? interest rate still low, cash buyers are out, more inventory, maybe looking at long term, it is still a good time to buy. The question is where? I would like to leverage on low interest rate, so financing is preferred. Relatively low maintenance, stable tenant, positive cash flow. Not far from North County. Where to look? I have about $150K-200k to invest.

[Jazzman]

The question you need to ask is what do I want from it? Cash flow to break even and hope for appreciation? A rental checks to supplement my income.

Here’s some guestimates

Price Paid $150k
Rent $1,500 a month

Costs
Landlord Insurance $125
HOA’s $400
Property tax $125
(Mortgage) $600
Vacancy rate $125
Repairs $75
Miscellaneous $25
Total $1,475

Net cash $25
Cap rate 0.02%
ROI -/+6% (will depend on whether you think prices are going to go up this year or not. Jury is still out on that one).

Many assumptions built in here, but aim for a rent ratio of one ie for every $100k invested, you need $1,000 rent per month. Allow 50% of rental for costs (excluding mortgage), and you should break even …if you manage it yourself. For SFH you don’t have HOA’s, but you will have to budget for Capital costs.

[Coronita]

Where? In Mira Mesa? no…

Some friendly advice.. This sort of business isn’t something a person wakes up one day and says “hey , I want to buy a rental property and make money right away…”

It’s really a slow moving process, wait and see process….Especially right now….You won’t get rich overnight.. Look at it like you would look at a CD, with slightly higher returns…But also more risk (though people tend to underestimate that)….

You should spend your time getting familiar with the current prices of possible rentals in possible areas, and what people are paying for rent…..

[Echoooo]

we have some cash to invest and I don’t need income from rental now. 10 years later, maybe. We have higher family income so tax break from rental is nice if possible. in 10 years, my kids will start college. It will be nice to help them with some rental income. Condo or SFR, not sure which has more advantages in our situation.

[EconProf]

Some observations about your guestimates:
The price to rent ratio looks awfully optimistic. Are you sure you can get that high a rent on a $150,000 property?
Landlord insurance looks way high. If it is a condo, why do you need insurance at all?
Property tax will be at least 1.2% of value, or $150/mo.
If your mortgage payment is $600/mo, at least $100 of that will be principal payoff, which is a form of forced savings, or, actually, income, just not cash income.
Glad to see you factored in vacancy cost, repairs, and misc, and put them on a monthly basis, even though they happen infrequently. Many beginners overlook these expenses.
As flu suggests, the long run is what counts, and it depends mainly on the rate of appreciation of the property. The big money in rental real estate is historically made, or lost, due to property values changing over time, not cash flow.

[NotCranky]

If I were one of the lucky young people who bought a “starter home” at the bottom with a good down and good prices and maybe refinanced to an excellent rate…I would probably be considering renting that out and buying another house to live in.

[Coronita]

[quote=Blogstar]If I were one of the lucky young people who bought a “starter home” at the bottom with a good down and good prices and maybe refinanced to an excellent rate…I would probably be considering renting that out and buying another house to live in.[/quote]

+1

[Coronita]

[quote=rcfe]we have some cash to invest and I don’t need income from rental now. 10 years later, maybe. We have higher family income so tax break from rental is nice if possible. in 10 years, my kids will start college. It will be nice to help them with some rental income. Condo or SFR, not sure which has more advantages in our situation.[/quote]

I’m assuming you’re contributing to a 529 plan already then….

[Echoooo]

actually not. we have heard different theories of 529. main disadvantage is limited portfolio choice, poor performance and decreased chance of getting financial aid. We are not qualified for any aid anyway based on family income.

[SK in CV]

[quote=rcfe]actually not. we have heard different theories of 529. main disadvantage is limited portfolio choice, poor performance and decreased chance of getting financial aid. We are not qualified for any aid anyway based on family income.[/quote]

529’s have pretty much the same portfolio choices as self-directed IRAs.

[Coronita]

[quote=rcfe]actually not. we have heard different theories of 529. main disadvantage is limited portfolio choice, poor performance and decreased chance of getting financial aid. We are not qualified for any aid anyway based on family income.[/quote]

I’ve been pretty happy with my kids 529 plan @ vanguard…. Passive indexes slow and steady.. I use the Nevada plan, since I don’t like the CA one that isn’t done by vanguard, and there is no state tax benefit with a 529 in CA

But like you, we wouldn’t qualify for financial aid anyway…So that negative is a non-issue.

I think the only drawback is if you have one kid and your kid doesn’t go to college……In my case, I would be screwed…

I would plan on property funding your retirement when you’re not working, no so much as funding your kid(s)’ education which is probably more of a nearer term….

I started put more emphasis on property simply because I had too much counting on the equity markets, so it was my way of diversifying. It’s not without risks too…So it’s not exactly “easy money”….

[spdrun]

Landlord Insurance $125
HOA’s $400
Property tax $125
(Mortgage) $600
Vacancy rate $125
Repairs $75
Miscellaneous $25
Total $1,475

You’re high as far as rent. I’d guess $1300 maybe. As far the rest, I’d say:
* HOA shouldn’t be above $250
* Property tax will be $150 (1.2% of 150k) / 12 mos
* Repairs won’t be $75/mo if you fix it right in the first place
* Insurance will be about $20 per month. HOA covers the buildings themselves. Landlord’s insurance is basically liability. Choose a number slightly greater than your net worth.

After adding vacancy and unexpected costs, you’ll likely end up with 6-7% assuming no mortgage. (Cash on cash, which provides a good way of comparison.)

[Jazzman]

[quote=EconProf]Some observations about your guestimates:
The price to rent ratio looks awfully optimistic. Are you sure you can get that high a rent on a $150,000 property?
Landlord insurance looks way high. If it is a condo, why do you need insurance at all?
Property tax will be at least 1.2% of value, or $150/mo.
If your mortgage payment is $600/mo, at least $100 of that will be principal payoff, which is a form of forced savings, or, actually, income, just not cash income.
Glad to see you factored in vacancy cost, repairs, and misc, and put them on a monthly basis, even though they happen infrequently. Many beginners overlook these expenses.
As flu suggests, the long run is what counts, and it depends mainly on the rate of appreciation of the property. The big money in rental real estate is historically made, or lost, due to property values changing over time, not cash flow.[/quote]
I was really pointing out what rent would be needed to cash flow, rather than is achievable. All the other numbers are guestimates as well, but give some idea of what to look for. You definitely need insurance which covers you for liability. The other question is risk and return. The lower the end of the market, the higher the return, but risks increase. Homes are also often older and can swallow a years net income with just one capital expense. I personally have not invested in CA, because I’ve never been able to find my benchmark cap rate. You might have been able to on the court house steps a few years back.

[Coronita]

The stock market these days is more like a casino.

Not that there’s anything wrong with it… But personally, I’ve seen the light and understand why one wouldn’t want to put everything in there….Especially as one gets older.

[UCGal]

[quote=flu]

I’ve been pretty happy with my kids 529 plan @ vanguard…. Passive indexes slow and steady.. I use the Nevada plan, since I don’t like the CA one that isn’t done by vanguard, and there is no state tax benefit with a 529 in CA
[/quote]
This – all of it.

That said – we’re switching our investment, this year, to ROTH IRA so we have more flexibility.

If they do Jr. College or don’t go to college, that can be used for our retirement.

We used to be income restricted, but that has changed and we qualify for Roth contributions again.

[Author]

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