I’ve mentioned previously that I made an offer on a third rental property and ran some numbers. I’m closing today on the property and have received the final HUD statement. I’d like to compare the final numbers to my estimates.
Here’s my original estimated numbers (changes in red):
Single-Family Home (built 2002)
3 beds/ 2 bath
1260 sq ft.
Purchase Price: $136,200
Down Payment: $34,050 (25%)
Interest Rate (4.75%/30-year fixed, but I’m still shopping) (I’m getting 4.5% now)
Monthly Costs:
HOA – $0
P&I – $532.86 (517.58, $15.28/mo cheaper)
Property Taxes – $254
Insurance – $68.10 (estimate) ($79.67, $11.57/mo more)
——————————
Total $854.96 ($851.25, $3.71/mo cheaper)
Rental Estimate:
$1300
Maintenance/Vacancy Costs (15%):
$195.00 (estimate)
Free Cash Flow:
$445.04
ROI (includes 3% closing costs plus 15% maintenance/vacancy):
8.08%
NEW ROI (includes exact closing costs of $2111.14 plus 15% maintenance/vacancy)
8.19%
I found out there were a few repairs that needed to be made. The seller agreed to give me a $2000 credit towards closing costs. I also received an estimate from a contractor for $1000 to fix these items and there’s a few I can fix. So I should get an extra $1000 when everything is done.
My closing costs are $3111.14, subtracting the $1000 gives me $2111.14 in total closing costs.
My new cash on cash return is: 8.19%.
So these numbers are a little better than expected if I can get at least $1300 for rent. This is mainly due to the seller offering to pay $2k towards repairs and already having a recent survey. The other good thing is that the house is practically move-in ready. It needs one move-out cleaning and a little bit of painting. The previous owner is leaving the washer/dryer plus fridge which are all still in great condition. The seller is also paying for a year of home warranty coverage. Most sellers tend to offer this in this day and age because it’s very likely that at least one appliance will malfunction at some point or another. All I can say is that it’s a good job that real estate professionals can be pointed in the direction of somewhere like First American, who appear to have some of the best home warranty plans out there, so that everyone has the chance to protect their appliances. The home warranty plan averaged at a good price too. The value of this was $475.
I don’t see myself having trouble renting this place quickly. I’m meeting a painter and contractor that will be doing the repairs tomorrow and the work should be finished by Sunday. I plan to list the property on Monday morning. In case any more maintenance works comes up, I could probably check out a local website that caters to my specific requirements.
My plan is still to have half my investments in equities and the other half in real estate. One of my goals this year was to add a third rental which is now done. I will be sure and post more updates as they happen.
Thanks for all the details! With my cursory calculations I hadn’t considered yet factored in “maintenance/vacancy costs” and I would not know what value to give it if I had. Thanks!
Wallet,
No problem, I’m glad that helps you a little. A lot of people factor 20% for maintenance/vacancy but I’m using 15% since I’m buying new homes and the rental market is so strong.
Take care!
A 3 Bed 2 Bath for $136K? That is depressing….my wife and I have been looking for a house (about the same size) and we have a hard time finding something for under $500K unless we leave the city and go to the suburbs.
Good to see these numbers…thanks for sharing
regards
R2R,
Well technically it is in the suburbs, It’s about 30 minutes outside of the city. It’s still a fast growing area though. Yeah the same house downtown would be around 500k also.
Thanks for stopping by!
Numbers look great man. At some point I kinda envy you having rental properties. But I am scared of dealing with tenants and renting stuff, taking care of all stuff. The reason is that it cost money and I do not have them. Fixing an options trade or stock trade is a lot cheaper for me than dealing with fixing a broken thing in a house. Like you said, you needed to fix something and it would cost 2k. I even hate fixing anything in a house no matter what it is.
Martin,
So far I’ve mostly had good experiences so I’ll keep my fingers crossed. I understand what your saying, there’s not any physical labor involved with our stock investments. I think we do pay a premium for that though. That’s why I’d like a mix of both. You can also get a home warranty plan if you don’t want to worry about a large one-time cost for an A/C unit or something.
Take care!
Pretty solid rental scenario AAI! The beauty of investing for cash flow is that your returns don’t include any potential appreciation that might occur down the road should you decide to 1031 the property or sell it outright. Best of luck getting tenants next week!
w2r,
Yeah I moved a little further out to get some better cash flow. I’m probably going to target an 8% or better cash-on-cash return going forward. That’s true, with the population growing here so fast, I think this house could have some major appreciation down the road. That would just be icing on the cake! Thanks alot!
Cheers