Monthly Rent To Purchase Price Ratio
hi all -
i have been buying some rentals, and i am trying to keep my monthly rent to purchase price ratio to 1%. for instance, my last purchase was for $175,000 and the signed lease for 1 year was $1750 a month. it needs about $2k worth of deferred maintenance, but according to my spreadsheet, im getting a pretty nice return on my 25% down payment.
my primary goal for these first couple of units is extremely solid cash flow.
can anyone comment on the 1% ratio that i described? first of all, is that a meaningful relationship between those two numbers? and second of all, if it is an informative ratio, is the 1% a good number?
If you are really interested in understanding cash flow buy the book What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli. It gave me a much better knowlege of how it works (link below):
http://www.amazon.com/exec/obidos/tg/detail/-/0071422579/qid=1127949358/sr=8-1/ref=sr_8_xs_ap_i1_xgl14/103-1656570-4295038?v=glance&s=books&n=507846
As an offshoot to the 1% question -
When working up the numbers for a potential rental purchase, how much should generally be calculated for vacancy and maintenance?
And do those numbers change if the property is multi-unit vs. single-family houses?
Thank you.
Quote:
On 2005-09-29 13:00, Fourman wrote:
When working up the numbers for a potential rental purchase, how much should generally be calculated for vacancy and maintenance?
i would think both items are highly market and specific property driven.
im using 8% for vacancy (1 month a year) and 3% for maintenace. i have a 2 year old house that probably doesnt need much repair budget (yet) and a 10 year old that will probably need more. i walked into both properties with a 1 year signed lease, so i have a good amount of room for my vacancy numbers.
anyways, with those numbers in my spreadsheet, i still see 30%+ return on initial investment on both properties (20 and 25% down). itll be interesting to see if i can really hit those numbers.
AWESOME! Hope you like the book.
Quote:
just ordered. looks very good. his excel tools like pretty nice too. anyone used them? ive cooked up a pretty decent one myself that i have actually paid a CPA to review. but something polished would probably make sense.
The national average for vacancy is 5% and I assume another 5% for maintenance.
Thank you for the responses to the vacancy/maintenance question. 10% combined is generally what I have heard, which is right in line with your responses, as well. Thank you again.
I was also interested to see the responses on the 1% ratio. Here in Connecticut, I am finding it fairly rare to see multis where the stated rental income is 1% or greater than the asking price - and yet they are selling! Hope those buyers are in for the very long haul, or I think they could be in trouble.
Any other feedback on this - is it the local HUD office that has a list for the city rates or is there another source?
"Bond for a Deed" please explain.
Yes I have heard of this type of arrangement but never had to enter in one..Did you have an attorney when you made the purchase? What type of document do you have? Have you been living or renting this property? have you had full responsibility for the up keep? The good thing is that when you do pay up what you owe the owner you will have the equity in the property that will help you get a mortgage easier and faster. When you are ready to assume the Deet make sure you also get a Owners Title Insurance Policy. ( free of any liens) Hire an attorney, is well worth the money.
Some states call this a "contract for deed" and some a "land contract".
Generally, No you cannot refinance the property as you do not own it. You get the deed when the contract is paid in full ... until then you cannot touch "your" equity.
I learned this the hard way ...
You probably would be better off with a "Deed of Trust" or "Seller Financed Mortgage". I do not know what is available in Louisiana .... for all I know this may now be a moot point with the disaster there. If you are in a stricken area, I hope that you and your family are safe.
This is my informatino sheet that I give everyone who gets an application ...
Information that you need to rent the apartment
The apartment located at 1111 S Oak Ave Unit A, Sanford FL is ready now.
Rental Application
All persons over 18 years of age who will reside at the property must complete a Rental Application. Each application must be legible, complete, and include a photocopy of the applicant’s driver’s license. Incomplete Rental Applications will not be processed. Applications are normally approved or rejected within two days.
Processing Fee and Holding Deposit
The Rental Application(s) must be accompanied with a non-refundable Processing Fee of $30 for each adult and a Holding Deposit of $400. Funds must be in cash, money order, or cashiers check. The Processing Fee is non-refundable. The Holding Deposit is refunded if the application is denied. If the application is approved, the Holding Deposit is credited toward the security deposit upon signing the lease. If the application is approved but the lease is not signed by the agreed upon date, the Holding Deposit is retained to compensate for loss of rent.
Signing the Lease and Start of the Lease
Unless otherwise approved, the lease must be signed and the lease must begin within two weeks of the Rental Application approval.
Rent and Funds required to move in
The rent for the house is $600 a month with a $650 security deposit. The first month rent is prorated so that rent is always due on the 1st. The prorated first months rent + security deposit – holding deposit are required to receive keys and move-in. Funds required for move-in must be in cash, money order, or cashiers check.
Tenant Criteria: (1) Credit Check (2) Rental History (3) Income
Credit checks are run on all applicants. You must have decent credit. Generally, a FICO credit score of at least 580 is required. But the credit score can be adjusted as all negative medical credit and anything prior to five years ago will be disregarded. No credit history can be regarded as good credit.
You must have good rental history or good mortgage payment history. Rental history will be verified - so PLEASE do not falsify your rental history. Rental applications are verified against a national database that lists all previous and current addresses for each applicant and lists each property owner name and property owner phone number. If you falsify rental history you will waste money and I will waste time. So, PLEASE do not falsify rental history and PLEASE do tell your current landlord that you are moving out.
The combined monthly gross household income (income before taxes or other deductions) must be at least three times the rent. Income will be verified. For example - if the rent is $600 a month, the gross household income must be at least $1,800 (600 x 3 = 1800) a month.
If your credit check, rental history, or income does not meet the necessary criteria, then a double security deposit may be required.
Pets
Pets are not allowed.
Call me with any questions or when you have a completed Rental Application for each adult (including the photocopy of driver’s license) along with the Processing Fee(s) and Holding Deposit in cash, money order, or cashiers check.
Brenda Grossnickle
407-733-9999 Cell
It is not standard practice in my area either. But all the top notch landlords that I know require a holding deposit. My cousin who owns 150 rental in NC, actually has them sign the lease and collects the rent and security deposit, when he gives them the rental application. Then the lease says that it is contingent on the tenant being approved based on the rental application. So he does not get a holding deposit, he gets all the money right then.
Asking for money upfront definately cuts down on the time wasters. I would never do my full tenant screening without a holding deposit money. But then again, my full tenant screening takes me about 1.5 hours and can warrant an "I was just in the neighborhood and could not read this one phone number" drive to their current address.
Brenda
Also, I require them to move in within two weeks. So if they do not have the money for the holding deposit now, how the hell are they going to come up with over a grand in two weeks?
Brenda
Above reply corret but even if you do get the blessing from the Town the money coming in will no where near pay your remodeling, taxes, Insurance, upkeep on top of the mortage? Think about renting the rooms out, no conversions, just as is. Call it your residence if possible to get a better mortgage. Are you able and capable to run it yourself? or would you depand on others.What condition is the property, do you have to do serious repairs? It is a lot to pay for a house in a bad area especially when you want income out of it. I would not rush in to it. Often if you have to think about something for too long it may not be the thing to take action on.
thank you very much. the house is currently in great condition. it already has 3 kitchens and only needs doors to be divided into 3 separate units. currently there are 3 people renting rooms on the top level which is one of the units that i speak of, each paying $300/2weeks. iof course i have to repaint the bottom two levels and rep[lace the carpet but do not see any need for major remodelling. does this make this deal sound any better. thank you for your advice.
Do you mean you get 1800./mo. by the top level only? how much more can you get from the 2 lower levels? Does each level have their own kitchen and baths?
I suggest you go and check the file at the Town hall for this property for any pending violations. Talk to the building inspector and check the fire codes. It may look good to you but unless it looks good to them you do not know to what extend you have to remodel. Have you records from the present owner for utilities and up keep out goings? I have a similar house that I paid $135,000. put $50,000. and I collect $3000./mo. You are talking 365,000. and less income. I just do not see how you look at this as a "Deal"
I can get at least $2000 for the other 2 levels. I know the price is high, but southeast washington dc is undergoing some major renovations with the baseball stadium coming and the rehabilitation of the dc waterfront so I am expecting a great deal of appreciation. there is one kitchen on the upper level, one on the main level, and 2 in the basement
again, just make sure it is legal to rent to three different families and that three seperates kitchens are legal. just because it has been done in the past, does not make it legal. All you need is for one neighbor to call code enforecement and they could make you take out two of the kitchens.
Brenda
Have you also factored in the cost of vacancies and maint? The national average of these I believe is at 5% each for a total of 10%. That changes your cash flow a lot.
My thought has always been to do major improvements just before I sell and not while tenants live in the units. No reason to spend the money to let tenants trash it.
[addsig]
I would do the work now rather than later. What if you decide to sell before the 5 years,besides any money you spend is tax deductible if you claim repairs rather than improvements. I found that good tenants are willing to pay higher rent for a nicer and pleasant www.apartment.Go for it.
Konte - the modifications he is talking about are NOT expensible. They are capital improvements that he must capitalize and depreciate over the useful life of the assets. All real property improvements will be depreciated over 27.5 years.
I hope that you are either getting a property manager or intend to get educated on becoming a landlord - otherwise you are closing your eyes and rolling the dice with a 250k investement.
Couple of thoughts:
1. Are you planning on managing it or hiring?
2. How do you plan to show it to land your tenant or having realtor find tenant? Will you be in that area?
3. Did you research your market rents for the area and know that you are asking for market rent?
4. Is there a good need for rentals for that market?
In my experience, there are more people who would gladly take a 2 yr. lease IF you are on market rent. Run your ad now so you can talk to lots of people and make your list of people interested in 2 yrs. If AFTER you have talked to people you find that you need an incentive, pick your prospects and see what it will take. And remember, a great tenant will help you land your next tenant if you have a good relationship. IF you must give free rent, much better to give it at the end!