Should we buy a rental property? (liquid cash, fees, mortgages, invest)

[aslowdodge]

Originally Posted by tommy64

If you could cut the maint cost and/or squeeze a little more in rent per month it'd net the "magical" 10%. You're close.

Why is 10% magical?

[SouthernLCPM]

Originally Posted by aslowdodge

Depending on how aggressive, how does it look if you put down less and buy 2.

Please excuse my ignorance. I have zero experience in this and this why I'm here.

Why would buying two be beneficial? Is it for the cash flow or for the asset net worth when paid off?

We were thinking of buying one and seeing how it goes before buying another in a couple of years. After all bills, retirement etc we have about $2500 left over each month. Just trying to figure out the best use of the money we currently have and plan for the future.

Would we be bette off sticking that money into our 401ks or what? I was leaning towards the rental to diversify some.

[SouthernLCPM]

Originally Posted by aslowdodge

You need to check if there is a cap of any sort. Some allow only a percentage to be rented out and if they reached itbyou might not be able to rent yours

Great advice here. Would this be a question that would need to be directed to the HOA or who?

[tommy64]

Originally Posted by aslowdodge

Why is 10% magical?

if it cashflows 10% return on invested capital in year one, I think that is pretty magical, don't ya think...?

[aslowdodge]

Originally Posted by SouthernLCPM

Great advice here. Would this be a question that would need to be directed to the HOA or who?

Don’t ask the hoa, you need to get a copy of the bylaws and if it is mentioned that there is a percentage find out 5he current status.
I once almost closed on a townhome that the realtor did not check this. I did and they allowed 20%. I asked where they were and they said 22% so no new rentals were allowed.

[aslowdodge]

Originally Posted by tommy64

if it cashflows 10% return on invested capital in year one, I think that is pretty magical, don't ya think...?

I just wondered if that was a benchmark of some sort.
I try to target 13% based on cash flow but try to get more on the fix up. Many of mine picked up 40 to 50% in the first two months after closing and fixing up.

[aslowdodge]

Originally Posted by SouthernLCPM

Please excuse my ignorance. I have zero experience in this and this why I'm here.

Why would buying two be beneficial? Is it for the cash flow or for the asset net worth when paid off?

We were thinking of buying one and seeing how it goes before buying another in a couple of years. After all bills, retirement etc we have about $2500 left over each month. Just trying to figure out the best use of the money we currently have and plan for the future.

Would we be bette off sticking that money into our 401ks or what? I was leaning towards the rental to diversify some.

Leverage. You need to pay with numbers and run hypotheticals. You might find that getting 2 with no profit yield more over the long haul.
Are you in an appreciation market?

[artillery77]

From a numbers standpoint, you guys look like you're in good shape. The rental acquisition also looks good from a numbers standpoint. I'd pencil in $5-10K to go through and make it look nice after acquisition.

2 Things to ask yourself that aren't numbers.

1. Do you have a source for getting renters? Renting in that price range gives you a good CAGR, but you have to think most people would be able to make that downpayment...you're renting to the ones that can't.

2. Do you have a source for fixing up the property at a reasonable rate? Stuff will break and you want a person (IMO) not a company that's got a ton of paperwork and minimums for service calls that are unreal.

Also, many will disagree, but letting the property pay itself off a little early is a great way to approach this. That way you don't let the new income float into more expensive hobbies. If you're unemployed later, a paid off rental can help put you at ease as opposed to adding to your worries.

Plus, your debt to income ratio may get too stretched to buy another rental if you don't pay it off. Most banks will cap at 45% if you push them, but they'd rather stay below 40.

Also, on the 401K, depending on who makes what, you may want to review your 21% rate or so you don't max out early and then lose the match for the last couple of months. Each of you can contribute $19,000 this year. Some employers also allow you to fund a Roth which gives you a little more room for OT overflows.

Finally, let's look at those assets again:

As of now our assets are:
$11k liquid mix of CDs/Cash - Partially Liquid
46k in my 401k - Not Liquid
88k wife's 401k - Not Liquid
3k in mutal funds. - Likely Liquid but volatile
59k equity in home - Not Liquid
$35k in cars (3, selling one shortly for $26k. Have a company car and no need for so many..my wife works from home etc) - Generally not liquid and poor at retaining value

If your home mortgage minimum is $~1,250 a month, and then you have insurance, food, utilities, gas etc...perhaps a ballpark amount of necessary expenditure (not including rentals as that's covered) is maybe $2500 a month...you'll know better. Assuming the $11K in cash/cds is liquid, you've got 4 months of coverage. For a 30 year old, that's pretty good, but if $10K of that is locked up in a 5 year, then you have no emergency cash.

Figure your emergency cash as how long it would take either you or your spouse to find a comparable income in the event that yours was lost. If you're position exists in all companies, maybe it's not too long. If you're a neural transmission researcher focused on optics....you may need to have a big liquid warchest.

You can still benefit from CD's, and part will depend on the buy line when CD's start to be actually attractive. However, if I know that I'll need $2500 a month, This month you could buy a 4 month CD for $2500, same next month, the month after and after.....now you've got short term CDs but are still liquid. If you can add a month, you can go to 5 months..etc. That's called a CD ladder. You want it big enough so you can get from job A to B with no worries, but not too big as it generally under-performs other investment opportunities.

Also, don't skip on insurance. It's a defensive move, but one you should learn. It starts getting expensive fast as you age.

Finally...don't wait too long to have kids. It's never going to be easy. It's never the right time. They are terrible financial investments...but the best thing you can do to have a great family and life.

All the Best

[Submariner]

In the past, my Dw and I have owned four Multi-Family-Residences [Triplex, Four-plex and Five-plex properties] each of them were owner-occupied. We knew at the time that by being owner-occupied we were avoiding many of the problems of owning rentals.

In 2016 we purchased a mixed-use Commercial/residential building for $165k. Since then we have poured another $235k into remodeling it. We are nearing completion and we are now in the final stages of inspections for the Certificate-of-Occupancy. The 'Rental Property Calculator' given up in post #2 shows that our projected 'internal rate of return (IRR)' should be around 12.5%

We have never operated a property before where we did not live on the property, so some of this is new to us.

We are seeing that by living remotely the city building inspector and fire marshal do seem to treat us more harshly, as compared to previous properties where we lived onsite.

[tommy64]

Originally Posted by aslowdodge

I just wondered if that was a benchmark of some sort.

My personal benchmark. That kind of cashflow helps me sleep. Any dollar that won't yield that number gets plowed into the SP500.