Need advice on rental property business

You guys must be expecting to make a huge profit on that first house if you're only putting $18k down but expect to have a second property within a year based solely on profits from the first property. And your friends are probably seriously underestimating costs associated with maintenance on said house, even if it's brand new.

You need to ask them to breakdown their analysis of estimated occupation time across all units, rent income per unit, costs associated with maintaining each unit, how they plan on maintaining the property as well as the house itself, if they plan on renting to section 8/other subsidization programs, if they plan on paying some or all of certain utilities in each unit, etc etc etc.

Most people severely underestimate costs associated with a rental property and severely overestimate overall profit. Also, the more units in the house the more problematic things become because people just don't get along with each other and you have to worry about that many more different sets of utilities (boilers, water heaters, electric). And if it's a college town and the plan is to rent to college students that's a whole other ball of wax (which can be very profitable, but can cause severe devastation of your property as well).

There isn't a lot of money in single family rentals in most circumstances. I personally avoid them. With a mortgage and with 3 of you I can't see how it would be worth it for you.

Duplex is what you want with a quad or six family being the sweet spot. Any bigger and it can be a real PIA without a management company or on site super and when you get on the small side, say single family, the money generally doesn't work out unless your market has a huge short fall of rental properties and rents are high.

You need to do the math for yourself. You guys look to be using leverage in your plan and that is fine assuming you properly account for all the variables and leave yourselves a lot of head room. Something that will be difficult if you're looking to do just single family properties.

Mortgage principal
Mortgage Interest
Time left vacant
Taxes
Insurance
Maintenance

Are your big ticket items.

Don't expect the unit to be rented 100% of the time. Many people getting involved with this for the first time have very lofty expectations that simply don't work out in the real world. The unit is going to need to be fixed up, it will sit vacant between tenants at times and you will likely miss that in your budget.

You'll have to replace things, stuff breaks and tenants use things hard. So expect to have clogged drains, broken AC, broken toilet small stuff in addition to stains on carpet, holes in the walls, needing to repaint between tenants. Sometimes you get a good one and that stuff isn't necessary, often times they are pigs and don't give a shit about your property and its a mess. Its easy to say you'll keep the security deposit but in my experience its not enough to cover damages and sometimes you get double screwed and they'll move out and not give you the last months rent. Just make sure you have a plan to handle all this more so than "Joe is handy he'll take care of it".

You'll need a new roof every 15 to 20 years for most shingle roofs. You'll need to replace appliances every so often as well. Dishwashers are the most popular appliance I replace for some reason. Refrigerators tend to last forever as do the washer and dryers. AC's, when they start having issues, are incredibly expensive to track down issues and have maintained. We don't have a need for elaborate heating here but that can be another huge expense in cold areas.

If you want to do this right, go for a duplex or bigger. The extra rents more than off set the costs in most applications and you have much more budget head room when you're in between rentals, fixing things up or have other issues. Sweet spot is between 2-6 families.

I can't account for the taxes + running costs. However, occupancy rate of 95%+ is not really realistic. House one being sold under value, and house two only needing one single house inspection before finding the right house are also a bit off imo.

Budget to lose 10% of gross rent to: vacancy, property management, and property taxes. Budget to lose 10%-20% on maintenance and repairs depending upon the age and condition of the building. If you are not making a projected return of at least 10%, but preferably 20%, after subtracting these expenses it's a bad deal. Razor thin profit margins in real estate will bankrupt you.

Blazin_sl said:

If you can afford it, the returns from commercial property far outweigh the residential crap shoot which almost guaranteed to not work in the long run. Having said that I think the assumptions in your spreadsheet are reasonable. The issue of rental rate I can't speak to as I don't live there but that is very easy to verify. Houses are just constant money sinks. I own warehouse/industrial property and these types buildings can sit for 60+ years with minimal maintenance and you can get much better terms than a 1 yr lease from someone barely at the poverty line. I'll take the 5yr lease with 3 5yr renewal options from a $100M corporation every time. No matter where you live in the US you are competing with an army of small time investors in residential who are hell bent on sucking every last profitable dollar out of single family residential investments.

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This is why I do not recommend ever buying a residential rental property in lower income areas or really old houses. Higher end residential properties, in my opinion, are far more profitable for a variety of reasons. The biggest being renters tend to be people who have the money to afford their own house but don't want to deal with the hassle of being a homeowner and they tend to rent for longer periods of time, especially if they have kids, because they want to remain a part of that school system. This of course will increase your initial investment costs but you'll find much more respectable people to rent to who don't destroy your property and you can charge higher rent because people are very willing to pay "the cost of affluence", especially when it means giving their children better education/opportunities.

Of course, nothing is a guarantee and you can also run into people who get in over their heads because they can't truly afford it, but that's why you charge application fees and do background/credit checks on prospective tenants.

That being said I agree about commercial properties and my next venture will be with another friend of mine who is also in the real estate investment game looking to start buying up said commercial properties.

Blazin_sl said:

Last but not least is be ready to make many offers and have them rejected. I don't ever get emotionally involved in wanting a particular property. If they aren't calling you a greedy asshole at settlement then you're overpaying.

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Real estate in a nutshell right there.