Investment Property Possibility

**jIM_Ohio** · 09-23-2010, 07:17 AM

See if any houses are for rent in the area (check the Sunday paper) and make sure the price point for your rent is in right range.

This was math posted by a response that a person made on another board for determining rent amount. It was not a response to your question, so if this person complains or similar, I will remove this section, but it was posted 2 days ago and its very valid for your situation IMO).

This is not my post, and it was on a financial planning forum on usenet.

The post to which I'm dealing
mentioned a citation for the rental of a house being roughly equivalent to
1/10 the cost of the house, a citation was asked for. It is THIS issue to
which I'm responding.
I've heard various "rules of thumb" for determing the fair rental price.
Everyone seems to have their own guidelines and almost every one I've ever
seen has some rational basis for it. For a peek into the other side I
thought I'd share with everyone how I advise my clients who own rentals on
how to set the rent. Note that not all of them follow it, especially in
this economy and most especially if they acquired the home at the height of
the housing bubble. But it is the starting point I recommend -
FIRST - consider how much cash the buyer had to put up to buy the house.
NOT THE COST, just the out of pocket cash.
SECOND - what rate of return would you have been happy to get in the local
market had you invested that money instead of buying the house. THIS gives
you the annual return on your investment in the house.
THIRD - we have to accumulate some other information about the property -
1 - annual amount owner pays for utilities, anticipated repairs, and
management fees;
2 - annual amount for mortgage payments (PITI);
FOURTH - total all three of these numbers, then divide by 12. This gives
you the montly rent you need to charge to cover your outlay and provide a
return on your investment.
Sometimes this actually works out to some mystical rule of thumb. But
whether it does or not, what it does give you a way to cover your costs. Of
course, as I mentioned, in this economy it may not be possible to actually
GET this much. Some of my clients are renting at a negative cash flow
because they can cover the spread and are holding on till the economy
changes.

My own advice for renting is focus on ROI.

Its not the value of the property which is important, it's how much money YOU put in, and how much money YOU get out of the deal.

Meaning if you get a property for valued at 30k for $10,000 (33% down) and that $10,000 gets you an income of $24,000 per year, that is good math (IMO) and a good investment (IMO). If you put $30k "down" (100% down) and that 30k gets you same income of $24,000, that is a less effective investment, but it could still be a good investment (you decide).

Remember to check the tax return. Look up schedule E (I believe that is where rental income is reported) and notice what you can write off against rental income.

You can write off mortgage interest (so if income was 24k and you paid $1000 in mortgage interest, only 23k is taxed)
You can write off depreciation. Depreciation is based on value, so if you buy for 10k or 30k, the depreciation is the same (27.5 years) and value of house (200k or whatever real house VALUE is). Meaning if house was 200k, the annual depreciation is 200,000/27.5=$7272 per year. This means if you have rental income of $24k per year, you get to write off $7272 of that per year (so just over $17k is taxed). Depreciation is a paper loss only, so you might as well take it.
When you sell the rental you are taxed on the depreciation whether you claim it or not (this is listed later in same section on rentals so read the IRS stuff).

Taxes are a similar write off, as are repairs and maintainance of the rental.

Some people like rentals to be 100% paid off so all income is free cash flow. Your tax on this will be on the high end of the scale.
Some people like rentals to be fully leveraged (25% down) so they have more write offs and pay less tax.
Your goal should be the highest after tax return on the money (I think), so run numbers both ways on the tax schedule and decide which was is best for you (high income-lower ROI-high tax or less income, higher ROI, less tax).

**KTP** · 09-23-2010, 07:50 AM

Tax rates in Miami are such that a $25K house is taxed at $9500 a year???

(I am not going by the $372K "value" of the house, since that is no where near the value if said house can be purchased for $25K. It might be the value in 15 years, but not anytime soon.)

If the house actually is worth $372K, then why not just purchase for $25K and sell for $300K, pocket the $275K and forget about renting?

**kork13** · 09-23-2010, 01:34 PM

Originally posted by KTP View Post

Tax rates in Miami are such that a $25K house is taxed at $9500 a year???

(I am not going by the $372K "value" of the house, since that is no where near the value if said house can be purchased for $25K. It might be the value in 15 years, but not anytime soon.)

If the house actually is worth $372K, then why not just purchase for $25K and sell for $300K, pocket the $275K and forget about renting?

The house is worth the $372k, I would just be getting it for the $20-25k through a foreclosure auction with the county. In 07/08 (before things went kablooie), it was valued at $545k. These numbers are all just based on the past few years of tax assessments, and as it was built in '06, there's not much in the way of comparison data.

As to why not just sell it immediately, that's just not what I'm looking for. I could use the property for some good, give me some basic experience in owning real estate, and over time the value likely will go up (if there's a rock bottom, there isn't much further to go in that direction), which would make a delayed, future sale more advantageous.

**KTP** · 09-23-2010, 05:14 PM

Originally posted by kork13 View Post

The house is worth the $372k, I would just be getting it for the $20-25k through a foreclosure auction with the county. In 07/08 (before things went kablooie), it was valued at $545k. These numbers are all just based on the past few years of tax assessments, and as it was built in '06, there's not much in the way of comparison data.

As to why not just sell it immediately, that's just not what I'm looking for. I could use the property for some good, give me some basic experience in owning real estate, and over time the value likely will go up (if there's a rock bottom, there isn't much further to go in that direction), which would make a delayed, future sale more advantageous.

A house built in 2006 on 0.25 acres can only fetch $25,000 at an open to the public auction? Exactly how bad is it to live in Miami now??? It looks pretty nice on Burn Notice (the tv show).

**randomlooseends** · 09-23-2010, 08:45 PM

First of all, I do not understand the Florida real estate markets. I live in the midwest, and even a homeowners association is a strange, unheard of concept around here. There are a couple of points, though:

1. I'm impressed by the work you've already done to lay out the expenses and calculate the payoff period and potential ROI. However, are you accounting for all the costs? Around here, people sometimes get angry and trash the house when the bank forecloses on the mortgage -- then, as soon as the house sits empty, people break in and steal the copper plumbing and electric cables from inside the walls. Be sure you won't have massive repair costs.
Also, is it normal in that area for renters to pay all the utilities, or does that need to be factored in as well?

2. I'm slightly jealous. Some of my coworkers have also bought investment properties at a low price, and it's a good market to be a landlord now. As people eventually quit renting and start buying homes instead, it will drive property values back up and you can have an easy exit strategy if you want to get your money back out.

**kork13** · 09-23-2010, 11:12 PM

Originally posted by randomlooseends View Post

First of all, I do not understand the Florida real estate markets. I live in the midwest, and even a homeowners association is a strange, unheard of concept around here.

New to me too... My family owns a home in Oregon, and there's no HOA. Because my father's already bought a home in the same area, he showed my the HOA rules and regs.... it's crazy the little peevish things that they regulate.

1. I'm impressed by the work you've already done to lay out the expenses and calculate the payoff period and potential ROI. However, are you accounting for all the costs? Around here, people sometimes get angry and trash the house when the bank forecloses on the mortgage -- then, as soon as the house sits empty, people break in and steal the copper plumbing and electric cables from inside the walls. Be sure you won't have massive repair costs.
Also, is it normal in that area for renters to pay all the utilities, or does that need to be factored in as well?

That's one of my biggest questions, not knowing what else to factor in. I know those 4 things will be players, but beyond that, I really don't know. Also, because it's a tightly-controlled, gated community, and a generally "upper-middle/lower-upper class" neighborhood, I'm not terribly concerned about the place being looted. Also, my father will take possession of his house next weeks sometime, so he'll be able to go by this one and check it out for me, hopefully there will be little-to-no damage. From my limited experience, renters pay the utilities.

2. I'm slightly jealous. Some of my coworkers have also bought investment properties at a low price, and it's a good market to be a landlord now. As people eventually quit renting and start buying homes instead, it will drive property values back up and you can have an easy exit strategy if you want to get your money back out.

That's sort of my thought process, that in a good decade or two when the "great recession" nothing but a distant memory, I'll be able to sell the house for a fair profit. Or, once I leave the military in 15-20 years, I could just go live there myself... Who knows.

(I added my comments above in red for simplicity...)

**jIM_Ohio** · 09-24-2010, 04:53 AM

Originally posted by kork13 View Post

1. I'm impressed by the work you've already done to lay out the expenses and calculate the payoff period and potential ROI. However, are you accounting for all the costs? Around here, people sometimes get angry and trash the house when the bank forecloses on the mortgage -- then, as soon as the house sits empty, people break in and steal the copper plumbing and electric cables from inside the walls. Be sure you won't have massive repair costs.
Also, is it normal in that area for renters to pay all the utilities, or does that need to be factored in as well?

That's one of my biggest questions, not knowing what else to factor in. I know those 4 things will be players, but beyond that, I really don't know. Also, because it's a tightly-controlled, gated community, and a generally "upper-middle/lower-upper class" neighborhood, I'm not terribly concerned about the place being looted. Also, my father will take possession of his house next weeks sometime, so he'll be able to go by this one and check it out for me, hopefully there will be little-to-no damage. From my limited experience, renters pay the utilities.

The way you hedge risks is by holding cash and putting less down on house (keep your money liquid and tied up into the property. That way if you "have to" walk away, you are out only a small sum.

Investment Property Possibility