I hear many guys speak of real estate investment properties here and I have no experience with that. A nephew of mine is buying a 4 rental unit house for 399k. He will live in the studio unit saving approx. 18k on his own rental costs at this time. The other 3 units generate 44k per year so I figure that to be 62k extra income. His mortgage with PMI will be about 40k per year escrowimg taxes/insurance. He is NOT handy and will have to pay or learn all maintenance issues on a hundred year old house. Roof at 20k needs to ne done initially. Home ispection is to be done by a friend/professiomal in the building business, so, thats good. My question is .....without having any additional info.... 1) does this appear a wise investment? 2) how do you arribe at such a decision? 3) are there glaring issues like "liability" or othe unknowns that go along with Owning rental units? I could value this as a bond/note with issues of carry costs vs. yield with the uncertainty of capital depreciation or appreciation but aside from that I know nothing beyond owning a single family unit. This property is in the Northeast US not Vancouver so it is a relatively healthy region and a "fair" neighborhood with demamd for rental units. I am trying to be of value to him without getting into fed policy/bubbles/end of days. He has a good job and a cushion to absorb a little adversity. Thanks
Thats wise and I think the same thing. Hiring someome to repair the small things could be Death by a thousand cuts. Most learn that on single family homes first befor taking on rental units.
Your nephew's got the right idea but is being overly ambitious. Best way to start if you're young is buy a *cheap* townhouse and fix it up yourself (if needed). Another option is a duplex where you live in one half and rent the other. I've had a heck of a time finding duplexes because they're so desirable as rentals.
Long term annual maintenance and repair runs about 5% of value of property (using hire hands), factor in 5% vacancy, add his own rent back in, etc. He is ~ cash flow breakeven. If the location is good with good appreciation potential and he has the cash reserve to take care of unscheduled repairs, it is not a bad deal because after mortgage is paid off he owns it free and clear, so, his renters pay off his loan for him. If he is thinking of flipping, not a good deal.
Stevegee58 and ironchef, Thanks for your reponses. On the back of his napkin, he estimated yearly maintenance at $4k ! The 5% estimate sounds about right to me. I have focused on this "maintenance" issue with him and the lifestyle changes he will have to make taking on this property. It simply does not suit him and he is only seeing Potential $$$ . I appear to be the only one in the family leaning towards "pass" The property has been on the market for 81 days so others have passed as well. Thanks again.
The only positive right now is low interest rates. He has to factor vacancies and the possibility of someone doing damage to the place. Even if not malicious damage, neglect can cause just as much in the way of costly problems. A 100 year old house is a sponge for money. Not to mention the potential for asbestos and lead based paint, etc...
If it's a stale listing (81 days is long if it's a good property in a good area), why not lowball the seller? Worst they say is "NO". I bid on roughly a dozen investment properties a year with the goal of buying one per year to add to my rental portfolio. My rule of thumb is this...If my realtor doesn't get screamed at or laughed at by the selling agent then I bid too high! You can always go up in price. Good luck.
Right now rents are high and finding someone to rent it to seems to be a breeze, but I know of a couple of people who bought investment properties back 10+ years ago where rents were NOT covering the overhead...they ended up selling the unit at a gain because of the increase in real estate prices however during that time period they owned rents were extremely low and finding someone to rent it was nearly impossible..... Today though it seems once a renter moves on you can easily find a new renter in less than week or two....can the rental market change, of course it can. Some places around my area rents have become out of control where a building with amenities like gym and game room can set you back about $3000 a month for 2/bedroom 2/bath. Right now you have a better return on your money buying a 2-3 family and renting it out than you do say keeping it in a CD at 1.5% or risking it in stocks....owning a house if you have the funds to back it up during the times you cant get someone to rent is fine.....just don't create a problem for yourself where if the entire house lays empty and the $3500 mortgage and tax bill is due at the end of each month and here you are scrambling to make a payment...
It's a great deal for a guy who likes to get on a ladder and do some painting and clean the gutters and mow the grass and fix this and fix that and enjoys going to home depot in his pick up truck and spends the weekend caring for his investment. But everything else sounds good. Especially if you get the right renters in there and they know you are involved and communicate with you. I rent and have been here for years and one of my neighbors has been here 20 years. But we have more vacancies than ever before, so location etc.