Let us do a rental property exercise

[pyriel]

I'm seeing some good returns here from those being tracked.... I'm very impressed and kudos to those who have been keeping up withe their TSP portfolio. I have an exercise here that i'd like to present just in case some of you would like to dabble into real estate.

A friend of mine just called me and told me about this duplex. I told him that i would do the comparable so that he can make a better decision. I'll give him the data tomorrow.

Situation: Foreclosed duplex (4 bedroom each) bank owned currently for sale. Renovation will cost about 20k. Each unit can possibly be rented for about $1300 per month. Bank will only lend you 80%. Selling price is 240k but can probably be negotiated for 220k. Closing cost will probably be about 15k. Let's put the interest payment to 7% (can be lower but we'll use this projection). After renovation, property estimate appraisal will be 270k. Let's set the property tax (5%), insurance (10%). maintenance fee (10%) of rental income. Let's say that it can be rented right away and renter will be under section 8 so they will stay there for 5-10 years.

Is this a good buy or not? please explain...
How long would it take to get all your investment back?
Would this property's ROI beat those currently leading in TSP tracker within 5-10 years?

Solution to the problem requires thinking outside the box. Keypoint is ROI.

Have fun...

 

[burrocrat]

trick question, this is less of an econimic issue and more an exercise in socionomics. return on capital is easy enough to figure, but to truly calculate return on investment one must first identify the 'investor'. in this case the investor is the u.s. government, or more accurately the american taxpayer. the key number is 8, any way you cut it.

winners:
a) mortage at 7% = winner bankers (who are implicity covered in any scenario either by governement gaurantee or by legal right to the collateral.
b) property purchaser = $235k purchase price + closing costs vs. $235k in rental income over 10 years = free asset (duplex) risk free via section 8 gov gaurantee.
c) occupants = subsidized existance (if qualify for section 8 also qualify for snap, wic, tanf, chip health care, etc.).

losers:
the american taxpayer through their government = fattened the bankers who will always get their pound of flesh with or without the gov; enriched a private investor who with $44k to invest in property should have enough savvy to shoulder their own investment risk without the gov backstop; and perpetuated a class of citizens who have little incentive to improve their circumstances.

gov paid $235k to rent and has no physical asset to show when it could have bought the property outright for the same cost. gov transferred wealth to banks and well-to-do investor. gov created a future liability to continue to support 2 families of 5 (10 future non-taxpayers).

solution: hands off private markets. or, if you and your spouse find yourselves unable to support your 3 offspring maybe you should have quit screwing 2.5 kids ago, got out of bed, and found a damn job.

 

[Valkyrie]

never buy a rental unless u will have 200-300 postive cash flow per month.
first rental property can be had using normal interest rates, after having 4 properties including primary then u have to get commercial rates (could be 2 or 3 depending on your salary).
know in detail all of the landlord/rental laws of your state/county and town. usually there are different laws btwn single home, duplex, apartment, etc. could be added cost. some towns have annual inspection fees.
suggested reading rich dad/poor dad books there are more than one. there is one specifically for multi-unit properties and the book written by him and trump.
good luck and God Bless.

 

[pyriel]

Very intuitive Valkyrie and burrocat... On a bigger scheme, there are losers and winners for those who plays in real estate. What we all have to do is to reduce the amount of risk. Risk is a relative term because some people are able to absorb risk while others, such as those not accustom to real estate may try to avoid it altogether. Several years ago, I was discussing my investment portfolio with a financial advisor. I informed him that I will stop putting money in to any mutual funds, but instead keep my TSP and concentrate with real estate. Of course, I was scorned. Funny thing was the financial advisor don't even own any rental property. So I proceeded to follow my own chosen path just to see if what I learned from Robert Kiyosaki's book Rich Dad/Poor Dad would actually work. So far, so good.

Attached is an excel worksheet on my solution to the problem that i presented earlier. BTW, I never buy a rental property unless the worksheet tells me it's a good buy. Anyone who would like to buy a rental property should use this worksheet. It's a tool to guide and help those people make decision before they even consider buying a rental property.

I created two worksheet within one file. The first one is what ROI my friend can get if he decides to keep the property within 5 years. The second worksheet shows that he could get his investment if he decides to refi after a year. I recommended that my friend buys the foreclosed duplex rental property.