As I was looking at some investment properties in a college town that I like to invest in today, I started thinking: “Is there a good way to make a formula to know what is a good value to purchase?”
If you are an investor in Texas, or anywhere else for that matter, you will often find that there are a number of properties that might work, but you need a system or a calculator to figure out how to compare them to each other.
The nuts and bolts of this work like this:
If I have a 3 bedroom 2.5 bathroom townhouse in Denton Texas for example that is available for $175,000. Then I see a big nice home that is a 5 bedroom 3 bath home like this one for $475,000. How can I compare them to each other?
It seems like I need to consider these criteria:
1. What is the rent value vs. my expenses?
I know this sounds like Rental Property 101, but I just got an email today from a Realtor offering an investment townhouse for just $175,000 that rents for $1300 per month.
After looking at the numbers, I figured that it would cost me about $1300 per month for PITI and HOA fees. That didn’t look like such a great deal to me.
I want to find something that will leave a few hundred dollars a month after paying principal, interest, taxes and landlord insurance to help me get a good return on my investment.
2. What will my cash-on-cash ROI be after I make the down payment?
This is just the follow to what we were talking about. If I make a $500 return each month on my rental property that is a great return on investment right? Well, it depends.
If you invested $90,000-100,000 in a nice townhouse that you were able to rent and make $500 per month on, then you probably had to put about $20,000 down to purchase it and that would make you $6,000 per year or 30% return on your cash investment.
In four years, with good luck and good tenants, you will get your initial investment back.
If you purchase the house in this example for $475,000 and put $95,000 down to purchase it then you make that same $500 per month, you are still making about 6% cash-on-cash return for your investment. If you figure the other tasks involved in being a landlord, that doesn’t seem like such a great deal.
3. How much will it cost me to fix up the property to make it rent ready?
I have seen investors from Fort Worth to El Paso not take into account the cost of fixing up the property to get it rent ready.
If you purchase two rental properties in Denton, you will find that sometimes your “low cost” option isn’t that low-cost.
By the time you redo the carpets, update the cupboards, and paint the place, you may have to pony up a big pile of cash that would have been better off invested in buying a rental property that is worth more and already in better condition.
4. How many students would I be able to comfortably rent to?
When I use the word “comfortably”, I am talking about the comfort of your tenants. Nobody wants to go to UNT and sleep four to a room in two sets of bunk beds.
We find that we can SOMETIMES put two students in the master bedroom of a nice rental property with plenty of room.
Then we do one student per bedroom in the other bedrooms. Sometimes if you have extra bathrooms in a house or really big bedrooms like a 3 bedroom, 3 bathroom house that is 2200 square feet, you can comfortably put two students in another bedroom.
Comfortably also refers to how easy it is to quickly rent your property.
If you stack folks in there, you may not get the same high-quality tenant who will take good care of your investment property. You may find that it takes longer to rent your rooms.
5. How much will this property appreciate over the next 10 years?
Sometimes you can find a property in the Denton area that is a huge cash cow. You are making that $500 per month off of a $20,000 investment, but the property is in a part of town that isn’t going to appreciate.
We bought a home that is in a market that really hasn’t had any considerable appreciation in 10 years. That is ok if we are doing well on our rent or it is the old family home that we are more emotionally attached to than we are interested in making it into a great rental investment.
We also bought a home in a different market that jumped up over $100,000 in value in less than 10 years. That is the equivalent of making over $10,000 per year off that investment. It would take a lot of extra rent to make up for that appreciation gain we had over those years.
6. How much hassle will it be for me to rent and maintain this home?
Number six is really a summary of a few of these other criteria for any landlord to consider.
How much time will I have to spend landlording Home A in the tough part of town versus how much time will I have to spend landlording a property in another part of town or a home that is in better condition?
If I purchase a rental property that was built in 1950 how long will it be before I have to do some major work versus the home that was built in 2006?
What about the money that I will have to earmark for repairs and maintenance for one rental compared to another?
What are other tips that you would offer for someone who wants to start renting homes? Leave a comment below.