Looking for opinion/info on rental property

[cshaw07]

Hey guys, 2nd post on here but I've been reading for awhile. First I'll list my financial info:

Age 23, single. Cost of living is pretty low here in Ohio.

Income:
Job income: $50,000/year
Rental income (3 units) $1500/month

Debts:
Personal home payment: $625/month 4.5% interest (P,I,T,I) tax deductable
Rental Property payments: $635/month 5% interest (P,I,T,I)
Loan 1: $3000, payment $175/month 4% interest
Loan 2: $3000, payment $175/month 15% interest
Credit card: $5000, min payment $85/month 0% interest until December
Student Loan: $5000, min payment $100/month 4% tax deductible interest

Assets:
Personal home: $90k value / $74k loan
Rental One: $20k value / $14k loan
Rental Two: $16k value / $10k loan
Rental Three: $25k value / $17k loan
401k: $8k and counting (i am young!)
Savings: $3k

I do have a lot of debt currently; but I'm also 23 years old, have a solid day job of over 3 years, and make decent money with the rentals. My credit score is very high with about 7 years of credit history.

So this brings me to my question, and opinions are encouraged.

A few weeks ago I put one of my houses back up for rent after an eviction (sucked up some savings). A very nice lady contacted me about buying a duplex in town that they've had for sale. Their asking price is $25,000. It's a 1 bedroom and a 2 bedroom, one unit rents for $450+ utilities and the other $350 + utilities. This home is in pretty good condition and wouldn't need anything other than tenants. It's got two new furnaces, two new water heaters, updated plumbing and electric service. "Rental Three" I currently own out right, but i'm taking an equity loan for 75% of the value which would be around $17k (i listed this home as having a loan above, but as of now it doesn't) to possibly buy this house. We talked for a few weeks and she said if I paid in cash she'd take $20,000.

The payment on the equity loan would be $280/month (P,I,T,I) and the rental income would be about $800, so about a $500/month profit. I'd also own the property outright and have all the equity (doing me no good as of now) in the property.

So, option one: take the equity loan on "rental three" and buy the duplex, rent it out, and use the proceeds to pay off: loan 1, loan 2, credit card, student loan.

Option two: Take the equity loan and pay off: loan 1, loan 2, credit card, student loan.

I like the sounds of option one better, more assets, potentially more income, and i just plain like being a landlord. $800 income - $280 loan = $520

Option 2 is safer though I think, but then it leaves me at a dead end. I could pay off my loans and increase cash flow a month by $535, but then I'd still have the loan payment of $280, leaving me with an increase of $255/month.

I've always considered myself a pretty risky person. People who don't take risks seldom see rewards, so that is what I've usually been going by, and it's been going really well. But for some reason this is a hard decision for me. Ideally I'd like to have all my consumer debts paid off and never ever get them again, but this whole ordeal with the duplex has me really thinking.

So, please and thank you for all the opinions, suggestions, or anything else good or bad!

-Curtis

 

[Meadbh]

Welcome Curtis. Sounds like you are off to a good start as a property mogul. Coming from a moderately high cost part of Canada I find it incredible that you could buy a house for 16K. I also find it amazing that a portfolio of three properties valued at $61K could generate rental income of $1500 per month, or $18,000 per annum. Let's assume that the tenant in the $16K home is paying a proportionate (27%) share of the rental income, or $405 per month. The tenant must be awfully strapped for cash if he or she cannot come up with the money to fund a downpayment on a similar home. Are these properties in high risk neighborhoods? How stable are the tenants?

Perhaps I am just naive about the current state of the housing market and the economy in Ohio.....if so, my apologies.

You do have a lot of debt, but if these properties are undervalued and can generate consistent cash flow on an ongoing basis you stand to do very well in the long term. It helps that you have a job with a decent income. However......the more leverage you take on, the higher the risk. Tenant risk, financial risk, hassle, job loss, etc. I too have rental properties (managed professionally) but am a bit more [-]older and wiser [/-]cautious and am actively paying down debt. It concerns me that someone is trying hard to get you to buy this duplex. Are you being sucked into a rash decision? My choice would be Option #2 (take a breather). It's really important to pay down the high interest Loan #2 and that's what I would work on as a top priority.

Just my $0.02.

 

[cshaw07]

Thank you meadbh for you input, much appreciated.

These properties aren't in the best neighborhood, but even though I've only personally owned them since last may, my aunt and uncle who I bought them off of owned them for 5 years. One of my tenants has been there for 4 years and only once was she late and even then it was only by two days (she paid late fee). The other current tenant has been there for a year and a half, paid the first YEAR in advance and since then mails me a check once a month, she's the perfect tenant. The other home I had some issues with the tenants but I only blame myself. Luckily since I make way more than I pay a month the loss of rent didn't affect me much, and the repairs i had to make only cost me about $1500. I consider $1500 for the amount of information I learned during the process was money well spent on my finding my next set of tenants. The house has been listed for 3 weeks and I've had about 30 people look at it so far, of those maybe 5 are possibilities but I'm still doing background and credit checks.

The duplex has been for sale for about a year if I had to guess. I went and looked at the property a few days ago and boy is it worth what the asking price is. The couple selling it have two jobs, two kids, and the woman recently got sick and that is why they are selling them (so they say), they had 4 rentals and this is the last one. She said with it being a duplex it's harder to pretty much anyone but investors. This one is in a better neighborhood than my other three as well. When I was about 17 I had an audio book called millionaire by thirty that I listened to. I remember them saying "take risks while you're young" and that really stuck.

My concern is that if I take the equity loan to pay down the other loans it will greatly slow down my house buying which in the end hurts monthly income because even though I'll have no more consumer loans, I'll also have no more equity I can cash in on. Either option I choose the next step is aggressive pay down of loans, I plan to either way have loan 1, 2, cc, and sl all paid off this year.

So knowing that, would you still take option 2?

 

[cshaw07]

Also, I just have one more piece of info.

If worst comes to worst and I buy the duplex, cant get it rented and all three of my other tenants move out leaving me with 5 empty units. I still make enough with my job to exactly cover all of my bills, loans, payments, etc without adjusting my 401k contribution. I wouldn't be living well and wouldn't have any money for food or gasoline to get to work, but then again I don't ever for see having a 100% vacancy either!

Edit:

Also, I am very, very handy. I do ALL of the work to the houses when they need it, fix all tenant issues, go to court when I have to for tenant issues, do my own taxes, etc. I seldom ever pay anyone to do anything that I can do or can learn to do myself. So that keeps my cost's much lower there as well. I also have a very flexible job that doesn't mind if I have to leave for a few hours to go to court or something though hopefully that never happens again. Sorry for all the edits and posts, just trying to give all all that I can to get more accurate suggestions and opinions!

Thanks!

 

[calmloki]

After careful consideration, given your ability to cover expenses with a 100% vacancy rate, your ability to do all the work and management, the disproportionate rental income to property cost... I think you need to sell everything and put all your money in long term bonds.


(what did you say the address of the duplex was?....)

Echo Meadbh. kick azz!

 

[cshaw07]

I'm going to take that as, "buy the duplex you dummy." haha thanks!

 

[jclarksnakes]

Also, I just have one more piece of info.

If worst comes to worst and I buy the duplex, cant get it rented and all three of my other tenants move out leaving me with 5 empty units. I still make enough with my job to exactly cover all of my bills, loans, payments, etc without adjusting my 401k contribution. I wouldn't be living well and wouldn't have any money for food or gasoline to get to work, but then again I don't ever for see having a 100% vacancy either!

Edit:

Also, I am very, very handy. I do ALL of the work to the houses when they need it, fix all tenant issues, go to court when I have to for tenant issues, do my own taxes, etc. I seldom ever pay anyone to do anything that I can do or can learn to do myself. So that keeps my cost's much lower there as well. I also have a very flexible job that doesn't mind if I have to leave for a few hours to go to court or something though hopefully that never happens again. Sorry for all the edits and posts, just trying to give all all that I can to get more accurate suggestions and opinions!

Thanks!

I was thinking that you might be overextending yourself. As in a case where all your tenants quit paying rent at the same time. Since you could actually cover expenses if that were to happen I would say go for the duplex.

 

[pb4uski]

Curtis, first off - you are doing great! Very impressive for your age. Here is what I think I would do.

Borrow the $17 on rental 3 as planned. Buy the duplex for $20 (proceeds from $17 loan and $3 from savings) and get it rented. Once the duplex is rented take out a loan on the duplex for $14 (70% of the $20) and use the $14 to pay off loan 2 (15%!), the credit card (once the 0% runs out), and put the remainder in an emergency fund in case you have some vacancies.

Then focus on eliminating non-mortgage debt and saving and buying another property or so a year and build some financial investments.

 

[arebelspy]

Curtis, first off - you are doing great! Very impressive for your age. Here is what I think I would do.

Borrow the $17 on rental 3 as planned. Buy the duplex for $20 (proceeds from $17 loan and $3 from savings) and get it rented. Once the duplex is rented take out a loan on the duplex for $14 (70% of the $20) and use the $14 to pay off loan 2 (15%!), the credit card (once the 0% runs out), and put the remainder in an emergency fund in case you have some vacancies.

Then focus on eliminating non-mortgage debt and saving and buying another property or so a year and build some financial investments.

That's exactly what I was thinking, and sounds like a solid plan to me.

Wish I had started in real estate when I was as young as you. You'll be FI by the time you're 30 if you play your cards right. Maybe you'll FIRE at 35 or 40, or not, but that won't be as important Nicole you have FU money coming in from rental income every month.

 

[AndrewJackson]

Dude. You are doing awesome. You seem to be very talented at real estate and should probably pursue it full time once you get a strong enough financial footing. However, you need to sure up your personal finances before you go deeper into real estate. I would suggest paying off the credit card/student loan/loan 1/loan 2 and paying off 20k in principal on your home mortgage, before looking at expansions in your business.

Now for your rental properties, don't even bother with loans. These rentals are too cheap to even mess around with it. Pay cash and grow slower. There will always be another opportunity. I really think, in your case, it makes a lot more sense. Before you know it, you will have enough income to buy a new unit every couple months just from your cash pile.

 

[pb4uski]

I agree with AndrewJackson on the first part, but I have a different view from him on leverage on your rentals. I think leverage is fine as long as you limit the loan on each property to 70% or less of the property value and you make sure that each property is cash flow positive over 12 months including sensible provisions for vacancy and repairs.

If you have an unusual vacancy at one property then the other properties can help out temporarily.

 

[susswein]

A few random comments:

1)18K gross rents on property worth $61K is about 3 times the going rate in my city. Willing to share where you're located?

2) Given these rates of return I'd (seriously) be interested in going in with you and investing the money to buy the duplex.

3) You mention that your one vacancy has been on the market for 3 weeks. I would have reduced the asking rent 2 weeks ago, and reduced it again every week until I started getting rock solid applications. Assuming your asking rent is $500/month, then you've already "lost" $375. Your rate of return is already so good that it doesn't make sense to waste your time on additional showings for $25 or $50 per month.

 

[haha]

Your combination of rents and low capital value, plus your steady job that could in a pinch carry them all means you don't need any advice.

My only concern, and it is a small one givern your obvious experience, would be : is this town or city on a pronounced downtrend that is likely to end in a Detroit style implosion that ends up with a lot of property boarded up?

Your property costs are laughable. My city is medium expensive, actually I guess a bit above medium for housing, but a truly small house in a truly terriible nighborhood would sell for 20x the prices that you quote, and perhaps rent for only 2x the rents you quote. Still, there are people who buy them and rent them out, though I have never been able to figure out why.

With your rent margins, you would have to be buying something on death watch to wind up a loser. Or something located where you would fear for your life.

Pedal to the metal!

Ha

 

[cshaw07]

Thanks for all the advice guys! I'm going to buy the duplex for $20,000 cash, get it rented as soon as I can and then save up about $3k again for emergency fund. Then I'm going to start paying down my loans. With all 5 units rented I should be able to pay off a $3k loan in less than 2 months. I'd like to have the 2 $3k loans and the CC paid off within this year, further increasing my cash flow by $450 a month. The student loan really doesn't cost me much, has a low interest rate, and is tax deductible so it's not really a concern to me right now I guess. After that I plan to open a Roth IRA and start fully funding that per year, may increase my 401k contribution by 5% bringing it to 10% with 5% employer match, and I'd like to put 10% of my pay checks in savings for vacations and stuff (no point in working so hard to save ALL of your money, right? hah) The rest I guess I'll use to pay down rental loans and I'll use the equity in the duplex for the next time a great deal comes around. These properties are located in Sharon PA, and it's been about the same condition of a town, possibly may have even improved, since I can remember. Though I am fairly young. Thanks again you guys for all the advice!

 

[Meadbh]

Acceding to Wikipedia, Sharon's population was almost 30,000 in the 1930s and has been declining steadily ever since, to just over 14,000 in 2010. Historically, oil and coal mining was big in western PA in the early 1900s but IIRC the area is now mostly agricultural. The decline of the town would explain the amazingly low property prices. Long term, what are Sharon's economic prospects? I guess, at 75 miles from Pittsburgh, it would be a long commute.

I passed through Sharon on a road trip many years ago when I lived in Pittsburgh, but I honestly don't remember much about the town. It's a pretty part of the country, though.

 

[Lazarus]

At age 23 I had zero debt. Pretty much zero net worth also.

 

[cshaw07]

Debt isn't a bad thing, without debt I would gross $1500 less a month than I do now. Of course it's a lot more work for that $1500, but I do enjoy it. I'm really trying to be "retired" by 30, though I am a tinkerer and retired to me means not working a traditional 9-5 job. Though the two personal loans and the CC aren't good at all... that's top priority after I get the duplex and get my emergency fund back up to where I'm comfortable.

Do you guys think I'm on the right track though with after buying the duplex and getting my emergency fund back up, to increase 401k, max out a roth IRA, and save 10% of income. Then start paying down rental home loans?

 

[cshaw07]

Oh yeah, I'm new to this site. What the heck do the stars mean under my name and what do dryer sheets have to do with anything?

 

[pb4uski]

Debt isn't a bad thing, without debt I would gross $1500 less a month than I do now. Of course it's a lot more work for that $1500, but I do enjoy it. I'm really trying to be "retired" by 30, though I am a tinkerer and retired to me means not working a traditional 9-5 job. Though the two personal loans and the CC aren't good at all... that's top priority after I get the duplex and get my emergency fund back up to where I'm comfortable.

Do you guys think I'm on the right track though with after buying the duplex and getting my emergency fund back up, to increase 401k, max out a roth IRA, and save 10% of income. Then start paying down rental home loans?

Yes. I think of it this way. The duplex is a bit of an opportunistic purchase and after you buy that, take a break from buying properties for a short bit and focus on paying off the personal debt and building up some savings (don't worry so much about the mortgages as long as each property can carry itself even with reasonable provisions for vacancies and repairs, which seems to be the case).

While the real estate has done well for you, I would be cognizant of concentration risk. With so many properties in a single geographic area there is a risk that if that area has issues you could be in a world of hurt. You may at some point want to expand your real estate portfolio beyond Sharon.

On "retiring" at 30, it depends on how much you need to live. A lot can happen between now and then so I suggest that you focus on your career, saving and investing (as you have been) and building wealth for now. Quicken Lifetime Planner (included in Quicken Deluxe and higher) might be useful to you in sketching out your financial future and looking at various what-ifs.

 

[cshaw07]

I totally agree with expanding my region. Not only for possible economic issues, but these properties are :50 minutes from my personal home and when there isn't a tenant there and I'm showing the property it really eats up time/fuel. The good thing about Sharon though, is even though it has apparently declined and the population had divided in half, Hermitage Pa which is right up the street is thriving. They've added a bunch of new businesses (kohls, super walmart, chipolte, cold stone, etc etc) in the past two years and I don't think they plan on slowing down in the growth department. Hopefully that trickles down into Sharon and it starts turning around as well. Thanks everyone for responding and thanks in advance to anyone that responds!