Re: First Time Home Buyer vs. First Time Investor - Posted by Gregory (VA)

Posted by Gregory (VA) on July 23, 2004 at 09:40:38:

When renting houses you want to at least break even, and preferably have a positive cash flow. Let’s say the sellers are asking $150k for the duplex.

The first step to determining a deal is to figure out what fair market value rents are for the property you intend to purchase. Let’s suppose that your duplexes FMV rents are $800 per unit. This gives us rental revenues of $1,600/mo and $19,200/yr.

The next step would be determining your expenses. Estimate your personal property tax (if any), home insurance, utility bills, and set aside accounts for maintenance, vacancy and management (if you don’t manage them yourself). A rough estimate of your expenses will be between 35% and 45% of your gross rental revenue.

Now, figure out how much you have to put down and what the terms of the loan are. Let’s just say you have 20% ($30k) to put down and you get a $120k 20-yr loan at 6.5%. This gives you a mortgage payment of $895/mo.

Here is how the numbers would work out for you:

Rental Revenue: $19,200

Expenses (40%): 7,680

Mortgage: 10,736

Rental Income: 784

ROI: 2.61%

Now you may be thinking that this isn?t very good. But you?re forgetting something: EQUITY. Let?s say over the course of the year the house appreciated 3%. That $150k home is now worth $154,500 or $4,500 more than when you purchased it. Don?t forget that your renter also paid one years worth of mortgage payments for you; the loan on the home went from $120,000 to $116,975, a difference of $3,025. Add $4,500 + 3,025 and you have $7,525 in Equity in this home. If you were to sell this house at the end of 1 year (forgetting about the costs to sell), you would have made a total of $9,309, or a ROI of 27.7%.

There is obviously a lot of due diligence issues that I did not cover. This was merely a superficial analysis of a property and assumed there were not major repairs that needed to be done right off the bat.