My mortgage broker got the appraisal back today and it was lower than expected. I think the original appraisal I got when I bought the place was for $90,000. This one came back at $81,000. I guess that explains why the original appraiser was not willing to re-certify his previous appraisal. What this means to me is my refi loan cannot be as much as I wanted. (Well, if I wanted to exceed the 80% LTV ratio and pay PMI, I could still get my original amount, but I don't want to do that.) So I need to come up with an extra $2,000 at closing. Not a big deal, but not something I'm too happy about. I've re-run the numbers based on this new data and this is what I come up with now:
Purchase price: $77,250.00
Taxes: $82.42 ($989 a year)
Prop. Mgt: $75.00
Insurance: $34.92 ($419 a year)
Maintenance: $0 ($250 first year, pre-paid)
Mortgage: $403.75 (30 year, 6.75%)
Rent: $750.00
Monthly profit: $153.91
ROI: 12.31%
Let me explain the maintenance figure a bit. When I signed up with the property management company, I had to establish a maintenance deposit of $250 with them. Any repairs will be taken out of that amount. Since I had budgeted $20 a month for maintenance, this is pretty much the amount for one year I planned on, but since I had to pay it in advance, I'd added that $250 in to the purchase price for the calculations. I believe this more accurately reflects the situation.
The ROI figure is based on a $15,000 down payment, which includes all the closing costs. The interest rate has already been locked in, so I know that's a valid number.
Also, while pulling some past numbers for this analysis, I went and applied labels to some of my old blog posts that didn't have them. For some reason, this caused those posts to show up again at the top of my RSS feed. Sorry about that, but I don't think there is a way around that with Blogger..
Tuesday, May 15, 2007
Rental #1 Apraises Lower Than Expected
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5 comments:
I don't pretend to know anything about renting real estate, but I do own a house, and based on that it seems that $20 a month/$250 a year for maintenance is a very low figure. I guess it depends on what shape the unit is currently in, but it seems to me that one can blow $250 simply on a couple of new ceiling fans, a few cans of paint, or a new dishwasher, and that multiple events of these types occur during any given year.
Maintenance reserves are one of those things where everyone has a different idea of the "right" amount. As a landlord, I am not responsible for every little thing that needs to be done. For instance, my lease states that tenants are responsible for pest control, minor plumbing issues, etc. So while an owner-occupant may be paying more for maintenance items, not all of those costs would necessarily apply to a landlord. And let's also not forget that the tenants have paid a security deposit. If they move out and I find there was lots of stuff that should have been taken care of by them, but wasn't, I can use their security deposit to pay for the repairs, as well as my maintenance reserves.
Shaun, I think this is a good addition to the portfolio, as long as you have done your research and know it's an area that you can re-rent when a tenant leaves fairly easily at the $750 (or more)...
This is exactly what I'd like to see when I buy - 10+% return... And I know there are those who say you need to factor in vacancy, etc... You do that before you buy to figure out what the worst case potential will be, but the reality is that while it's occupied, the best case scenario prevails and the bottom line is a nice one... While $150 / month won't get you rich, if you accumulate enough of these, eventually it can certainly pay you as your full time job, allowing you to spend more time focusing on your portfolio...
I think a couple of lessons can be learned from Shaun's experience as I too do real estate investing in Central Pennsylvania. I do think your maintenance is low. Your cash on cash return is low based on $15,000 down. You tied up $15,000 to make $153.91 a month. I could not see myself making that investment. Plus if something goes wrong that $153 can be gone pretty quickly especially since you have tenants doing minor plumbing repairs. Also according to your posts the house just went down $9000 in value. I am not trying to be all negative but it just doesnt make sense to me.
Scott - Thanks for your input. As I mentioned, maintenance is one of those things everyone will have a different idea about. as for COCR, again, what is not acceptable to you is acceptable to me. I'm perfectly happy with a 12+% return. You may not be. I'm currently in the process of writing about the differences in appraisal values. It appears the difference is due in part to differences in appraisers opinions and calculations.
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