Higher-end Rental Properties…
AdamTX,
Those are much better numbers on a higher end rental than what we can get in my area… That sounds pretty good to me. I would set my repairs/vacancy factor much higher than $1K/year, though. In the long term, you can figure out your factor; right now, you are guessing. Here is why $1K/year is way too low… One person moves out one time. You say you can show it in the last 30 days, and someone else moves in right away. Yes, in an ideal world, and sometimes that does happen. Other times, tenant has beat up the place some. It doesn’t look good enough to show it. Maybe they don’t pay the rent, either. Now you have lost rent money, must spend money to evict, and spend a month (vacant) and $5K getting the place ready to rent again. This might not happen often, but if you have enough houses long enough, it will happen. Somebody will fool you. Somebody will hit on hard times. Somebody will fall in with the wrong crowd, and change from who you rented to into someone you don’t even recognize. I had one single lady that was a model tenant for 6 months, then fell in with the wrong crowd. Neighbors told me what I saw - she became a different person overnight. Went from model tenant to having 3 pit bulls on the property and not paying the rent. Plus kept the dogs inside and they made a mess! Do nice houses in nice areas reduce this some - yes. Eliminate it - no way. Even bad neighborhoods have some good people, and even good neighborhoods end up with some bad people. Biggest tip: after you have an applicant picked out, go by the place they live now, unexpected, and see how they live. Whatever their current place looks like, that is what your place looks like in one year. Back to the repairs: what about the year you need a new roof, A/C, all new flooring, or whatever, that costs about $5K… That equals 5 years of $1K/year. In fact, if you figure a new roof and A/C every 15 years, at $5K each, that is $750/year right there ($10K expense every 15 years). Figure if you have carpet, that gets replaced every few years for sure. Someone moves out, and you likely have to repaint a lot or all of inside of the house (how many square feet?). Some areas actually have landlord/tenant laws requiring inside of all rentals to be repainted every so often (I don’t know of any specifics; have heard about it). A lot depends on how well you manage your property, and especially on how well you screen your tenants, but IMHO $1K/year is going to prove to be way too low. I estimate my vacancy and repairs as 25% of my rents, for my small houses and my big ones, and that is slightly conservative, but it keeps me safe. I go several months with very low repairs, and think that number is way too high, then I have a month where I replace an old A/C and a tenant of 5 years moves out and I have to spend a month and $5K redoing and upgrading the house, and the reason for the 25% factor comes flooding back to me. Even when you have a good tenant, keeping a place decent, if they move out after 5 years, you pretty much have to repaint entire inside, replace all carpet, do some updating and minor repairs (and this costs a lot more on big and fancy houses than on little, plain ones).
Also, not related to you, but just sharing a thought here. I have been poor (one of three kids raised by a single mother). Many have not. It is a common misconception that poor means horrible, dirty, rotten people. Many poor people are good people who just don’t have a lot of money. I was taught poor from birth, and I only fixed that with a lot of work on myself and my money habits. I grew up hearing “rich people are greedy”, “$ doesn’t grow on trees”, “you have to work hard to make money”, “money is the root of all evil”. That isn’t easy to overcome. However, I was responsible, clean, honest, etc. I made a great tenant (until I was able to buy my own home). Poor people need decent, clean homes with fair rent, the same as anyone else. I meet a basic need with my working class neighborhood houses. I fix things fast, and I treat my renters well (not like dogs). Most of my renters say I am a great landlord, and they appreciate me very much. Most of them are good people, and I appreciate them very much (they are making me wealthy). Among the poor, is the percentage of ‘bad apples’ higher - absolutely. So I screen a little harder. However, with decent, clean homes and fair prices, I consistently get plenty of applicants, and rent out homes fast to decent people who just want a decent, affordable place to live and a property manager that treats them decent. Now, poor people come with a little less ability to manage their lives than someone with higher income, and I anticipate that and head it off at the pass. A la Ron LeGrand, “what can possibly go wrong, and what can I do now to fix it?” But, good people needing homes are there in the low end market, and you can get wealthy being a good person and doing right by everyone that you deal with. In fact, I suggest that if you aren’t doing right by everyone you deal with, sooner or later you won’t be in business because the word will travel fast and far, and you will struggle in all areas - renters, contractors, lenders, etc. The common perceptions of lower end rental property, renters and landlords and the adversarial relationship that must exist, don’t have to be true (and won’t be, if you are good at what you do)!!!
Best wishes,
Chris in FL
P.S. - Adam, I am in no way saying you need to switch to lower price properties. I think your repairs and vacancy factor needs to be higher, but your numbers look good, your plan sounds solid, and if it meets your purposes, I wouldn’t suggest changing a thing.