SE Michigan Cap rates/rental properties

Real Estate Investing Real Estate Gurus
1

Hey guys, I’m trying to get started in real estate and had a couple questions for the gurus here. Please let me know what you think of my plan.

I am looking to purchase a house that I will live in for 1-2 years and then move and rent out the house. I currently live in the Royal Oak area and would love to purchase in the area if it is a good investment market as well. I would be willing to spend up to about 100k if the house will cash flow. I have done some research on houses I think I could get into for 80k.

Let me know if these numbers seems reasonable based on my research and if there are much better areas to do this in SE Michigan.

Purchase price - $80,000 (3bed,2bath,1,000 sq. ft.,bsmnt,reasonable condition)
Rent price - $1200 (comps for this house were $1200-1300)
NOI - $14,400 rent - 3,000 taxes (millage 50 for investor) - 800 insurance, -1200 maintenance, -1200 property management = $8,200
Cap. = $8200/80000 ~ 10%
CoCR = assume 20% down, 30 year fixed @ 4.5%, $325 payment = (8200 - 3900) /16,000 = 4300/16000 ~ 25%

Cliffs: Are cap rate of 10% and CoCR of 25% reasonable in SE Mi for an investment rental or are my strategies off?

Thanks for taking a look guys!

2

20% is a lot to put into a deal in this market…I just sat down with the owners of 3 duplexes and our agents yesterday. I think Im gonna be able to pick up all 3 for around $250k with $30k down. Keep in mind my $30k is made up of a $15k note on a another property and with all the credits involved I should be between 2-3% of actual cash out of pocket to close.

Be creative…dont do what other people think you need to do to buy properties…Make more money than the guy who puts 20% down…

3

Ya, I’ll take the best deal I can get, I’m not afraid to do 0 down and do a bunch of leveraging if the opportunity presents itself. If I’m living in it for 2 years before I rent it out is it worth it to pay off the PMI that I will likely be charged until I have 20% equity though?

Also what do you think about the other estimates for costs?

Is 10% cap rate decent in this market?

Thanks a lot for your input!

4

Hi Ice,

You NEVER use Cap Rates for a single family house. It’s just not a good way to look at the deal. And while Royal Oak is a decent area, $80,000 for a 1,000 SF house seems like a LOT of money for MI.

I suggest you take the time to educate yourself on real estate “investing” first, before you dive in. We have a vast assortment of free articles and other resources here. Take your time, and make your first deal a great one!

Good Luck.

JP

5

Seems difficult. You need an expert and you need to be good with numbers. You’d be facing a taxing authority who litigates these cases all the time. Plus family pressure. I wouldn’t do it.

Thanks
Regards
Chantell Wilson
Site address:http://www.apartmentcafeteria.com
Apartment Rentals with user reviews, amenities and location Map.

6

Wow.

Just wow.

20% down in this market!? Crazy!

Good luck to you.

Sincerely,
James

PS - Just BUY these houses for 6-8k instead and cash flow for 500 net/month…

7

He’s Back!

James Cash-Flow-From-The-Get-Go is in the house. Show your love ladies and gentleman, show your love!

I can ALWAYS use some of James’ “buy at 8K and cash flow at $500/mo” balm. I never tire of it. Seriously. You are one of the few people that makes this CRE world sound fun. Good to see you here again.

8

Yes, I agree James is a good time and I enjoy his posts, but how about giving the poster something constructive instead of mocking him.

Hmmm? Come on James. I know you can do better than that.

–Natalie

9

Updated calculations, feedback please!

While I understand that the answer to many real estate queries may be “buy a house for 6-8k, rent for 500 profit/month… get rich… rub money on your butt…” I don’t believe that is a house that I want to live in for 1-2 years or an appropriate response to this question.

Brandon: I can do FHA on this house and put down 3.5% My loans will be at 3.9% +/- depending on when I close. I think I will go this route as the PMI will not add a significant % to the interest when compared with interest I would pay to get that 20k by other means (student loans not paid off).

I have found a house listed at 125k that is a 3/2 1000 sq. ft. ranch with nice updates (granite countertops, hardwood refinish, cherry wood cabinets, finished basement, modern bathrooms, etc.), garage, deck, and an 800 sq. ft., finished, basement. It will be a nice house for me to live in for a couple years and should make a reasonable rental property, for which I have a good niche/market to rent in, and should be able to rent at 1350 +/- 150bucks.

I anticipate getting the house for 115,000 all in w/ seller reimbursing closing costs.

@3.5% down = $4,025 down

@1400 rent/month
taxes = 2350 (previous year at 55k SEV)
insurance ~800? (quoted 450 by 8 companies for homestead taxes)
maintenance ~ 1500?
property management ~ 1400 (~10%)
vacancy ~ 1200 (~8% with good niche market of students)
Debt service w/PMI assume 4%, 30 year fixed = 590x12 = 7080

Total expenses w/ debt service = 14,330
Total yearly profit = $2470
CoCR@1500 = 86%
CoCR@1400 = 61% (pm/va values changed to reflect rental price)
CoCR@1300 = 40%
CoCR@1200 = 17%

[b]I have two questions regarding this deal.

  1. Are my estimates for expenses ballpark for your average house of this nature
  2. Does this deal make sense to do in light of the fact that my investment options are somewhat restricted by my requirement for a move-in-ready-homestead?[/b]

Thanks for taking a look!

10

[QUOTE=icecoldriva;882287]While I understand that the answer to many real estate queries may be “buy a house for 6-8k, rent for 500 profit/month… get rich… rub money on your butt…” I don’t believe that is a house that I want to live in for 1-2 years or an appropriate response to this question.

Brandon: I can do FHA on this house and put down 3.5% My loans will be at 3.9% +/- depending on when I close. I think I will go this route as the PMI will not add a significant % to the interest when compared with interest I would pay to get that 20k by other means (student loans not paid off).

I have found a house listed at 125k that is a 3/2 1000 sq. ft. ranch with nice updates (granite countertops, hardwood refinish, cherry wood cabinets, finished basement, modern bathrooms, etc.), garage, deck, and an 800 sq. ft., finished, basement. It will be a nice house for me to live in for a couple years and should make a reasonable rental property, for which I have a good niche/market to rent in, and should be able to rent at 1350 +/- 150bucks.

I anticipate getting the house for 115,000 all in w/ seller reimbursing closing costs.

@3.5% down = $4,025 down

@1400 rent/month
taxes = 2350 (previous year at 55k SEV)
insurance ~800? (quoted 450 by 8 companies for homestead taxes)
maintenance ~ 1500?
property management ~ 1400 (~10%)
vacancy ~ 1200 (~8% with good niche market of students)
Debt service w/PMI assume 4%, 30 year fixed = 590x12 = 7080

Total expenses w/ debt service = 14,330
Total yearly profit = $2470
CoCR@1500 = 86%
CoCR@1400 = 61% (pm/va values changed to reflect rental price)
CoCR@1300 = 40%
CoCR@1200 = 17%

[b]I have two questions regarding this deal.

  1. Are my estimates for expenses ballpark for your average house of this nature
  2. Does this deal make sense to do in light of the fact that my investment options are somewhat restricted by my requirement for a move-in-ready-homestead?[/b]

Thanks for taking a look![/QUOTE]

Given the limited information about your pro forma expenses, the property, and area you are in, its impossible to give you much information about your expense estimates. However they seem reasonable. Your vaccancy line mentions a niche market w/students. Students are generally very hard on property, and turnover every semester. Also, student rental areas generally have a preadatory “code compliance office” that will victimize landlords with absurd registration fees and compliance requirements. You will not be able to fight back, as this will be a matter of policy. Keep that in mind.
Assuming your math is correct, the figures you posted seem reasonable to me, and I would not be afraid to move forward.

11

AmotoXracer, thanks for your time and expertise.

The target students are medical students who tend to stay in the area for four years and probably are less risk than the undergraduate population living in typical student housing neighborhoods.

This area is a central area for several hospital systems and a medical school. It is very near a popular urban area and has good school systems but is not slated for student housing.

Unfortunately I forgot to factor in millage rates for investment properties and my taxes will be more along the lines of 3k once this change occurs. As a result the CoCR’s will drop about 17%.

Hopefully this works out, I understand this won’t be a cash making machine but I really like the house and hope that it can be a reasonable investment at the same time.

12

None of them are as high as the pay rates posted on the home page of this forum, unfortunately. … amy in Clinton Township, Michigan