Monday, April 2, 2007

Another Rental Property Purchased

I picked up another rental property over the weekend, again in Tulsa. Here are the details: 3 bed / 1 bath, 908 square feet with a carport. The tenant is a Section 8 renter with the rent 100% paid by the state of Oklahoma. The lease is up in July and I'm investigating if the state will pay a higher rent at that time. An older appraisal valued the place at $48,000. I'm getting it for $40,000. I've got a 60 day escrow on this one and will be putting down about $10,000. Numbers below are monthly.

Taxes:$43.42 ($521 / year)
Prop. Mgt:$60.00 (10% of rent, but a $60 minimum)
Insurance:$20.33 ($244 year)
Maintenance:$20.00 (approx. 5% of rent)
Est. Mortage Pmt:$179.87
Annualized ROI:13.85%

The mortgage payment amount is estimated and depends on what interest rate I'll be able to get. I used a 6%, 30 year loan for these calculations. I've run the numbers with interest rates from 5.875% to 6.125% and with a $10,000 and $15,000 down payment and all results are acceptable to me. (The ROIs range from 11.47% to 14.13%.) With these down payment amounts, I won't be paying PMI, so I don't have to worry about that cost.

I like this deal because the property is already in the Section 8 program, so I don't need to go through all the headache of getting it approved. The rent is 100% paid by Section 8, so I don't have to worry about late payments from the tenant. The drawback is that I am limited as to how much I can charge for rent because Section 8 will only pay the prevailing rate for a similar property in the neighborhood. But then, that's pretty much how all rents are determined. The difference is that with Section 8, I'll have to wait for neighborhood rents to increase and then follow suit rather then be the one leading the rent increase :-) Another plus is that Section 8 inspects the property every 6 months and makes sure the tenant is keeping it in good condition.

The property management company charges 10% of the monthly rent with a $60 month minimum. I'll be paying the minimum and you can look at this two ways: On the one hand, right now I'm paying more than 10% in management fees each month. On the other hand, 100% of any future rent increases go directly into my pocket and nothing goes to the management company - at least until the rent reaches $600 a month. I also inquired about volume discounts with the PM company. In order to get a discount, you need to have at least 4 properties with them. At that point, their monthly fee drops from 10% to 9% and the new tenant fee drops from 75% to 65% of one month's rent. I told them I only had two properties so far and she mentioned that they have some older owners who may be looking to sell their properties. I told them I'd be interested and to let me know if anything comes up.

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