March 6, 2013
I received a call from my rental property manager. He had a short sale he was working on for 6 months, and wanted to know if I wanted to purchase it.
The house is a 3 + 1.75, built in 1963. It is 1,487 square feet. It has central A/C, a 2 car garage, and a pool. There are tenants that have been renters for about 18 months, and have a great rental history (meaning they pay on time each month). Rent is $1,250 a month. Price is $124,000. The property is located in California.
My analysis is as follows:
Monthly Income:
Rent = $1,250
Monthly Expenses:
Mortgage = $0 (I would be paying all cash)
Property taxes = $200
Insurance = $50
Gardener = $70
Pool = $85
Property Management = $85
Total expenses = $490
Net income = $760 a month or $9,120 a year
The ROI (return on investment) is 7.35%
I decided to pass on it, mainly because it has a pool. Pools are great for tenants, but a headache for landlords. There is the $85/ month pool maintenance charge, plus eventually they require expensive pool equipment repairs, tile work, and more.
If the property did not have the pool, my net each month would be $845/ month, or $10,140 annually. This works out to a 8.17% return.
I am also not including any repairs that would be needed, as this is an unknown right now. But after buying over a dozen homes in recent years, repairs will likely run $5,000 to $10,000. This reduces the return considerably to below 7%. I always look to get at least 9% for rental houses, after repairs and renovation costs.
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