Real Estate: Please review my recent investment (with numbers from recent purchase)

Question

I recently bought a brand new home as a rental property in Syracuse, NY:

Price: $200,000

Down payment: $40,000 (20%)

Monthly payment: $1,500-1,600 a month (~$800 mortgage + ~$700 for taxes)

Price I pay for agent to find a tenant: $1,000

Rent: $2,100

FYI Syracuse taxes are extremely high:

The tax rate for the village of East Syracuse is $15.22 – the highest for all villages in Central New York and 16th among villages in the state. Add to that school, county and town taxes and the total rate for village homeowners is $46.70.

However, since it's a brand new home, the taxes on the first year of the house are extremely low because they are based off of the land value. which means I pretty much got a "free ride" on taxes for 6 months. This brought back a return of 5k or so.

Based off of my numbers, is my cash flow considered decent? I ask because this was my first real estate investment so I don't really know what's considered 'good'. My agent is trying to sell me another place that's more expensive but with a similar return (brand new house, $250,000-260,000, rent it for $2400, monthly payment would be $1800, freeish taxes on the first 6 months) and I am not sure if these numbers are any good.

One thing that bothers me are the taxes. The monthly cash flow is the same, but the monthly payment is higher. However, this is supposedly the "hottest" neighborhood in Syracuse, so it would be easy to rent (according to him).

Any advice would be appreciated. Thanks!

Answer 1

Okay so I am going to break this answer into a couple sections:

• Did you get a good deal?
• The purchase of the second home.
• Education

Okay so first things first. Did you get a good deal? This is challenging to answer for a number of reasons. First, a good deal is relative to the buyers goals. If you're attempting to buy an asset that provides passive income then maybe you met your goal and got a good deal. If you're attempting to buy an asset that provides long term growth, and you purchased above market (I'm speculating of course) then you may have made a bad deal.

So how do you determine if you got a good deal?

1. Look at the "Comparable[s]", or houses that are very similar to the one you just purchased, in the surrounding area. What are they selling or have sold for? What are they renting for? If your real estate agent is worth their weight, they will already have a detailed analysis done for you, with a map, printed or in PDF format. The caveat here is if your agent doesn't have this, find a new agent NOW.
2. Does your rental income exceed your rental expenses. This includes, but is not limited to, mortgage, taxes, insurance, water/sewage/trash (if you pay it) and of course, the one that everyone LOVES to forget, a HEALTHY repair budget. Now granted you have a new property so hopefully repairs are minimal. That said, collect the funds, put them in a dividend paying mutual fund that reinvests in itself and LEAVE IT.

3. Does your "Gross Rental Multiplier" equal that or is less than that of the average GRM in your area. The lower the better.

   • Gross Rent Multiplier or the (GRM = Purchase Price / Annual Rental Income)

   So how do you use the GRM to determine if you're getting a good deal? Divide your purchase price by the average city (or area) GRM and that will tell you what you should be getting annually in rent. You can also use the GRM to determine if a future purchase is over or under priced. Just replace purchase price with asking price.

Alright, so these are the tools you can use to decide if you made a bad business deal or not. There are many ways to skin a cat so to speak. These are the tools I use BEFORE I purchase a home. Many people are penny wise and pound foolish. Take your time when making large purchases. It's OKAY to say PASS.

Okay next thing is this new purchase you're looking at. The number one rule when working a franchise is you don't open a second store until you have a perfect working model to go off of. If you've never had to file a tax return for your current rental. Then you need to wait. If you've never read your local and state rental laws. Then you need to WAIT. If you've never had to leave an event early, wake up in the middle of the night, or get a text while you're on a date from one of your tenants. THEN YOU NEED TO WAIT. Give it a year or two. Just learn the unknown about rental properties. Use your first as your test bed. It's WAY more cheaper then if you make a bad mistake and roll it over multiple properties.

Finally I will leave you with this. No one on this site, myself included, knows everything there is to know about real estate. Anyone that claims they do, send their ass packing. This is a complex COMPLEX business. There is always something to learn and if you don't have the passion to continue learning then hand it off to someone who does. There is tax law, rental law, city repair law, contract law and this doesn't even include the stuff that makes you money, like knowing how to leverage low or no money down loans.

Please take some time and go out and learn.

Good luck! -AR

Answer 2

You question is a bit scary to me. You show $2100 rent, and let's even assume that's 100%, i.e. never a vacancy. (Rule of thumb is 10% vacancy. Depending on area, a tenant may stay a year, but when they leave, you might need to have a bit of maintenance and miss 2 months rent)

You count the mortgage and taxes, and are left with $500/mo. Where is the list of ongoing expenses?

• Seasonal - Lawn and landscape / Snow removal
• Water bill - who pays this?
• Maintenance - New houses still get clogged drains, leaky faucets, failed electrical items. Stuff breaks.
• Long term repairs - A $12000 roof may have a 20 year life. Budgeting for $600/yr may seem silly, but with multiple systems heat/AC, driveway, etc, you can accumulate $40000 or more over a 20 year cycle, so somewhere you'll be coming up with an average $2000/yr or more for these repairs.

I suggest you put that $500/mo into a separate account and let us know a year from now if anything is left.

To Anthony's point. I agree 100%, no one can tell you everything you need to know. But, whatever my answer, or his, other members with experience (similar or different) will add to this, and in the end you'll have a great overview. The truth is that it's easy for me to sit here and see what you may be missing. By the way, if you look at the 'rules of thumb' they will make your head spin. There are those who say the target is for the rent to be 2% of the value of the house. But, there are markets where this will never happen. There's another rule that says the expenses (besides mort/tax) should be planned at 50% of the rent, i.e. you should put aside $1000/mo for expenses over the long term. The new house will be lower of course, but in years past year 10 or so, this number will start to look reasonable.