One of my goals for this year was to purchase a rental property to further diversify my passive, well semi-passive, income sources. After the first quarter of the year I figured it probably wouldn't be a realistic option because there's a lot of obstacles to overcome given my work schedule. It had been a while since I looked at potential real estate investments but earlier this month I decided to browse around a bit on the internet and found a really great opportunity.
Based on the pictures I found online the property looks to be in pretty good shape. There's laminate wood flooring throughout with newish appliances. The previous owners had added on an extra room that added an extra 342 sf to the house which is essentially a second living room. I used to live in this same neighborhood before my wife and I bought our own house and the area is in a great location with easy access to two main highways. It's a small neighborhood off on it's own and isn't the greatest of neighborhoods but would probably be considered a B/C neighborhood.
Here's the details about the property.
Asking price - $109,000
Property Taxes - $1,800 annual
Insurance - $1,100 annual
No HOA fees
4.75% interest rate
Whenever I look at rental properties I always like to run through a few scenarios to check out how the numbers look on both the low and high end of rent. And I have to say the numbers looked really good for this property.
Low End of Rent
The numbers look pretty good on the low end of rent. With just $1,200 per month in rent the property would provide almost $200 per month in positive cash flow. That's a 8.45% cash on cash return and a 13.21% gross cap rate. Not bad at all considering that's holding 8.33% of rent for vacancy reserves and 10.00% for maintenance. Especially since this is on the low end of the rent scale.
High End of Rent
The numbers look even better on the high end of rent. At $1,500 per month for rent the property would provide over $400 per month in cash flow while maintaining the reserves for vacancy and maintenance. That would be an awesome 17.92% cash on cash return and a 16.51% cap rate.
I was very excited about this property and the possibility that it held as a rental. It would have been a great starting point for my venture into rental property as an additional income source. The numbers look good on the low end of rent and absolutely wonderful on the high end. Plus this assumes that we paid full asking price for the property which anything less would just be icing on the cake.
When I was home this past weekend I called up my real estate agent and tried to set up a viewing of the property. But unfortunately this one just wasn't meant to be. My wife and I were very busy when I first got home and we weren't able to get in to see the property on Friday. That was a big mistake since on Monday they had already accepted an offer on the property. The stars just didn't line up for us on this investment but it's renewed my spirit in looking for quality properties that can help diversify our income sources.
At a average yield of 3% the cash flow from the high end of rent would be like doubling my current portfolio but would only use about $27k in capital rather than the current $156k that I have invested currently. I want the majority of my investment capital to be in dividend growth stocks but adding in a few rental properties would be really nice. I'll keep looking for other opportunities in both the stock market and rental estate, but I'm really hoping to add a rental property to the mix. Using debt in a responsible way can really leverage up your returns.