House #3
House #3 is a condo (2 bedrooms/1 bathroom, 800 sqft) I bought in a gated community for 147,000 about two months ago. I put 33,000 as the down payment which equals to about 22% down. I wanted to make sure I put enough down so the mortgage payments wouldn’t be a money suck for me over the long run.
Terms of my bank loan:
- Borrowed 114,000 from bank
- No fee mortgage plus (bank covered my closing costs)
- Fixed 4.5% interest rate
- 15 year loan payback time (2009 to 2024)
Expenses related to condo:
- HOA cost of 276/month (covers trash, water, gas, insurance)
- Electricity cost per month
- Mortgage payment of 870/month
- Property assessed at 147,000 so property tax is ~150/month
Total expenses: about 1,300/month excluding electricity costs
I bought this property mainly to be a real estate investment. I plan on renting it out to generate cash flow and hold it for capital appreciation.
Researching rent costs for similar condo properties in my area I found that the average rental price is 1,250/month. As a result, if I rented this out at market price then I would only have a negative cashflow of (50) per month. And this negative cashflow is mainly due to limiting the loan payback time to 15 years. If instead I went for a 30 year loan period then the mortgage payment would average 670/month. But I would much rather pay an extra 200/month and have the payback period be cut down in half from 30 to 15 years. Less expenses looming over me for a long period is always a perk.
However, even though the market rental price is 1,250, most likely I will rent it for 1,200 because it is always easier to rent when you price it just a little below market price (what good is a high rent but no tenant right?). This would then set me back (100) per month, which is doable with my income.
Current situation: Right now Bae (my significant other) is renting my place for 700/month. This amount is much lower than the expected rental price of 1,200 and thus I am set back about (600) per month but with my current income I am able to make up the negative cashflow. It is possible that Bae will move out in a year or so because Bae’s parents are going to move to the United States and most likely that will result in moving out of the condo and into a nicer place. However, in the case that Bae doesn’t do that and continues to live in the condo with Bae’s parents, we have agreed to increase the rent to 900/month. This would then only set me back (400) a month. We’ll see what the future holds.
Prepayment: Even with the current negative cashflow I am prepaying the principal on the mortgage by a sum of 500 per month. Using Bankrate.com’s mortgage calculator I was able to determine that doing so will help me cut the 15 year payment period down to 8 years as well as cut the total interest paid from ~40,000 to ~20,000. Dang! The lure of cutting interest paid in half and being able to own a property clear and free within 8 year motivates me to prepay 500 every month.
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whats the geographic location of your rental?
It’s in Los Angeles County of Southern California.
But shouldn’t tennants pay for water, trash and gas?
Whenever I have rented an apartment, I have always paid for those ( maybe not for trash).
The water, trash, and gas are all covered in the $276 monthly HOA cost so I wouldn’t charge the tenant separately for them. I would only have them pay for their own electricity usage cost per month.
Cool, I would love to learn more about your experiences in real estate investing. My only experience with rental real estate investing is by purchasing REITs. I would hate to have tennants not pay rent and me having to evict them. I would expect my property to be severely “mishandled” by such tennants..
Most of my experiences with individual real estate investing has been through helping my parents, I just ventured out on my own buying my own property a couple of months ago. But tenants aren’t that scary, the most important thing is to have a good landlord system that you follow without fail (eg. always perform a credit check, background check, etc…). That generally will help you weed out most of the people that might not pay rent or trash the place. I’ll try to write a post about that next time.
Btw, I’ve always been interested to invest in REITs but due to the recent commercial mortgage meltdown, I’ve been staying on the sidelines for those.