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Help setting rent for properties

Question: I am looking into 8 properties and plan to purchase 1 as my first investment property. Two factors that I must consider are the value of the property and the cash flow. I have read about many methods for determining property values but nothing on setting a rent amount.

My cash flow will be determined by the amount for which I can rent the property. This is a very important number and I have no idea how to get a range.

How can I determine the amount I should expect to able to rent a property for?

I’ve chceked the newspaper but have found very few homes in the area of the ones I’m looking at.

Answer: It’s only fair for me to explain how such transactions end up happening, and why people should beware of advertising making such claims. Even when they are true, there are other circumstances involved in the transaction that contributed to the final closing price of $1.00.

One cannot lie about property purchase prices, they are public record. I purchased two properties for $1.00 each, 4606 S. Grand, 63111 and 7803 Pennsylvania, 63111 both within the City of St. Louis, both with existing tenants in place, both at $350.00 per month. Albeit one was a deadbeat and hard to collect from, but the other always paid promt.

I met an investor who was getting tired of being a landlord and wanted out of the business. All of his properties were paid for, and I think depreciated down to zero. A couple had new furnaces, and a couple of others had new roofs.

Someone had made him a fairly decent offer on a 6×5 apartment complex, which would leave him with 5 two-story SFR’s and 1 one-story SFR. He was not to happy with selling them off individually, so I made an offer to him to buy all six 50k below his asking price, and agreed to close on all six at the same time. After negotiations were completed, the final purchase price for all six properties ended up at 120k or 20k for each property.

However, it is very hard to get financing on amounts below 25k, so instead of financing all six houses, we only used four of them to obtain mortgages. Each of the homes were appraised and mortgages were secured for 70% of the appraised values of the top four of these homes.

Needless to say, this means the purchase price for each home had to be a set or fixed amount, comperable to the loan being placed on that property. Although we had an original contract to purchase 6 houses for 120k, a new contract had to be written for each individual house, showing the agreed purchase price. Since the first 4 houses used up the full 120k agreed purchase price, the last 2 houses had to be deeded over to me for $1.00 each to make it legal.

FWIW: The as-is appraisals for the 6 properties combined, exceeded 170k, if cosmetically renovated without any upgrades, the appraisals would easily cross 200k. If I upgraded only the bathrooms in each, plus cosmetics, the appraised value of these properties would exceed the 250k mark without a problem. Updating the kitchens would increase it a little more.

I had originally planned on putting about 20k into the purchase, which in essence I did. But a partial cash-out was obtained on one of the dollar homes as soon as it matured, so I recovered my initial investment. So, after the maturation period, I owned six occupied rental properties, some with tenants now over 18 years, at no cost to myself, that generates after debt service a positive cash flow of roughly 1/2 of the collected rents. Insurance, Taxes, Maintenance, Utilities and a Reserve set aside for future major expenses, like roofs or furnaces, consumes about another 1/4 of the collected rents. So roughly 25% of the collected rents transfers to my hip national bank as personal income, with no cash investment of my own.

I couldn’t really call this a no money down deal, because I did make a down payment, that was recovered shortly after closing.

I couldn’t really say I walked away from closing with cash in hand, because it was a year later when I decided to pull a little cash out of the other dollar home.

The only drawback will be when I sell, $1.00 is the basis for two homes that are both now under lease options, each contract is for over 28k and they were both placed under lease option contracts as is, with the buyer doing all the work. Renovated, both houses should appraise at 35k or over for the new owner, if they exercise their option to purchase. If not, they don’t get back the extra 50 dollars per month being applied to their down payment from the rents paid. And I will have collected $400.00 per month rent on homes that were renovated by the tenants. Less some permit and inspection costs, not to mention a couple of small fines from the city, because work requiring a permit was done and an inspection called for and made (and passed), but there was no permit for the inspector to sign, so a 10 dollar permit was obtained with a 40 dollar fine. Still cheaper than replacing a deck yourself, right!

I regularly buy houses for between 3k and 5k that only require about another 5k to bring them up to code. Or roughly 12k to 18k to completely renovate. Most appraise at or over 50k when completed. Occasionally I get a white elephant that renovation costs near the 25k mark and I can only get around 45k out of them, but that’s still at my expected 15k return. So perhaps they aren’t a white elephant at all.

I recommend staying away from homes the city will sell for a buck. They already have made thorough inspections of the property and know every little detail about it, and have flagged every single permit that is required to repair the home. Nothing at all will be grandfathered, and everthing must be to current code standards. Basically this means only a total gut rehab will appease the city. And these homes are in areas where you cannot recoup your expenses.

I don’t know about the rest of the investors on this forum. But I myself do not consider any investment home purchase a good deal, unless, after all expenses, including an age calculated Reserve set aside, there is at least a 25% (of collected rents) clear profit. Or more easily figured, 50% after debt service.

I’ve mentioned Reserve a couple of times in this post. For new investors, a Reserve account is monies set aside to cover future known maintenance expenses. The required Reserve amount I keep is based on 3 things, the Roof, the Furnace/AC (AC if applicable), and the Siding (if applicable) or Major Exterior. Things like Doors, Windows, Gutters and Hot Water Heaters fall under normal maintenance expenses. I use a fairly simple formula that applies to all houses. New Roofs 20 years, Existing Roofs 15 years less current age, Furnaces/AC 15 years, Siding/Exterior 10 years.

Without getting bids, you can find out roughly what it will cost to replace the roof, furnace, siding, etc. by comparisons. Add to this 5% per year for inflation until the time of expected replacement. Then calculate how many months from the current month to the time of expected replacement. Deduct this amount from your collected rents and place it in an interest bearing reserve account, as it grows, purchase CDs (Certificates of Deposit) to earn greater interest. When it comes time to do a replacement, you have the money on hand and do not need to borrow to have the work done. It also becomes a nice nestegg for emergencies.

Although we all carry hazard insurance. Few investors know that their insurance will double if they have even a small claim, or be cancelled and will cost triple if they have two claims. In the state of Missouri, hazard insurance increased 34% across the board this year, due to extensive claims in Kansas City for hail damage, which also affected us here in St. Louis. An unexpected 34% increase in insurance, especially when you own several properties, is a very bitter pill to swallow, and has forced many investors to sell their properties well below market value, many for just what they owed on them, and has driven quite a few into bankruptcy. So that emergency nestegg is an important asset to any business.

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