That is interesting. Not only did I put 20% down, I have 15 year mortgages on the houses. They were purchased six years ago and have cash flowed from the start. Maybe my situation is unique in that they are four bedroom, which is harder to find in a rental house, and they are in a top notch school zone. Another factor might be that Tallahassee is a fairly recession-proof city, with so many people working for the state. From what I understand, home prices have not taken as big a hit here as in many other parts of the state. I have not researched that, just heard it.
You are correct that Tallahassee homes are not in the same ball game as vacation properties in South Walton. We are talking about apples and bananas.
The old rule of thumb is that an investor would like to beat the average return of other investments. This is changing greatly over the last decade, with the stock market being at the peak, and now off tremendously. I'm not sure what the average rate of return is on the stock market over the history of the market. It used to vary between 7-8%. Anyway, some simple math to keep in mind for true investment property is that (without considering property value increases/decreases and tax shelters) an investor would want to see monthly rents of 1% of the purchase price, in order to receive a 10% return per year. eg- a house costing you $200,000 should pull rent of $2000 per month. That is far from the case here today. At best, a $200,000 house in South Walton might on a good day pull around $1000 per month. That math doesn't work inside these guidelines. Here is why:
$200,000 purchase price
20% down = $40,000
balance of loan = $160,000
(assuming a 6% fixed interest rate for 30 years)
Monthly principle and interest = $960
expect a monthly cost of taxes to be around $150
expect insurance to cost around $200 per month
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So, you have monthly rental income of $1000
less monthly expenses of $1310 per month*
leaving you an estimate NEGATIVE cash flow of $310 per month, and you have a part time job of a landlord, costing you time and labor.
*(we'll stop there, but there are additional cost of maintenance and repairs and if you aren't calculating at least 2 months per year of no occupancy, you are leaving out meaningful numbers.)
I will gladly look at examples of possible POSitive cash flowing properties, but on average, you won't find any to purchase in South Walton at this time, and probably won't see many in the future. This doesn't mean that property won't increase in value and return money on your investment. Just means that properties purchased today in our area, don't tend to Cash Flow in a positive manner.
Let's use the example above with a monthly rental income of 1% (of purchase price) per month to see how the cash flow would vary:
$200,000 purchase price
20% down = $40,000
balance of loan = $160,000
(assuming a 6% fixed interest rate for 30 years)
Monthly principle and interest = $960
expect a monthly cost of taxes to be around $150
expect insurance to cost around $200 per month
_______________________________________
So, you have monthly rental income of $2000
less monthly expenses of $1310 per month*
= $690 per month, or $8280 per year
Remember, you have $40,000 of your money tied up, plus $1310 per month ($15,720 per year). Divide $8,280 (return) on $55,720 (money invested) = 14.9% ROI (return on investment). Again, we aren't calculating the time when there is no occupancy, and not setting aside money for repairs and maintenance. Both are real costs, and when included, you will come closer to a 10% ROI, which still beats the life time average return of the stock market. (You still have a part time job as a landlord, which may mean calling the plumber on a Sunday to fix the flapper on a toilet, at a cost of $120, or doing it yourself. -- Being a landlord is no glorious job.)
*(but there are additional cost of maintenance and repairs and if you aren't calculating at least 2 months per year of no occupancy, you are leaving out meaningful numbers.
Any thoughts would be appreciated. I've had rental properties for over 15 years (albeit these are not vacation homes). Would be happy to share my model.
