Real Estate

What does a Rental Property Look Like?

dianahill
Diana Hill
Professional Real Estate Investor Instructor

Any kind of real estate can be a rental property (providing there aren’t any rules restricting it). I get asked all the time if a Single Family or Condo can be a good rental. My answer: “What do the numbers tell you?” Let’s look at the Pros and Cons of owning either a SFR or Condo as a rental and then we’ll look at the numbers.

Single Family Residence (SFR) Pros:

  • Free WorkshopSFRs are easier to rent. Renters are more stable, they tend to be families who are looking to create a home. This allows you, as the landlord, to have stability in your rent
  • They offer more privacy for the renter which is attractive
  • They are easier to sell when you need to liquidate
  • Their appreciation rates tend to be more predictable

Condominium Pros:

  • Most condominiums require very little maintenance from the owner. Yard work and such is most often paid through your monthly dues. Reserve funds are also saved by the condo association for larger repairs
  • They have amenities such as pools, clubhouses and exercise facilities that attract good tenants
  • They are usually less expensive to purchase
  • You can buy in the better neighborhoods for less

Single Family Residence Cons:

  • Single Family Residences can be subject to expensive and extensive repairs, such as roof, electrical, plumbing etc.
  • Since you have a single tenant, loss of that tenant means NO income
  • The monthly cash flow can be tighter
  • There is more to maintain, such as a yard or pool

Condominium Cons:

  • Condos typically have less privacy
  • Space is limited. For example: outdoor space, storage (such as garage or storage units), and rooms tend to be smaller.
  • There are monthly dues which increases your cost of the unit.
  • The resale process can be much longer than a SFR
  • There is a set of rules known as CCRs that must be followed by your tenant and it’s your responsibility to enforce them.
  • The CCRs might also restrict or make it illegal to rent the unit

Now let’s look at the math.

An average Single Family home as a rental:

Size: 3 bed 2 bath, 2 car garage, nice family neighborhood

Price: $180,000

Loan terms: 20 percent down, 4.5 percent interest rate on a 30 year loan

Expected rent: $1500.00

dhill 20150217 - SF-rental-lessons

As you can see in the table above (this is an example of the spreadsheet models we use in our Real Estate Investor Classes) there is positive cash flow, also known as CADS (cash after debt service) of $155.37.

An average Condominium as a rental:

Size: 2 bed, 1 den and 1 ¾ bath, 2 parking spaces very upscale neighborhood

Price: $95,000

Loan Terms: 20 percent down payment, 4.5 percent interest on a 30 year loan

HOA’s (Homeowner Association Dues. We add it to utilities): $195.00

Expected rent: $1075.00

dhill 20150217 - condo rental lessons

The table above calculates that there is a positive cash flow (CADS) of $79.67.

I hope these two models help you better understand how the numbers, along with the pro’s and con’s, can help you make a wise buying decision.

Great Fortune,

Diana Hill – dhill@tradingacademy.com

 

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