Mostly-random posting (updating you on what I have been doing instead of Armory developement):I have been neglecting Armory completely the last few days, because I got
nerd-sniped trying to figure out the investment quality of buying rental property. This came up because my new fiance and I started counting up each others' financials and realized that a dual-income will leave some headroom for investing. And we noticed some nearby properties that are going for super-cheap which we could rent out for much higher than the mortgage payments.
So I spent the last few days diligently digging into IRS publications, and making spreadsheets to try to model the relative investment potential of the rental property, taking into account every relevant tax code. Partially for curiosity, partially for education, but ultimately because it's feasible we could do this in a couple years. What I found surprised me. And I have included everything on
this spreadsheet, which I am posting because others might find it useful, and the time spent making it would otherwise have been spent on Armory development, which is what you were probably expecting
I won't go into extraordinary detail about it here (off-topic!), but this spreadsheet assumes that the initial closing costs on the loan are your "investment", and compares your movement in net worth to a fixed-rate-of-return asset. What's your overall equity&cash gain through an entire cycle of purchase, rent it out, pay taxes, sell it, and then pay more taxes? For this particular property, it looks like approximately 11%
annualized return for 10 years. That's hardcore!
It appears that house prices have dropped dramatically, but rent prices have not. Perhaps this happened because the shitty economy has made it very difficult for people to do anything about the market inefficiency. I'm sure many people see the opportunity but can't act on it because they can't get the credit, and/or don't have capital for down payment and closing costs
None of this constitutes financial or tax advice. I just thought it might be educational, and I'm sure there's a lot of investor types reading this. Perhaps you have some experience with this and will PM me your thoughts about it! Your occupancy rate seems high, and your annual repairs numbers seem low. (Not based on any hard evidence, just what my gut says, but my gut is
very conservative.) Also, you need to pay for management, either in the value of your time, or as cash to a service. If you have good friends in need of a home to rent, and you don't mind losing them as friends, the management cost can be reduced considerably.
More on the occupancy rate. A 95% occupancy rate doesn't mean that you earn 95% of the rent income each month, it means that you need to make the mortgage payments out of pocket for an average of 12 months over 20 years. That means that you need $34k to close, not $22k, and you need to be vigilant about not spending that contingency fund on anything but mortgage payments, and you must replenish it first, before taking profits. You must assume that those 12 months that you have to pay out of pocket will come at the absolute worst time, when you have both lost your jobs and don't have outside cashflow to make the payments from your regular income.
Also, you have to resist the temptation to dip into the repair fund for non-repair costs. If you spend less on repairs for a few years than you planned for, you can bet that the water main under the front lawn is going to pop the following year and wipe you out, or a storm will send a tree through a wall, or something. Don't expect to use your insurance policy to cover things that are really repairs. You should probably also put a few years worth of repairs into the fund up front, further increasing your closing costs.
The good news will come a few years down the road, when you have multiple units and you can start to make reasonable expectations that the law of averages will be working on your side instead of against you.
Oh, and for the love of god, incorporate. Hopefully a different company for each property. Nevada has no corporate income taxes, and it is super easy to incorporate there. Plus, you get to fly to Vegas to apply for bank accounts in person, which is always fun. This may be futile though, since your state may hit you with corporate income taxes on the basis of the property under rental being in the state, even if you try very hard to properly establish a nexus in Nevada. Check with your lawyer (and get a lawyer). Take the corporation seriously, follow all of the procedures and your bylaws to the letter, do all of the paperwork by the book, don't commingle your funds. When you get to multiple properties, have a corporation that owns the corporations that own them, and let that holding corp manage the pooled repair and vacancy funds.
Make sure that your accountant takes you out on the boat that you are going to buy him on the installment plan for keeping your books straight. (And get an accountant.)
