Investing in Rental Property: Getting Ready

"If it's on sale, but you can't afford it, it's not a bargain."
– My mother

Handshake 2.0's headquarters are in Blacksburg, Virginia, USA, with its unusual real estate market of an ever-replenishing demand for housing from Virginia Tech's incoming students, faculty and staff.  A recent article in the Wall Street Journal asked Are You Ready to Be a Landlord?  Essentially, houses are on sale in the United States, including in Blacksburg, ready for purchase.  But what does "ready" mean for an investor considering investing in rental property in Blacksburg, Virginia?  How much capital does a prospective rental property investor really need to begin to be "ready" to invest?

Are you ready in invest in rental property?To answer that question, I used figures in the Wall Street Journal's Are You Ready to Be a Landlord? to extrapolate the purchase of a hypothetical, single-family, 3-bedroom, 2-bath home with a sales price of $200,000.  (When the Wall Street Journal offers a range – 3% to 6% for closings costs, for example – I'll use the high end of the range, playing out the "worst case scenario" of possible costs.)

A place to start in estimating the risks and rewards of investing in rental property is with the rent.  For all-things-real-estate, I turn to Tommy Clapp, our real estate agent.  (Tommy Clapp is with Coldwell Banker Townside, REALTOR(R), a client of Handshake Media, Incorporated, the parent company of Handshake 2.0).

For single-family, residential rental property in Blacksburg, Virginia, Tommy recommended estimating rent at $300-$400 per bedroom. Using the lowest figure to continue with our "worst case scenario numbers," my hypothetical 3-bedroom house would rent for $900 per month.

Sources cited in the Wall Street Journal's Are You Ready to Be a Landlord? caution prospective investors to factor in unanticipated costs, which we total here:

3 months rent to find the first tenant:

3 x $900 = $2700

6 months rent in case of vacancy:

6 x $900 = $5400

6 months rent in case of major repair:

6 x $900 = $5400

Evicting a tenant can take time as well.  The WSJ tells a "nightmare" story of 3 months, so we'll use that number:

3 x $900 = $2700

My gross estimate of total liquid assets, or close to liquid assets, needed in reserve to be ready for investing in real estate in Blacksburg, Virginia:

$2700 (first tenant) + $5400 (vacancy) + $5400 (major repair) + $2700 (eviction) = $16,200

Most lenders require at least a 20% down payment for investment property.

$200,000 x .20 = $40,000

We'll take the WSJ's 6% estimate for closing costs on the $200,000 purchase price for our rental property:

$200,000 x .06 = $12,000

So, using the Wall Street Journal's numbers, how much capital does a prospective rental property investor really need, then, to be "ready" to invest?  By my estimates, for a $200,000 3-bedroom, 2-bathroom single family home in Blacksburg, Virginia:

$16,200 (reserves) + $40,000 (down payment) + $12,000 (closing costs) = $68,200

"The pitch is compelling: Buy a vacant house or apartment building and rent it out to some of the throngs of Americans who have lost their homes to foreclosure," Jessica Silver-Greenberg begins in Are You Ready to Be a Landlord?  The pitch is compelling in Blacksburg, Virginia, too:  Buy a vacant house and rent it to some of the throngs of Virginia Tech folk who will make Blacksburg home for a time.  Houses are on sale in Blacksburg, Virginia.  Now that we know the numbers, we can decide whether or not, for us, they're a bargain we can afford.

Our series on investing in rental property:

Investing in Rental Property: Doing the Numbers
Investing in Rental Property: Getting Ready
Guide to Managing Rental Property in Blacksburg, Virginia

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