Author Topic: Case Study - 1st Rental Property Eval  (Read 2592 times)

alwayslearning

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Case Study - 1st Rental Property Eval
« on: February 23, 2016, 01:01:34 PM »
Property Type: 4 plex
Asking Price: $175,000
Gross Rents: $2300
Taxes: $4,000
HOA costs: 0
DP = 20% or 35k
Mortgage: 140k
Mortgage payment including taxes: $1077

All units are occupied with various ending dates in 2016 and 2017.

Sounds great, right? But this property according to the sellers disclosure is being sold "as is" and needs a new roof, new deck, has had foundation repair in the past and is located close to a creek that doesn't usually, but can flood.

Is it worth it for such a great price, but with such big (known) headaches in the future? Thoughts?

This would be our first rental property and it is out of town (about 4 hours away from where we live).

iamlindoro

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Re: Case Study - 1st Rental Property Eval
« Reply #1 on: February 23, 2016, 03:48:00 PM »
A couple of questions you'll need to answer to get a real analysis:

1) What are your insurance costs?
2) How are you planning on getting 20% down?  Owner financing?  Fannie/Freddie backed loans on this property would be 25% minimum.
3) What interest rate are you expecting?
4) Are you planning to use property management and/or a service to place tenants?

If we go by my own assumptions:

25% down
4.75% interest rate
$1500/year Insurance
10% property management (which you should always work into the budget even if you plan to do it yourself)
10% maintenance and capital reserve contributions
Normal tenant placement fees and an average tenant stay of about two years ($1550 a year in tenant placement or lease renewals)
Deck + roof + other deferred maintenance cost you ~ $15,000
$4K acquisition costs
$40 a month in lawn cutting

Then I get an 7.95% cash on cash return.  That, combined with the hassle of dealing with a flood zone and the unknown deferred maintenance would make this a "no" for me.  Changes to some of these assumptions might change the outcome, but I would not rush to say you will manage it all yourself indefinitely, and that it is thus a decent deal-- life can throw you curveballs that turn this from a so-so investment to a burden, quickly.  Even removing all PM and tenant placement charges, the property still only hits 14.51% COCR.  By contrast, all of my properties *including* property management hit a minimum of 15% COCR.

arebelspy

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Re: Case Study - 1st Rental Property Eval
« Reply #2 on: February 23, 2016, 09:55:29 PM »
Agree with lindoro's post.

But this property according to the sellers disclosure is being sold "as is" and needs a new roof, new deck, has had foundation repair in the past and is located close to a creek that doesn't usually, but can flood.
...
(about 4 hours away from where we live).

When taking on such big issues, you should be getting a big discount.  Picking it up for 50k?  Maybe. Maybe. (Considering it may need 50k worth of work.)  175k?  No thanks!

(The only potential thing that might change that which you didn't mention is fair market value--it could be worth considering if it's well below market value--and I'm talking by over six figures--and you fix and flip it. But you'd want GOOD contractors inspecting it ahead of time with not to exceed quotes.)
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alwayslearning

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Re: Case Study - 1st Rental Property Eval
« Reply #3 on: February 24, 2016, 10:20:38 AM »
Thanks for your honest replies! We would be using our savings for the DP, so no financing needed for that portion of it. I'm not 100% sure of insurance costs, but it already sounds like this is an awful buy.

Thanks for taking the time to review it. We are having a really hard time finding a good rental property - it feels like there are so many duds out there!

What is COCR? Cash on Cash Return?

iamlindoro

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Re: Case Study - 1st Rental Property Eval
« Reply #4 on: February 24, 2016, 10:30:46 AM »
Thanks for your honest replies! We would be using our savings for the DP, so no financing needed for that portion of it. I'm not 100% sure of insurance costs, but it already sounds like this is an awful buy.

To clarify, you mentioned in the OP that you were going to put 20%, or $35K down (and presumably financing the rest).  Most mortgages in the country are backed by one of two mortgage corporations:  Fannie Mae or Freddie Mac.  These two main backing organizations set the baseline terms for all the other banks and lenders to underwrite based upon, including minimum down payment amounts.  Because the property is being purchased for investment purposes, and because it is a multifamily property, the mortgage will require that you put 25% down.  That was the source of my question: why you planned to put 20% down, and if you knew something about your financing plans that I did not.

Thanks for taking the time to review it. We are having a really hard time finding a good rental property - it feels like there are so many duds out there!

You're right-- there are lots (not that people don't buy them)!  But you're doing the right thing and actually learning to analyze the property rather than just assume that things are going to go well.

What is COCR? Cash on Cash Return?

Yep!

http://www.investopedia.com/terms/c/cashoncashreturn.asp

alwayslearning

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Re: Case Study - 1st Rental Property Eval
« Reply #5 on: February 24, 2016, 10:47:16 AM »
Thanks for your honest replies! We would be using our savings for the DP, so no financing needed for that portion of it. I'm not 100% sure of insurance costs, but it already sounds like this is an awful buy.

To clarify, you mentioned in the OP that you were going to put 20%, or $35K down (and presumably financing the rest).  Most mortgages in the country are backed by one of two mortgage corporations:  Fannie Mae or Freddie Mac.  These two main backing organizations set the baseline terms for all the other banks and lenders to underwrite based upon, including minimum down payment amounts.  Because the property is being purchased for investment purposes, and because it is a multifamily property, the mortgage will require that you put 25% down.  That was the source of my question: why you planned to put 20% down, and if you knew something about your financing plans that I did not.


Good catch! I forgot that IP's require the 25% (we just bought our primary residence last year and I had the 20% we put down stuck in my head).

AM43

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Re: Case Study - 1st Rental Property Eval
« Reply #6 on: February 24, 2016, 11:25:00 AM »
Property Type: 4 plex
Asking Price: $175,000
Gross Rents: $2300
Taxes: $4,000
HOA costs: 0
DP = 20% or 35k
Mortgage: 140k
Mortgage payment including taxes: $1077

All units are occupied with various ending dates in 2016 and 2017.

Sounds great, right? But this property according to the sellers disclosure is being sold "as is" and needs a new roof, new deck, has had foundation repair in the past and is located close to a creek that doesn't usually, but can flood.

Is it worth it for such a great price, but with such big (known) headaches in the future? Thoughts?

This would be our first rental property and it is out of town (about 4 hours away from where we live).

Those 3 items in bold are all you need to know.

Foundation of the house can cost thousands to repair if its a major issue and even then its not guaranteed.

Creek that doesn't usually, but can flood. It does not have to usually flood. All it takes is one 1 time and you are on hook for thousands in repairs and lost rental income.

About 4 hours away from where we live. Way too far where you can at least show up every couple months.
You are going to have to hire property management co and I would not trust them to run things for you without keeping an eye on it.

My personal opinion I would stay away from this purchase.
« Last Edit: February 24, 2016, 11:34:15 AM by AM43 »