# The Money Mustache Community

## Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: rachael talcott on July 01, 2014, 11:55:17 AM

Title: Case study / How much would you pay for this rental?
Post by: rachael talcott on July 01, 2014, 11:55:17 AM
Yesterday I put an offer on a SFH (3/2, 1400 sqft) and I'm curious as to how others here would analyze the situation.

Market value: ~\$88K after fixing
Cost to fix: ~\$7-10K (depends on how much work I do myself)
Anticipated rent: ~\$800 (maybe 850, but I'm being conservative.  Zillow says 950, but most landlords around here have a high eviction rate and I take the approach that I'd rather lower my rent and insist on good credit)
Taxes: \$970/yr
Insurance: ~\$700/yr

List price: \$66K

I offered \$50K cash.  That means it doesn't meet the 2% rule.  However, I would eventually sell the house, and considered as a flip, I've seen the formula that you should try for (after repair value - repair cost) * .7.  For this property, that would be 88-10=78*.7=\$54.6K

Honestly I'd be surprised if they take my offer, but I'm wondering if I should go up a little if they counter.  The calculation that I've done in the past is to try for at least 10% ROI, taking into account typical repairs and vacancy.  This one meets that at 50K, but not at 55K.

Thoughts?

Title: Re: Case study / How much would you pay for this rental?
Post by: frugally on July 01, 2014, 05:49:06 PM
Running the numbers through my personal spreadsheet, I wouldn't buy based on cash-on-cash return assuming a 25% down payment.  Cap rate 8%, cash-on-cash 9% with \$171/month in cashflow.  My estimate is probably conservative as I estimate repairs + capex at 15% of rent no matter the house condition.  Curious to see what arebelspy says.
Title: Re: Case study / How much would you pay for this rental?
Post by: Another Reader on July 01, 2014, 05:55:24 PM
Why not just flip this one?
Title: Re: Case study / How much would you pay for this rental?
Post by: frugally on July 01, 2014, 05:56:20 PM
I should note that none of my numbers take into consideration what you get for it retail, this assumes long-term buy and hold.  In other words, that 88k  market value means nothing in my calculations.  One advantage you could potentially get refinancing the loan out to be 100% financed, in which case the property would still cashflow a small amount (\$50-70).  Take my advice with a grain of salt though, I'm just getting started and don't even own a property.

As I was typing this, Another Reader responded - I'd agree.

To answer your original question, if the goal is to buy and hold the repairs really throw off any high cash-on-cash return.  It really depends on how long you'd intend to hold it.
Title: Re: Case study / How much would you pay for this rental?
Post by: rachael talcott on July 02, 2014, 07:41:27 AM
Quote
Why not just flip this one?

I got into real estate investing because I wanted an alternative to the stock market as a place to put my cash, and I have loads of free time during the summer (college teacher) that I try to put into finding and fixing one rental per year.  I don't have the time to continuously flip one after another all year, even if that might yield more over the long run.

I am hoping to RE in 8-10 years, so that's a maximum time to hold.  If in a few years the local real estate market is up and the stock market is down I'd sell it and put the money in stocks instead.