Author Topic: Getting cold feet  (Read 2131 times)

Murse

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Getting cold feet
« on: February 16, 2017, 05:01:12 AM »
I need advice. I am working on my first RE deal that happens to also be out of state. I need someone (or a few people) to talk it through with.

Numbers-
purchase price 50k (appraised at 52k)
Interest rate 5%
Insurance under $600/year
Maintenance, vacancy and PM all budgeted at 10% of gross monthly rents each
Currently renting for $775/month
COC calculated at around 16%

Total sum invested into this deal-2k so far

I am getting cold feet as the closing date approaches. I am concerned about the added complexity (mostly taxes and finding the next deal) to my life as well as the risks involved with RE (major expenses, lawsuits, PM not working out ect...) I am considering walking away. I need advice, thanks.



redrocker

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Re: Getting cold feet
« Reply #1 on: February 17, 2017, 12:29:22 PM »
Curious why you went out of state for your first RE investment?

Have you any previous experience with having a property manager?

Have you any experience maintaining your own house and becoming accustomed to the things that can come up? (I only ask that bc you said this was your first deal and I was wondering if you were excluding the purchase of a residence)

I can't speak for how this potential purchase fits with your own plan with the info given but my first impressions:
1) it's a relatively small investment, so lower risk but also lower returns
2) if the tenant situation becomes a headache, I'd be questioning if the return is worth it
3) double check property taxes as they're not listed here

Hopefully someone else experienced with out of state rentals chimes in. That's not an area I want to dabble in personally. Financially this seems to make sense, it'd be earning a better return than one of my two rentals. But as you hinted at, simplicity in your dealings has an incalculable value.

bosspross

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Re: Getting cold feet
« Reply #2 on: February 17, 2017, 04:19:58 PM »
I would be concerned about the maintenance calculation. You stated 10% which would be 930 a year. Is this including cap ex and maintenance? I know lots of people do 10%-20% for repair and 10%-20% for capital expenditures depending on the condition of the house. Can you fill out the rest of these numbers:

P&I=
Rent=
Taxes=
Insurance=
Vacancy=
Repairs=
Capital Expenditures=
Property Management=
Water=
Sewer=
Garbage (If not included in taxes?)=

Murse

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Re: Getting cold feet
« Reply #3 on: February 17, 2017, 05:44:43 PM »
I live in the Portland market which is not exactly a market that can cash flow (easily.) my initial plan was and still is (if I can follow through) buy properties out of state that cash flow well. This is my first real estate purchase, however I do have limited experience helping my parents take care of their houses growing up.

Murse

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Re: Getting cold feet
« Reply #4 on: February 17, 2017, 06:46:17 PM »
I would be concerned about the maintenance calculation. You stated 10% which would be 930 a year. Is this including cap ex and maintenance? I know lots of people do 10%-20% for repair and 10%-20% for capital expenditures depending on the condition of the house. Can you fill out the rest of these numbers:

P&I=
Rent=
Taxes=
Insurance=
Vacancy=
Repairs=
Capital Expenditures=
Property Management=
Water=
Sewer=
Garbage (If not included in taxes?)=
P&i=215
Rent=775
Taxes =1082 annually
Insurance=44 monthly
Vacancy calculated at 10% gross rent
Repairs calc'd at 10% gross rent
PM calc'd 10% gross rent
Capital expenditures= should be none, the only thing not being fixed by the sellers is some siding issues but I will likely defer that for a year or two while I build reserves
Water, sewer and garbage all paid by the tenant.

bosspross

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Re: Getting cold feet
« Reply #5 on: February 18, 2017, 09:24:14 AM »
I would be nervous about not accounting for cap ex for a few years. Currently you will be cash flowing 194 a month. Eventually you will have to replace things like appliances, siding, and roofs. If the siding has to be done in three years and cost 7000 then that would be your entire profit. What happens if the roof or furnace needs to be replaced in the next 10 years?

waltworks

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Re: Getting cold feet
« Reply #6 on: February 18, 2017, 02:11:12 PM »
Based on those numbers, this deal is barely going to squeak out $2k a year under the best circumstances. Why even bother?

-W

Murse

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Re: Getting cold feet
« Reply #7 on: February 18, 2017, 05:32:56 PM »
Based on those numbers, this deal is barely going to squeak out $2k a year under the best circumstances. Why even bother?

-W
My initial hope was to buy around 10 properties with similar returns to get to me to around 20k annually as half of my needed fire number.

Murse

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Re: Getting cold feet
« Reply #8 on: February 18, 2017, 05:44:13 PM »
I would be nervous about not accounting for cap ex for a few years. Currently you will be cash flowing 194 a month. Eventually you will have to replace things like appliances, siding, and roofs. If the siding has to be done in three years and cost 7000 then that would be your entire profit. What happens if the roof or furnace needs to be replaced in the next 10 years?

I always thought capex and repairs were interchangeable. I just looked into it and saw I was wrong. Even in the great cash-flow markets you would need a steep discount to make it work.

bosspross

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Re: Getting cold feet
« Reply #9 on: February 19, 2017, 06:45:54 AM »
Correct, most houses do not cash flow. I would review your numbers and decide if the deal is still worth it. It may also be helpful to continue doing research before jumping into your next deal.

Car Jack

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Re: Getting cold feet
« Reply #10 on: February 21, 2017, 08:49:18 AM »
Based on those numbers, this deal is barely going to squeak out $2k a year under the best circumstances. Why even bother?

-W
My initial hope was to buy around 10 properties with similar returns to get to me to around 20k annually as half of my needed fire number.

So you're talking 4% best case return on your initial investment.  This sounds like an awful lot of work for what you could pretty safely assume you'll get in a 60/40 stock/bond investment......with zero work.