Author Topic: Pls help analyze potential rental  (Read 3814 times)

BBub

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Pls help analyze potential rental
« on: February 16, 2016, 04:31:36 PM »
Numbers
Purchase Price: $67k
Down Pmt: $17k
Loan Amount: $50k @ 4.25% 30yr fixed
Loan PMT: $250

Expected initial repairs/upgrades: $8k
Total Investment: $75k

Expected Rent: $825/mo

Cash Flow
Rent: $825
PM: -82 (even if I self-manage, this will be an expense.  My time would likely be > 82/mo).
Mortg: -250
Ins: -100
Taxes: -40
Maint: -100
Vacancy: -68 (approx 1 month/yr)
Net Cash Flow: +185/mo

Details
The good: The house is in a pretty good, stable area.  Numbers look decent.  I think it will rent reliably based on the current mkt.  Historical rent is $750.  I think w/ some basic cosmetic enhancements it can conservatively fetch $800-850 based on comps.

Concerns: The house is old & wooden.  Not sure if $100/mo is a realistic maintenance projection.  The ongoing maintenance expense is by far my biggest concern, as it could eat into cash flow & profits.  Currently it's in decent shape.  A few issues are present including a leaky roof & cracked tile floors, but seller is willing to repair the roof & replace the floors.

It's not a home run but could be a good first house to get the rental portfolio started.  Honestly, the 185/mo isn't really exciting, but it seems a good first step towards building something bigger.

I would appreciate any thoughts, concerns, help analyzing the numbers, or pointers if I'm missing anything.
« Last Edit: February 16, 2016, 04:35:10 PM by BBub »

adamcollin

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Re: Pls help analyze potential rental
« Reply #1 on: February 17, 2016, 02:39:56 AM »
Purchasing the home and renting it out can be profitable for you.

iamlindoro

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Re: Pls help analyze potential rental
« Reply #2 on: February 17, 2016, 10:45:42 AM »
Purchasing the home and renting it out can be profitable for you.

Yes, that is... uh... the definition of Real Estate Investment.  So... yeah.

BBub, you are doing the right kind of analysis, and I can't see anything major that you missed, though you should also figure in your closing and loan origination costs, which are likely to run you a few K more.  I would shop your insurance quote around a bit if you haven't gotten one/multiple quotes yet.  $1200/year seems quite a lot for a property of this type, but insurance is very variable and it's not implausible that you're correct.  If actual insurance numbers are a lot less (especially when you start to play with deductible amount) this deal might become more appealing.

As you've mentioned, it's not a home run, but it might be at least a decent place to get started as more of the numbers come into focus.  I would definitely push hard for the seller to make any and all repairs you can get them to make, and you'd obviously want to get $825 rent as a bare minimum.  If you haven't already, get your contractor to do a walkthrough to make sure you're not missing some major structural issue (like serious pest damage or foundation issues).

Bottom line, the same cash money could make you more elsewhere, but it's not a totally bad deal either.  Polish up your numbers a bit and see where the cash flow is at the end.

not_a_trex

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Re: Pls help analyze potential rental
« Reply #3 on: February 17, 2016, 10:59:30 AM »
I would definitely push hard for the seller to make any and all repairs you can get them to make

I've heard other buyers opt to be compensated in the form of a lower purchase price and then doing the repairs themselves. They said that if the previous owners do do the repairs, they aren't "good enough". Do you think it's common to get burned in this way?

iamlindoro

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Re: Pls help analyze potential rental
« Reply #4 on: February 17, 2016, 11:02:24 AM »
I would definitely push hard for the seller to make any and all repairs you can get them to make

I've heard other buyers opt to be compensated in the form of a lower purchase price and then doing the repairs themselves. They said that if the previous owners do do the repairs, they aren't "good enough". Do you think it's common to get burned in this way?

Agreed, and you're totally right, I should have said "make price adjustments to cover any and all repairs."  It's definitely preferable to make the repairs yourself rather than risk the sellers do a half-assed job themselves.

BBub

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Re: Pls help analyze potential rental
« Reply #5 on: February 17, 2016, 11:49:55 AM »
iamlindoro - Thanks for the feedback & reassurance on the analysis.  Excellent points.

Closing costs: $2 to 2.5k is what my banker estimated.

Insurance: unfortunately $1,200 is pretty accurate  Didn't get a hard quote but made a phone call to a trusted agent.  It's near the gulf coast, hurricane wind premiums are high.  I will shop this & play with deductibles before committing.  Good advice.

Contractor: def going to do a walk through.  The home was under contract a few months ago & it didn't go through - I don't know why.  The realtor won't say because it wasn't listed with him at the time.  I may even do a contractor walk-through in lieu of home inspection.  What are your thoughts?   I know a few good contractors personally who say home inspections are often expensive and contain a lot of irrelevant BS.  I had a similar experience when I bought my home - home inspector listed all kinds of erroneous little issues. 

So, assuming the place doesn't have major issues here's what I'm thinking for the offer.  The asking price is $69,900.

Initial offer: $62k (to account for repairs) with seller paying closing costs up to $3k.

they'll counter with something

Final offer: $67k with seller paying closing up to $3k. (unless I can get a better deal)

That'll put me right in line with the original numbers in my analysis, leave me room to make up to $8k updates, etc.

iamlindoro

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Re: Pls help analyze potential rental
« Reply #6 on: February 17, 2016, 12:05:10 PM »
Contractor: def going to do a walk through.  The home was under contract a few months ago & it didn't go through - I don't know why.  The realtor won't say because it wasn't listed with him at the time.  I may even do a contractor walk-through in lieu of home inspection.  What are your thoughts?   I know a few good contractors personally who say home inspections are often expensive and contain a lot of irrelevant BS.  I had a similar experience when I bought my home - home inspector listed all kinds of erroneous little issues. 

Honestly, my inspector is my hero and has saved me serious money, so I always do both.  Actually, what I do is:

1) Get the contractor to pop by and estimate what he or she can before making an offer.
2) Make offer with inspection contingency.
3) Have inspection done.
4) Send inspection to contractor to refine estimate/add any critical items.

I always look for an inspector that is also a landlord, a tradesperson, or both, so that may be why I've had such good results.  I just know that in the market I'm focusing most on right now, my inspector spends a ton of time with me after delivering his report to talk through the issues, advise on what is worth fixing immediately, later, or never, and has been a huge help to me.  It's also been a source of reassurance because the inspector isn't counting on you completing the deal to have made their money.

Anyway, I am not trying to convince you one way or another (and probably having a trusted contractor really evaluate the place critically will do just as well), just offering my positive experience with inspection.

BBub

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Re: Pls help analyze potential rental
« Reply #7 on: February 17, 2016, 12:08:54 PM »
Ok, good to know.  Thanks for the info.

not_a_trex

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Re: Pls help analyze potential rental
« Reply #8 on: February 17, 2016, 12:31:37 PM »
Honestly, my inspector is my hero and has saved me serious money, so I always do both.  Actually, what I do is:

1) Get the contractor to pop by and estimate what he or she can before making an offer.
2) Make offer with inspection contingency.
3) Have inspection done.
4) Send inspection to contractor to refine estimate/add any critical items.

That's interesting that you have two people look at it. I assumed that you only needed the inspector to take a look before you made an offer. Why do you have to contractor look too? Is it because they are the ones that will be doing the repairs and can therefore give you a better estimate on the costs? Or is it just for a 2nd pair of eyes? It seems like a good idea. I just never thought of doing it like this.


iamlindoro

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Re: Pls help analyze potential rental
« Reply #9 on: February 17, 2016, 12:38:15 PM »
That's interesting that you have two people look at it. I assumed that you only needed the inspector to take a look before you made an offer. Why do you have to contractor look too? Is it because they are the ones that will be doing the repairs and can therefore give you a better estimate on the costs? Or is it just for a 2nd pair of eyes? It seems like a good idea. I just never thought of doing it like this.

Basically, yeah- Since the rehab budget can make or break the numbers on a property, I try to have at least a very general idea of the rehab costs before making an offer, even though I expect that the scope of work will change after I see the inspection report.

robartsd

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Re: Pls help analyze potential rental
« Reply #10 on: February 17, 2016, 01:23:55 PM »
The inspector makes his money by doing inspections. The contractor makes his money by doing repairs. The contractor has an incentive to encourage the purchase of the property, but the inspector does not (unless he relies on real estate agent referrals for business and feels he gets more referrals by minimizing negatives he finds).

not_a_trex

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Re: Pls help analyze potential rental
« Reply #11 on: February 17, 2016, 03:32:42 PM »
Thanks for clarifying guys.

fishnfool

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Re: Pls help analyze potential rental
« Reply #12 on: February 17, 2016, 08:17:20 PM »
A thorough inspection would be highly recommended. Old...means old plumbing, old electrical etc etc. Unless you are a handy guy and can do many of your own repairs when issues pop up, and they will, I'd be very concerned of ongoing costs.

If in fact you can get the rent in the $800 range the numbers look good.

arebelspy

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Re: Pls help analyze potential rental
« Reply #13 on: February 18, 2016, 03:47:23 AM »
Expected Rent: $825/mo
...
Historical rent is $750.  I think w/ some basic cosmetic enhancements it can conservatively fetch $800-850 based on comps.

This is my biggest concern.  What do you have that indicates your market will support 10% above the historical rent levels with some "cosmetic enhancements"?

If your numbers are accurate, this is my opinion on it:
It's not a home run but could be a good first house to get the rental portfolio started.

8% cash on cash return return is not super exciting (185/mo x 12 mo / 18k down + 7k rehab + 3k closing costs), but it's also not terrible, and when you add on the other benefits (tax benefits, appreciation, and principal paydown) plus the experience and just getting started, which is the big hump, it seems worthwhile to go for.

Good luck!
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BBub

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Re: Pls help analyze potential rental
« Reply #14 on: February 18, 2016, 06:49:53 AM »
A thorough inspection would be highly recommended. Old...means old plumbing, old electrical etc etc. Unless you are a handy guy and can do many of your own repairs when issues pop up, and they will, I'd be very concerned of ongoing costs.

If in fact you can get the rent in the $800 range the numbers look good.
10-4.  Will do.  Planning on a contractor walkthrough next Monday.  If that goes well, will make offer contingent on a home inspection.

BBub

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Re: Pls help analyze potential rental
« Reply #15 on: February 18, 2016, 07:03:42 AM »
Expected Rent: $825/mo
...
Historical rent is $750.  I think w/ some basic cosmetic enhancements it can conservatively fetch $800-850 based on comps.

This is my biggest concern.  What do you have that indicates your market will support 10% above the historical rent levels with some "cosmetic enhancements"?
I'm looking at listings from other houses within a few blocks.  The homes w/ fresh paint, shiny floors & an updated kitchen seem to be listed for 900+.  Houses w/ crappy finishes go for $700-750.  I figured my updates would allow me to at least split the difference..  Ha - not too technical.  Do you have a better method for estimating rent potential?

Quote
If your numbers are accurate, this is my opinion on it:
It's not a home run but could be a good first house to get the rental portfolio started.

8% cash on cash return return is not super exciting (185/mo x 12 mo / 18k down + 7k rehab + 3k closing costs), but it's also not terrible, and when you add on the other benefits (tax benefits, appreciation, and principal paydown) plus the experience and just getting started, which is the big hump, it seems worthwhile to go for.

Good luck!
Thanks for the thoughts.  It's nice to have reassurance that I'm looking at the potential upside realistically.  I agree, getting over the hump of starting is definitely part of the motivation here.
« Last Edit: February 18, 2016, 07:05:15 AM by BBub »

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Re: Pls help analyze potential rental
« Reply #16 on: February 18, 2016, 11:33:57 AM »
Hi you have gotten some good advice already in this thread I just wanted to add one more thing that can help you get a better Cash on Cash Return.

First of all depending on your loan there is a limit to how much the seller can pay in closing costs If I remember correctly for my last loan it was around 2% of purchase price. so if you buy for 67K you can only get 1340 paid in closing costs not the 3000 you had estimated. Verify with your lender to determine what the actual amount is. That being said reducing closing costs and cash for repairs is a very useful way to increase your cash on cash return. 

One way that I did it on my last purchase was to write a clause in the contract that states the seller will immediately after closing pay "specific Contractor" $7000 for repairs needed to the house. So basically What happened was the price I wanted to buy the Quad was at 163K (to make my numbers work) but the house needed a whole new roof and If I paid the 7000 to the roofer I would have  hurt my Cash on Cash return, So stead I closed the deal at 170K with the seller paying my roofer directly. That way I know the work is good and I essentially pay a few extra dollars a month in mortgage instead of paying 7000 in cash up front.

I hope this helps.

BBub

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Re: Pls help analyze potential rental
« Reply #17 on: February 22, 2016, 07:02:10 AM »
Nice - thanks for the tips!

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Re: Pls help analyze potential rental
« Reply #18 on: February 22, 2016, 01:25:58 PM »
One way that I did it on my last purchase was to write a clause in the contract that states the seller will immediately after closing pay "specific Contractor" $7000 for repairs needed to the house. So basically What happened was the price I wanted to buy the Quad was at 163K (to make my numbers work) but the house needed a whole new roof and If I paid the 7000 to the roofer I would have  hurt my Cash on Cash return, So stead I closed the deal at 170K with the seller paying my roofer directly. That way I know the work is good and I essentially pay a few extra dollars a month in mortgage instead of paying 7000 in cash up front.

I hope this helps.
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