case study: potential first rental property for me

[rentalnewbie]

Hello MMM real estate investors! I have been a long-time lurker and inspired to write my first post to get your thoughts on an investment property – my first – I am considering. I feel it meets the “rules” I have learned from you all about how to not totally screw up ER investing. I have been looking at properties in my area for ~2 years while saving a lot. I welcome your thoughts!

House is a 2bd/1.5ba SFH, it’s a foreclosure. I would say a B to B- neighborhood, it’s safe but not right downtown or fancy. The city is pretty working class overall but the downtown has rapidly gentrified over the past few years. These are the most conservative numbers for everything, if anything was higher than this on further investigation, I would not move forward.

LP: 60k (my target price would be 50-55k)
DP: 12k (or 20%)
Loan of 48k @5.25% = $265/mon
Insurance: 42/mo (based on what I pay for my similar sized house)
Taxes: 84/mo (rounded up. The tax value is due to be reassessed in 2016, and will likely go down. It is currently being influenced by a sale of 112k before the crash, which resulted in this foreclosure)
Monthly costs: 250/mo (incl maintenance, vacancy, a little for my time to self-manage it)
Rent: 850 (1.4%, could go up to 900, based on rentometer, craigslist in the area, Zillow, and what large apt complex a block away charges for a 2 bedroom)

Rent (85) - Mortgage + taxes + insurance + monthly costs (641) = 209 net cash flow/month; 2,508/year

The house is in very good shape for a foreclosure; there is a layer of dirt over everything, it needs appliances, a few rooms could be painted more neutrally. There are nice wood floors/tile in every room and the bathroom has been updated with a new vanity and shower/tub. The ceilings in the house are little low, I would say only 7 feet (I can reach up and touch them, but I wouldn’t hit my head on anything anywhere and I’m a reasonably tall female). The lot is spacious, there’s a deck in good shape and a garden shed.

There is a drainage issue on the lot with some slope going toward the house instead of away from it that I will need to correct with a drainage pipe. Though, there is no visible damage to the foundation and the crawl space was dry when I looked in it, despite a very significant amount of rain in our area over the last two weeks (some areas were flooding). If anyone has installed a drainage pipe before, I would love to know about your experience/costs.

I estimate needing to put an additional 3k into the property to get it cleaned up, appliances and dig a drainage pipe. After these changes, I estimate the property to be worth 75-85k based on houses selling in the area.

I have ~25k liquid assets (+retirement accounts, home equity & access to credit) and can cover the mortgage & costs from my salary if need be, so I still have some “Oh f***” money if needed.

I know the cash flow is not amazing but for such a small investment, I felt it was worthwhile. I really like that I can cover this mortgage and my own from my salary if I have to and that it's a smaller investment to get my feet wet in RE.

Ok, MMMers, tell me what you think! I can take it!

[rentalnewbie]

I've heard from my bank, I would qualify for an interest rate of 4.625%, bringing the payment down to 246/mo and brings the net positive cash up to 228/month and 2,736/year.

This assumes I pay full listing price, which of course I won't do.

Thanks for your thoughts!

[Another Reader]

The 7 foot ceilings and the drainage would cause me to look more closely at the construction.  You might have a  building code issue with the ceilings.  It helps that the crawl space appears to be dry.  I would review the permit files at the City building department.  Also have a look at the Assessor's records for construction information.   The bank should understand that the mortgage is less than $50k, many won't do loans under $50k.  How long has the property been on the market?  It would concern me if it was several months or longer.  Someone else should have snapped it up if it really was a good deal.

[Papa bear]

If your assumptions are true, it sounds like it would be a reasonable deal.

I'm assuming it is bank owned; can you write in contingencies with the offer and have you had a contractor or inspector look this over?  I would be concerned about costs that you may not be aware of as this is your first property.   If there are no contingencies allowed in writing an offer, I'd pass.


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[rentalnewbie]

Thanks for the responses Another Reader and Papa Bear!

I will look into the ceiling height issue to see what the local regulations are, I was kind of wondering if they were too low to make a legal rental. Do you think it will impact interest in the house?

It has been on the market a little under three months, it was under contact once and it fell through, I don't know why. I would definitely get an inspection! It is bank owned.