Author Topic: Second Opinions  (Read 717 times)

epps

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Second Opinions
« on: January 07, 2019, 03:06:20 PM »
Hi All-

I'm relatively new to the game, and I currently own one SFH as my primary residence. I'm preparing to move for work, and I will be purchasing two properties near my new location while renting out my current house (originally purchased with this rental in mind). I'm looking for some second opinions on back of the napkin calculations to compare with my own for two options that I have found for the first new property, located close to my new workplace. I will ultimately buy a second property within the next year, but it will be in a larger metro area nearby so only one (or none) of the following properties are possible right now. I have had my eye on the market for the past five months and have seen deals like these picked up pretty quickly, and I am ready to pull the trigger myself on the next quality deal I find. I plan on visiting them later this week in person. Here is a breakdown of what I'm looking at right now:


Property 1: 3 bed, 2 bath, 1100 sqf. Foreclosure listed at 68,000 with ability to negotiate (however only on the market for two weeks so far). Defaulted loan was a VA loan originated in 2016, appears to be in decent shape but will require minor updates (paint, locks, etc.) and needs a refrigerator. Would require at least 20% down, and I would probably put 25% down based on my financing options, so 13,600-17,000 plus closing (for a number of reasons I need to use an investor loan for this specific property). Comparable properties appear to be in the 90,000-100,000 range, and rent for 850-950$ per month currently. The area is less desirable overall, but closer to the large employer in my area. Likely to attract the lower paid workers from this employer as primary rental crowd. No expectation of appreciation. Built in 1999.


Property 2: 3 bed, 2.5 bath, 1400 sqf. Foreclosure listed at 135,500. Likely no ability to negotiate, but VA vendee financing available (VA seller financing program), which means only 5% down is required ( $6,775) plus origination fee (can be rolled in to the loan), and there will be no PMI required. All appliances are new and the property overall is in good condition. Has a garage and a large fenced in yard. Located slightly further from the large employer in a desirable school district/more popular town, and will attract the middle management crowd from this employer as well as employees of the nearby university/ more of a middle class crowd. Comparable properties in the area are selling for 150,000-165,000 and renting for 1200-1300. Practically move-in ready. Built in 2010, town is the only one in the area likely to see appreciation.


Although I plan to occupy the property (likely with roommates) initially , I would like to examine both deals from a worst case-rental only perspective. Property 2 will likely qualify for a slightly better mortgage rate due to the type of financing, but for the sake of argument I'd like to compare them with identical financing.

For those seasoned veterans out there, what are the considerations that jump out at you? I don't want to prime the pump too much with what I'm thinking, because I'd like to see if I am heading down the right path. Thanks in advance for any ideas! 
« Last Edit: January 07, 2019, 04:12:43 PM by epps »

waltworks

  • Magnum Stache
  • ******
  • Posts: 3400
Re: Second Opinions
« Reply #1 on: January 08, 2019, 08:38:27 AM »
Why are these foreclosures selling so far under market? In most areas I'm familiar with, foreclosures generally just sell for about what their comps do these days.

If you run some actual numbers (ie, PITI, some kind of estimate for maintenance/capex, etc) how do they stack up? Neither one jumps out at me as being an amazing deal unless taxes are super low and insurance is dirt cheap.

-W

ilsy

  • Stubble
  • **
  • Posts: 182
Re: Second Opinions
« Reply #2 on: January 08, 2019, 10:00:00 PM »
What concerns me personally about these properties is why those relatively new and pretty affordable properties were foreclosed? Were the owners out of state trying to rent (the owners defaulted after 2 years, too soon)? Is this a small town?

The numbers don't work for me personally.

epps

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Second Opinions
« Reply #3 on: January 10, 2019, 03:53:54 PM »
Thanks for the feedback!

Some updates based on the points y'all raised- this is the standard discount for foreclosures in the area so nothing too extravagant there. There are a large amount of VA loans in this market, so there is a larger than average amount of VA foreclosures in the inventory. It is relatively small but stable market (this large employer has very deep roots there). Taxes and insurance are fairly cheap in this market (~$650 for insurance and currently $1400 for taxes) .

After having a local friend check out both properties, I'm ruling out the first one becuase there are plenty of similar properties that need less work, and the discount is not enough to take on the minor rehab required from the foreclosure. Here is a more in depth breakdown of the second property at list price with the financing available:

Purchase Price: 135,500
Downpayment: 5%- $6750
Financed: $128,250
Terms: 4.00% for 30 Years (Current VA rates I'm seeing are 3.75%)
Total Cash Outlay: $9250


Monthly Rent: 1300
Yearly Gross- 10% Vacancy: 14,040


Property Taxes: 1551 (Actual)
Insurance: 800 (conservative)
Maintenance: 1350 (1%)
10% Management: 1404
Placement: 650
PM Inspections/misc: 275
Waste/Lawn Care (HOA): 350
Total Expenses: 6,409

NOI: 14,040-6409= 7631

Mortgage PI: 612 x 12 = 7347
Cash Flow: 284
Cash ROI: 3.07%
Equity In Year 1: 2,259
Total Return: 2,542
Total ROI: 27.48% With Management
Without Management: Cash Flow $1,688, Total ROI $3,947 in year 1 or 32.83% with equity (18.24% cash).


Other items of interest:
-I will be living in the property for three years, by year 3 I will have a total of 9601+6750= 16,351 of my own money as equity plus whatever equity I capture in the sale. After this point I will be self managing. At year 4 the cash flow with management is $757 for a total return of $3,303 including equity.
-This property or a similar foreclosure (no other candidates available) are my only way of buying in this town for cash flow (but plenty of cash flowing properties available in the more "blue collar" town nearby), everything else is fairly well picked clean or would require significantly more down, limiting my ability to purchase a second property this year.
-This is the only available property on the street, others have sold between 145-155k in the past two years. The street is fairly close to an interstate nearby, so this might be the explanation for the price discount? Although the others on the street that sold for 10k+ over this list are also the same distance away.

I appreciate any feedback on any of the numbers above.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3400
Re: Second Opinions
« Reply #4 on: January 10, 2019, 06:04:16 PM »
I'd say your maintenance number is low by at least half since these are low-price foreclosures. Even without that, it looks really mediocre. But you won't lose your shirt, anyway, so go for it.

-W

Jon Bon

  • Pencil Stache
  • ****
  • Posts: 941
  • Location: Midwest
Re: Second Opinions
« Reply #5 on: January 11, 2019, 07:50:24 AM »
So your going to go through all of this effort for less than 300 bucks a year?

Maybe I am basis I dont love single family homes as rentals. Also there is something to be said about price floors on home renovations.

Yes the house is cheap, but a new roof is still going to be expensive no matter what part of the country you buy it in. I guess me point is a single large expense could wipe you out for a few years.

Good luck.

epps

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Second Opinions
« Reply #6 on: January 12, 2019, 07:41:00 AM »
I think what was attracting me was the extremely affordable seller financing available (basically allowing the purchase of two properties this year with a total of 5% down and 2x closing costs, because my second purchase is going to be a VA loan) so that I could squeeze out the next property faster (potentially even towards the end of this year). So I was willing to justify the slim initial cashflow by focusing on the total ROI (equity included- so the ~$2500 on the with management scenario vs. the ~$300 cash flow) as compared to the amount I put down, especially when considering that most other properties will require 20-25%. Basically getting greedy and neglecting the fundamentals. 

The reality of the matter is that regardless of that equity accumulation, the mortgage and all other expenses need to be paid with actual cash, so I agree that that margin is dangerously thin and could quickly become a headache if things don't go my way. I'm going to sit tight and see what else opens up since I still have some time. Appreciate the help.
« Last Edit: January 12, 2019, 07:59:09 AM by epps »