Deal Analysis Sanity Check

2 Replies

I created a separate thread earlier today regarding buying from wholesalers and mentioned that a local wholesaler had a couple properties that seemed to meet my criteria. I'd like to post some numbers and get feedback from those with experience. Is my thinking sound, and do these sound like "deals" to you?

Background: My plan for now is to buy & hold single family homes. I would be buying these with a conventional loan and 20% down payment.

House 1: Seller's price is $75k. Estimated rehab (for full retail sale) is $30k, ARV is around $135k. This house is occupied with a tenant that has a purchase option for $100k that expires this summer. Current rent is $775. Estimated rent after repairs is $1100. Tenant has already made some repairs to the house, so it would seem they are interested in exercising the purchase option, which would allow me to pocket around $15k after some minor repairs and closing costs. If they don't purchase, I would make repairs to the house (~$20k) to bring rent up to the $1100 level. House is built in 1970's and in a established stable neighborhood.

House 2: Seller's price is $85k. Estimated rehab is cosmetic only, around $5k. ARV is $130k. House is empty and would just require some cleanup, carpet, etc. Estimated rent is $1000. House is built in 2005 and is in a developing neighborhood (mostly wooded lots for sale).

House 2 looks like an easier start for a beginner due to lower rehab cost and newer build, but House 1 looks like it could be more profitable in the long run. Both would bring approximately the same cashflow (rent minus mortgage, taxes, insurance, and management), which I estimate at $450 for House 1 and $350 for House 2. I show House 2 to have a higher Cash-on-Cash return ($4.2k/$22k = 19%) than House 1 ($5.4k/$35k = 15%).

I may be too late to the table to acquire House 2, but I wanted to at least run through the comparison process and get some feedback. Thanks!

Kurt,

Welcome to BP. Since I'm not from little rock i cant speak intelligently on the returns for your area. They seem low to me, but my market is a bit different.

House 1: Concerns should be the super low rent that is currently being paid. How well does it cash flow at the worst case scenario rent? $30k of rehab on a 135k house is pretty substantial. Even though the current tenant is doing the work, you cant be certain its being done right. If they cant commit to buy, then you are left with their "work". You should also pull credit on that person and see if they will even be able to get a loan.

House 2: How long has that development been trying to build out? How many lots are sold and built on each year? These types of areas can either be great for rental properties or awful. It just depends on what the area provides in the way of retail/jobs/grown ect.

Hopefully that helps you think a little more and leads you down the right path. Best of luck.

Medium facebook profile logoSam Craven, Senna House Buyers | [email protected] | 832‑722‑4815 | http://www.SennaHouseBuyers.com | Podcast Guest on Show #137

@Sam Craven - House 1 definitely needs some work in order to bring the $135k sale price or $1100 rent. Apparently a bathroom sprung a leak upstairs and caused some rotting on an exterior wall. This hasn't been repaired yet, thus the low rent. Good idea to ask the current owner for a little more history on the current tenant. If the house remained rented at $775, it would maybe break even as far as cash flow goes, which obviously wouldn't be much fun.

As for the question about the lots around House 2, that is something I haven't considered yet. Thanks for bringing that up...I'll see what I can find out.

Regarding the market, I could probably get a higher cash flow or return by looking at some lower priced housing, but my primary goal is to build wealth through equity. So, I'm trying to stay away from the $30k houses that rent for $600/mo and will have questionable value in the future.

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