Newbie: In the midst of my first deal.... thoughts?

28 Replies

I live in northern new jersey where most work in nyc (like myself) and deal with insane taxes. I currently live in a townhome community which is nice. i have some cash from stocks that i wanted to use to buy a place and try my hand in real estate. my strategy is to buy and hold a few properties with postive cash flow. Its almost impossible here to apply the 50% rule with the criteria.

here are the details of the deal:

House was new to MLS. they had multiple offers in 2 days. I went aggressive and got it at 335k for a small single family starter home that was a flip, ie I am the buyer of a flip. it has nearly everything redone (kitchen,roof, floors, plumbing, electrical). i plan on putting 20% cash down and getting financing. with PITI cost equal about $1950/mo. The key is that the taxes on this house relative to the area are very low at 7k/year. I pay 11k for my townhome! its a nice up and coming town with a rail to NYC close by. I am about to get out of attorney review and inspected soon.

my realtor and research is showing that i could get EASY $2200 possibly up to $2500 for this per month. its modest cashflow but positive none the less.

I have reserve funds to pay for unexpected repairs and vacancy. (I could buy this place outright cash)

I'm new, i get it but am I that naive to think this is a no-brainer? What am I missing here? I know on-going maintenance like landscaping is something to consider in costs too (do it myself, pass off to renter, etc).

I figured this would be a great opportunity to learn the ropes and learn what I don't know with minimal investment up front (~65k). I know the area very well, I would live in this place!

I'm trying to stay postive because I am hearing negativity but I want to get off my *** and DO IT.

Any thoughts would be great.

Unless I am missing something, the numbers on this property are *terrible*.  This is an absolute, definite, do-not-want.

You'll want to look up "50% rule" and "2% rule," but in short, to satisfy the 2% rule, you're want to be getting nearly $7000 in rent per month.  The rule essentially says that your month rent should be at 2% of the purchase price.  Some, myself included, are fine with getting closer to 1.5%, and some people are fine with 1%, but this isn't even close to 1% in your best case rent scenario.

Further, it's not relevant that *you* have the cash to weather vacancy and major repairs-- the property itself is supposed to pay for those in the long run.  

This deal has "money pit" written all over it.

if you include the taxes in the monthly expenses, 

you may just brake even...it would be  too tight for me to be comfortable moving forward.

i say walk away.

Well it sounds like @Lino B. already bought the place so it's too late to back out now.

But you say you're going to have "positive cashflow" and by my calculations you are wrong.   Below is my math for both your best case and worst case rent amounts.

Rent (worst case scenario) = $2200 month

PITI = $1950

Vacancy = $185

Repairs/CapEx reserve (at 10%) = $220

Property Management (at 10%) = $220

Net cash flow = NEGATIVE $375/month

Rent (best case scenario) = $2500

PITI = $1950

Vacancy = $185

Repairs/CapEx reserve (at 10%) = $220

Property Management (at 10%) = $220

Net cash flow = NEGATIVE $75/month

So even with rent being at the best case scenario you are losing money on this deal every month.

Dawn Anastasi, Core Properties, LLC | http://www.coreprop.biz | Podcast Guest on Show #29

I read it as accepted offer, but not closed yet.  My numbers agree with Dawn's-- this is a bad deal.  Even if you intend to manage it yourself, you are still either negative, or so close to negative as to be a minor emergency away from negative.

There are tons of good deals out there.  This isn't one of them.  Depending on the where you're at in this deal right now, it may be wise to walk away, even if it means losing some earnest money.

Lino,

This deal only makes sense if you are speculating on appreciation. As the others before me have stated, the numbers do not work and you'll be negative in cash flow. In general, in that part of the country, on a newly renovated property that your find on the MLS.....the numbers aren't going to work too well.

If you moved into the home, what could you rent the townhome for?  If you are determined to buy this and rent it use the lowest possible rent number to double check your numbers.  

I am still in attorney review and I have still have the potential to back out if I want to.

@Robert G.  I should've been more clear in that I am absolutely speculating on appreciation in this town. There is significant growth and there is a bunch of townhomes being constructed as rental only properties with one family residences are being rented about the numbers I state below. Additionally, I am investigating the possibility of either living there in the future or further renovations (dormer) and then resell.

Thank you for the feedback, the numbers at a more granular level is what i wanted some opinions on. Frankly, I believe 2200/mo is the floor. I believe 2500/mo is very obtainable and not ceiling but I want to be conservative. The reason I bring up the fact that this is a flip with all new appliances, plumbing, electrical is because that would certainly cut back on immediate future repairs? aren't the numbers @Marci Stein  suggest guidelines? 

with a buy and hold strategy, even breaking even with the appreciation i expect wouldn't that be a feasible strategy for building equity?

@Robert McNamara  for someone in SJC area you can certainly understand the position I am in with this inflated markets. I am not comfortable looking at and dealing with foreclosures and short sales at this stage of the game. any other ideas?

@Marci Stein my monthly includes taxes (PITI)

@Bryan N.  this is certainly part of my plan of flexibility. I am in the positive on my current townhouse and could rent it for $400/monthly cashflow and this includes HOV.

If you're relying on appreciation only to provide returns, then why is this a better investment than a Total Stock Market Index Fund, which will return on average 7-11% annually over the long term?  Do you believe that property values in your area will increase at a faster rate than that?

Really, I think the question is:  What is your specific plan?  It may help to lay out exact numbers (your interest rate, break out PI/T/I individually, your figures for vacancy, management if any, transfers to reserves, etc.).  10% to reserves, etc. may be "guidelines," but eventually something major WILL need replacing-- a roof, a major portion of the structure, whatever-- and if you didn't budget it in to begin with... well, there go all your profits since the start of the project.  Better to plan for those things and be pleasantly surprised if nothing ever comes up than to never budget them in at all.  An extended vacancy (they do happen!), a uncovered emergency (they happen on homes of all ages and conditions), or a lengthy eviction could wipe out your profits for many years to come right off the bat.

With no offense intended to you (truly!) it seems like you're latching on to any potential explanation for this investment rather than describing a clear, coherent strategy.  I can see that being easy when the property is in your backyard-- we would all have a natural tendency towards properties we ourselves would want to occupy.  The numbers as the rest of us see it don't provide for much, if any, cash flow, and speculating on appreciation is a very risky play.  

Really, I think everyone just wants to challenge you to look critically at this as a business decision.  Don't fall in love with the property just because you would live there-- it comes down to one thing: Does it make you money?  There are strong indications that the answer here is probably no.  I am also a relative beginner compared to most here, but the most fundamental skill I think you can pick up, ASAP, is the ability to calculate your own expected return.  There are some great spreadsheets here that let you objectively look at a deal as some of us (albeit quickly) have here, and they help clarify your decision making process a lot.

As to your question, you're absolutely right, it's tough to find a good deal where I am also.  I'm investing out of state.  Currently turnkey properties, but I have plans for 2015 to start doing some light to medium renovations remotely.  You're in an even better situation because you could easily drive to markets with great numbers.

@Robert McNamara My hopes of this post was just that to be challenged by people who understand and have been there. I have enough skeptics. I want and appreciate that candidates, This is helpful. By no means do I believe this is a slam dunk but wanted to engage in dialogue that would give me a better idea of the details of the deal and the potential hidden costs and guidelines. Ultimately I may still jump in to learn the hard way in hopes things go well. This area is truly hard to find the numbers and maybe I jumped in hoping.

385k would by every Freddie/Fannie listed in my entire county...

@LinoB

HI

welcome to BP

where are you buying? (town)

check in your town, if the taxes would go up if you pay 335 for the house

I have also the feeling that house in NJ ,good areas are going to go up in few years

@Lino B. have the property taxes been reassessed post rehab? What do the comps say about the ARV? Did you see any comps that are newly renovated? What do those taxes look like? This is a condo, so also be careful of any special assessments thrown your way.

Keep in mind also that you're buying off the MLS. It'll often be a challenge to find good cash flowing properties in our state when buying off the MLS. Try more 'underground guerrilla marketing' tactics such as marketing to estates, foreclosures etc.

Medium step buys houses logo 13Ibrahim Hughes, STEP Buys Houses LLC | http://www.StepBuysHouses.org

@Ibrahim Hughes based on yours and previous post that's my biggest concern right now. I'm going to call the tax office on Monday. I have a feeling these taxes are pre ARV. BTW this is a SF not a condo.

@Lino B. is the realtor you are working with familiar with investment properties, does he/she own investment properties? I think it is important to work with someone that is not just a realtor, you need an REI specific realtor.

If you are looking to buy and hold in Northern NJ MFR's are the way to go. SFR's are very tough to make money on.

Hi @Ibrahim Hughes would you happen to know where you could find a list of Estates for SFH or MFH's in the north jersey area? I agree with you 100% that its very tough to find a deal off of the NJMLS or GSMLS.

@Mark Y.  

 - You could try a list provider such as Listsource (never used them personally) or personally visit the county surrogate and search their database. Hope this helps.

Medium step buys houses logo 13Ibrahim Hughes, STEP Buys Houses LLC | http://www.StepBuysHouses.org

@Lino B.  Welcome to the site!

Be careful with bidding wars. They can work both ways. A place I recently purchased was in a bidding war (priced WAY below market value and ARV). There were 16 offers (only 2 were cash, including mine), but the seller wanted a 2 week close, that's why it worked out.

And don't get too caught up in the rules. Some places that only follow the 0.9-1.0% rule can cash flow quite well. What was the asking price and the accepted offer price?

Cash is king therefore cash-flow is the master of us all. I just made that up but it makes sense.

To make any money on the sale, it needs to increase in value by 7-10% just to cover your REALTOR fees and closing costs.

On top of it, it will need to appreciate by more than what your losses are per month, which @Dawn Anastasi  kindly broke down for us.

If you hope to earn a 10% return (similar to what stocks might get?) then the 385k house needs to be....

385k

+ 40k closing costs (purchase and resale, 6% broker fee, attorneys fees twice, title insurance etc)

+8k (10% return on your Down Payment of 77k)

+4500 (loss on rents for one year...I always go with worst case scenario)

Total of $437,500.. 

If you think the property will sell at 437,500 in 12 months, you will have exactly broke even compared to your return from stocks. This does NOT include whatever you value your time at. Overall this means your market needs to be appreciating at a rate of at least 12% a year.

Originally posted by @Lino B. :

 Ultimately I may still jump in to learn the hard way in hopes things go well. This area is truly hard to find the numbers and maybe I jumped in hoping.

 No deal is better than a bad deal. 

Thanks for revitalizing this post guys. I just conducted the home inspection and may very well back out. While the house was a flip and it has many updates, based on the input here and based on some of the analysis of the inspection I think backing out may be prudent. I anticipate another 10k of costs and my realtor is suggesting the seller is going to push back on concessions because they had multiple buyers lined up, bs? Who knows or cares.

I believe the property can appreciate up to 400k clearly based on Eric's analysis that's still not enough.

very educational post.  thanks guys

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