Buy and Hold Help with Analysis

4 Replies

I need help and advice on my current property of interest. I am very conservative in my RE investing for the time being and do not have much loan/risk tolerance.  With That being said I just want to focus on buying 1 Rental to start out with, Learn all I can, Increase the cash flow as much as possible, all the while saving money and preparing for my next deal.  My goal is to pay off this first rental completely before i buy another one and then do the same for that one.  I know this is a lot slower pace to great wealth but at least for the time being I do not want much debt or properties to deal with.  With that being said here is the current property i am interested in....

1/2 of a duplex for sale.  The property has a 2 car attached garage, 3 beds, 2baths 1149sqft and is in a great/desirable location.  It was originally listed at 127,000.  Now the property is listed for 122,000 and has been on the market for 3 months.  I believe it is due for another price cut very shortly.  I believe the property is over priced and needs all new flooring, updated both bathrooms and kitchen.  All in 15k-20k in repairs needed.  Rent for this property would be between 1,000-1,200 a month.

CapEx 200, Repairs 50, Vacancy 50, Property management 100, property tax 180, Insurance 80, Trash pick up 15-----All expenses 675/month-------$405 Mortgage payment (If i get the home for 100k w 20k d.p.) For a grand total of 1080/month in expenses. (i would manage myself for 100 less a month but wanted to include it).

I Want to make this deal worth it because while you cant bank on appreciation, this property would at least have the opportunity for that.  It is in a good area, that will hopefully attract better tenants with lower turnover and headaches.  This seems like an awful deal but i want to make it work. I wanted to originally offer 90k for the property but didn't want to offer to low and offend the buyers and not make them want to work with me.  With a top dollar i would be willing to go between 100-105k.

I was considering refinancing my current home and pulling the cash out of it to put in the deal.  Depending on what it appraises for i assume i could come away with 30k-45k.  With my savings combined with this i could get very close to paying all cash for property.

IDK lots of thoughts here. My Goal is to pay off property ASAP, Assume 50% rule and therefore cash flow 500-600 a month ASAP once property is paid off.

You don't want to have the property paid off fully, as that kills your cash on cash return since you are completely unleveraged.

Honestly this deal looks no good just from what you've said:

1080 in expenses for rent from 1000-1200 a month which means with 20k down at 15-20k in repairs you are cash flowing $120 a month at best for 35-40k cash down which is only 4% cash on cash return (1440/yr for 35k invested). Sure you'll cash flow $100 more without paying a property manager, but you need to consider that $100 a month extra your fee to yourself for self managing, not part of your ROI.

"I want to make this deal work" The deal shouldn't be forced into working.

@Jeff Ihnen No deal! I think too many newbie investors make mistakes by trying to make a bad deal, a good deal. Anytime you put $20k into a property, there needs to be equity attached after the rehab. There's tons of deals out there that will provide a good amount of equity for you after rehab. Just get with your local wholesalers, market to homeowners or relentlessly patrol the mls. You'll find a great deal that you won't have to work so hard to make the numbers work. 

Thanks for sharing! I appreciate you both helping me with this.  How do i find local wholesalers @Corey Smith ?  

Do either of you know much about buying foreclosures?  Currently looking at a deal listed at 70k down from 75k listed for 1 month.  Fair market value on the home is 93,500.  My question is once I figure rehab costs, I will know more about if I want to offer.  I have heard a good rule of thumb is banks will only take a certain percentage less than asking price and i was going to start with 20% less so around 56k? I have yet to step inside house. But just wanted any thoughts/ comments about buying foreclosures. Thanks!

@Jeff Ihnen I can tell by the way you've structured your question that you're looking at these deals in the wrong way. ALWAYS, ALWAYS, ALWAYS start with the end in mind first then work backwards. What it sounds like you're doing is working from the beginning forward.

For example:

Your thoughts now: purchase price/offer,rehab, exit strategy

Your thoughts should be: Exit strategy, ARV(After repaired value), rehab, purchase/offer price(based on formula and exit strategy), cash flow (if renting)/Profit Potential (If flipping)

Your exit strategy is important because majority of the time there's less "holding cost" associated with renting, so investors have a higher tolerance for a higher LTV purchase.

For Renting, A great rule of thumb is to always try to get at minimum 100% return on the money you put into the deal with unrealized capital gains. What does that mean?!

Ex. Deal: ARV: $100K Rehab: $10k Purchase: $65k Money in deal: $15k

$65k(Purchase)+$10k(Rehab)=$75k(Project Cost) 

Unrealized Capital Gains Equity= $25k {$100k(ARV)-$75k(Cost of Project)}

The $25k equity gives you an unrealized return of at least your $15k(100%) back and some. Your return becomes "realized" after you sale the home or you refinance to pull your $15k back out of the deal. 

So the long answer to your short question is, no experienced investor can help you evaluate a deal without all the information. That's like trying to put a puzzle together without all the pieces. If you shift the way you evaluate deals, keep it strictly numbers with no emotion, the evaluation process will become tremendously easier. 

Hope this helps!

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