Help Analyzing a property

23 Replies

Hi everyone... I'm a newbie that is getting his feet wet analyzing properties. I found one on the MLS and ran number against it and wanted to know if I am doing it correctly or if anyone has pointers,

Here is the rundown:

Sales Price - 37,000

25% Down Payment (from a HELOC) - 9,250

Remainder - 27,750

Closing Costs - 4,000

Mortgage - 31,750


Rent - 750


Mortgage & HELOC (@6%) - 293.78

Tax - 75

Insurance - 100

Repairs (5%) - 37.50

Vacancy(7%) - 52,50

Property Mgmt(10%) - 75

Total - 633.78

Cash Flow - 116.22

I want to pay off my HELOC as quick as possible, so that should up the cash flow to 219.64

Please provide some feedback

Thanks in advance for your help!

Hi @Scott Garvin

A few things -

1) $4,000 in closing costs seems extremely high. Are those actual figures?

2) You seem to be wrapping in your closing costs with your loan amount. This is going to inflate your ROI because you are amortizing your closing costs over the life of the loan versus paying them up front. Unless, of course, your lender is truly wrapping the closing costs into the loan.

3) I don't know the area of the property, but $100/month seems high for insurance on a $37,000 house. Have you called around and received quotes from some local insurance agencies? If not, I would recommend doing that and comparing the prices. 

4) $900 in property taxes? That's sweet. 

5) Who is paying for water/sewer/garbage? 

6) I would add in CAPEX (capital expenditures). I typically estimate 5% of rent amount.

Hello and glad you are taking action Scott!  Your description implies you are looking at one unit in that example.  Your occupancy will be 0% or 100%. Unless that location is in high demand at the very least you'll be experiencing a month's worth of income loss.  Are you certain about the property tax amount.  You could lower your down payment and delete the closing cost by getting the home Owner to finance.  Who will manage this for $75 a month?  The more units, the better. 

Trying  to buy a single rental unit is very risky unless you are planning to buy 25 of them right away.  Does that location require any flood insurance?  There is no turnover expense to come from a reserve account.  The turnover could cost more than you reserved.

 It may be easier to act like a bank offering some people a financier with a lease option  and make them your typical lease people because they  want they want home ownership someday and become an owner but they did not previously qualify for with a loan from the Bank. 

Have a clause in the lease which requires them to provide all maintenance that costs up to $250.00.  They will typically take better care of the home because they hope to be owners someday.

They will typically not take the purchase option and you can do it all over again.  You can usually have a larger down payment amount that is non-refundable and allow you some extra cash with a new option.

Good luck to you!

@Josiah Kay -

1) I read somewhere that closing costs are typically 3-4K, so I use 4K to be safe.  What figure should I use?

2) I did wrap the closing costs into the loan. I was looking at doing a zero out of pocket transaction. Was not looking at ROI... was just looking at income. I will update my numbers and look at ROI with and without the down payment. That was a good point as it is something I should look at. Thanks.

3)  I did not call around for insurance quotes.  I just threw in a number that I figured was a little high.  Another good point.  I will do that also.  Thanks again.

4)  I got the figure off of Zillow.  I know I should get the actual figure from the county website.  Do you know if the tax figures on Zillow are accurate?

5)  Tenant will pay everything

6) I will add that in.

Thank you so much for your feedback!

@Michael Lee - Thanks for your response!

   I am not certain about the property tax.  I got the number off Zillow and not the county website.  I will go back and verify it there.

   Why do ask who will manage this for $75 a month.  I would get a property manager.  Is there a problem with this calculation?

Why is buying a single rental unit very risky? I would like to buy more using BRRR, but don't know if 25 right away is reasonable to assume. My income from my job should allow me to make payments on it if I do not have enough saved up from the rent. I know that is not what I want to do, but I think it mitigates some of the risk if that is what you were alluding to.

   Not sure if it needs flood insurance.  Good point.  I will look at that.  Thanks.

    I'm looking for a buy and hold, so I'm not interested in offering a lease option.  I suppose I could go that route if I am having a ridiculous time renting it.  

   I LOVE your suggestion about providing all maintenance up to $250.00.  It does seem a little high though.  I would think that $100 is reasonable.  Thoughts?

Thank you for you feedback!

Hello again Scott!  The main reason one unit is so risky is that th occupancy is 0 or 100%.  It is the most risky you can try to own.  The more units you own that pain, a vacancy, is less painful.  I had a real estate broker license in Texas for about 30 years so I know what I am talking about.  Because of that and the fact that my father did mostly commercial real estate for about 40 years and my college education with honors have helped me very much.  That as well as growing up in Dallas,, Texas have taught me very much.  All of that has contributed to my knowledge.  Getting several actual quotes will tell you how much your budget should be in property management.  I meant to say the tenant will pay the maintenance in full up to that amount.  Then, the owner would help.  I hope all of this makes sense.  Best wishes!

@Scott Garvin

It looks like the numbers you have are rough estimates.  You probably got the management fee by calculating the rent times 10%.  That is normal, but on a property with a rent price that small, I don't know if that works.  Most places will charge you to place a tenant PLUS 10%, but they may have a minimum.  Like $100 per month or something.  

The Zillow numbers are good guesses, but you should probably talk to your lender and/or the title company and see what numbers they see on those properties. 

@Michael Lee give you some good advice.  I would re-read what he said.  Single family homes are a good way to start in the real estate business.  His lease-option idea is a common way to run Single Family properties and many times people will not take the option.  So it can be a quasi-"buy-and-hold". 

Good luck to you!

@Scott Garvin

1) I couldn't tell you an exact figure to use. As an example, I recently paid around $1,500 in closing costs on a $100K property. However, when you shop around for a mortgage, you'll get a better idea of what your local lenders have for closing costs.

4) Typically, they appear to be fairly accurate, however, I still prefer to get my information from the source. 

Your closing  will likely be under 2,000 depending on how the property taxes calculate out and the time of year they hit. I recently bought a property June 1st for 35k the closing was 1,650$ total but that was a cash sale . If you need a loan that certainly adds to closing due to all the  hoops the bank requires you to jump through 

700 rent is not bad for a 37,000$ house .that is not a bad deal if the place doesn’t need a bunch of work ,but if you pay a property manager that is going to really burden your profit down . Personally from an investor viewpoint I would not waste my time on a sfh . The profit isn’t there ,the likelihood of losing two years profit in a single repair expense is high ,the potential for a breakin / theft is high and the potential for paying all costs out of pocket when there is a vacancy is high . Plus single family homes aren’t as scalable as apartment buildings . Having solid cash flow is incredibly important when starting out . It’s going to be a rocky start if you have to payout to everybody but yourself . Personally I would not even think of a property manager unless I had way too many rentals to manage myself . They are really pricey 

@James Call  

 Yes... some of my numbers are rough estimates.  I have no idea about the insurance or closing costs.

Thanks for that info on PM's...  I have only heard 8-12%.  I will look into them a little deeper for a better understanding.  Thanks!

I appreciate the feedback!

@Eric Adobo

I thought a SFH was less risky than multiple units too. But, I know nothing. The all or nothing of the rent makes sense though. I have enough funds to cover vacancy, so I am not too worried.

As far as it being in the hood...  it is not, but I didn't want to include that factor since I just wanted to know about my numbers.  I know there are a lot of other factors in purchasing a house that I didn't want to focus on with this thread. 

Thanks for your reply!!

Originally posted by @Scott Garvin :

@James Call  

 Yes... some of my numbers are rough estimates.  I have no idea about the insurance or closing costs.

Thanks for that info on PM's...  I have only heard 8-12%.  I will look into them a little deeper for a better understanding.  Thanks!

I appreciate the feedback!

 HEre is the thing, a property that cheap will be tough to get to cash flow.

The problem you will have, is repairs on really cheap properties aren't that much less than repairs on expensive properties.  Other than it being smaller, painting a house between tenants is going to cost the same, a new roof will cost the same, a new air conditioner, hot water heater, furnace will be the same cost etc.

For instance, it costs us about $1,000-$1,500 plus a months rent as a leasing fee. each time we change tenants, by the time we paint, do landscaping, repair damage, change locks, patch holes, paint walls that need to be painted get a make ready clean. 

Now maybe in a lower priced property, you don't do all of those items every time you change tenants.  But those costs aren't insignificant.

I think when you really add up all of the costs, you will find that your house isn't cash flowing

@Bart H.

I am only now starting to investigate PM's.  I will have to get one as I am looking out of state.  I didn't realize the cost they charge for filling a vacancy.  I question why that isn't a line item in the calculations that I have seen people use.  Good stuff to know though, so thanks for the reply

@Scott Garvin  - regardless of what anyone thinks. You are the one taking the risk. You might not cash flow any significant money for the first couple of years but your net worth just went up. 

My only advice is find a PM that finds you a tenant for free if the tenant breaks the lease for any reason. Good luck. 

Originally posted by @Scott Garvin :

@Bart H.

I am only now starting to investigate PM's.  I will have to get one as I am looking out of state.  I didn't realize the cost they charge for filling a vacancy.  I question why that isn't a line item in the calculations that I have seen people use.  Good stuff to know though, so thanks for the reply

 Scott, if you live in Logan Utah, and its growing, why not invest locally?

Personally I think new investors are best served to start off locally in their home town.  you know all of the streets, the good places, the fun places, the shady places.  You know Fred up the street is about to open a new bar and grill and all of the artists are moving into that area nobody thinks about.

Its my personal belief, but one of our advantages as investors is that we have a great relationship with our contractors.  And since we are learning about construction, being able to go after work and measure cabinets for the 4th time, or compare the tile to the grout, or pick up supplies so your expensive contractor doesn't have to waste his time picking out paint colors, flooring, appliance etc... are all things that are easier to do in person.

If you have a lot of experience flipping houses, or working construction,  then yes go for it, you can be successful as a long distance landlord.  IF you have experience and have the means to pay for project managers or other someone who can be your boots on the ground, great.  But that does have a cost associated with it, we would at this point in our lives supplant it with some sweat equity.

@Scott Garvin Hey Scott Just looking at your sales price and knowing how much properties cost in Norther Utah and in Logan, I would guess that what you’re looking at is a mobile home. Usually with mobile homes you not only pay a mortgage for the home itself but you pay a monthly rent fee to the mobile home park association as well for the land the home sits on. Make sure you check to see if there’s a rent fee on top of your mortgage payment because that would eat up your cash flow if not turn it into negative cash flow.

Most Lenders minimums are around $75K to $100K.. If you know a lender that does below $50K mortgages.. Message me the lender.. Thanks..