This deal seems almost too good to be true, but numbers don’t lie! The only question is, are these numbers reasonable? Would love any advice on this Jacksonville North Carolina deal.
@Reagan Huefner Your rent to purchase price is good, but repairs and capex combined at only $1620/yr. is not a reasonable budget IMHO. Instead of using percentages, I’d create an actual capex and maintenance budget for the specific property instead. Add up all the items you expect to encounter during your hold period (determined by looking at expected remaining life of roof, furnace/HVAC, hot water heater, floors, landscaping, appliances, driveway, components (windows, doors, garage door etc.)). Forecast which ones you’ll likely have to replace during your ownership, and divide that number by the number of months in your hold period. $1600/yr. is simply nowhere near enough to maintain a typical home, so think about that and make sure your total numbers make sense.
Vacancy is another area where using percentages of a low rent number may not result in a realistic number for the minimum operational expenses involved in running a rental. 5%/$45/mo. is only$540/yr. That's only around two weeks of vacancy per year. That's cutting it close. You'll need money for turnover costs somewhere in this calculation as well.
I think Capex, repairs and vacancy are going to eat up all your profits on this one unfortunately, as there is just not enough gross rent here to keep up with the expenses involved with maintaining a property.
@Dan M. Most of the three bedroom houses with similar square footage in the area are renting for $1000-$1200. Since the house is only 1 bath I estimated under that.
Cool well it looks good and cash flows I think its a good deal definitely on the surface just do your due dilligance and hire a good inspector. Good luck :)
@Reagan Huefner Your rent to purchase price is good, but repairs and capex combined at only $1620/yr. is not a reasonable budget IMHO. Instead of using percentages, I’d create an actual capex and maintenance budget for the specific property instead. Add up all the items you expect to encounter during your hold period (determined by looking at expected remaining life of roof, furnace/HVAC, hot water heater, floors, landscaping, appliances, driveway, components (windows, doors, garage door etc.)). Forecast which ones you’ll likely have to replace during your ownership, and divide that number by the number of months in your hold period. $1600/yr. is simply nowhere near enough to maintain a typical home, so think about that and make sure your total numbers make sense.
Vacancy is another area where using percentages of a low rent number may not result in a realistic number for the minimum operational expenses involved in running a rental. 5%/$45/mo. is only$540/yr. That's only around two weeks of vacancy per year. That's cutting it close. You'll need money for turnover costs somewhere in this calculation as well.
I think Capex, repairs and vacancy are going to eat up all your profits on this one unfortunately, as there is just not enough gross rent here to keep up with the expenses involved with maintaining a property.
@Steve K. Thanks for the tips! I haven’t yet walked through the property, but if I do pursue it further I will definitely create a legitimate capex and repair budget. How would you suggest calculating vacancy for a property like this?
@Steve K. Thanks for the tips! I haven’t yet walked through the property, but if I do pursue it further I will definitely create a legitimate capex and repair budget. How would you suggest calculating vacancy for a property like this?
I would do 8-9% bare minimum as that's at least 1 month a year. I'd also budget a few thousand per turnover, every 1-2 years.
I agree with @Steve K. comment on maintenance/cap ex being way too low. Those items are less related to rent than to size, number of bathrooms, age of unit, class of unit, etc. Using a percentage of rent for maintenance/cap ex makes no sense, but many calculators do it this way.
I am OK with using a percentage for vacancy as a month of vacancy every 20 months is 5%. But before I use any vacancy percentage, make sure 1) you know what the vacancy rate is for the area 2) that you are in a position to do quick tenant turn overs when it comes vacant (do you have a local team). My tenant unit turnover costs I place under maintenance/cap ex but if you carry it under vacancy then add it to vacancy. Make sure the costs are accounted somewhere. My turn over costs (high cost market) are ~$400/year of vacancy for the first 5 years of a tenant (5 year tenant cost me ~$2K for unit turn over).
When I do a quick evaluation, it is always based on 50% rule (even though I do not believe cap ex/maintenance should be based off the rent, a lot of the cost are). I then evaluate the RE from there. Post refinance 50% rule is $184, but low rent market indicates 50% rule may be aggressive. I will be surprised if this unit hits $184/month (adjusting for inflation) over the long haul.
In addition, because it is a zero appreciation market (meaning appreciation has not historically surpassed inflation), there is not likely to have increased cash flow or much return from property appreciation (in inflation adjusted dollars) and may not even keep up with inflation.
I would not choose to own a unit that forecast less than $200/month return without having much chance at that return increasing. Where an individual places this cutoff is individual specific. If it is local to you and the type of return that is usual, maybe it is a good place to start. If it is not local, there is no reason to consider this RE.