New to Real Estate · Richmond, VA · Member since 2020 · 24 posts · 9 votes
Hello! Can someone help evaluate a deal for me?
Purchase Price: $295K
Improvements: $10K in bathroom reno
Closing Costs: $5K
Down payment: 20%
Interest Rate: 2.75%
1 unit and renting at $1800
Vacancy Rate: maybe 5%
Property Taxes: $1,992 annually
Insurance: $888 annually
I'm also new and I'm not very familiar with the 50% rule. Can someone help explain this? Based on one calculator I used, I am seeing 8.21% cash on cash return. Is this good enough?
Rental Property Investor · Richmond, VA · Member since 2017 · 295 posts · 229 votes
5y
Just at a quick glance, I would think you'd be around 9% CoC return gross but net (after vacancy, property management.. even if you self manage because you need to pay yourself, capex, and maintenance you would be under 3% CoC). Using 23% of rent for those categories/monthly reserves. What are your criteria for buying a property? Personally, I wouldn't do it with that low of CoC and high of cash needed to invest into the deal (closing costs, down payment, rehab).
Rental Property Investor · Richmond, VA · Member since 2017 · 295 posts · 229 votes
5y
Just at a quick glance, I would think you'd be around 9% CoC return gross but net (after vacancy, property management.. even if you self manage because you need to pay yourself, capex, and maintenance you would be under 3% CoC). Using 23% of rent for those categories/monthly reserves. What are your criteria for buying a property? Personally, I wouldn't do it with that low of CoC and high of cash needed to invest into the deal (closing costs, down payment, rehab).
Rental Property Investor · Richmond, VA · Member since 2018 · 87 posts · 51 votes
5y
@Tiffany Luu I would agree with @amyh that’s a lot to spend for a rental with that income. You can also do quick math with the 1% rule. This rule of thumb states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property. Sometimes it can still make sense if it’s in an area that is appreciating greatly. If you are still about to pay all the bills and have money for possible repairs & turn over. Best of luck!
Hi @Tiffany L.. What are your goals for the property? Clarity around this will help you decide on which calculator to use as well. You might not have seen it, but within the calculators the blue linked instructions to the right of the line items provide further information. Here's a link from within BP for the 50% rule:
New to Real Estate · Richmond, VA · Member since 2020 · 24 posts · 9 votes
5y
hi all - I made a mistake. The purchase price would be $285K and not $295K.
@Sarah Stamper: That is helpful to know about the 1% rule. @Ash Fields: The goal is for the home to appreciate and to have some cash flow income. We are not planning to flip. @Amy H. : the floors were newly renovated and based on initial viewing of the home, it's in pretty good condition
Rental Property Investor · Richmond, VA · Member since 2018 · 87 posts · 51 votes
5y
@Tiffany L. It also depends where the property is located. If it’s in a good area or not. Also how old it is. Newer properties in appreciating areas might be good investments but might not meet the 1% rule. I have some turn key rentals that don’t meet the 1% rule but still cash flow well & are great investments to hold onto because the area is appreciating. Generally with higher class rentals you might not get as good return but you might get less problems & less turn over.
Tiffany, I highly recommend you use the BiggerPockets calculator or better understand the 4 square method. In the attachment are links to using 4 square calculator and a video on how to use it. From running your numbers, you will most likely be under a 5% cash on cash return. This is me not taking into consideration Cap ex or repairs.
How much will those renovations increase the value of the property? Is this a possible BRRRR or just a rental?
If you are going to self manage and are just looking to get started with a side hustle or make any tangible investment, and because Richmond is steadily appreciating, this is a decent investment. Before you spend the -$65K though, think about how long it might take to save up again and do the next one. If you’re looking to accumulate several properties quickly and don’t have a bunch more money in the bank, I wouldn’t do this deal. If you want more, start looking at other markets or find a lender that will do 10% down.
I invest in Roanoke and would be open to partnering on a 10-20 unit multifamily.
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
5y
@Tiffany L. I agree with the others in the thread here, this seems like it will tie up a lot of your cash. But, if you're just looking to buy one investment to get started, and you really like this specific property, there is nothing wrong with that. Here are some questions I'd ask:
Is the $1800 based on actual, rented comps?
Will you self-manage? What happens to your cash flow if you need to hire a property manager that charges 8-12% of a month's rent?
Will having $75-80K tied up in this deal impact anything else you want to do in the near future?
New to Real Estate · Richmond, VA · Member since 2020 · 24 posts · 9 votes
5y
Hey @Nicholas L.! Yes, that’s the initial goal to try to purchase one investment to get started and to have something close to where I live. I’m not quite comfortable with out of state investing. I also can’t seem to find deals in my area less than $200K unless it’s in an area where there’s a lot of crime (but I would like to avoid that). I do plan to self manage and do not plan to hire a property manager. I don’t believe having the cash tied up will impact things I would want to do in the very near future. I am also sharing this risk with my siblings. Also, the $1800 rent is based on actual rented comps. We learned that the property was already renting at $1800 without the renovations and upgraded appliances. Thank you for taking the time to reply to a newbie like me!
No worries @Tiffany L. Based on what you said regarding your strategy, the rental calculator might be a good option to check your numbers. See if you can meet some investors in your area doing the something similar. The local knowledge will give you further insight. As it progresses, keep us all updated. Cheers.