Home for sale about 2 blocks away from our first rental property (this would be our second). We paid $52k for the first property.
This rental is basically the same, except it's a brick home instead of siding like the first one. Listed at $48k and just added to MLS today, has 2 other offers already and they are waiting for ours to make a decision (gave us till 1pm tomorrow).
Outside in great condition, inside needs paint, carpet and bathroom needs to be redone. New roof, newer furnace and AC, newer windows. Kitchen floor has paint spilled in a spot so either it can be removed and floor is fine or need to put in sticky tiles over it.
I'm thinking of an offer about $50,500. Thoughts? We think the repairs would be around $5k. The other home we did about $2k repairs after purchase. So this would put us around the same price and it would rent for the same, $850+$100 for garage.
Did I estimate enough, I don't know how much it would cost for the bathroom. Looks like it requires a new toilet, new bathtub or surround, prob want to redo the flooring and has a vanity/sink already. Thoughts on that?
We bought property 1 Nov 2013, so it is the comp for this one.
Well based upon rents you almost have a 2%. My question to you: If the repair budget had to double for some unforseen reason would you still be able to profit from the deal? If so, go for it.
Regarding you offer, could you run comps for similarly priced properties on the neighborhood to see where bids are coming in relative to price. In my neighborhood, foreclosure a go for ~6% below list on average, but in multiple bids they go for about 5% over
Thanks for the additional thought about the budget. If it were to double, be $10k instead of estimated $5k, it would put us at $61k cost for the property.
Returns would be 15.6% cash flow yield if repairs are doubled. If they come in at $5k, then 31.23%. If under that, then even better of course. This is presuming the same rent as the other one 2 blocks away at $850+$100 for the garage, so $950/month rent.
The other property is the actual comp in the neighborhood and we bought it at $52k. Both that one and this one were estate sales. The other one was listed at $67k and sat on the market 6 months. this one is listed at $48k and has 2 offers first day of listing. Other houses in the area have gone under contract/sold $50k-$90k, but ones that are comparable are near the middle end of that.
Coming down to the numbers, if the repair estimates doubled, we'd near the lower end of the range we'd want as far as return goes (don't want anything that gets less than 15%, always shooting for 20% though). I'm pretty sure we won't hit that doubled number though, and of course we would do an inspection first.
@Therese V. You need to look at this in a different way.
As a full time real estate investor I calculate the max purchase price I can pay for a property with my spreadsheet. Asking price from a seller is irrelevant.
First I input all of my fixed cost, Taxes Insurance Utilities Rehab etc...
Then I calculate a reasonable expected rent, since you already own in this neighborhood you have a good idea what this is.
Once I have input all of this I adjust the purchase price to see what price will allow me to meet my MINIMUM acceptable profit margin. Now you have your MAXIMUM purchase price.
In some cases this number will be far below list price, or way above list price. Again the listed price of a property is irrelevant. (It is very hard for people to wrap their head around this) Too many people refuse to pay over list price because the don't feel like they are getting a good deal.
Now that you have your Max Purchase Price, compare comps in the area, we don't want to be over paying for a SFR because our main exit strategy is to sell this to an owner occupant. For the most part if your meeting a your minimum rental profit your likely not overpaying.
OK, now that we know the max price we can pay for the property and still meet our minimum required profit, we can finally look at the list price. This is where we have to play poker and try to figure out what we have to do to beat the other offers that we are competing against.
This requires a bit of a mind game, most investors will refuse to exceed list price. But if your Max PP is say $55k, and the home is listed at $48k I might go in strong at $49k or $50k, we will likely be higher than other people bidding, but we are still $5k under our max PP.
Does this make sense? Please let me know if I can clarify anything.
@Chris Adams :
Thanks for the info. I put in our offer at that price over asking and was comfortable with it. Didn't hear anything when they were supposed to decide. THEN they changed to wait til Mon. Just heard today they went with a cash offer that waived the inspection. No way would I waive an inspection!