I have a possible lead on a first investment property. My goal from the strategies I have been learning and studying is to build a cash flow portfolio that can eventually be sold as a whole.
The property is in a quiet area but definitely urban. I've drove the streets and it appears to be a good neighborhood. It is a 1bd 1bth with an unfinished basement, a room that was added on, a kitchen and a living room.
Comps in the area rent at $595.00
The home should appraise for around 24k.
It is owned out right. "Partner" of mine met the home owner and passed her my way.
IF I can get the property for around 12k that should get me instant equity (make your profit when you buy) and a mortgage (15 year) of around $117.00 a month including taxes/insurance.
Using the 50% "rule". The cashflow on the property should be right @ $181.00 a month.
It also passes the 2% "rule".
My exit strategy is either portfolio or try to get a lease option tenant. As a first purchase the ROI vs the risk is appealing. My concerns are that it's only a 1bd and that may make it hard to sell 5 years down the road as well as it being close to a rougher area. Obviously section 8 would always be an option with this property as well.
Thoughts of the BP community are greatly appreciated.
HI Ryan! Congrats on finding your first deal.
Regarding the property, assuming most houses are 3/1 or 2/1s in the area, being that your property is unique and in a tougher area that could be a disadvantage for you down the long run as far as rent and appreciation. As far as the 12K offer, do you know why the resident would sell it for 50% of its appraised value?
Numerically speaking, the numbers sound great, but being that's so cheap and in a rougher area so the numbers can be over inflated when you don't take into account tenant issues, maitenance, and possible turn over. I would advise you look at a few more deals before pulling the trigger on this one.
I appreciate the advice. I'm looking at several different options. A friend of mine runs a "we buy houses" campaign. Most of the people who contact them either either want out or want to move on. He is using the very things you mentioned to haggle it down. Not sure if she will bite but will know in the am. He also has a lead on a 3bd 1bath that would be a little bit more that I am more interested in. Just curious from a rental perspective what some of you vets have to say?
I would agree with Jordan, even though the numbers sound great, you are looking at just a couple problems eating up your 'instant equity' when you repair them. I think you would be better off waiting and finding a 3/2 or 3/1 for a first deal! Good luck!
I can see that you are based in Missouri.
We just moved from KC where we bought quite a few properties.
Where is the potential deal located? The numbers look decent if you can make it a cash purchase. I believe the property would also be in a C class area with those figures? Need to have great PM in C class to make the numbers on paper achievable in real life.
The 1 bedroom is a bit of a turn off.
Biggest mistake I made when starting out was jumping in too soon.
Be patient as there is always a better deal around the corner.
Thanks and have a great day.
Especially near a rougher area I would want more options. A 2/1 or 3/1 would give you a wider variety of potential renters (couples, families, roommates, students, etc.) vs. needing to find 1 person by themselves. Also, there will be more people to market to if you decided to sell at some point due to the neighborhood. Even if you want to buy and hold, you should have multiple exit strategies.
We live in south city and our neighborhood is a mix of 1/1, 2/1, and 3/1. The 1/1 houses are either perpetually "for rent" or "for sale".
Ryan, the best way for other local investors to give you specific neighborhood advice is to provide the approximate address of the property. Then we may be able to tell you whether to avoid that block or not.
I know investors in St. Louis who own investment property at that price range and rent, with mostly Section 8 tenants.
I wouldn't bet on any appreciation or even "instant equity" in your case because the only potential buyer in the future would most likely be another investor. So your pool of buyers is going to be limited.
You also didn't mention about the condition of the property, whether it needs work at the price of $12k. The plumbing, electrical, HVAC, and roof will be the major items you need to consider.
Especially in these areas, you will need a GREAT property manager. And think about if you can absorb the loss if you have a 3-month vacancy (or 6?).
Try sticking to at least 3/1 for your first few deals as an investor, once you're more seasoned then you can break the rules.
P/S: If you know other seasoned landlord in the area, you may be able to wholesale it for a quick profit if the numbers work out.
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