I have started searching around BiggerPockets the last few months, listening to the podcasts etc and would love for the knowledgeable folks here to review my first potential rental.
It is a 665 Sq ft SFH, 2 bedroom 1 bath with brand new roof and new furnace.
- Market Value $60,000.
- Rent would be $700 per month and can be filled in days (hot rental market).
- I have financing approved through a local bank with 15% down and $2000 fees required at closing @ a 4.75% rate on a 30 year.
- Taxes $1301 annually
- Insurance quote was $400
The property isn't on the market yet as it's being sold by a Realtor and he's giving other Realtors in his brokerage first shot at selling it before going onto the market.
My Realtor, that I trust, suggests that properties with 8% Cap rate and up go in days for full asking price in our market. I'd like to offer less than asking price, but honestly feel like negotiations will end close to the $60k.
I'm showing a 9.6% Cap Rate roughly with $500 per month maintenance. Cash on Cash return of 27%.
Running the numbers it seems like a good deal, what do you think?
From a far, the returns seem on the low side. If this property has appreciation going on, that would change that my take. In order to feel 100% confident I would have to compare to 100 others and see where this one stands.
Thanks for the reply Matt, I appreciate someone else responding. After reading on BiggerPockets about the suggested COC, CAP's etc I haven't found anything better than this yet. I would rather lose out on some average deals for a better deal, but I'm being told this is a "better deal".
Appreciation isn't super high, nor is it low in our market. During the market downturn in ~2008 our local area hardly slid at all. Just the average 3% increase I'm told.
I see you're in California where returns can be much higher, I wonder if anyone closer to the Midwest is getting similar returns to the west coast.
Hi Chris, just a couple thoughts from my own experience.
1) If the norm for the area is 1 and 2 bedroom, then seems average. But if there are more 3+ bedrooms around there, pegging yourself into a 2 bedroom just makes it a little harder to liquidate whenever you plan to.
2) Pockets listings is what you describe here.....a couple things on that. First, generally speaking, in most areas, all the sharks ( big, full time investors) already eat up the best MLS deals kind of behind the scenes and/or pretty fast once they hit. So, coming up on a "deal" begs the question..."why is this still around?". So, if it really is not that great, it would typically need all the "extra hype" - like pocket listing status - to give it a little extra umph to get rid of...right? So just consider that and let your gut inch you around a little.
3) It sounds like you are ready to put down around 9k on that deal and you are almost at ease with your estimates. As for whether it is a "good deal" really depends upon a) other available options at the time of purchase and b) your overall goals in your investing business. For example, if that nine spot cleans out the bank and now limits your other opportunities, then it might not be your best move right now..which is independent upon whether it is a good deal overall. If you had marketing in place that generated inbound motivated seller leads, you'd have a range of leads to choose from. In most places, MLS listings represent a very, very small percentage of the population. The future of your business is on targeting deals upstream by picking up on the scent of distress....long before they trickle downstream and end up on the MLS....where as you already perceive, 3rd parties are going to skew you toward 60k in this example...because they have a fiduciary responsbility to do just that....independent of the trust.
Good luck either way and add me to your buyer list once you start cranking up the marketing!
My figures on your cash flow do not show that the property is a good investment option.
First, let's apply the 50% rule to a monthly income of $700 and a mortgage payment of $308.54 (including PMI). You are showing monthly cash in pocket of only $41. Most investors require $100 per unit.
Now, let's use your numbers (specifically $1,301 taxes, $400 insurance - which seems about 50% low). I just can't see $500 per month on a house that needs no repairs. Typically you should allocate 10% of the gross income for repairs and 5 - 10% for capital repairs (such as carpet, roof, HVAC - any big ticket items). Using those numbers, you only have a $75 a month profit.
You would need a purchase price of no more than $55,000 to make this profitable in my opinion.
Thank you for the perspective everyone! I'm hunting for another house while I make a lower offer to see what we can do.
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