please help analyze this deal

11 Replies

House costs $55,000---needs a new roof and some sheetrocking, gutters and paint 

(approx 14,00-$20,000) . . Taxes are 5,500 a year and insurance may be another 

$50 a month. Average rent in that area is $1,100- 1200 a month.

Does this sound like a good deal?

one of the things i like is that it is under 1 hour away  from where i live, and in a 

desireable neighborhood, but those taxes may be a dealbreaker--

your thoughts much appreciated! .   

assuming: 

75k all in..  

1200 rent 

10% for property management 

10% vacancy 

50/month for insurance 

This comes out to a 6.5% cap rate.     If the taxes were half that it would be a 10% cap rate deal.     Taxes can kill your cash flow...  

317‑965‑8708 | http://fshouses.com | IN Agent # 34119

And they say Texas has high property taxes.  That is 7.33% of value for tax!!!

so what does a 6.5 cap rate mean? 

(also,there is no property mgmt--I am it!)

I think that this would still cash-flow, even with those taxes. The rent is 1.6%, not too bad.

Originally posted by @Marci Stein :

so what does a 6.5 cap rate mean? 

(also,there is no property mgmt--I am it!)

 I believe the cap rate is the potential return on investment given on an expected income of the property. 

Cap Rate is simply Net Operating Income (annualized) divided by acquisition cost, expressed as a percentage. 

Cap Rate is more typically used to evaluate Commercial Property than Residential Property.

I prefer to use Cash on Cash. Simplified, how many years (months) does it take to receive my investment back? If I spend $12,000 for a property, how long will it take for me to receive $12,000 from the property.

My own rule of thumb is it cannot take more than 5 years. If it takes over 5 years, I will not buy. Most of my investments return totally in 3 years or less, but 5 years is the absolute maximum. If I spend $12,000 for a property, the NOI will be $2,400, or better.

One last point? I do "Little Deals" only. Less risk, spread out money over several properties. With "Little Deals", I find it easier to hit my target.

It really does depend on your business model. The deal looks like it stacks up but that depends on what your goal is. Are you in this to flip it after a year or is this part of a growing portfolio with a 10 year exit plan? 

I would say this stacks up as a deal if your holding for a medium to long term with a view to benefit from capital appreciation in the area (if we manage to get much) and also build up a return based on the rental amount.

What are they selling for in the area with no work required?

Thanks Joseph-- I like your "low hanging fruit theory",

although not sure how realistic it is in NY...

do you only buy in Fla?

Marc---homes sell for 120,000 and up in the area, but would cost an extra 60,000 to get into perfct shape for that price.....thanks!

I ran the numbers on my own calculator, and returns are slim unless you are doing all of the tenant placement and mgmt yourself.  Taxes at $5,500/year really eats up profit if you are only get in the $1,200 range for rent.  Personally, I think there's better deals elsewhere, not enough margin for the risk IMO.  

thanks Rob-- i do everything myself --do you really think thta makes much  of a difference?

Yes, farming out the property mgmt typically costs you a months rent to place tenants, and about 10% of the rent on a monthly basis to manage.  Personally, I wouldn't do the deal unless I anticipated significant appreciation in property values, and them maybe worth the risk as cash flow is pretty minimal.  I'd have to either get a lower price on the property, or a prospect for higher rent than $1,200 if the annual taxes are $5,500.  

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