Nervous about pulling the trigger on first house - feedback?

22 Replies

OK its a SFH in a nice neighborhood in NC with mostly military families renting. House built in 1992.

Asking price $139k

Hopefully paying 127K in cash

Rental income $1300

Taxes $1100/yr

Prop management 10% of rent

Insurance $80/month

House is in good shape. May need roof replaced in the next 5- 10 years.

Any feedback on this? 

Thank you!

Two quick thoughts @Heather Ippolito . Your property management number seems high. You should be able to find something in the 8-10% range. Also your insurance number seems high.  That insurance amount is what I might expect on a property 3 times that price.

Thanks.

I was given an estimate on the insurance by a mortgage lender. I'll look into it more.

I was also just giving a large guess  on the prop management. I haven't looked deeply into it yet. 

Have you used the rental analysis tool on BP?  It is good and that's what it is for.  

Property managements seems high, but that may be the norm for that area.

Are you paying cash, as in your own cash?  Have you looked at leveraging the property so you aren't all in at cash?  About 10% return on cash...?

If you put down 20% and finance the rest (or 30 or 40%), you could purchase more than one property and spread the cash slightly.  You could potentially have three properties totaling the same cash flow, yet you have tenants paying down your loans and building more equity.

Just a thought.  You could also make 12% off $127k and cash flow more, just don't have ownership of any equity, but that's another conversation...

Many experienced investors on here, should get some great advice.

Thanks @Brian Fouts . The BP calculator doesnt seem to be working right now. I'll try again soon.

I'd get a realtor to pull comps and find the value of the home. If you can buy the home and repair it, all for 10-20% (or more) under its value, pull the trigger. If you buy under value, you ought to be able to sell in order to exit should you not be able to find tenants or whatever. It also needs to be able to sustain rents that cash flow but that shouldn't be a problem if you are paying cash. We always buy with the exit in mind.

My PM charges 10%.  To me insurance seems right...I lived in SC for a long time and the NC area was always slightly higher.  Personally I think you should get a bigger discount for paying cash...That's just me though.

@Heather Ippolito I like it a lot better than the HOA situation you were considering.

What class property/neighborhood is it?

23 year old house....yes, you will probably need a new roof this decade.  When was HVAC replaced?  I assume it has original kitchen (likely not original appliances) and bathrooms - will you have to update them to stay competitive with the market?

Insurance does seem high.  I recommend you talk with an Erie agent.  Others here are using other companies...post a topic in the insurance forum and include the county and you will get some good leads.  My experience the captive agents (Nationwide, State Farm, etc) are not competitive).

I know others disagree, but I think PM will be higher than 10%.  You will pay 1 months leasing fee, then 10% rent.  You may pay 1/2 months renewal fee, etc.

So is it a good deal...depends?  What are the comps on the house?  What's your exit?  I

It's not a high return when you don't leverage, but I understand it's personal preference and that was unpacked in your other thread.  

@Kyle Penland I agree. We offered 120k  ash and they countered at 134k. I thought they were more motivated to sell than they apparently are. I'm now thinking of offering 125k cash and if they reject it, just move on to the other property I thought was a good deal  as well.

Thanks @Derek B. Your input is always helpful and gives me more to think about. I'm wondering whether I should make one more lower off (125k cash) and then, if rejected,  walk away and consider another property I was interested in.

@Heather Ippolito

This property probably would not meet my ROI requirements. Given $1300/mo and applying the 50% rule (since you didn't really account for all the operating expenses) gives only $7,800/yr. If you got it for $125k all cash, your return would be about 6 1/4%. If you have one month vacant per year, your return drops to 5.2%. Pretty thin. You'd do better to loan your money to a rehabber at 12% and forget the worries of being a landlord.

Now you could increase your percentage return by leveraging the property, however your debt service with eat into your cash flow. All in all, this would probably be too thin at this price point. What return on your investment do you want? 

You could work from your needs to determine whether a deal will work for you, instead of starting, as most of us do, from the seller's needs. Try this: I need to make X% ROI and $Y of cash flow each month for a deal to be good. Given the rents in the area, I should make $Z/yr. In order to do that I would have to pay no more than $C in cash and finance $F.

For example, I found a nice home in an area where military families would pay $1,300/mo. I want to make 8% or better on my investment and at least $400/mo in cash flow. We'll assume for this example the expenses come out to 50% of income, including vacancy. 

So, 

$1300/mo x 12 = $15600   (gross income/yr)

$15600 - $7600 (gross expenses/yr) = $7600/yr (NOI)

$7600 / 8% = $95,000 (all cash)

$400/mo x 12 = $4800 (cash flow/yr)

($7600 - $4800) / 12 = $233 (debt service/mo)

$53538 @ 3.5% for 30 yrs = $233/mo

$80462 (cash) + $53538 (credit) = $134000 (seller's best offer so far), which yields 9.45% cash on cash and $400/mo cash flow

Pretty cool, huh? I know it's a little complicated, but I squished it all into under a dozen lines. It leaves you with a better return on your money than an all cash offer and more of your hard earned dead presidents in your bank account looking for another deal.

What do you think? Clear as mud, right? Play with this a bit, tweak the numbers. It should start making sense after a fashion. If you have any questions, feel free to ask.

Thanks @Tom Mole ! I'm still learning! I think that for this ROI I may be just as profitable as letting my investments sit in mutual funds right now which gets me about 5,6% returns. I think I got excited and didn't think enough into it yet. I do have more learning to do!

I'll take a different tact and address the nervousness.  If you weren't nervous, I'd be worried.  I was nervous on my first one as well.  Nervousness is not a bad thing.  It keeps you on your toes.  The only advice I have for you is until you feel comfortable (and this goes beyond your first deal), make sure the worst case for you isn't life altering.  If you just could not get this house rented for 2 years, how does that affect your life?  Can you float the expense for that long?  What if a $5k repair bill comes up, will that wreck you?

Obviously any of those things suck, but if the worst happens and you can handle it financially, it helps make things a lot easier.  If it destroys your life financially if the worst was too happen, the deal is too big and you need to scale back.

Once your comfortable with doing deals, those items won't even be a concern anymore.

Originally posted by @Tom Mole :

@Heather Ippolito

This property probably would not meet my ROI requirements. Given $1300/mo and applying the 50% rule (since you didn't really account for all the operating expenses) gives only $7,800/yr. If you got it for $125k all cash, your return would be about 6 1/4%. If you have one month vacant per year, your return drops to 5.2%. Pretty thin. You'd do better to loan your money to a rehabber at 12% and forget the worries of being a landlord.

Now you could increase your percentage return by leveraging the property, however your debt service with eat into your cash flow. All in all, this would probably be too thin at this price point. What return on your investment do you want? 

You could work from your needs to determine whether a deal will work for you, instead of starting, as most of us do, from the seller's needs. Try this: I need to make X% ROI and $Y of cash flow each month for a deal to be good. Given the rents in the area, I should make $Z/yr. In order to do that I would have to pay no more than $C in cash and finance $F.

For example, I found a nice home in an area where military families would pay $1,300/mo. I want to make 8% or better on my investment and at least $400/mo in cash flow. We'll assume for this example the expenses come out to 50% of income, including vacancy. 

So, 

$1300/mo x 12 = $15600   (gross income/yr)

$15600 - $7600 (gross expenses/yr) = $7600/yr (NOI)

$7600 / 8% = $95,000 (all cash)

$400/mo x 12 = $4800 (cash flow/yr)

($7600 - $4800) / 12 = $233 (debt service/mo)

$53538 @ 3.5% for 30 yrs = $233/mo

$80462 (cash) + $53538 (credit) = $134000 (seller's best offer so far), which yields 9.45% cash on cash and $400/mo cash flow

Pretty cool, huh? I know it's a little complicated, but I squished it all into under a dozen lines. It leaves you with a better return on your money than an all cash offer and more of your hard earned dead presidents in your bank account looking for another deal.

What do you think? Clear as mud, right? Play with this a bit, tweak the numbers. It should start making sense after a fashion. If you have any questions, feel free to ask.

Great thread and I am following everything until I get to the Cash on Cash return 9.45%.  If by definition I take the gross income of 15,600/ Down payment 80,462 I get 19.38% unless I have something wrong.. so I took cash flow... 4,800/down payment which got me 5.96%.  I think I don't understand that number.  Everything else makes perfect sense and is actually a great explanation for me (thank you very much for that!!!).  Could you please explain if I botched the numbers or if I am just not looking at something correctly?  Thank you!

I think I answered my own question LOL... I had to do some adjusting but ended up figuring it out (at least closer to your number)... for the NOI I ended up with 7800 (50% rule).. My expected return then became 97,500 and my before tax cash flow turned into 7,566.67. So that made my cash on cash 9.4%... did I get it right? :-) Sorry to be not correct before but I hope I got it this time.

I turned what you explained into a sheet so I can full grasp it.  here is the link if anyone needs it.

https://docs.google.com/spreadsheets/d/1va-Zcb1ooFdVx6VDdT2IXId9YLjlxJFvOoHCn4VaUl0/edit?usp=sharing

@Heather Ippolito Coming from Port Jefferson NY you need to become fully aware of value in NC markets. What looks like a bargain to a New Yorker may not in reality be a good  buy in NC. Out of state investors need to make sure they have a good support team, and have meaningful relationships with locals. Investors from California and NY often pay too much for investment property and in areas that are not conducive to making a profit. 

As a cash buyer I would expect more than a 1% factor for rent to purchase price. I would need to see at least 1 1/2 % to 2% and assume 50% expenses to start to look at a property.

I have property In the Hamptons , not to far from you and my son Lives in Port Jeff.

Best of luck.

@Heather Ippolito that's good to know.  the first thing you need to do is to determine your goals and time frame.  There are markets that are conducive for fix and flip and others that are better for buy and hold . Each have different characteristics. For instance , I invest in Dayton Ohio where I have acquired a 3 bedroom Property for $20,0000 repair for an additional $10,000  and rent for $800 month . expenses  1400 tax 700 ins 500 repair and capex. 900 property management and 800 vacancy, or a total of $4300 expense and net operating income of $$5,300.  This translates to 17.6% return on cash invested.

the downside is that if I had to sell it would be difficult. the area is low income and with that comes management difficulties. appreciation may be anemic . It does however provide current income and that is my goal . If your goal is not current income but future income and your credit is good , consider buying a more affluent area get a 15 year mortgage and and let your tenant pay for your investment.

Just something to consider , hope this is of value to you

@John McConnell ,

I think you're right. It looks like I used the NOI instead of the cash flow. Good catch!

The ROI number should have gone up, so I saw what I expected to see. The trouble is that I forgot the big difference in the acquisition price. Nuts! I should have noticed that. My bad.

What would have made more sense would have been to recalculate the maximum allowable offer with financing. In order to get 8% return at $4,800/year, you can only put in $60k, so the maximum financed offer would work out to $53,538 + $60,000 = $113,538.

Thank you for checking my math. 

I've always wondered what it would be like to be wrong :D

@Heather Ippolito please keep in mind that this only a quick "back of the envelope" calculation. There were only enough details to rough it out, but do your own due diligence. You should look at everything then rerun the numbers yourself, then have someone double check your arithmetic.

@Tom Mole Very glad I could help and your math has opened my eyes and things are starting to get clearer..  so thank you!

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