I've read several books now on real estate investing. I'm setting up a Wyoming LLC and writing a business plan. I want to focus on properties in university towns and rent to young professionals, junior faculty, graduate students.
The property I have in mind is a solidly built, arts & crafts house with hardwood floors, a large lot, mature trees, and an excellent location near a major university. It is fully rented to medical students and residents. It generates rents of $88,800 / year ($7,400 / month).
The property is listed at $800,000. I calculate the operating expense ratios at around 39% (the property very well maintained - but maybe this is too low). The property should have positive cash flow of ~$12,300 / year (not counting any paper loss - but I calculated this at $1,300 for year one).
The cash on cash return is 12%.
The homes in the area are expected to appreciate by 4% next year. They increased 7% last year. This property is on the higher end of local home costs though, so that makes me a bit nervous about re-sale. But I am going to pursue a buy, hold, and rent strategy for at least 5-7 years on this property.
I've never done this before - so not sure if this is a good deal. I think it is - but would love to hear feedback from more experienced folks on this forum.
A few thoughts about your evaluation:
Never assume that the property will be fully rented 100% of the time -- you don't even want that since it's a sign that your rent is priced under market. For a top-tier property you'll likely be approaching the top of the market ask, depending on a few factors. Ask around for the average vacancy for your area, determine whether or not that's seasonal (based on semesters), and also make sure you're very familiar with the general rent ranges for comparable units.
The owners will have rent statements for the property, along with leases and records for the maintenance, and while you're free to ask for proof of all those there's no requirement for disclosure for that stuff without an accepted contract that stipulates as much; hopefully your agent (and hopefully you're working with an investment-friendly Realtor) has good contracts for that kind of disclosure. As my CPA says "In God we trust; all others we audit." People will of course present their property in the best light, so that 12% CoC might be less.
Inspections can also reveal a number of surprises, even if everything looks good-to-go on the surface. There might be a number of deferred maintenance items that could present upcoming capital expenses. Mature trees could also present a number of problems if you have a big storm come through, or add expenses for lawn maintenance during the fall. The general expectation is 50% of income goes to expenses, so 39% is probably too low. You'll want wiggle room there anyways to put cash in a sinking fund for unexpected/expected maintenance expenses.
Even with "expected appreciation", don't factor that into your purchase. If you're buying to make income, evaluate the property based on that metric alone. One strategy at a time. This is market-dependent, but you'll only be in a more secure position if you consider appreciation as icing on the cake rather than the whole meal -- especially for your first purchase.
As far as it being a good deal, well it might make money, it might not -- those questions really depend on your experience, how you manage, how you finance the deal, and your exit strategies. Look around at other deals and see what your market has to offer, especially since, as you said, this property is coming in at a premium price for the area which will make your exit more tricky.
Originally posted by @John Spaight :
I calculate the operating expense ratios at around 39% (the property very well maintained - but maybe this is too low). The property should have positive cash flow of ~$12,300 / year (not counting any paper loss - but I calculated this at $1,300 for year one).
Make sure that you include property management in your operating expense. Some listing agents will not include it, but from a lending perspective, we will always include it on apartments. If the loan goes bad, the lender wants to make sure to cover that expense.
Question: you have no experience with rentals or property management. Why not start with something smaller and cheaper? $800,000 sounds like an awfully expensive way to "dip your toes in the water" with real estate investing.
Without even crunching the numbers, this sounds like an investment that could go either way. Meanwhile, there are small, single-family homes for under $100,000 that will get you a much better return and you can gain the experience without having your entire life savings tied up in one deal!
I agree with @Nathan G. , $800k might be ambitious for your first deal. I got into real estate by accidentally becoming the apartment manager for a 32 unit building in Milwaukee Wisconsin on Marquette University. We rented to a lot of graduate students. Because of our proximity to the university we were 100% occupied every year. It was privately owned so we ran it ourselves. Let me know if you have any questions about managing a building like that.
To shed light on other opportunities I have a multi family deal I am working to close with an asking price of $700k and it generates $115k in revenue, $60k noi if I sit in my chair and let others manage and fix everything. This is a 16 unit building well cared for with all sub metered utilities and half of the tenants have lived in it for 10+years. Even this property I would say $600k is the most I would pay if I came in with the ability to finance/pay with out any owner financing. Know your NOI after every expense and pay based on the cap rate you are comfortable with or targeting.
I also agree with the other comments. Start with a smaller multi to get your feet wet. I bought a 4 unit to get going and learn the ins and outs of how I want to/will run my business.
I would start smaller. You learn a ton from your first couple of deals, so start out small so your mistakes are small.
Also, check the C-O-C numbers his COC maybe 12% but yours maybe vastly different. An 800,000 at 20% down is 160,000 down payment. 12,300 of cash flow would only be 7.7%. You may have different financing but I usually have to put down 25%
Thanks everyone for the feedback. I suppose its probably smarter to learn the ropes with less exposure, in case operating expenses prove higher than anticipated or other things go wrong. I'll start looking at some 3 or 4 unit multifamily residences in the same area.