2.75% COC ROI - Is this deal worth it? 315K SFR (New Built)

32 Replies

Guys, i have been actively hunting down for a SFR property and came up with following analysis after doing BB Rental Property Calculator on a brand new SFR:

COC ROI = 2.78% when i have estimated:

1% Capex, 1% repair, 1% management (which means self-manage)

As per knowledge gathered on BP podcasts, it is advised to go for 12% COC ROI, in today's market, i could have gone in with 7-8%, but these numbers are looking bad.

This leaves me counting on appreciation alone. Is it better to research REIT's or look/wait for another deal, as market continues to remain on the high and this area appreciated 5-6% already in last 9-12 months. Also, speculations remain that market will crash after 3 years by 2021 (been hearing this saga since 2015 and we have been running in a record bull run ever since 2012)

Is this assuming you buy cash or leverage? At 2.78 percent you’re barely outpacing inflation

2.78% is not even worth a first consideration. A moderately aggressive mutual fund will easily hit 8 - 12% consistently.

Never count on appreciation, it is not real money until the day you pull it out or sell.

@Varun Parkash , it looks like you're trying very hard to talk yourself into this. Are you simply looking for confirmation of what you've already decided, or are you genuinely expecting/hoping to be slapped around so that you'll snap out of it?

If a lot of the purchase price would be borrowed, then you'd be taking such a big risk!

And if none of it's borrowed, then is that the best investment you can come up with?

So, either way, my vote is: leave such new builds for owner-occupiers! Cheers...

Originally posted by @Brent Coombs :

@Varun Parkash, it looks like you're trying very hard to talk yourself into this. Are you simply looking for confirmation of what you've already decided, or are you genuinely expecting/hoping to be slapped around so that you'll snap out of it?

If a lot of the purchase price would be borrowed, then you'd be taking such a big risk!

And if none of it's borrowed, then is that the best investment you can come up with?

So, either way, my vote is: leave such new builds for owner-occupiers! Cheers...

Haha, well, it is a standard 20% down - FHA loan (30yr). I am not into flipping/older-property investments/rehabs or multi-family (will eventually get into them) at this stage as i don't have the man-hours to burn at the moment - so it is a class A property in good neighborhood.

I am not counting on this investment to give me $3-$5k per year - this is more to park the money & bank on some appreciation in next 5 years and then do a 1031 exchange. I already missed that boat of earning 3-5k in this area by 9-12 months. 

I am yet to find a deal on a Brand-New built - Class A SFR where i can get more than 3% COC ROI in Dec 2017 (with exception of 5% COC ROI on 200K 12+ year older condo's - which don't appreciate as much as an SFR) - such deals as per my research no longer exists unless you inherit properties or have solid connections with owner-selling directly or perhaps you guys may know it better.

Any properties closing in Dec 2017 can give 5-10k discount in selling price but to rent them out also takes 2-3 months in winters - so that vacancy eats up all the rent and you have to role the dice between booking something and have it built out by summers and then rent it out or suck-it-up now and close it in December to check your luck. 

I spent quite a lot of time researching Austin/Dallas markets, to get positive cash flow there with 2.5-3% property tax rates is nearly impossible unless you bought in early 2016 (look at homes sold data and its openly evident). 

Updated 7 months ago

Update: Investor loan not a 1st home owner loan

@Varun Parkash , so, about this "standard 20% down - FHA loan (30yr)". Are you saying you'd be living there (but will put down 20% instead of 3.5%, just to avoid Mortgage Insurance)?

Well, you'll always need to live somewhere, so why the worry about its CoC return?...

Originally posted by @Brent Coombs :

@Varun Parkash, so, about this "standard 20% down - FHA loan (30yr)". Are you saying you'd be living there (but will put down 20% instead of 3.5%, just to avoid Mortgage Insurance)?

Well, you'll always need to live somewhere, so why the worry about its CoC return?...

 Nope, its an investment property in which i will never live.

Originally posted by @Varun Parkash :
Originally posted by @Brent Coombs:

@Varun Parkash, so, about this "standard 20% down - FHA loan (30yr)". Are you saying you'd be living there (but will put down 20% instead of 3.5%, just to avoid Mortgage Insurance)?

Well, you'll always need to live somewhere, so why the worry about its CoC return?...

 Nope, its an investment property in which i will never live.

If that's allowable, it's news to me. Are you sure that it's an FHA loan (ie. reserved for owner-occupiers only, in the case of 1-4 unit buildings, afaik)? [What have you learned, that I haven't?]...

Originally posted by @Brent Coombs :
Originally posted by @Varun Parkash:
Originally posted by @Brent Coombs:

@Varun Parkash, so, about this "standard 20% down - FHA loan (30yr)". Are you saying you'd be living there (but will put down 20% instead of 3.5%, just to avoid Mortgage Insurance)?

Well, you'll always need to live somewhere, so why the worry about its CoC return?...

 Nope, its an investment property in which i will never live.

If that's allowable, it's news to me. Are you sure that it's an FHA loan (ie. reserved for owner-occupiers only, in the case of 1-4 unit buildings, afaik)? [What have you learned, that I haven't?]...

 Please excuse my error, it is an investor loan, I forgot the jargon for it.

bp is not the greatest place to get advice for low return rentals..

in non appreciating markets there is not reason to buy unless there is substantial cash flow

in markets that have a history or a good chance of going up .. 3% with appreciation and mortgage paydown is not bad at all.. especially when you don't have to put up with tenant BS you do in lower end rental markets.

I agree with @Jay Hinrichs that this is a rough place to get advice about appreciation plays and I am one of those people. But I have evolved and nuanced my opinion over time.

I still believe it’s a mistake for beginners to start with a house that is only good if the market goes way up. I don’t want to see a situation where you don’t have any wiggle room the market goes down, there is a big expense with the property like a lawsuit, or you make mistakes because you are a new property owner. This is a blueprint for a big financial loss.

But if you have good financials without counting only on your job or have other money you can tap into. Or have other properties that can help ride out any storms. And you should also have experience dealing with tenants and properties. I think that having strong appreciation is an important part of wealth building.

It sounds like you are more in the former group.

@Andrew Ware   Irvine is a rare place even if markets retreated a bit.. just don't sell in a retreat.. rents will hold tenants will be there.. and wait for the next cycle.

were investors get hurt is when teannts are bad.. they have turn overs were their units are trashed and or rents stop and they have to do protracted evictions..

in Irvine unless your totally asleep at the switch your not going to have those lovely experinces you will have in lower price point or to use the A B C D analogy  C and D class rentals.

@Andrew Ware    Andrew I was making the assumption he was talking about PRIME IRVINE or OC ( Orange County CA )  not Texas or some other market were there is a lot of new construction that is being sold for rental purposes.  if its those markets then I would have different advice/opinion.

Originally posted by @Jay Hinrichs :

@Andrew Ware    Andrew I was making the assumption he was talking about PRIME IRVINE or OC ( Orange County CA )  not Texas or some other market were there is a lot of new construction that is being sold for rental purposes.  if its those markets then I would have different advice/opinion.

 Actually, this property is in North Atlanta region (not CA)

Originally posted by @Andrew Ware :

I agree with Jay Hinrichs that this is a rough place to get advice about appreciation plays and I am one of those people. But I have evolved and nuanced my opinion over time.

I still believe it’s a mistake for beginners to start with a house that is only good if the market goes way up. I don’t want to see a situation where you don’t have any wiggle room the market goes down, there is a big expense with the property like a lawsuit, or you make mistakes because you are a new property owner. This is a blueprint for a big financial loss.

But if you have good financials without counting only on your job or have other money you can tap into. Or have other properties that can help ride out any storms. And you should also have experience dealing with tenants and properties. I think that having strong appreciation is an important part of wealth building.

It sounds like you are more in the former group.

Hi Andrew, thanks for chiming in. This is my 2nd investment property (this time - outside CA), I don't have experience with tenant issues yet because my 1st tenants in the 1st property have been long-term and good. 

Regarding lawsuits, I will have to secure myself under an umbrella insurance policy. A down-market can create issues of lower rents - which just like any other investment is a calculated risk. 

I make sure to get married, 700+ credit score tenants with stable jobs, no criminal history even if it takes more time to rent it out. I am in the 2nd investment for 5-7 years minimum. 

I have multiple income sources - so not a hand-to-mouth situation here. 

there are great parts of Atlanta no doubt.. good luck

Where in North Atlanta? What school district? Can you provide some basic specs - size, price, beds/baths etc?

There are far better, passive investments, that will return higher rates. Put your money in a REIT and save yourself the stress of owning real estate. 

Originally posted by @Thomas S. :

There are far better, passive investments, that will return higher rates. Put your money in a REIT and save yourself the stress of owning real estate. 

 I have no knowledge or research on it yet, to establish trust without it is dangerous. REIT can yield 6% but i am not sure if i control any appreciation or get any in that set-up. To make 6% of 60k (down payment) = 3.5k/year is not really my end goal. Please let me know if i misunderstood the REIT concept completely. Ignorance is not always a bliss.

@Varun Parkash - I'd look at the deal and your goals this way (using napkin math and flat rents): 

You say that you want to purchase this home at $315,000 which would cost say ~$5,000 in closing costs. You then want to hold it for 3-5 years and sell. Assuming no appreciation, you would need to pay 6% or roughly $19,000 in sellers fees. Maybe you get a better deal, maybe you don't, maybe a buyer covers some costs. I'm not trying to argue that here.

The point is that you would have a potential $24,000 in costs associated with on and off loading this deal. Is that worth the cash flow (My estimate is you'd make about $140/month?) or COC you could get elsewhere? Also, what's your exit if the value decreases when you go to sell in 3-5 years? (Hint - If you sell, it's not pretty.)

Like you said, it HAS to appreciate for you to win. If it is flat or goes down you lose. I did some quick math shown below in the attached image. I only see you winning if you hold for 3 years and it appreciates. Otherwise, I like what @Jay Hinrichs   has to say. Great as always!

It’s impossible to predict the next real estate crash; just like stock market, those who say they can, are 100% full of crap.  If you know someone that predict the last real estate crash or the stock market crash, well that’s because he predict there will be a crash EVERY SINGLE year. Nonsense. 

Thanks Alex, appreciate your calculations, I found out that at 2% appreciation every year, after 5th year and after taking out the 6% sales costs as well as the 5k closing costs paid now (doing 1031 exchange) = the profit comes out to be 35K*.

[Please note that my numbers include * Property value minus net cash expenditures and sales costs + initially paid closing costs]

In worst case scenario of 1% appreciation every year, the 5th year shows profit of 20K*

It’s important to consider all perspectives and considering it’s an area on the high, I’m hoping for the best and appreciate all your experienced opinions :)

Cheers !

I’d tell @Jay Hinrichs to follow his gut all day long and buy it. Then again he wouldn’t need to come here and ask.

The part about new investors that concerns me taking these kinds of deals is that there isn’t just a market meltdown to worry about. Personal or family meltdowns can cause as much or more havoc. And lack of experience can cause more trouble. Put a couple of those things together and you can cause a lot of financial damage to yourself for years.

As far as the lawsuits I was just using that to sub in for any of the things that can happen. Yes it’s brand new you probably won’t lose your roof, but that doesn’t mean other things don’t happen.

I’m not saying you can’t make money at it because you clearly can. But in any of these appreciation posts I’ve never seen people say it’s a screaming good deal. It’s gambling and it will probably make you money if you can hold it long enough.

@Andrew Ware   Every investor has the same risks of personal issues to deal with.. and extraneous issues out of their control.

as much as anything I see a lot of people jumping into buy and hold ( and of course you have to start somewhere) but they don't even know if they like landlording or not.. or have the temperament for it.

only to discover they don't.... and you better have appreciation or your going to lose money when your 3 cash flow properties in that don't go up in value and you say to yourself I don't like this I want to sell and buy notes or I want to only do short term lending or I only want to invest with a natinoaly ranked syndicator or I only want to buy REITS or I want Bitcoin..  

Thanks jay and Andrew - agreed that it’s not a smoking hot good deal - which will make me thousands in profits.

My 1st gamble of buying and holding in Irvine, CA - has been negatively cash-flowing - in which I jumped in 2 years ago without many calculations or ROI or 6% sale costs considerations etc.

Today I can break even on it if I sell inclusive of all costs, but I don’t want to.

I have a thick skin & unlike many millenials- bitcoin or quick money making stressful investment schemes including stocks (without solid research - analysis & a guide or mentor) hasn’t really been my thing.

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