Skip to content
Buying & Selling Real Estate

User Stats

42
Posts
32
Votes
Ross Kerne
  • Rental Property Investor
  • New Braunfels, TX
32
Votes |
42
Posts

Help me validate my first rental property(ies) analysis

Ross Kerne
  • Rental Property Investor
  • New Braunfels, TX
Posted Dec 14 2017, 07:32

I am ready to pull the trigger on my first rental property, and you could say I'm jumping in with both feet. I've been lurking on Bigger Pockets, reading, and listening to podcast for about 6 months. I am still learning a lot everyday, but I getting comfortable enough to take action and bring learning to the next level.

I found an off market 4 plex in Central Louisiana, and while viewing the property, the seller stated that he would also like to sell the 4 plex next door! The units are low income, but not the worst area of town. Each of the units need some exterior work, but the inside seems to be rent ready. There are some key observations that could work in my favor, or could be red flags that I'm too naive to avoid. The seller was originally asking $150K each, but within 15 minutes had already knocked $60K-$80K off of his own asking price for an "as-is package deal". He said he'd take $240K for both, maybe $220K if owner financed. I don't think I want to go with owner financing for my first deal.

Conventional Financing and Property Management are lined up, but the estimate for insurance should be on the high side.

Structure Details:

Unit 1

  • 4 - 2 bedroom 1 bath
  • 2 stories, built in the early 80s, brick and wood siding
  • 3 of 4 units currently rented month-to-month
  • Rent ranges from $625 - $550 (tenant pays utilities)
  • Mixture of tile/carpet
  • Some units come with washer/dryer, but all have hookups
  • Metal staircase needs to be repaired or replaced $$$
  • Roof is in bad shape, needs to be patched or replaced $$$
  • Fascia and soffit  on 2nd story needs significant work as it is hanging with visible rot
  • Outside AC units are a mixture of old and older
  • Comps for nearby 4 plexes average about $165K on MLS (realtor friend pulled them)
  • Tax Assessor Value $159,000
  • Roof, fascia, and stair repair estimate $19,000 

Unit 2

  • 4 - 1 bedroom 1 bath
  • 2 stories, built in the early 80s, brick and vinyl siding
  • 0 of 4 units currently rented, and seller said that he hasn't put any effort into finding tenants (red flag?)
  • 1 bedrooms are rare in that area, but should go for $400-$450 (tenant pays utilities)
  • Power and water was turned off so I couldn't really test appliances or AC/Heat
  • Mixture of tile/carpet
  • Some units come with washer/dryer, but all have hookups
  • Roof is in bad shape, needs to be patched or replaced $$$
  • Outside AC units are a mixture of old and older
  • No comps available for 1 bedroom 4 plexes in the last year
  • Tax Assessor Value $112,000
  • Roof repair estimate $8,000

Analysis Details:

Unit 1

  • Tax Assessor Value $159,000
  • Roof, fascia, and stair repair estimate $19,000
  • Planned offer $110,000
  • Current rent ranges from $625 - $550, but rents in the area are listed at $500-$550 according to PM
  • Average rent $550 = $2,200 monthly
  • PITI $790
    • P&I $424 (25% down, 30 yr fixed at 4.625%)
    • Taxes approx. $200/mth (from tax assessor page)
    • Insurance approx. $166/mth (lender says this should be lower)
  • Initial Cash Flow $1,410 (= $2,200 - $790)
  • Other monthly cost $1.070
    • 15% Maintenance $330
    • 10% Vacancy $220
    • 10% Cap Ex Savings $220
    • 10% Property Management $220
    • $80 average monthly lawn care
  • Total Monthly Cost $ 1,860 ($790 + $1,070)
  • Final Monthly Cash Flow $340 ($2,200-$1,860)
  • 3% for closing ($2,200)
  • 8.3% IRR w/ $19K repairs (13.6% ROI if initial repairs are paid for as cash flow comes in)

Unit 2

  • Tax Assessor Value $112,000
  • Roof repair estimate $8,000
  • Planned offer $90,000
  • Rents for 1 bedrooms in the area are $400-$450 according to PM
  • Average rent $450 = $1,800 monthly
  • PITI $660
    • P&I $350 (25% down, 30 yr fixed at 4.625%)
    • Taxes approx. $140/mth (from tax assessor page)
    • Insurance approx. $166/mth (lender says this should be lower)
  • Initial Cash Flow $1,140 (= $1,800 - $660)
  • Other monthly cost $980
    • 15% Maintenance $300
    • 10% Vancancy $200
    • 10% Cap Ex Savings $200
    • 10% Property Management $200
    • $80 average monthly lawn care
  • Total Monthly Cost $ 1,640 ($660 + $980)
  • Final Monthly Cash Flow $260 ($1,800-$1,640)
  • 3% for closing ($2,025)
  • 9.5% IRR w/ $8K repairs (12.5% ROI if initial repairs are paid for as cash flow comes in)

The big question... Would you take this deal?

As a bench mark, @Brandon Turner shoots for 12% and $100 per door (wants $200/door)

If I factor in maintenance, vacancy, and capex; cash flow and ROI seems low by comparison, but if I extract those cost, I am cash flowing $1,100 & $880 at 27% and 32% ROI. If I wait to do the repairs with cash flow, the ROI is around 44% for each.

Does 5 of 8 vacant units (and currently no power/water in the 4- 1bds) throw out a red flag, or is that insignificant? I plan to write the purchase agreement pending inspection.

If you made it this far, thanks for reading the wall of text. I would appreciate any input. Thanks

Loading replies...