Hello, I am a new real estate investor recently out of college. I have been searching for a while now for a good fix and flip property that has a high enough margin where I am comfortable committing my limited capital and time to. I have found that in the current market (Maryland, DC, VA) areas many home buyers are going in well above asking. This escalates my perceived risk as well because this trend is not sustainable and I am hesitant to change how I evaluate a properties value just because others are buying them at higher prices (going back to price is what you pay value, is what you get...). The housing market is a whole other discussion. I have stumbled across a weird niche market that has sparked my interest and wanted to hear feedback and comments.
There is a local area near me that has a strong job market and average population (relative to surrounding areas), but the home prices are selling at a de-valued figure. I did some quick research and figured I could purchase a 2-3 br, 1-2 bath home for around 60k in rent ready condition and turn around and rent it for a minimum of $1000 up to $1500 monthly, which would on average pay for the investment of the home in about 5 years barring any major repairs or set backs. (The property taxes are practically negligible at such a low evaluation). IMO any rental real estate investor who owns and operates rentals would jump at this kind of ROI.
The main reason I want to flip homes now instead of beginning to build a rental portfolio is to raise capital faster and accelerate my business and then diversify as it grows. My question is as a rental income investor what kind of metrics would you be looking for from a sale to show you that it is a good investment for you. My idea is to buy one of these properties and do curb appeal and lipstick renovations quickly and get renters in the unit. Then I want to put the property up for sale at a higher price and flip the property based on the rental income generation.
I listened to a podcast (maybe bigger pockets or another im not sure) that said this kind of increasing the value in single family homes is not a good business practice and it is only applicable in commercial real estate, but I want to think by lipsticking and setting up a renter and income from a cheaper property in a strong location would be like tossing a softball in to an investor looking to invest in rental properties.
Any and all feed back is appreciated. Not only I am looking for feasability feedback, but ideas on what data to present on the back end as well as how to present it and advertise it to the right people. Thanks in advance for your thoughts, Paul
Welcome to BP! I'm relatively new and have a very similar strategy in mind as you do, flip homes for capital and experience, and eventually build a rental portfolio. I haven't done any deals yet, but I've done a lot of research and thinking about what would make a good rental, so hopefully I can help at least a little bit. The main problem with trying to flip to an investor, is that they will still need a discount from market value to make it a good deal for them.
A good rental property investor is most likely more concerned with cash flow than appreciation, so I did some (very rough) calculations using the rental property calculator on here based on what you provided. If you buy at 60k with a couple thousand dollars in closing costs, put 10k in (just a hypothetical guess without knowing anything about the property, but it would have to be VERY light repairs to be much below this from what I've seen) You're in it for about 72-74k before your carrying costs. At a purchase price of 80k, renting for 1250 a month and including some pretty standard assumptions as far as expenses, this property would make the end investor monthly cash flow of about $140. That's not a bad deal depending on who you talk to, but I wouldn't call it a home run. Although, that only nets you 6-8k minus your carrying costs which in my opinion would be a pretty slim margin for error. It turns into not such a great deal for the investor even raising the purchase price by 5000.
Again, I don't know any specific numbers about the area or your deal, but based on what you said you're trying to do, this is at least how you need to think about it. Hope this helps and I sent you a connection request so I'd be happy to talk more since we're in pretty similar situations!
Thank You very much for your input and analysis. I do not have access to that tool but I can imagine the fundamental numbers and calcs it uses to come up with that cash flow (mortgage, repairs, taxes, etc). 60k would be on the high end of what I am will to spend (Factor of Safety). What I see is a cash deal on that would return my investment in 6 years 100 percent give or take. My actual target purchase price is 35 - 50k and I have a target list of homes I think are obtainable and only need minimal repairs in the 10k dollar range.
What I really want to gain insight on is the end game "construction". What are the KEY metrics a rental income investor would want to see (specific percentages generally, dollar amounts, etc). My goal is to create a rental report and sell the home using that report to change its value (in addition to my small repairs). If this does not work I am comfortable with those rental returns myself.
Good luck on your future deals and I appreciate all input.
If you wanted to create one yourself, you would want to include thing like property value; expected appreciation based on area trends; expected rent with comps to back it up; estimates of expenses such as trash, snow removal/lawn car, and utilities (actual quotes from companies in the area would make this section even better); estimates of annual taxes and insurance; and basically anything else you can think of that would affect the investors cash flow/investment growth as well as anything that might just be helpful like a list of property managers/rental agents/handymen in the area. Most investors will want to verify many of these themselves anyway, but when your numbers come back to match what they find, it will help you build a good reputation and may make them want to work with you again in the future.
Most of these calculations are already listed in the rental property calculator tool here, and it turns it into a really well put together presentation for you, all you'd have to do is include the supporting docs. So I think it and the other tools you get are well worth the cost of the pro membership, but this should be most of what you'll want to include if you build it yourself.