Please Help Analyze My First Deal

8 Replies

Hello BP,

We are new to this and trying to invest in the Minneapolis/St. Paul metro area. We have been looking for our first deal for a number of months now and I believe we found one and are looking for feedback from the community. I believe this will be a good candidate to rehab and rent but I’m definitely not an expert in that regard.

The house is an off market side by side twin home. It is a 3 bed 2 bath with about 1,400 sq ft with a walk out and a tuck under 2 car garage. The home was built in 1989 and is in Oakdale, Minnesota. It is in a good location, close to shopping and an easy commute for multiple large businesses but located on a busier street.

I did an extensive walk through today and the rehab includes the need for a new air conditioner, stove, siding, 5 windows and one sliding patio door along with replacing the majority of the flooring as the carpet is beyond it’s usable life. There are some smaller items on the list but those are the major ones I noted. I will be doing the majority of the work save for the carpet and HVAC. I’ve done carpet and did not find it a good use of my time and I did not enjoy it. For the major items we are estimating about $8,000-10,000 so I would am penciling in $10,000-15,000 for rehab cost.

From the comps in the area we believe the ARV will be between $180,000 and $200,000 and the initial thought was we could pick the property up for about $100,000 but after the current owner crunched his break even numbers it looks like we will need to come in at $118,500 to make this deal happen.

If we go through with this we would be looking at closing in the beginning of December and I should be able to hit the ground running with the inside rehab. I’m a little leery of the timing and the exterior repairs in the MN winter but as it is now the house is sealed so if need be the siding can wait until spring.

For financing I’m looking at either a commercial loan 15% down or a conventional with 20% down.

As far as the rent goes we believe the going rate for a 3/2 with a 2 car attached garage in the area to be about $1,600. Being this will be the first and only property in our fledgling portfolio we plan on self-managing and in that case we expect to net between $250-325 per month after taking into account 10% for taxes, vacancy and cap-ex (even though most major items will be under 5 years old) and 5% for insurance.

Being a rookie I’m sure I missed something in my process so any help is appreciated. Is this a good deal? Is this a bad deal?

My two cents; many newbies sweat over details and over analyze the numbers. Don't get me wrong, obviously the numbers and details are important, but keep it simple; when you finance, will the rents be enough to comfortably cover the debt service and other expenses (vacancy, capex, PM, whatever you budget for) and leave you some breathing room? The rules of thumb, 1% rule, etc, are nice, but I work with many investors who have very different goals and financial situations that make those rules and the BP calculators irrelevant.  

For example- you mention the ARV above- when I am BRRRing, I don't even consider the ARV once, with the exception of making sure I can pull enough cash out of the deal and move on the the next. WIth a rental property that you are borrowing against, look at the monthly cash flow and decide if its acceptable to you. That's all you need to do.

Over time, rents will increase, your income will increase and small details, repairs, etc, will become much less burdensome. Best of luck!

I haven't seen the house but would be surprised if you could get the work mentioned completed for $10k-$15k. I understand that you will be taking on a second job to complete a lot of it but you are trying to stretch your dollars pretty thin.  You also have to account for your holding costs (loan payments, RE taxes, etc)....

If you haven't already I would talk to @Tim Swierczek about your financing options so you have a good grasp of your cash needed to cover your down payment and the renovation. On the cover your cash on cash return seems small especially considering the amount of work you are putting in. Completing this house at a price under ARV is good but that doesn't necessarily make this house a good rental candidate. If the numbers pan out it may make sense to just fix it and sell. That decision may depend on how confident you are on your ARV.

Thank you for the replies @Corby Goade @Jordan Moorhead @John Woodrich I'm beginning to think this likely isn't a good candidate for my first deal. The only exception would be to possibly flip it but then most factors would need to end in the best case scenario. I don't think I'm comfortable making that bet at this point

@Mack Benson it may work as a flip but you have to get a little more confident on your numbers. If your ARV is $200k you have some room. Most of your money will be made on the sweat equity so that is something to consider. If you make money on this property it may also help springboard your next deal as you can show a lender or potential partner that you have some experience.

I wouldn't kill the idea based on posts here. Another option would be to purchase it and try to wholesale or list on the MLS for $145k as a fixer upper.... A homeowner may be waiting for something like this.

If you do decide to pass on it I would be interested in the address.  I may know someone who would be willing to sweat equity that property for the reasons I just mentioned.

@John Woodrich that is great insight. I had the thought about trying to wholesale it last night and started reaching out this morning, I hadn't thought about the purchase and resell on MLS as a fixer upper which is another great idea. I haven't completely given up on it as a deal but realized it probably wouldn't work as my original intent.

If things don't work out I can definitely touch base with additional info