Should I move ahead with my first deal?

Question

Hello,

I'm currently working on getting my first property and I just wanted to get some opinions on whether or not this is a good deal. It looks to me like it is even if the cash flow is a little lower than I was hoping but the cash on cash return looks pretty solid. Any thoughts are appreciated! Thanks

Property Information

Cost   Information

Property   Name

C Class

Building Cost

$  34,311

Location

Birminham , AL

Land Cost

$  -

Type of   Property

SFH

Cost Basis

$  34,311

Size of   Property

3,000 Sq Feet

Less Mortgages

$  25,733

Year Built

Equals Initial Investment

$  8,578

Amortization Period

30

Ratio   Information

Loan to   Value

75%

Mortgage Information

Cashflow /   Initial Investment

18%

Balance

Payment

Interest

Loan     Term

Amtz     Period

Cashflow /   Assets

5%

1st Mtg

$  25,733

$  (138)

5%

30

360

CAP Rate

9%

Description(All Figures are Annual)

Annual     Amount

Notes

POTENTIAL   RENTAL INCOME

$  7,800

Total Potential Income if   rented 100%

Less:   Vacancy

$    (624)

Assumed 8% Vacancy Factor

EFFECTIVE   RENTAL INCOME

$    7,176

Plus: Other   Income

$    -

Other Fees, charges, etc

GROSS   OPERATING INCOME

$    7,176

Total Revenue

OPERATING   EXPENSES

Real Estate   Taxes

$  535

Property Taxes

Personal   Property Taxes

$    -

Property   Insurance

$    1,442

Off Site   Management

$    780

Payroll

$    -

Expenses/Benefits

$  -

Taxes/Worker's   Compensation

$    -

Repairs and   Maintenance

$    624

Utilities

$    -

Accounting   and Legal

$    -

Licenses/Permits

$  -

Advertising

$    -

Supplies

$    -

Lawn and   Grounds Keeping

$    200

Miscellaneous

$    390

TOTAL   OPERATING EXPENSES

$  3,971

Sum of Line 6 thru 23

NET   OPERATING INCOME

$  3,205

Less:   Annual Debt Service

$  (1,658)

Total Mortgage Payments

CASH   FLOW BEFORE TAXES

$  1,547

Add   Back:  Principal Payments

$    371

Principal Paid on Loan

-   Depreciation

$    (1,144)

Tax Depreciation on   Building

TAXABLE   NET INCOME (LOSS)

$    775

Scott Elkins · Answer

Did you do it? let us know!

Clayton Mobley · Answer

@Adam Egloff Just my two cents, but regardless of these numbers (and maybe we could get a better layout? it's a bit difficult to read, maybe upload a PDF?) I would caution you against investing in C class or lower properties outside of your home market. Lower-tier props look really good on paper, but there are often lots of other issues that make the real world performance less amazing. Being a Birmingham local myself, I can tell you that when we started Spartan we dabbled in C-class props and it wasn't worth it. And that's coming from someone who had a company built specifically to find deals, rehab them, manage them, and make money - and someone IN the market I was buying. From a less stably-employed tenant pool to Section 8 inspections (and they will ALWAYS find something you need to fix) to folks losing vouchers, there's a lot of headache. Vacancy is higher, evictions more likely. In Bham we have two housing authorities, so things can be confusing. Paying for a management company (which is necessary if you go out of state) cuts into what is already a narrow margin.

What's more, a property that is selling for $34k is either in bad shape and needs $$$$ (and time, which = vacancy) for rehab, or is probably more of a D-class property. Many lenders have loan minimums of $50k or more, so you may find that financing is harder to come by for these cheap properties.

For new investors, esp those looking OOS, I suggest sticking to B/B+ properties and neighborhoods (ie not just the best house in a bad area, find a solid house in a solid area where folks like nurses, teachers, and skilled laborers live). It's often tempting to buy lower-tier props because they are cheap, and new investors want to get started yesterday, so it's enticing to pull the trigger on something just to get the ball rolling. If that sounds like you, I'd advise you to wait until you have the cash to put a downpayment on something a bit nicer. If you just like this asset class, I would advise you to try to stick closer to home so that you can self-manage to cut expenses and be more familiar with the area and tenant pool.