still timid to buy first deal...how does this look?

35 Replies

Would love some feed back or thoughts on this.

I'm looking at a private sale of a rental house. What do you think? I would need to purchase all in cash immediately and then re-finance later. 

  • $145k price, must be all cash 
    • (zestimate @ $158k, Redfin @ $190k)
    • $5k closing fees
    • $3700 annual taxes
  • 3BR, 1Ba
  • has a long term tenant (husband, wife, 2 small kids) since 2016
    • rent $1150/mo. Tenant pays all utilities.
    • lease signed until May 2020...would probably extend again
    • well maintained and new-ish interior
  • Round Rock, TX, suburb of Austin. 
    • walking distance to Dell Campus
    • good pocket
    • I live about 15 minutes away from here
    • I wouldn't need to do a management company
  • the owner is moving out of state and doesn't want to deal w/ a management company

Real estate professionals usually ignore Zestimates due to ridiculous lack of reliability, and I doubt Redfin is any better, and particularly given the wide disparity between one and the other, you might want to do your own comparables.

It's not that hard. Find all the nearby similar properties that sold in the last few months, throw out the cheapest sale price and the most expensive sale price, and average the rest. Although I'm sure other people have other methods.

Don't worry if the previous owner doesn't want to deal with a management company. He/she is going to deal with you and/or your agent. You can always get a management company later, long after the sale has concluded.

Visit www.dealcheck.io and load the numbers in. See what kind of results you get for things like cashflow, cash on cash return, internal rate of return. Take a look at how insurance, maintenance, Capital Expenditures and other expenses may ruin all of those. Or, you can use the BP calculator, altho I haven't tried that one yet.

@Adam L. at less than a .8%, I’d be interested to see the numbers. After accounting for reserves, capex, vacancy and property management (even if you do it), what does cash flow look like? Do you need to put money in for repairs?

Originally posted by @Patrick Menefee :

@Adam L. at less than a .8%, I’d be interested to see the numbers. After accounting for reserves, capex, vacancy and property management (even if you do it), what does cash flow look like? Do you need to put money in for repairs?

 Hey, So I guess that's what I'm asking about w/ advice on modeling cashflow. When you say "see the numbers" what do you mean? All the numbers I know are posted.

so it's got a long term tenant w/ signed lease paying below market rate, so vacancy is likely low.

$1150/mo rent

$3700/yr taxes

$145k sale price

3.5%, $5000 closing costs

https://imgur.com/a/fwmxqnQ

Originally posted by @Alvin Sylvain :

Find all the nearby similar properties that sold in the last few months, throw out the cheapest sale price and the most expensive sale price, and average the rest. Although I'm sure other people have other methods.

Don't worry if the previous owner doesn't want to deal with a management company. He/she is going to deal with you and/or your agent. You can always get a management company later, long after the sale has concluded.

Visit www.dealcheck.io and load the numbers in. See what kind of results you get for things like cashflow, cash on cash return, internal rate of return. Take a look at how insurance, maintenance, Capital Expenditures and other expenses may ruin all of those. Or, you can use the BP calculator, altho I haven't tried that one yet.

It looks like a CMA ~ $160k-$170k: https://imgur.com/a/fwmxqnQ

I wrote the line about current owner/mgmt company as the backstory for why the house is up for sale.

for dealcheck.io, I'm still a bit 'green' on what I'm looking at.

does this look right?

@Adam L. When I evaluate something like this, I evaluate it as if I was financing 100% (outside of closing costs) of it because that shows you how much money you would make with basically very little cash in the deal. The thought process is that if it doesn't cash flow positively at 100% financed, then all you are doing with your cash downpayment (or full cash payment) is buying cash flow. I threw your numbers and a few assumptions into a spreadsheet to get the following:

Purchase Price: $145k @ 4.5% 30 yr mortgage - $735.21 per month mortgage payment

Closing Costs: $5k

Monthly income: $1,150

Monthly taxes: $308.33 ($3700/12)

Monthly insurance: $115 (Not knowing your area I totally guessed on this, you might call around and get some quotes so you can estimate this correctly)

Vacancy 8% of monthly rent: $92 (I use 8% because 1/12 = 8.33%, so you basically would save up 1 month's rent each year)

Repairs and Maintenance 5% of rent: $57.50

Capital Expenditures 10% of rent: $115.00

Management Fees 10% of rent: $115.00 (even if you plan to self-manage the property, it's still a good idea to estimate this, one day you may need to hire one, plus is accounts for the cost of your efforts)

The net result is negative cash flow of ($388.04). If everything remains the same but you pay 100% cash for the property you end up cash flowing positive $346.65 per month, BUT your cash on cash return on investment (total annual cash flow of 346.65 x 12 = $4,159.8 / $150k of cash spent) is only 2.77% which is not a good return on your investment. Heck, you can put your cash in an Ally Bank account and make 2.10% on it with it just sitting there. 

Overall this would be a pass for me, but maybe there's an upside I'm not seeing. Maybe you can get the price down or raise rents, but I wouldn't necessarily count on that. Good luck!

Originally posted by @Kevin S.:

Overall this would be a pass for me, but maybe there's an upside I'm not seeing. Maybe you can get the price down or raise rents, but I wouldn't necessarily count on that. Good luck!

@Kevin S.:

Great reply! Great advice! so it looks like rent is under valued but they have another year on their lease...and its a long term tenant w/ young family...I don't know how I'd feel jacking the rent next year.

I guess other factors may be that it is close to a large corporate park/employer, so vacancy may be slim-to-nill and its in a fast growing suburb part of Austin, so maybe property value will rise and rise and rise? Not sure how to model and evaluate this.

Also, is that a normal way to model? 100% financing? not 80/20?

@Adam L.  

1) you can't be afraid to raise rents to market rate (assuming you're city/state doesn't cap rent increases), each year your expenses on the property are going to adjust for inflation so your rent should too. However if they have a full year left on the lease you can't make any changes for 12 months, which means that any opportunity to increase rent is offset by 12 months of loses from lower rent. 

2) It may be close to a corporate park, but are there a bunch of other rental options near there too? It sounds to me like you are just guessing at vacancy. If you don't have any true data to back that up then I question whether you can rely on that. Call some local property managers or try to connect with other local investors and see if they can weigh in on vacancy.

3) This is just me personally, but I don't invest based on what I think the property value will be. To quote you "so maybe property value will rise and rise and rise" yes sometimes you get lucky and this happens, but not always. Basically this is you speculating, whereas rental income is a known number and can be counted on (assuming you account for vacancy). 

4) Like I said, I model at 100% because I want to know what return I would get when I spend as little money as possible (basically just closing costs). The 80/20 rule is based on banks typically requiring somewhere between 20-25% downpayments on a mortgage for an investment property. If I were buying an investment property with a mortgage I would do two models, one at 100% to know what my return is with little money invested, and one at whatever my true downpayment is to find out my actual return (knowing that the difference between the two is me just basically buying cash flow).

@Adam L. Why does it have to be all cash? A seller demanding all cash it should be a red flag. Does that mean that a bank won't approve the condition of the property? Or will a bank not appraise for that price? A house in round rock proper for $145k is a home run though, on the surface of it. The median house price for 78664 is 248k. Why would anyone want to sell their property for a huge discount? So, it probably has some issues with it. Cool. Discount is there. What are the fix up costs, if any? I would find out more about the tenant situation. Is the tenant leaving soon? Has the tenant destroyed the place? What kinda condition is it in? Those are just a few questions that pop up in my mind. 

@Adam L. the breakdown that @Kevin S. provided is what i meant by “the numbers”. You have to take all of these expenses into consideration when evaluating the cash flow of a property, whether paying cash or not. A lot of times, it looks like a great deal when you pay cash because you don’t have a mortgage payment. That’s why COCROI is so important, because it measures your actual cash flow compared to the cash invested.

As far as 100% or 80/20, i don’t quite go the same route as Kevin. I do that evaluation based on what i know I’ll be paying...if i know i can get the property 100% financed, that’s what I’ll run. If i know I’m going to be using a conventional mortgage and will put 20-25% down, I’ll run those numbers.

Either way, i would recommend at least analyzing cash flow with an 80% mortgage. The logic Kevin stated about accounting for property management applies here too...if you later want to pull cash out of the deal and refinance, you need to know if you will still cash flow.

As they say, you can’t squeeze water out of a rock. There are plenty of deals to evaluate, don’t get hung up on this one and try to figure out how to theoretically make bad numbers good

@Adam L. also...just reread your initial post and missed the part about refinancing later. Optimistically assuming it appraises at the Redfin number and you do an 80% LTV refi to avoid PMI, your mortgage payment is $830. You're now cash flow negative by over $400/mo

My 2 cents:

Based on the info that it was built in 1984 and the square footage numbers, my guess is it is located east of I35 in an area of homes built by NPC.  

-The cash return seems awful to me as my guess is it will be close to zero

-You will get killed on repairs as an out of stater as you will be basically throwing darts to find repair guys

-1 bath homes are not near as attractive to buyers or tenants

Originally posted by @Aaron Gordy :

@Adam L. Why does it have to be all cash? A seller demanding all cash it should be a red flag. Does that mean that a bank won't approve the condition of the property? Or will a bank not appraise for that price? A house in round rock proper for $145k is a home run though, on the surface of it. The median house price for 78664 is 248k. Why would anyone want to sell their property for a huge discount? So, it probably has some issues with it. Cool. Discount is there. What are the fix up costs, if any? I would find out more about the tenant situation. Is the tenant leaving soon? Has the tenant destroyed the place? What kinda condition is it in? Those are just a few questions that pop up in my mind. 

Hey Aaron,

From what I understand, this property is listed by a local wholesaler. They routinely email out to their distribution list when they have a property. It's usually first person to show up and close, and the wholesaler charge a 2-3% fee. Often these are sold w/in days of being posted. I'm sure if I had the time to secure traditional financing, I could show up and close as normal, but these usually don't last that long. 

I am capable and able to float that cash out for the initial purchase but would most likely want to refi as soon as possible.

At first glance, the house seems to be in great shape and well maintained by current tenant. Doesn't look to be much fix up cost, but always room to make 'nicer'. 

Comps show around $170k.

Tenant situation seems solid. I've got a copy of the lease and multiple extensions. They've been there since 2016 and just resigned another year until May 2020. Single family (husband, wife, 2 small children). They appear to be maintaining nicely, as the grass is mowed and the place seems to have normal curb appeal.

want to chat directly?

Originally posted by @Greg H. :

My 2 cents:

Based on the info that it was built in 1984 and the square footage numbers, my guess is it is located east of I35 in an area of homes built by NPC.  

-The cash return seems awful to me as my guess is it will be close to zero

-You will get killed on repairs as an out of stater as you will be basically throwing darts to find repair guys

-1 bath homes are not near as attractive to buyers or tenants

Hey Greg,

Thank you for input.

Yes, just east of i-35, right near Dell Campus.

FYI, i'm in Austin (Balcones area)

So I'm at the house now.

It's pretty small but well maintained. 

The 3rd BR is actually a converted garage. It's nicely done and is being used for office and play room.

The single bathroom is between master and kids room, with an extra sink inside master.

Yard looks pretty ok size... Not sure if possible to add more sqft.

The tenant is a nice, clean family and they said they are actually looking to not renew, as they are expecting a 3rd kid and want a bigger space.

Man, I am paralyzed with first buy indecision.

Originally posted by @Catherine Wong :

Hi @Kevin

I am new to this.  What is Capital Expenditures?

Also repair and maintenance 5% is that a standard percentage?

Thank you

Capital Expenditures (CapEx) is money set aside for future major expenses. E.g. you put $50/month into the bank hoping you won't need to spend $10,000 on a new roof until after 16 or 17 years.

Originally posted by @Catherine Wong :

@Alvin .. ah .. got it.. this gives a more accurate calculation.  Thanks!  Is 10% a reasonable estimate?

 It's a judgement call. A new roof should last 15 to 20 years. A 20 year old roof -- less. When is the last time the HVAC system was serviced? Are those pipes PVC, copper -- or rust? There is no one answer that will fit every situation, altho if you talk to enough experienced property owners, you can get an idea of what you can use for comparison purposes.

It also depends on your plans. Are you keeping the place as an heirloom for your as yet unborn grandkids? Or are you selling as soon as enough appreciation kicks in? If you plan to sell in 5 years, who cares about a roof good for another 15?

I usually like 3 to 5% of rent altho you didn't hear that from me!

Originally posted by @Adam L. :

So I'm at the house now.

It's pretty small but well maintained. 

The 3rd BR is actually a converted garage. It's nicely done and is being used for office and play room.

The single bathroom is between master and kids room, with an extra sink inside master.

Yard looks pretty ok size... Not sure if possible to add more sqft.

The tenant is a nice, clean family and they said they are actually looking to not renew, as they are expecting a 3rd kid and want a bigger space.

Man, I am paralyzed with first buy indecision.

 If you know the tenant is leaving anyway then you'll avoid any drama in raising the rent to market values. So now all you need is find out the market rent in the area.

DON'T PANIC! This won't the last opportunity to come your way. If the numbers work, they work, and if they don't, they don't. Don't pay too much, and the worst that can happen is you'll have to sell sooner than you expected, not a whole lot worse for the wear.

welp....the Mrs didn't feel comfortable moving so quickly on the deal. It just sold to highest bid @ $145125 .

Curious if yall think this number is too high. Plus the $5k closing.

@Adam L. . Why does it have to be cash? That’s a red flag right there to begin with personally, unless it’s not in a condition to be financed. If you don’t know what you’re doing this is a good way to overpay.

Do you know what the appraisal would be? Zillow is not a good way to determine value. It’s actually a terrible way to determine value.

All those things aside this deal sucks. It’s not the one percent rule and with the high property taxes in Texas, I don’t see how you’re going to make any money on this.