Accountant · Tulsa, OK · Member since 2018 · 312 posts · 349 votes
7y
@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!
Real Estate Agent · Cypress, CA · Member since 2018 · 88 posts · 41 votes
7y
@Adam L.
Hi Adam,
The property at $145k doesn’t exactly touch the 1% rule. The rent would have to be at least $1450/mo. Not saying that every deal should be analyzed through the 1% rule, but that $1150/mo rent is definitely not enough (as mentioned above) to cover all your expenses.
Investor · Albany, MN · Member since 2018 · 15 posts · 3 votes
7y
@Adam L. what it's your goal? If your looking for cash flow then this is horrible unless you plan on putting a lot of money in. If I was to buy a property for 145k I would want at min 2000 a month rent!
Rental Property Investor · Martinsburg, WV · Member since 2017 · 111 posts · 81 votes
7y
@Adam L. I didn't read all the answers but I'd look up the 1% and 2% rules. Given 100% cash purchasing, there is no way I would go in at asking with this price and property performance.
Offer to close quickly, not use an agent, etc., something to let them know you are serious but at that rent rate I'd offer something much lower, in the 95-100k territory, if I was paying all cash. It reduces your risk of a volatile market but it also is an opportunity cost.
Rental Property Investor · Newport, KY · Member since 2017 · 3 posts · 1 vote
7y
@Adam L. My guess is it was purchased by someone using the property as their residence and not an investment. Based on SF prices in Austin this seems like the correct route. So it is hard to say whether they overpaid or not.
Rental Property Investor · Member since 2019 · 72 posts · 33 votes
7y
@Kevin S. @Adam L.
Using Kevin’s strategy, it’s a pass for me too unless..... that area is appreciating well. Could you rehab the property later to increase the value/equity?
If you cannot get your purchase price down, take a look at the long term. I’d gladly take a short term hit if it means bigger opportunities later by appreciation or rehab/refi.
Wholesaler · Austin, TX · Member since 2018 · 10 posts · 3 votes
7y
Hey Adam,
Having been born and raised in the Austin area and currently residing in Round Rock, TX, I can say this seems to be a common trend in local areas. You have to consider with all the new development going on the prices will go higher as many investors shift their focus more towards Pflugerville, Round Rock, Georgetown. That being said the notorious 1% rule can be a little more elusive to find but not impossible...yet. For a property to start at $145k even for a 1 bath is steal. The appreciation will definitely be the major factor on this deal.
Thank you for the follow up on your post, I'm always curious to see the out comes. Are you a buy and hold kind of investor or flipper, or both?
Having been born and raised in the Austin area and currently residing in Round Rock, TX, I can say this seems to be a common trend in local areas. You have to consider with all the new development going on the prices will go higher as many investors shift their focus more towards Pflugerville, Round Rock, Georgetown. That being said the notorious 1% rule can be a little more elusive to find but not impossible...yet. For a property to start at $145k even for a 1 bath is steal. The appreciation will definitely be the major factor on this deal.
Thank you for the follow up on your post, I'm always curious to see the out comes. Are you a buy and hold kind of investor or flipper, or both?
I haven't done anything yet but looking to be a buy/hold person. I've got a day job already and not looking to replace that w/ flipping.