Does this sound like a good deal?

Question

Hi BP Family, I have been listening to the BP podcasts and watching the videos for quite some time.  I am a new investor and would like your feedback regarding the following deal in Wiley, TX.

Single-Family Home - 265k - House appraised for $275K

Interest rate fixed 3.625

Down payment & Closing Cost $70258 (20% plus closing costs)

Tenants have an 8-month lease left at $1950 a month and will most likely renew their lease (same rate).

Income: $1950

Expenses: $1503

Cash Flow $447

COC ROI = 7.63%

What do you think about the COC ROI percentage? I was thinking about holding the property and then doing a cash-out refi to get some money back to get another property.

Thanks in advance for your input and feedback.

Chad Carrodus · Answer

Willy, if your goal is to buy and hold have you thought about small multifamilies? More doors allow you to "hedge your bets" smarter. For example, if you have 4 tenants and 1 does not pay, you have 3 others to offset while you replace the tenant.

Willy Ayala · Answer

@Chad Carrodus  Thanks in advance for your feedback and your experienced insight.

Ryan Hill · Answer

Hey Willy, that's great you are starting to invest! The numbers seem a little bit tight to me just looking at the price/cost ratio. Using traditional financing, how fast are you going to be able to accumulate enough rentals to get to your goals? For example, when I'm buying rentals, I aim to put down between 3-10k per deal between points/closing costs/cash on hand in case unexpected expenses arise but I'm using the BRRRR strategy and using hard money!

Tim Herman · Answer

@Willy Ayala You haven't accounted for any soft costs. Non recurring. This would be the only house that the tenants stay forever, don't have any repairs, and things don't wear out.  Vacancy, repairs and capex are the soft costs. I use 8% repairs, 5% repairs and 10% capex . Take that out of your cash flow and you will have a negative cash flow. 8% is 1 turnover per year. When the tenant moves out there will be repairs, so you need a reserve. Plus a reserve for capex. My capex budget includes roof 25 year life span, floors 10 year life span, appliances and hot water heater 12 year life span, hvac 20 year life span, bath and kitchen remodel 20 year life span. Assume 1500sf of flooring. My area it is $6 sf to replace. 1500 sf*$6 sf= $9000/10 year life span/12 months in a year=$75 per month for 1 item. I would look for a better deal.

Cory Carlson · Answer

So I made some assumptions and please note this is only to serve as an illustration.

• 5% Vacancy
• Self managed
• $1000 year for repair/maintenance 
• $1000 year for reserves
• Investor effective tax rate of 15% (you sent me property tax info, effective tax rate is specific to you and off your tax return. 
• 3% Appreciation as requested, for Texas, i doubt it... I would personally use 1-2% to remain conservative.

The projected year 1 returns are as follows:

(1) Pre-tax Cashflow (Also known as Cash on cash) $1,817 (3.42%), (2) After-tax Cashflow $1,997 (3.77%), After-tax + Principle Pay down $5,980 (11.28%), Total Return (After-tax + Principle Pay down + Appreciation-3%) $13,930 (26.28%).

As far as single family goes in Texas, the returns aren't overly enticing for a generally speaking, cashflow heavy market. These returns are indicative of a highly appreciative NW market and my operating expenses may be a tad low. In my opinion, for what its worth, keep shopping. But if you have questions about my analysis, shoot!

Willy Ayala · Answer

Hi Cory, wow!! Thanks for the detailed analysis and all the information regarding the property. I have a better understanding of how to analyze future deals and will be sure to count for repairs and have reserves.  Thanks a lot for your time and guidance.  Stay healthy!

Willy Ayala · Answer

@Tim Herman Wow, you are absolutely right! I did not account for a lot of potential future expenses.  The list of expenses you provided is definitely something I must account for and have reserves for those items.  Thanks for your insight and your feedback. I will continue looking for other, more profitable, deals.  Thanks

Willy Ayala · Answer

@Chad Carrodus - I thought about it, but I feel that with a full-time job, I will not be able to be present for multiple tenants and do not want to make my ROI profits slimmer by hiring a Property Management company. I will definitely think about it and keep that in mind.  Thanks for your feedback!

Willy Ayala · Answer

Hi @Cory Carlson,

Thanks for your feedback regarding the 1% rule and for helping me analyze this deal better.

1 - Expenses:

P&I = $ $906.40

Insurance $102.51

Taxes $497.62

I did not account for repairs as they seller offers a home warranty of 12 months and I will manage the property. Perhaps, I should have account for vacancy and maintenance nonetheless.

2 - Taxes

CWY (Wylie City)

0.688454 (2019 Rate)

Collin County Tax Office

GCN (Collin County)

0.174951 (2019 Rate)

Collin County Tax Office

JCN (Collin College)

0.081222 (2019 Rate)

Collin County Tax Office

SWY (Wylie ISD)

1.538400 (2019 Rate)

Collin County Tax Office

Cory Carlson · Answer

The 1% rule is a catch all i see mostly used in no-low appreciation markets - please just use it as a quick reference. Highly appreciative markets on the west coast almost never see 1%. I will run a much more thorough analysis for you if you can provide me with some information:

1. What is the expense load breakdown? You said $1503. I am looking for taxes, insurance, repair/maintenanc, management (if applicable, likely 8%), and reserves.

2. What is your effective tax rate?

If you don't know i can make some guesses just for illustration purposes.

@Willy Ayala

Does this sound like a good deal?

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