Does this deal make sense? (First time rental)

7 Replies

Hi BP, I've been hunting for my first rental property for awhile now and been running calculations on this but keep wrestling with it in my mind.

This is in Denton, TX (2 universities in town)

New construction Townhome - $210k (3 bd, 2.5 bth, 1,670 sq ft)

I've had rental comps run in the area and for other townhomes renting in the complex and they are renting around ~$1,750.

20% Down payment - $42k

Income --> $1,750

Expenses (including principal, interest, HOA, insurance and taxes) --> $1,424

Cash flow --> $325

CoC ROI --> 8.63%

My biggest concern is this doesn't meet the 1% rule so I don't want to be paying a lot more than I should. However, being my first rental property I love the idea of starting with a townhome because it will be an easier way to start (the HOA takes care of everything exterior plus this is new construction so everything will be brand new). I also like the fact that this is in a busy college town so I figure occupancy will be good here. I'm just really excited to get my first rental property and start compounding from there but I don't want to be rushing into an over-inflated market.

I appreciate any advice on this!

@Mark Romanski Hi Mark, in your $1,424 expenses you list principal, interest, HOA, taxes.

You'll also want to consider into your expenses a vacancy % and Maintenance and CapEx (Capital Expenditures - big ticket items that can break or will need replaced) %.

Hope this helps, Justin

With a new construction your %s would be lower but as a reference point

Assuming as % of monthly rent:

5% Vacancy (5% of $1,750 is $87.50 monthly), 7% Repairs & Maintenance ($127.50 monthly),

7% CapEx ($127.50 monthly),

10% Property Management ($175.00 monthly)

Everyone does their analysis differently but these are all factors to consider. If you manage the property yourself than you'd save on the Property Mgmt fees. With a new build your CapEx can be a lot lower (although its always smart to run your numbers so that you can build up the reserves in case something does happen earlier than expected). Reach out if there is anything else I can help with.

@Justin Schreibeis Thanks for this! Yeah, I would run property management myself since it will be my only property and that would help save some of that expense. 

I would save for vacancy and repairs as well but agree my cap-ex could probably be low since it is brand new. 

With taking those into account, does this seem like a good first deal or would you rather wait for something else to come across? Just looking for expert advice to consider, thanks!

Hey Mark!

I grew up just south of Denton and went to school at a university there. For a new 3bed 2.5bath townhome, I think $1750 is actually kind of low - especially if you're closer to TWU. But this is just based on what I've observed :)

Something that seems interesting to me is that this home is 1670sqft, but only 3 beds. That would be more than enough for a 4th bedroom in a college town - I own a rental 4bed 2bath house just south of Denton with ~1500sqft. Maybe this new construction could have some modifications for a 4th bedroom? This would certainly drive up your income and make the number look better!

I'd say the #1 thing you should be sure of is what is your criteria for "success". If you believe any return is a good return, then yes, this property cash flows on paper and should work for you! If you criteria is to make an 8% CoC return though, this probably wont work. Define your criteria first, then let this determine if a deal meets your criteria or not.

Hope this help!

@Mark Romanski tough call. I have no knowledge of the area and other regional factors but generally I like to see $200 net cash flow after all other %s are factored in.

What will your setup costs be? Once you get the keys can you list it immediately for rent? Or will you have to get in there & paint, put in new appliances, etc? Any anticipated advertising costs?

Hardest part as an investor in my opinion? Balancing analysis (did I think of everything, are these numbers the best estimate I can get to and reflective of the environment and indicators I know about) vs action (the urge to act on opportunity, missing this means a delay to my plans/growth).

Best wishes!