HELP! Is this a good deal?

Question

So I found a property in a nice neighborhood in Portland, Oregon. This would be my first deal. Asking price is $475,000 and it's a 3BR home with a separate entry 2-3BR in law sweet downstairs. The place needs some work to get it ready for rental, I'm thinking about $30,000. I think the house would rent for about $2000-$2100 and the ADU would rent for about $1500-$1600. I would be using a 3.5% FHA with $16,625 down. Here are the numbers I've calculated.

Rental income $3600

Monthly expenses $3225 (5% vacancy, 5% Cap Ex, $100 repairs)

Cash Flow $345

Rehab $30,000

Total Investment $51,625

ROI 8.02

Cap Rate 6.71

Any thoughts on whether this would be a first good deal? Thanks in advance!

Rental income $3600

Monthly expenses $3225 (5% vacancy, 5% Cap Ex, $100 repairs)

Cash Flow $345

Rehab $30,000

Total Investment $51,625

ROI 8.02

Cap Rate 6.71

Any thoughts on whether this would be a first good deal? Thanks in advance!

Tyler Gibson · Answer

@Lance Nelson I see a major flaw in your plan right out of the gate. With an FHA loan you would need to owner occupy for at least a year so your rental income would be 2000 or 1500 depending on which unit you choose to live in. If your goal is to reduce your cost of living by house hacking then yeah this might work but it is not a pure rental for at least the first year. The question is after year one would you be able to Refi and have enough cash to go buy something else or save enough over the next year or 2 to be able to go get the next place.

Tyler Gibson · Answer

@Lance Nelson yes sometimes people do take cash out and yes it would change your numbers.

Jim Pellerin · Answer

@Lance Nelson On the surface, this doesn't sound like a very good deal. You haven't allocated enough for your expenses. Your monthly out of pocket will be higher than you think. You won't be able to take anything out on a refi based on 80% Loan to Value.

Kurt Jones · Answer

Others on the thread have addressed most glaring concerns. Honestly not a real I would invest in with my own money.

Jacob Sampson · Answer

@Lance Nelson You are correct.  True cash flow is the golden goose and difficult to find.  Especially in our current real estate environment.  I understand that many people buy properties that don't cash flow.  That just isn't for me.

Lance Nelson · Answer

@Jacob Sampson Thanks for the response. It definitely doesn't cash flow with those expenses. Unfortunately, what I'm finding is most of the properties in good locations don't even come close to cash flowing in my area with expenses like that. Maybe I need to find a way to find off market properties.

Jacob Sampson · Answer

This doesn't meet my requirements, and your capex and general expenses are too low.  To make it simple do this:

Monthly rent - 30% (vacancy, maint, and capex) - principal, interest, taxes and insurance = true average cash flow.

Lance Nelson · Answer

@Tyler Gibson Thanks for the response! This would be a house hack. I'm trying to analyze it as if I were not living in the property to make sure I'm getting a good deal for the long term. As far as having cash for the next deal, I think ARV would be about $600k so my hope would be that I could refinance. When you increase value and refinance to a conventional do people typically take cash out and refinance at a higher mortgage amount? Wouldn't that make the numbers look less desirable since you'd likely have a higher mortgage payment?

HELP! Is this a good deal?

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