Good Investment or Not?

Question

I'm getting my feet wet for the first time in out-of-state investing.  I am interested in a property that seems good. I will be buying and holding.  If the offer is accepted, I would be purchasing the property for 75% of asking price (value). It passes the 1% rule.  Actually it goes to about 1.5%. Cap rate at about 9.5% but the Coc ROI is only 6.39%. I still feel like this is a good deal because I think interest rates are about as high as they will likely go. Of course I could be wrong but I predict in a year or two the rates will have dropped to maybe around 6% and then I could refinance for bigger cash flow. It's also not a huge investment with the purchase price being only 80K. What are your thoughts?

Alecia Loveless · Answer

@Lisa Hartz If you like it and besides the mortgage and expenses you’ve also accounted for CapEx, Vacancy, and Repairs and Maintenance and it’s still cash flowing then I say go for it.

Right now my portfolio, 25 doors is averaging $225/door/month. That’s about average. As you get better and do more deals likely you’ll start to get better returns.

My most recent deal is at $400/door/month and the one before that by next June once we’re done with a few more renovations will be at about $525/door/month.

I think your numbers look great for a first deal. We’re all hoping we’ll be able to refinance something in a few years, or maybe a lot of deals. If rates fall, higher cash flow is icing on the cake!

Eli Yashar · Answer

From my experience, private lenders are not excited about the opportunity of lending money for deals lower than 100k Arv.

Lisa H. · Answer

@Eli Yashar I have reached out to a lender. I’m going to talk with him later today. I’m not sure he knows I want such a small loan amount. The area I’m looking in has many homes under $100k. Does that mean banks don’t give regular home owners loans?

Eli Yashar · Answer

@Lisa H. did you try reaching out to lenders? From my experience, most of them won't refinance a property worth less than 100k

Worth checking before closing

Good luck!

Lisa H. · Answer

@Dan Heuschele  why don’t you think they would give me the loan? Too low amount?

Dan H. · Answer

Lender knows the purchase is $80k so at 80% LTV the loan amount is $64k and is willing to finance at 8%?

If that is the case, it removes one of my 2 larger concerns (no leverage).

Using your numbers P&i is $470.  $600 - $470 = $230/month cash flow ($2760/year). $16k plus closing costs to cash flow $2,760/year.  Percentage is good.  Dollars does not seem great, but in this environment few properties purchased at today’s rates project positive cash flow using the 50% rule (so anything positive is better than many/most properties)>I’m keen on putting this “deal” together for a good learning experience. It’s not a terrible deal. I understand this.  It would not be a bad starting point.   If you can get the loan as you indicated, you will have leverage, first RE investment purchase, and first experience as LL.  Education has great value.    I still question if you can get that loan, but if you can then great.Did you use the BP calculator?   If so maybe post your underwriting (link to save calculator results) for opinions on your estimates but I suspect the 50% rule will not be grossly off.

Good luck whichever route you decide.

Lisa H. · Answer

I think what’s hard is defining my investment criteria.

I am working with a lender. Rates will likely be about 8%. Putting 20% down.

This might sound foolish but I’m keen on putting this “deal” together for a good learning experience. It’s not a terrible deal.  I wouldn’t be loosing money unless it turns into some crazy lemon house with endless out of the ordinary repairs.

Dan H. · Answer

$80k plus closing costs, rents for $1200 (1.5%) with 50% rule is $600 month cash flow not including P&I.  Not a bad return if all cash. $7.2k cash flow.

You discuss interest rates but I question getting any reasonable financing at that low of a price point.  Have you talked to a lender?  I suspect conventional will not be an option.   I question if financing will be feasible (I.e. any financing would be at very poor terms).

Price point indicates historically has NOT appreciated above CPI.  There is correlation between property appreciation and rent growth.  This implied rent growth is unlikely to be above CPI.

Does $80k for $7.2k projected profit with unlikely growth above CPI meet your investment criteria?  Do you have $80k plus closing costs as I expect financing will be difficult?

It would not meet my buy criteria because difficulty using leverage and low chance of growth.

Good luck

Lisa H. · Answer

@Chris Seveney

• The condition is not bad.  Needs cosmetic renovations. Paint, flooring, replace appliances, minor drywall patches, handyman work--and a lot of cleaning. May need a new air conditioner in the future.

• It's a townhouse so all exterior should be covered by HOA (looking up the CC&R's to confirm).

• I believe it's in a C area.  Is there a map you can get online?  I haven't come across this yet.  I am assuming it's a C area based on the crime map.  Crime map puts it in a C grade BUT it's right on the edge of a A/B area. Its a block from stores/shopping/food. It sits right next to an elementary school.

• Change for appreciation?  I believe so but not sure entirely.  There is a rental shortage in the area.  Not sure how to find this out. The property has earned $40k in equity in the last 4 years.

Chris Seveney · Answer

@Lisa Hartz

Not close to enough info to tell you whether it’s a good deal

What condition is the property in?

Is there deferred maintenance?

What type of area is it in, A or D?

Is there a change for appreciation?

Need to see the whole picture in order to provide you any meaningful feedback

Good Investment or Not?

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