Help reviewing a deal, should I cut my losses?

8 Replies

Hello everyone, I was looking for advice on how to proceed on a potential buy & hold property I am looking at. I made a very rookie mistake and got to eager to get a deal done and did not run the full numbers. Now I am looking at the numbers again and I don't know if this property is worth it.

Property is $78,000 I would be putting 25% down, the closing cost would be $3000 and an interest rate of 4.6%. It would need $10K to get it into rental shape where I could ask $950-1050 a month in rent. This is in Richmond, VA

I have already paid a deposit of $1000 on this property but after running the numbers through the calculator on BP and accounting for 10% vacancy, 15% Repair & Cap EX COMBINED and paying for water at $50 this property comes in at 6%-8% cap rate and it seems like it has the potential to be a money pit or at least no returns.

My question is am I being overly cautious or should I cut my losses on this one and back out of the deal? I would rather lose a $1000 than be stuck with a bad property.

This sounds like a single family property.

Why are you paying water on a single family?? If that occurs at all it is usually in multi-family properties.

Single family the tenant typically pays everything. No way I would want to pay water at those rent to purchase price ratio's.

Hey there @Kevin Beres . I have a couple of questions-

Do you have the property under contract and is there an inspection/ attorney contingency?

Did you forget something in your numbers or not run them initially?

What are typical returns in your market?

78,000 Plus 10,000 or $88,000 plus closing expenses?   How much are TaXes and Insurance?  

It passes the 1% test?  Are you going to do the Property Managment or hire a PM (if so deduct 10% or approx $1,000 a year)

Will this be your first buy?

 Are you deducting  too much for Maintanence?   and Vacancy? 

Thanks for the replies, this is a single family property and will be my first rental property. I admit I am not quite experienced enough to know what the typical cap rate in the area is but home appreciation is stable in the area and averages 1.5-2.5%. My best guess for cap rates are an average of around 10% in this area. This is a B- area of town.

I will remove the water utility from the projections, I do plan to self manage for at least the first couple years but want it to still make sense if I used a property manager in the future. Repairs are being budgeted at $150 a month

After adjusting the numbers to remove water and a property manager and assuming a rent of $950 I am getting a cash on cash ROI of 10% and a cap rate of 8.7% and it just barely qualifies for the 1% rule. This would be with 25% down and 32.5K in total cash required. Based on these numbers would you walk away from this deal?

@Kevin Beres I'm not sure of your numbers since you want to manage it yourself, I still put in 10% for PM fees. You may start out managing but if you don't continue then you will not have budgeted for future PM.

First you said, "15% Repair & Cap EX COMBINED" then you said "Repairs are being budgeted at $150 a month" so I was unsure of what percentage you ended up doing.

I did 10% vacancy, 5% cap ex (which is low), 18% R&M because your last statement was budgeting $150 per month.

Our calculations may differ as I take the vacancy from the Gross Rent to achieve my effective potential (some may call it something else) and then begin deducting things like Taxes, Ins, PM fees, utilities (IF they apply).

Since you didn't put taxes nor insurance I put $1000 for each. But you should include these.

I also assumed 30 yr term. The monthly expenses based on this is $406.07

Again, my calculations may differ from others or what you did but I would think they would be close.

If I just did 50% rule (as a lot of people do) it comes to $175 positive cash flow.

Thank you very much for providing a detailed estimate to double check my numbers. My only other option on this property would be to fix and flip but that is not a road I am ready to go down at this time. 

I appreciate your help and I think I will walk away from this property.

@Kevin Beres you may also want to determine what you want to cash flow per month. That may help as well. And by all means check my numbers....I do all the time and if others see something please point it out.

I hoped I've helped in some way.

Have a great day.

@Kevin Beres

Your numbers don't sound too far off from my first rental purchase.  Congrats for at least getting to this stage, many people won't.  

Why are you putting 25% down?  You should be able to do 20% I would think. 

If all goes south, do you have enough of your own money to cover the rent each month until you sold it?

I'm not an expert by any means but I have three properties now and each deal I do has a better return. 

We all have to start somewhere.

Good luck to you.  I hope everything works out.

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