Cheers to my first time posting on BP!
I am looking at the small-cap asset market in the (Metro) Detroit area (because it's the only market that I know). I've put together a quick proforma and I wanted to get some (semi-)professional opinions.
- Cash deal (no financing for purchasing/rehabbing)
- Asset ~$20,000; Rehab ~$3,000; Closing costs/fees ~$2,000
- Total out-of-pocket: ~$25,000
- 2-3 Bedrooms, 1-2 Baths; Rent $700-$850
- Annual Gross Revenue: ~$9,000
- Property Tax ~$1,500; Property Insurance ~$1,000; Property Management ~$1,000; Vacancy Loss ~$1,000; Replacement Reserves ~$1,000
- Annual Operating Expenses: ~$5,500
- Annual Net Profit: ~$3,500
- Cash on Cash: $3,500/$25,000 = 14.0%
Rental properties in low-income areas carries the risk of vacancy, damages, delinquent payments, and evictions.
I see paying a Property Management company as being a great way to help with: sourcing the most reliable tenants, bi-annual interior/exterior inspections, and handling the delinquencies/evictions.
I see Section 8 as being a great way to help with guaranteeing a portion of the annual rental contracts.
The city of Detroit allows a max. of 1.5x the monthly rent to be required as a security deposit (to help pay for any damages that may incur).
Also, I would required myself to set aside ~$1,000 annually (over 1x monthly rent) to help with any vacancies that may occur between tenants (see Annual Operating Expenses above).
If the cash on cash wasn't enough to make your mouth water, then I offer an additional option of financing the property (post-rehab) in order to provide the liquidity required to repeat this process hopefully every 1-2 years !
Worst case scenario is that I don't find it worth my time to operate a rental such as this. In which case, I could sell the property and get almost all of my out-of-pocket cash back.
Thoughts? What am I missing!? Thanks!
Welcome to BP. Are you able to get bank financing? I would prefer to use that 25K to leverage into a 100K house in a better area and get better tenants, more appreciation, higher rent, and better return overall.
Thank you for the feedback.
I could get traditional financing but current market conditions seem to show that residential real estate price appreciation for most Metro areas is near their pre-great-recession peak. Detroit and Warren seem to still be near the post-recession-lull, in terms of purchase price, but still have a strong rental market.
My opinion is the ROI that you expect from the $100k market is near the same as the $20k-60k market's return (cash on cash) due to the debt P/I payments and debt service fee(s).
No problem, David. My main point is that if you factor in the mortgage pay down for your investment, you can get the same kind of cash on cash return plus this extra 10% or so of return from this. When you buy properties in cash you are losing a lot of extra ROI.
Your thread title includes: ..."BRRRR, Rental Properties"... but, I see no mention of ARV?
In your example, unless the (realistic) ARV is around $40k+, you won't get all your cash back.
But sure, if you can get deals that DO cash flow like that, and appraise like that - worth a look...
I can't get into all the numbers right now but I second Brad's post. Take your money and use it as down payment to buy a rental in a better area. In theory your analysis sounds great ( I mean that too- I'm not being sarcastic) but in real life you're better off buying in better areas because you'll have substantially less vacancy, less damages, less delinquent payments, and less evictions. Especially, if this is your first rental property. Don't buy in the City!
Anyway, we both live in Ferndale. I'd be happy to meet up with you and give you more details.
Be careful! Mike Dundon
@David Kassab How are things going with the property?
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