(Metro) Detroit, BRRRR, Rental Properties - Considering Section 8
Hello everyone,
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.
Case Study:
- 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%
Risk Profile:
Rental properties in low-income areas carries the risk of vacancy, damages, delinquent payments, and evictions.
Risk Mitigation:
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).
Upside:
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!
-David