First Deal Analysis Feedback

17 Replies

I'm seriously looking into doing my first deal after about 6 months of self-study in real estate investing, and I'd like to get some outsider thoughts on the setup of this deal.  The property I'm looking at is a 2 bed 2 bath single family detached town home 15 minutes north of Minneapolis, MN.  It happens to be directly across the street from my own detached town home, and is the exact same model building, so I'm very familiar with it, and the location is extremely convenient for a busy life with a wife and two kids, as I plan to self-manage it.  Here are the numbers:

Purchase Price = $176,900

PITI per month = $1250 (this includes association dues which cover lawn/snow/water/roof/siding).

Down Payment = 15% ($26,536).

Monthly rental income = $1450.

I inspected the property today with my agent, and it looks to be in pretty good shape.  The only things I saw that would need immediate attention would be to redo the laminate flooring in the kitchen and replace a leaking water heater in the crawlspace.  Roughly $1000 total at most.

Why I like this deal: The longer term plan has always been to keep our current home as a rental when we move to our next home, so having two in the same town home association would be extremely convenient.  This home has been on the market for a few weeks now, which is pretty odd considering others in the area have been selling within hours of listing for full price.  I think I could get the seller (an investment group) to come down on price slightly, but not much.  I do think this town house would be a strong asset long-term, as it is in a location and class of property that is rapidly rising in value.

Why I don't like this deal: The cash flow numbers are pretty low.  I don't need to plan for tons of capex on this kind of house, because most of the major things (roof and siding) are covered by the association.  But I wouldn't be banking much outside of the equity build each month.  My long-term goal is overall wealth rather than massive monthly cash flow, but I don't want to be losing money by any means.  This would also eat up almost all of my current savings, which I am really not willing to do.  I'm working with a couple lenders to see if I can get in at 10% down, but they are hard to convince.

Thanks in advance for your thoughts.

How would utilities be handled with this type of rental. If you as the owner are paying for the water or anything else, then your cash flow is 0. Even though you won't have to repair or take care of the exterior maintenance the interior guts of the property will need repairs or replacements in the future. Just some things to consider, best of luck with your purchase.

Water would be covered in the HOA. You still have to budget a bit for repair/cap ex. So cashflow is probably $100 a month if you don't factor in vacancy.

Said another way, this is less than a 5% cash on cash return. 

Any wiggle room in the price/rent? 

Thanks @Tom Cramblit .  All utilities are paid by the renter.  I would have to take care of interior maintenance, yes.  These town houses were all built in 2003, so they are still in pretty good shape.  The major expenses would be furnace and appliances, though all those looked to be in good shape when I inspected the property today.

Thanks for the reply @Kevin Powell . Rents have been climbing pretty quickly around here, and $1500/month wouldn't be unheard of. Ideally I'd like to get into this place much closer to the $150K price range, at which point PITI drops to about $1180/month. That said, I don't think I can get it that low. $170K flat is probably the most realistic I could hope for.

That gets you to a 10% CoC return. With 15% you have mortgage insurance, how much is that a month as that will impact your numbers. Everything has to be perfect though.

If you have to justify a deal, it isn't really a deal. I think you can do better than that return personally. 

Is the property currently occupied with a long term tenant, or are you going to need to find one right off the bat?

The fact that the property is <15 years old does help reassure that it won't (or shouldn't) have any major issues, but there will be issues regardless eventually. 

That COC return doesn't look terribly promising (don't forget about closing costs) even excluding any vacancy or repair costs. As it is, the margin seems pretty thin.

@Kevin Powell PMI on the loan would be $50 - $60/month, depending on the final purchase price. I agree that I am trying hard to justify this deal simply because of the massive convenience of it, and the long term wealth I think it will build. It's not a cash flow monster by any means, but at the right price still feels like a decent deal.

@Jonathan Streufert It is currently unoccupied, so I would have to find a tenant.  I'd be pushing the seller to pick up the closing costs, though that is by no means a certainty.

This doesn't meet the 1 percent rule so based on that alone your cash flow will likely be low

$200 per month for vacancy, repairs, maintenance, and CapEx isn't going to cut it. One vacant month and there's your best case cashflow for 7 months gone. HVAC needs replaced? There's two years of best case cashflow gone. Then you still have all the other repairs and maintenance to take care of. You would need big appreciation and rent increases to ever make money on this.

I agree with Austin. Even with newer appliances, things will break and tenants will move out. If either of those things happens you are in a losing situation. There are deals out there where you can build long term wealth AND monthly cash flow, but this doesn't seem like one of them.

Thanks for all the feedback everyone.  I agree that this is a marginal case for me.  I know there are better deals out there, just have to keep looking.  The convenience factor is still the major plus for me here, but convenience doesn't earn money.

Those are some huge numbers for $200/mo. If you deduct Vacancy/Repairs/CapEx, cashflow will be negative. On the other hand, if this is LOW for rent in your area it may be worth a second look. BUT if you just think you can get $1450/mo and you realistically can't it would be hard to dig yourself out of this one. Think to yourself, "If noone rents my house for 6 months, would I be ok?"

Kitchen flooring AND hot water heater replaced for $1000 total? I highly doubt it will be that low - maybe you could buy the materials at that price, but then somebody has to install ...

It's awesome to hear that you are actively moving on a property! So many people just sit back and never get going. With that said, I agree that there are better deals on paper and a good realtor should be able to help you find them. I have consistently found you can meet the 1% rule in the areas surrounding the twin cities, so don't settle for less. Cash flow is king, and you are likely not building wealth very quickly without it. 

@Eric Beise I've seen a lot of 1% deals during my searches in the Twin Cities north metro area as well, though I'm typically priced out of them from the start (don't have the down payment saved for anything over $175K, and don't want to partner).  I'm curious if you've seen any luck going further out from the metro core area.  I see some better deals once I get an hour or more outside the suburbs loop, but I worry about higher vacancy in small-town MN.  Thoughts?

I leased out a townhouse last month in Otsego. It generated a ton of interest and I was able to get a really good quality tenant into it in under two weeks. From what I can tell you can get all the way up to Elk River and still have solid rental interest while having more affordable options. Stick to properties close to main roads and the light rail line that goes out that direction, and I bet you will have good luck finding solid renters. 

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