Hypothetical Scenario

3 Replies

My wife and I are looking to start building a portfolio of rental properties and really are just trying to get a handle on the whole process at the moment. I was wondering if I gave a possible scenario if I could get some input form successful landlord/investors.

This will be for lower price rental property to get started so that we can see the process in action.

What if you had a chance to do the following:

Opportunity to purchase an older investment property (2 bed / 1 bath) in an average "c" neighborhood where home values are from 35K to 70K. The seller was willing to give you a 24 month $2,000 down lease for $400 a month and the property already rented in the past for the $550 to $600 range.  If the selling price was at $35K and you were given the chance to secure financing over the 2 years and all of your payments over the lease paid down the note less 6% interest. Would this be a good deal to investigate for a first time property? In this scenario we would not have to secure financing for 24 months so it buys us some time.

I have run the numbers and it seems it would have a positive cash-flow after securing financing of around $200 to $250 after expenses. We would most likely have to put 10 to 12K into it up front on top of the 35K which would still have it a bit below market value.

35K + 12K = 47K all in

First 24 months 

$400 + insurance, vacancies,etc = $600

Rental = $600 

So for first 2 years or until I can finance I break even in a perfect world

After financing the deal at 5% to 6%  over 30 years I would get something like the following:

$180 + insurance,vacancies, etc = $380

Rental = $600

So this would generate positive cash-flow of $220

Does my thinking seem legit on a deal like this?

Anyone have any insight? I may throw out some other hypothetical situations so that I can get my head wrapped around the process. I have ran businesses for years but there are possible loopholes in real estate that I may not be aware of until I walk through it with the first property.

Any thoughts are appreciated. 


Thanks

I'm not sure that I understand how you came up with numbers for "insurance, vacancies, etc."  Probably since I think of those numbers in annual totals. Just thought I'd point out that factoring in property management might be wise and turnover costs. Those are two things I didn't see you mention in your post. 

I rounded the turnover into the etc amount. I simply erred conservatively there to be on the safe side.  Management would eventually come but not on one property.

Thanks