Help With Analyzing A Deal in Kansas City Area

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Help With Analyzing A Deal in Kansas City Area

Rustin Dowd
Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes

Ok so I have a current deal that I know I can buy for $47,900. It appraised for $103,000 last year, it is a foreclosure property (divorce). So after looking at those numbers it seems like it is a great deal. However I know they are a ton of other factors that weigh in here. 

After using the bigger pockets rental calculator and looking at all expenses like property management, repairs and maintenance, cap ex, taxes, insurance, and vacancy my cash flow doesn't look great.  My gut tells me it is a good investment because of the purchase price and appraised value however the numbers I am running are telling me otherwise. Maybe my numbers are wrong but let me know what you think

----Here is the details-----

Purchase price: $47,900

Down Payment: 10% - 4,790

Rent: $800-$950

Vacancy: 8.33%

Gross Rent: $733-$871

Property management: (10%) $80-$95

Repairs and maintenance: (10% GR) $73-$87

Cap ex: (7% GR) $51-$60

Taxes (2016 Taxes $2,099) $175

Insurance: $100

Monthly Operating Expenses: $474-$513

Annual Operating Income: $8,800 -$10,453

Annual Operating Expense: $5,696-$6,157

Net Operating Income: $4,296

Mortgage Payment: $346 (15 year and 5.25% interest)

Cash Flow: -$87 - $11 (Gross Rent - Monthly Operating Expenses - Mortgage)

Thoughts? Is this really a bad deal or are my numbers skewed? I appreciate the help! 

Thanks,

Rustin 

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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
9y

@Kevin McConnell

Here is what you're missing, you just found 25k cash in your pocket and infinite cash on cash return! You are getting a 100k property for 50k so that means that in 6 months you can do a cash out refi of 75k. Take away the 50 that you owe and put down and that's 25k in your pocket that wasn't there before. Now the property will probably cash flow a little with that cash out but all the equity is the win. If you have no cash left in a deal your cash on cash is infinite. This is a really great deal. 

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  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 587 votes
    9y

    @Rustin Dowd you forgot to mention if the house needs repairs right now to get it rented.     I do know that if you don't buy it . I will .

    0Reply
  • Rustin Dowd
    OP
    Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes
    9y

    @Gordon Cuffe it needs minimal repairs. (Less than $6k). I currently have it under contract. Just wanting reassurance it is a good deal. I am new investor, this is only my second deal and I want to be sure I don't screw up.

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y
    You've run the numbers on the conservative side (60% expenses), with a 15-yr note, and you'll still cash flow. Good on you! Go for it!
    0Reply
  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 587 votes
    9y

    @rustin 

    @Rustin Dowd pull closed sales less than a mile away to see what simalar sized homes have sold for . If they have sold for 100k then this a good deal. I am serious that if you don't want to keep it then I am interested. I will have funds available may 12 th or later from the sale of a house in kc

    0Reply
  • Rustin Dowd
    OP
    Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes
    9y

    @Austin Fruechting ok thank you, I appreciate the feedback! I would love to take you out for lunch sometime to pick your brain and learn from you.  Over 100+ properties by age 32! That is impressive, maybe my goals are too small! 

    0Reply
  • Rustin Dowd
    OP
    Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes
    9y

    @Gordon Cuffe Ok I will do that, thanks for your advice! 

    0Reply
  • Chris Turnbull
    Kansas City, MO · Member since 2016 · 1 post · 0 votes
    9y

    Buy it. Your numbers are very conservative on the expense side of things. Also be sure there aren't any HOA dues or other neighborhood fees you need to factor into your equation. You should be able to secure a 20 year note too, which would help with cash flow.

    0Reply
  • Kevin McConnell
    Kansas City, MO · Member since 2017 · 14 posts · 1 vote
    9y

    @Rustin Dowd Is there a specific reason why you went with a 15-year note?

    Did you acquire this property through personal contacts since you mentioned a divorce foreclosure?

    0Reply
  • Gregory N.
    Investor · Vista, CA · Member since 2016 · 35 posts · 17 votes
    9y

    @Rustin Dowd Definitely buy, those are conservative numbers and please PM me how you stumbled upon that deal!  : )

    0Reply
  • Kevin McConnell
    Kansas City, MO · Member since 2017 · 14 posts · 1 vote
    9y

    @Austin Fruechting Hey could you just clarify what you meant by 60% expenses?

    When I run the numbers with the conservative end of the rent ($800) and same expenses:

    Gross rent (8% vacancy) - $736

    PM (10%)- $80

    Repairs/Maintenance (10% GR)- $73

    CAPEX (7%)- $51

    Taxes- $175

    Insurance- $100

    NOI = Gross monthly income ($736) - Gross monthly expenses ($479)

    NOI = $257 monthly, $3084 annually

    Cash Flow= NOI ($257/mo, $3084/yr) - Finance ($346/mo, $4152/yr)

    Cash Flow= -$89/month or -$1068/yr

    I realize the expenses are conservative to start, but I am getting negative cash flow....am I missing something or doing something wrong?

    *Thanks in advance

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    @Kevin McConnell - That's my bad, I did not see the negative sign in front of the $87 per month.  I was skimming a too quickly before running to an appointment and read it as making $87 per month.

    As to the 60% expenses I was just looking at the aggregate numbers where he said NOI $4,296. Gross rents $800-950, which would be $9600-11400 a year... $4,296 is roughly 40% of the average.

    Also, I'm going to assume the 15-year note because its under $50k.  Big banks often won't finance that at all and portfolio lenders will do them but often want shorter term for the smaller amounts. 

    1Reply
  • Kevin McConnell
    Kansas City, MO · Member since 2017 · 14 posts · 1 vote
    9y

    @Austin Fruechting I appreciate the response.

    So using this as an example, based on the picture and purchase price, it looks like it would be a steal of a deal in terms of great looking property for such a low price of just under $50K. It also initially seems like a good investment at ~1.7% using the 2% Rule. Even despite the conservative expense numbers, the cash flow just doesn't pan out like I thought it would prior to analyzing these numbers.

    I guess my question is, being new to this and assuming I'm running these numbers correctly, where does this deal go wrong in regards to poor cash flow? I realize there is the big variable of financing routes that could affect the outcome, but after analysis, it seems like this would be a poor buy and hold investment. 

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y
    Originally posted by @Kevin McConnell:

    @Austin Fruechting I appreciate the response.

    So using this as an example, based on the picture and purchase price, it looks like it would be a steal of a deal in terms of great looking property for such a low price of just under $50K. It also initially seems like a good investment at ~1.7% using the 2% Rule. Even despite the conservative expense numbers, the cash flow just doesn't pan out like I thought it would prior to analyzing these numbers.

    I guess my question is, being new to this and assuming I'm running these numbers correctly, where does this deal go wrong in regards to poor cash flow? I realize there is the big variable of financing routes that could affect the outcome, but after analysis, it seems like this would be a poor buy and hold investment. 

    Actually a few things again. I just took it straight up it was -$87. Claimed NOI $4296. Payments $4152. Cash flow +$12 a month with roughly 60% expenses.

    If he ends up with 50% expenses his NOI goes to $5250 (assuming the average of $875 rent range). Now he's cash flowing +$91.50 a month

    The reason these numbers aren't wow-ing is the 15-year loan. If he was getting 5%/25yr his annual payments would be $3024... making cash flow of $106 per month at 60% expenses, and $185.50 at 50% expenses.  

    So he's going to still make a good return, it's just more in equity than cashflow because he's just having to pay a higher percentage of the NOI towards the loan than normal.

    1Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    9y

    @Kevin McConnell

    Here is what you're missing, you just found 25k cash in your pocket and infinite cash on cash return! You are getting a 100k property for 50k so that means that in 6 months you can do a cash out refi of 75k. Take away the 50 that you owe and put down and that's 25k in your pocket that wasn't there before. Now the property will probably cash flow a little with that cash out but all the equity is the win. If you have no cash left in a deal your cash on cash is infinite. This is a really great deal. 

    Podcast Guest on Show #373
    2Reply
  • Rodney Harris
    Rental Property Investor · Kansas City, KS · Member since 2016 · 114 posts · 57 votes
    9y

    your sitting on a piggy bank! 55k of equity is already baked in! Your CoC is infinite like what @Lee Ripma said. Plus if you let it season for 6 mo or 12 mo depending on what the bank wants you can pull out some really good cash! Go for it! You have a built in exit strategy! 

    0Reply
  • Chris DawsonPro Member
    Real Estate Broker / General Contractor / Property Manager · Kansas City, MO · Member since 2010 · 395 posts · 425 votes
    9y

    @Rustin Dowd I have several questions for you:

    1) What repairs are needed?

    2) What area of KC is this property located (city and zip code is good)?

    3) How many beds/ baths?

    If you are getting this for $47,900 and it is truly worth $103k, why don't you flip it?  Assuming it needs less than $25k worth of work, it would potentially make a good flip.

    1Reply
  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Rustin Dowd:

    Ok so I have a current deal that I know I can buy for $47,900. It appraised for $103,000 last year, it is a foreclosure property (divorce). So after looking at those numbers it seems like it is a great deal. However I know they are a ton of other factors that weigh in here. 

    After using the bigger pockets rental calculator and looking at all expenses like property management, repairs and maintenance, cap ex, taxes, insurance, and vacancy my cash flow doesn't look great.  My gut tells me it is a good investment because of the purchase price and appraised value however the numbers I am running are telling me otherwise. Maybe my numbers are wrong but let me know what you think

    ----Here is the details-----

    Purchase price: $47,900

    Down Payment: 10% - 4,790

    Rent: $800-$950

    Vacancy: 8.33%

    Gross Rent: $733-$871

    Property management: (10%) $80-$95

    Repairs and maintenance: (10% GR) $73-$87

    Cap ex: (7% GR) $51-$60

    Taxes (2016 Taxes $2,099) $175

    Insurance: $100

    Monthly Operating Expenses: $474-$513

    Annual Operating Income: $8,800 -$10,453

    Annual Operating Expense: $5,696-$6,157

    Net Operating Income: $4,296

    Mortgage Payment: $346 (15 year and 5.25% interest)

    Cash Flow: -$87 - $11 (Gross Rent - Monthly Operating Expenses - Mortgage)

    Thoughts? Is this really a bad deal or are my numbers skewed? I appreciate the help! 

    Thanks,

    Rustin 

    Is it in a rough area? Outside looks nice. Roughly speaking, deal looks great! Don't perseverate over the BP calculator. You are being too conservative and some of your expenses seems redundant. Get in the game!

    0Reply
  • Ryan K.
    Investor · Richmond, VA · Member since 2015 · 139 posts · 43 votes
    9y

    Looks like a great deal to me. Instant equity. Not much cash flow but that's just a result of conservative numbers and the 15-yr note. I'd go for it if everything checks out ok.

    0Reply
  • Rustin Dowd
    OP
    Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes
    9y

    Ok great, I appreciate all of the feedback! I am excited about this deal. I just had an inspection done and everything checked out great. I am moving forward with the purchase. 

    A couple options with this deal that I have thought about

    #1 Making it buy and hold asset and just renting out. 

    #2 I have also thought about renting it out with the option to buy after a year. I have a few clients that I have through my business that are looking to buy but still saving for downpayment.  (I have heard that by keeping it for a year you will be in a lower capital gains tax bracket.) Is this true?

    #3 Flipping it. However by selling it right away I am afraid that I will get hit with a huge capital gains tax. Unless I can do a 1031 exchange to buy my next couple properties. (Not exactly sure how all of that would work) 

    1Reply
  • Ian R.
    Real Estate Investor · San Antonio, TX · Member since 2016 · 143 posts · 167 votes
    9y

    @Rustin Dowd

    Assuming that the property is in a good/desirable area and in good condition, I would definitely keep it as a buy and hold rental.  Then, as a couple others mentioned, I would pull some of the equity after the seasoning period and parlay those funds into your next 2-3 deals.  You really have a smokin' hot deal on your hands here...congrats!  This one deal could quicky advance you into a nice little portfolio.

    I'm also curious how you came across this.  Not looking for specifics or to steal your "secret sauce". Just genuinely curious.  Was it from your own direct marketing?

    0Reply
  • Rustin Dowd
    OP
    Real Estate Agent · Olathe, KS · Member since 2015 · 11 posts · 7 votes
    9y

    @Ian R. no secret sauce.. I just like foreclosure properties. All I do is search for foreclosure properties, or properties that I think might go in foreclosure and then go look at them. After I go walk around and inspect them myself I get a figure I want to buy it at. Then I watch that property till it gets to $15k-$20 above my figure and then I submit my offer. I like bidding on ones that the bank or HUD have had possession of for 4-6 months. I have only done two but so far it seems to be working.

    1Reply
  • Steven Silva
    Investor · Aurora, CO · Member since 2013 · 55 posts · 13 votes
    9y

    Hey, I'll be in town looking at larger multifamily properties in Kansas City area may 6-10. I'd be interested in meeting up and seeing the house you're talking about. I could give you a second look at everything. I'm networking with investors there and still getting a feeling for the areas of the city. 

    0Reply
  • Laura Williams
    Kansas City MO · Member since 2014 · 357 posts · 349 votes
    9y
    Rustin Dowd Your insurance numbers look high to me for KC. I think you could get that down a bit. I use State Farm and the most I pay is about $30-60 a month on my SFH. Plus if you do certain improvements to the property they offer utility discounts. Also I would try to repeal your property tax ......not sure if you're on the Missouri side or Kansas where it's higher ..but I do know from experience on Missouri side you can appeal property tax based on what you paid (not what it's worth) which in your case is very little at less than 50K. You'd need to take photos and document stuff but it's worth it to squeeze out that extra Cashflow. If you did get your insurance & property tax cost down plus did a 30 year note instead of 15 then you should cash flow positive on this property plus have nice amount of equity.
    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Rustin Dowd, If you select the option of flipping you will actually get hit with ordinary income tax.  You could be looking at 30 - 40% tax.  You cannot do a 1031 on a property that you purchased with the intent of reselling.  So the best thing to do would be to stay the course your contemplating and put a rentor or two in there.  And then in a year evaluate it for sale.  If the time is right you can then sell and use 1031 to purchase your next property.

    If you're in a hurry then you could buy this property, get a renter in and then refi.  Pull the cash out and use that to buy your next property.

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  • John Madrid
    Residential Real Estate Broker · Oceano, CA · Member since 2016 · 10 posts · 2 votes
    9y

    Sounds like a good deal...you don't want to have a good deal and have it explode!  Your numbers are conservative, especially with minimum down.  The most important task at hand is finding a "GOOD" renter.  A bad renter will bury you.  I had one, good kids, good parents, I thought!  Anyway the Greenwalts stopped paying rent, damaged the house and after attorney fees and judgements the investment was a disaster.  Good renters can make or break a deal...if you move into it then you know the renter pretty well!   Look into Renters Insurance for damage and loss of income.  It will cost a few bucks, pass it on to the renter.

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