Help with rental/value price

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Help with rental/value price

Account Closed
Rental Property Investor · Member since 2018 · 104 posts · 44 votes

First off, I am new to the forum but have learned so much. 

Some info:

I will be buying a short sale for $110,000 in need of renovation (estimate around $70k updating everything including electrical/plumbing)  that is in a very sought after neighborhood. However, the neighborhood has so much different types of homes that it is hard to pinpoint comps. The closest I have seen is in the $180,000 range (taken into account # of beds/bath and year), but the house I am looking into is 400 sq ft bigger, the yard is bigger, and it has privacy fence and bushes. The realtor is also having trouble trying to pinpoint potential rental and value due to the fact that $180,000 has 3 bed rooms, but if we try to match the sq footage with other homes, its at $220,000 with 4 bedrooms (the house I am looking at is 3 bed).

On top of that, there are currently no rental available in the neighborhood (very low turnover rate) with the exception of the newer houses but smaller sq footage which are going for $1 per sq ft. All the other homes that is the same year +/- 5 years and sq ft are not popping up for rent for the past 3 months.

With this type of mix neighborhood, how would you price the value and rental property? 

oh forgot, the house I am looking at is built in 1970s while the newer homes with high turn over rate are built in the 2000s. It's a buyers market here still so closing cost is paid by seller and houses are typically in the market for over 60 days if that helps any. I trust my realtor, but curious on the thought process and what ya'll would price this home at. 

Thanks!

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Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
8y

Listen to Caleb , the numbers just aren’t there . This is clearly not a good investment . I’d bet if you crunched accurate numbers you’d see  there’s simply no meat left on the bone in this property by the time it’s all said and done . Walk away 

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  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Jeff Sechrest:

    Ezekiel,

    Have you put an offer in on the property yet?

    If no, then stop talking to the realtor who gave you all that useless information. 

    If you're truly looking for a private residence and plan on renting it out. This isn't the property for you.

    I don't mean to be so direct here but read on. This could save your future.

    Even if you manage to buy a newly built home and you plan on renting it out now or 2, 3, 4 or more years down the road. Everything in and around that property has a useful life. So from day 1 that investment requires maintenance and money to be set aside for future use.

    So below is a few big ticket items I've had to pay for out of the repair and capex dollars on one of my single family properties built in ***2013***.

    There were plenty of the smaller charges as well. Simple things like ac filters each month and the mailbox and post demolished by the UPS truck in front of my eyes.

    Keep reading, there is a point to this.

    AC coil for 3 ton unit.                   $1200

    Garage door.                                 $600

    Stove/ oven combo.                     $350       

    7' by 10' deck.                                $800

    House pressurwashing twice @ $250

    Carpet.                                            $800

    Paint/ wall repairs.                        $600

    Total of $4600.

    We had an eviction and yes there was a court ordered judgement but that's hard  to pay when the former tenant is now living in the state prison. Stranger things have happened folks. Turns out proper screening only shows what people have done in the past, not the future.

    Ok so some simple math using the generic percentages I see often on deal analysis help posts and the $1250 rental price referenced on the original posting.

    10% capex @ $125 per month

    5% repairs @ $62.50 per month

    Equals $187.50 per month squirrelled away each month.

    That's 25 months with the canned percentages. Easily absorbed if you have multiple rentals but how about on an E-5's pay or an O-3's? Not so easy right. This story is more common than you think. Well maybe not the prison part but the $4600 part for sure.

    OohRah

     Ok, I think the numbers are all getting jumbled up. Here is screenshot of the rental calculator that is on here (I forgot to add $116 per month for landlord insurance).

    The vacancy rate, capex, repairs, and management rates are from the property management I will be using. 

    Purchase price of home: $110k

    Down payment: 0%

    Inflated Renovation estimate: $70k 

    Actual renovation estimate: $55-60k (estimate from GC. Not a bid proposal)

    Interest: 5.2%

    Estimated rent: $1750-$1850 (based on property management company)

    The renovation will include new A/C, electrical rewiring, upgrade plumbing, flooring, replacing countertops, bathroom renovation, new garage door/opener, recessed lighting, paint, new appliances and a wall tear down to open up kitchen. The water heater is fairly new and roof had been repaired recently.

    I had put an offer in today, but it still hasn't gotten accepted. Should I pull it? Please let me know if I am missing something else on the calculator.

    0Reply
  • Brendon Brooks
    Rental Property Investor · Houston, TX · Member since 2017 · 50 posts · 39 votes
    8y
    @Ezekiel Racelis, Hello, and thank you for your service to our country. I will have to agree with Caleb on this one, there doesn't seem to be much meat on the bone on the intial buy to gain equity. Disclosure, I'm fairly new to REI, but have done a lot of research, deal analysis and learning, so I'm just throwing in my 2 cents. Why does it need $70K for rehab? To me, for a less than $200K market that sounds too high, unless you're almost rebuilding. Have you just taken your agent's word on the rehab cost or have you looked into any contractor estimates or bids? I would suggest finding out as much detail on the deal as possible with values and rehab needs, and then taking that to your local REIA and ask a local investor and contractor for some guidance. They will give you a much better idea of what your looking at. Now if there was some room in the rehab cost to only have to put in $25-50K the deal would look much better. Understand what the rehab really needs, and if the market doesn't justify putting in highend finishings and amenities then don't. From my understanding that will not guarantee you anymore in return so you don't want to overdo the rehab.
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  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Brendon Brooks:
    @Ezekiel Racelis, Hello, and thank you for your service to our country. I will have to agree with Caleb on this one, there doesn't seem to be much meat on the bone on the intial buy to gain equity. Disclosure, I'm fairly new to REI, but have done a lot of research, deal analysis and learning, so I'm just throwing in my 2 cents. Why does it need $70K for rehab? To me, for a less than $200K market that sounds too high, unless you're almost rebuilding. Have you just taken your agent's word on the rehab cost or have you looked into any contractor estimates or bids? I would suggest finding out as much detail on the deal as possible with values and rehab needs, and then taking that to your local REIA and ask a local investor and contractor for some guidance. They will give you a much better idea of what your looking at. Now if there was some room in the rehab cost to only have to put in $25-50K the deal would look much better. Understand what the rehab really needs, and if the market doesn't justify putting in highend finishings and amenities then don't. From my understanding that will not guarantee you anymore in return so you don't want to overdo the rehab.

     Please look at post on top of yours. I listed the numbers and where they came from and also took a screenshot of the calculator. 

    Let me know what you think. 

    It’s going to be a buy and hold.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    @Ezekiel Racelis You know with a VA loan you have to owner occupy the house for at least a year right?
    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    @Ezekiel Racelis You’re still using canned percentages for repairs. That’s not the way to do it.
    0Reply
  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Caleb Heimsoth:
    @Ezekiel Racelis

    You know with a VA loan you have to owner occupy the house for at least a year right?

     Not a year, lender said no specific time frame. But yes, I am going to occupy for a year. 

    0Reply
  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Caleb Heimsoth:
    @Ezekiel Racelis

    You’re still using canned percentages for repairs. That’s not the way to do it.

     What do you mean by canned percentage? 

    0Reply
  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Caleb Heimsoth:
    @Ezekiel Racelis

    You’re still using canned percentages for repairs. That’s not the way to do it.

     Never mind, I got it. So what should I use for repairs? 

    0Reply
  • Jeff Sechrest
    Rental Property Investor · Big Spring, TX · Member since 2015 · 58 posts · 25 votes
    8y

    repairs...

    Anything that can break probably will so if you move forward with this mentality you'll be fine. My earlier post can be summed up like this. The sooner you build a slush fund for anything that could go wrong the better off you'll be. If you put 5k or some amount you deem necessary, in an account and keep it there for a rainy day, that's the concept.

    Once you have that fund built up 2 things happen for you and the property. You no longer have to worry with an "emergency" coming up you aren't prepared for and your cash flow goes up because your fund is funded.

    1Reply
  • Tom Keith
    Investor · Longview, TX · Member since 2012 · 631 posts · 186 votes
    8y
    @Ezekiel Racelis I am hoping you are taking to heart the investors who are trying to tell you that this might not be a good BRRR or buy and Hold. For several reasons like Jeff Sechrest and repair numbers, the actual honest to goodness numbers used to find the cash flow that are not canned. the fact that you dont have good comps even from the Realtor that is a property manager?? And your downplaying your renovation cost while up playing your rental income. Two great ways to get in the negative real fast. One of the items I have found is if this is your first venture then you should double the renovation expenses for those things you have not thought about or find are not what you thought they were. J.Scott’s first book here explains the reason for doubling the renovation cost as newbie so if it works that way you will have a much better chance of coming out in the black. One other item is your estimated property taxes. I wonder if you are using the tax rate you will have as an owner occupant instead of the rate you wil have as an investor. Here in Texas you do not receive any discounts or credits for a home you do not occupy as your primary residence and the difference is monumental. I would suggest you take all the reasons you have been given for it not being a good deal for rental and Really look at them, take the emotion out of it and find the True numbers, then if it works go for it. No one here is trying to steer you into a bad deal or give you advice that will hurt you, We are not guru’s and have no motives other than assisting you to make your deals work in the best way possible. Get another non biased knowledgeable look at this property before you make a decision that could hurt you down the line. Best Wishes and Thank You for Your Service to us and our Families.
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  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Tom Keith:
    @Ezekiel Racelis I am hoping you are taking to heart the investors who are trying to tell you that this might not be a good BRRR or buy and Hold. For several reasons like Jeff Sechrest and repair numbers, the actual honest to goodness numbers used to find the cash flow that are not canned. the fact that you dont have good comps even from the Realtor that is a property manager?? And your downplaying your renovation cost while up playing your rental income. Two great ways to get in the negative real fast. One of the items I have found is if this is your first venture then you should double the renovation expenses for those things you have not thought about or find are not what you thought they were. J.Scott’s first book here explains the reason for doubling the renovation cost as newbie so if it works that way you will have a much better chance of coming out in the black. One other item is your estimated property taxes. I wonder if you are using the tax rate you will have as an owner occupant instead of the rate you wil have as an investor. Here in Texas you do not receive any discounts or credits for a home you do not occupy as your primary residence and the difference is monumental. I would suggest you take all the reasons you have been given for it not being a good deal for rental and Really look at them, take the emotion out of it and find the True numbers, then if it works go for it. No one here is trying to steer you into a bad deal or give you advice that will hurt you, We are not guru’s and have no motives other than assisting you to make your deals work in the best way possible. Get another non biased knowledgeable look at this property before you make a decision that could hurt you down the line. Best Wishes and Thank You for Your Service to us and our Families.

     I am no longer renting it out, but will use it as my primary residence for at least 3 years (have orders to stay in this city). My realtor is not a property manager. Her co-worker is the one that looked at the home. All the real estate companies here have a property management division for rentals. The renovation I have been stating is inflated. The estimate I got from the general contractors is 50-60k (had 3 estimates from different ones), but like I have stated; I want a buffer of 20k so I am using the 70-80k range. The canned percentage for future repairs was what I got from the property manager. Don't know how else to estimate future repairs.

    We just had it appraised with the VA appraisal while the General Contractor was around today. It appraised for $240k ARV (this is an A class neighborhood by the way). So while I am not going to be renting it out, my plan is to pull the equity out with a heloc to use as a down payment on a duplex in the Class C neighborhood. Still trying to look for a good deal in the lower crime area, but Class C neighborhood seems to have the best cash-flow for my market.

    1Reply
  • Caroline Widjaja
    Rental Property Investor · Los Angeles, CA · Member since 2018 · 84 posts · 54 votes
    8y
    @Ezekiel Racelis If you want to buy this property as a rental property, then I suggest that you walk away. You will have soo little of cash flow or maybe break-even (hopefully not a negatIve cash flow). What @Caleb Heimsoth mentioned above is totally correct.
    0Reply
  • Caroline Widjaja
    Rental Property Investor · Los Angeles, CA · Member since 2018 · 84 posts · 54 votes
    8y

    If you have a property with low cash flow and high price appreciation, that’s still understandable. Don’t buy a property that will generate a low cash flow AND low or no price appreciation, it’s a total disaster LOL. 

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  • Account Closed
    OP
    Rental Property Investor · Member since 2018 · 104 posts · 44 votes
    8y
    Originally posted by @Caroline Widjaja:

    If you have a property with low cash flow and high price appreciation, that’s still understandable. Don’t buy a property that will generate a low cash flow AND low or no price appreciation, it’s a total disaster LOL. 

     Ya I understand. I thought since I had no down payment, with seller paying for closing cost and no lenders fee (basically free renovated house), I would get away with very low cash flow. I'll just go forward and buy the house, renovate and use it as my primary residence. Use the equity to get a duplex or single family home in a lower class neighborhood (the house in question is in a class A neighborhood). 

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