Hi everyone. I am still a new investor and have been away for a few years after a bad experience/good learning experience on a previous SFH rental.
Anyway, I have a potential new construction townhome deal and the numbers look good (if I don't factor in repairs, capex and vacancy). However, after 20% down I have about $20,000 in a reserve brokerage account that I plan to use for this and future properties (will be adding to it over the coming months/years).
Rent will be approx. $1400 (potentially $1500) with a CoC return of 6.5% and cash flow of $246. I don't have any need for cash flow at this time so this will be a buy and hold with all cash flow going back to the property in order to build capital/equity for another purchase in the future.
I feel this is a good deal for my situation but I am a bit gun-shy.
On a side note, this is area is a potential landing spot for my wife and I when we leave California in the next five years.
I am sure I am leaving out some details (unfortunately I don't know what I don't know). But hoping someone can offer some advice or additional information for me on what I should be focusing on or not focusing on.
Thank you and I look forward to hearing from you.
I don't think new construction is going to be the best choice. I personally would look for a motivated seller or distressed property to get a good discount off the ARV.
"You make your money when you buy"
Without Capex, repairs and maintenance, you are going to sell yourself short on what it will actually cost to run the property. 5% assumption for each wipes out half of your remaining cash flow and will reduce your CoC return.
Agree. I guess what I should have asked is if I already have a reserve for capex, repairs and vacancy and I add a little bit each month, and I don't need to cash flow, how much is too much to have in the reserves? If I am starting reserves at $20k for this single property? With monthly expenses at about $1050 that means I have 19 months covered without adding in the extra cash flow amount.
I know that if I dip into the reserve it will have to be refilled from the cash flow but with a 1 year warranty (so no major issues for that period to worry about), new appliances and saving the cash flow, roof and exterior covered by HOA, I don't expect any major issues for a few years (although thats not guaranteed of course).
Sorry to sound naive but I really just want to understand the details.
I agree with the guys above. I feel like not factoring in those costs is very risky - you will definitely have those costs at some point. And you might be "okay" with no cash flow, but what's the opportunity cost of that money? You could invest it passively elsewhere and get much better COC and probably a good refi on a multifamily deal to where you have little to no cash invested in the deal after a couple years, and then REINVEST that capital! There are also many unforeseen issues that could come about with the new construction, although issues are possible on any kind of deal of course. If I were you though, I'd invest in some value add multifamily and refi that cash out to reinvest in the next couple of years.
Never buy something that does not cash flow day 1. Your number 1 goal is to preserve your capital. Goal #2 is to not forget rule #1. Having the building CF is what allows you to keep the building and wait for appreciation. What you were saying is you plan on the property eating through your $20k and if the property does not CF you will be adding personal money to it.
I will echo everyone else’s responses you need to run your numbers conservatively and buy a property that will CF. You also want to be conservative in future projections. Do not assume that properties will appreciate the way they have this year and the rents do not need to be raised to have +CF.
In your initial post you mentioned you had a bad experience/learning lesson before. Trust me you do not want another one
@John C. I think you want to have the reserves AND run the numbers with repairs, maintenance, and capex reserves. The reserves will keep you afloat in case there is another covid-type situation. Also, I went back to your original post and if you aren’t factoring in vacancies, your cash flow is even more overstated. Vacancy is very much a real expense. I would run revised numbers “fully loaded” with these reserves and see if it still makes sense.
Thank you everyone for the insight. After reading everything and running numbers I wonder if I am trying to make a deal for the sake of making a deal and I know better than to do that.
I appreciate the feedback.