I have been listening to BP for about 6 months now , and am new to real estate investing. I have been eager to get involved in it for a while and think I might have found a deal that will work.
It is a 2 bedroom / 2 bath house outside of Nashville in Pleasant View. The market has not quite rose here like it has in other Nashville suburbs yet, but from my research and talking to other people I believe it will take off here soon. The details of the deal are below:
Purchase Price: $165k
HOA: $100 / mo.
Capex: (figured based off roughly 1% of purchase price): $130 / mo.
Vacancy (figured roughly based off 5% of monthly rent): $70
Cash flow: $110
Another pro to this is that my family will be taking care of property management because they live in the area with several other properties around that they currently manager for free of charge (I will be responsible for capex costs, but day to day managing will primarily be done through them).
There is already a renter who is ready to take over the lease as soon as I close on the house as well. The property has been appraised at $190, but I am able to get a deal since it is through my family.
Any thoughts or opinions on this deal? Do the numbers look good, or is there anything I am forgetting?
Any advise is appreciated. Thanks!!
There are several ways to look at this
It is not clear what your down payment is. Let's assume it is $40K. With a $110/mo cash flow that is around a 3.5% cash on cash return. I would shoot for double digits.
If I'm reading this correctly, you aren't paying anything for property management. Typically, that would be 8-10% of revenue. Assuming your family won't work for free forever, or they quit the business, is this still a deal? At 8% that takes $112 per month off your cash flow for a negative $2 in cash flow.
If the house is really worth $190K and you can buy it for $165K with a $40K down payment, then you have a 62% equity gain from the start.
Given the above scenarios, this doesn't look like a cash flow play. If you think the area will appreciate a lot, you may want to buy & hold anyway. Personally, I like strong cash flow while I wait for appreciation, since that is more speculative. Alternatively, you could sell the property for some quick cash and then use that as down payment on another property.
Downpayment is only $10K through an FHA.... so it is kind of low. However, The same home has sold for that price recently. The property management shouldn't be an issue because the family owns the subdivsion and they will take care of managing the tenant and have for many years prior to now. If it ever changed, I would just do it myself to save costs, but don't see it being something that will come up in the near future.
Have I left anything out of the expenses? Is $110 an ok cash flow for a property that will require minimal work on my behalf?
I gave up on Nashville after Belle Meade Cafeteria closed. :)
But seriously, my opinion is that investing $165K in a property that is only going to generate $16,800 in revenue before expenses is probably not the greatest investment.
That is not something I would recommend to my investor clients.
The $990 is including all insurance and taxes correct?
I am new, but when evaluating properties I use the 1% rule. If I buy a property for 165K I need the rent to be at least $1650 a month.
Just another thought... Why not rent it out for one year, then when the lease expires, get the property in mint condition and sell it to a retail buyer? This way you enjoy a year of cash flow (if your numbers are actually what you predict), then 1031 exchange into something that cash flows better, like multifamily outside of Nashville.
Correct. $990 is insurance taxes and all. I have been having trouble finding deals to where I will be able to rent for 1% but i guess that is part of it. I think 1031 exchange might be in my future, or an increase in rent. However, I think finding a renter for that price point might be difficult. If anything, since the management is minimal I might hold onto it for a while even though cash flow is minimal.
@Daniel Beaulieuprobably has this one right. Your doing an FHA loan but buying it pretty well so you will have some level of equity to ride this Nashville wave for the next 5-7 years. On this deal though - it might make sense to sell it and move on. So let's look at it!
Appraises at $190 today, let's say you get 2.5% the first year.
Sell at $195,000 in 12 months
7% transaction costs = (13,632)
Gross Sale: $181,350
Cash Flow :$1,320
Net Revenue: ~$28,000
May think about taking that win. Keep mind the rental will have several tax advantages.
As for property management being done by family...you know them better than we do, but in general it is good advice to run your investing like a business. Plan on the 8-10% because you NEVER know what could happen 6 years down the road.
As for is $110 good cash flow? That is totally up to you. Several people require $100 per door minimum and shoot for 12% cash on cash return.
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