Check My Numbers - Rental Property - DFW
Arlington, TX · Member since 2018 · 23 posts · 13 votes
Hello All,
I would humbly ask for someone to double check my numbers on a potential deal I am working on. (Sorry if this is not the proper thread, this is my first post, other than new member post).
Details:
My numbers:
Thanks! Let me know your overall thoughts of this deal in today's climate.
Thanks for the post Andrew. If I leave all of the original numbers and add in the Property Management, i get the following:
This looks like the definition of a borderline bad deal. Certainly not a good deal.
Just looking at the numbers I would pass. Having to spend 40k to make $200/month is pretty low but it depends on your area and your goals (long term and short term). I am in Pittsburgh, PA and that same 40k down payment could buy you a house free and clear here that would cash flow $300-$400/month. If this is your first investment I would recommend looking at a lower price point just so you don't have so much money on the line while you learn with your first couple deals. Are there duplexes or triplexes in your area? I always recommend beginners try to start with a duplex so risk is significantly mitigated as having just one of the two units rented normally covers all if not most of the costs. If your SFH is vacant you make nothing so multi's are good to learn with to reduce risk.
Only you can decide if the deal is right for you or not. Some people are content to let someone else buy a house for them, while others expect returns closer to what they might expect in an alternate investment.
One thing to keep in mind, is that the value of real estate is volatile. In a deal like this one, where you are barely breaking even and always going to nervous about taking a loss when those unaccounted for expenses come round, the relative purchase price is much more important. The reason for this is that if you ever get in a pinch and have to sell, you don't want to be underwater and if you are underwater and you have to sell and you don't have the cash to cover the loss, well...that's how foreclosure happens.
Most all markets in the US have returned, and even exceeded in many cases, the high price mark from before the crash. One of the lessons that ought to have been learned from that time, is that real estate will likely not continue to go up at a higher rate than everything else and that you should always be careful about what you buy, to make sure it is not over-priced for what it is. The ceiling to housing prices is affordability, which ought to be common sense, but somehow people don't think that one through, and conclude markets have the ability to increase perpetually.
When the crash happened, sure prices pretty much dropped across the board. However, a closer look showed that in many places what happened was more of a correction than it was a crash. This was evidenced by certain markets that got hit harder than others. For instance, in the higher-end market around here ($500k and up around here), homes did not lose value, and even continued to increase in many cases. The simple answer there is that it cost that much to build one of those homes. Conversely, there was a more middle section of the market, where homes peaked out at like $350k to $425k or so, and crashed down to to like $250k to $300k. These were large, but plain, and were not all that expensive to build, and people were paying stupid amounts for them, because they thought the market would increase forever. Probably the hardest hit market were condos, that have most always been over-priced for what they are (I never did understand that one). Another interesting thing, though on a slight tangent from what I am taking about, were lake properties. All of a sudden, it became very apparent to what degree these were a luxury, as opposed to a necessity. This is a bit different due to the scarcity factor, but interesting to note.
So, my advice is to not pay market ever. Pay what the house is worth in terms of what it would cost to build as the main factor. There is of course no path that is absolutely risk-free, all I am saying is don't get caught up in the hoopla of increasing markets, and never forget markets can go down too. Playing the market margins is for short-term flipping, not long-term renting.
I would ask myself this on your deal. Am I ok with such a small profit margin? Do I have any other funds available for unaccounted for expenses? What is my opportunity cost? Am I ok being the property manager? Is the rate of rent needed realistic, and could it ever go down?
I have a friend who bought a house, then moved down south. He simply kept the house and rents it out. He makes very little, if anything, like your deal. He is content. He is not trying to be a landlord, but sees how simple it is to have someone else purchase the house for him. 10 years later and he is well on his way to having it paid off. There is exactly nothing wrong with that.
Good luck!
I'm seeing plenty of people happy with 1% and cash flowing around $200 a month, but thats with a 15 year note. Why is the interest rate so high for 30 year fixed?
Got quoted for 5.8% 30yr fixed on an investment property in Baltimore, Maryland with 780 credit. Thought rates were worse out west? What rates are you seeing right now for investment properties in Dallas?
I'm relatively new to this game, but have a couple slightly more positive takes than others.
Demographics: From what I can tell Arlington is in a long-term positive uptrend in terms of population growth, job growth, etc. While nothing is certain, it seems that this house (good schools is positioned for at least modest appreciation. There is likely going to be some tradeoff in terms of cash-on-cash return and future appreciation, but if your long-term goal is wealth-building you may be able to compromise on the near term cash flow. You'll of course also be paying off principal.
CAPEX: It's great news that there is a new 40-year roof on there. If any other major systems are recent updates (HVAC, windows) or if the kitchen has been updated somewhat recently, then you might not have to up your estimate here all the way to 10%.
Property Management: It'd be useful even if you plan to self-manage to talk to property managers in the neighborhood. Offer yourself as a potential client and ask not just their rates, but also their estimates for things like vacancy, maintenance, etc. How fast are similar properties moving right now, and is your rental expectation realistic? You may be able to tweak a few numbers further after getting a few of these data points.
On the other hand though, man those property taxes (and to a much lesser extent HOA) are rough.
I think I am leaning on a pass here. I'm going to go ahead and see it in person, just for the experience. I think looking at lower price points is a good call here. There are a few duplexes, but not many. Even fewer triplexes and quads. Maybe we can find a partner or two to buy a small apartment complex haha.
@Account Closed
Thanks for the sage advice. I was hoping that ~20K below market was going to make this deal worth it. It would be a good deal if my wife and daughter were going to live in the house permanently. The school district is where we would like for her to be and the neighborhood is pretty decent.
A 1875 sqft home is going to run you a $1000 in paint alone (maybe I'm exaggerating). But you definitely cant base your numbers off of what the outside looks like.
When I bought my home, my estimates were way off. I mean, way off. And I still was very fortunate to have amazing friends in every trade willing to help me out. If I didn't, id still be sleeping on plywood.
Hi Preston, if you look at the Cash Flow only, this might not be good deal but if you are 100% sure it will appreciate in coming years and do a 1031 exchange, then you might think again. if you are not interested in this deal can you PM me the info, I might be interested in it. Thank you.
I don't think anyone can be 100% sure of appreciation.
don't be afraid to look out of state. I have two rentals out of state, and great tenants. All I do is collect the checks.
DFW is super hot right now, I can't even find a decent flip.
don't get locked into a small return. not worth it, there are way better deals (off market) out there.
keep looking.
oh, yeah and TRIPPLE check your rehab costs, if this is your first rehab/rental. get at least 3 quotes before you buy.
Think about what Merritt said. think about it simply in terms of ROI. what if you could find an investment (other than real estate, or a better buy that yielded) 6,7,8,9,10% ? you are locking your cash for years into a 5.x?
Think about what Merritt said. think about it simply in terms of ROI. what if you could find an investment (other than real estate, or a better buy that yielded) 6,7,8,9,10% ? you are locking your cash for years into a 5.x?
Isn't it worth something that at the end of 30 years you have a "free" house? The other investments can't say that.
Closing cost-suggest you contact title company getting more accurate #.
You are the gardener? Rehab cost: Break it down more if it is not turn key you need to spend more. In our area, renters expect new flooring, new kitchen, freshly painted house of their color choice and a gardener.
Taxes-confirm with the locality it is close to actual. Looks like ball part number to me.
I'm seeing plenty of people happy with 1% and cash flowing around $200 a month, but thats with a 15 year note. Why is the interest rate so high for 30 year fixed?
I honestly thought that is what the current rate was for a rental. I have excellent credit, but I don't see it going any lower than maybe 4.75? What are you seeing these days?
Yeah definitely 4.XX%... with strong credit
I'm seeing plenty of people happy with 1% and cash flowing around $200 a month, but thats with a 15 year note. Why is the interest rate so high for 30 year fixed?
I honestly thought that is what the current rate was for a rental. I have excellent credit, but I don't see it going any lower than maybe 4.75? What are you seeing these days?
Yeah definitely 4.XX%... with strong credit
Are you sure its still there? I got a quote (in central Illinois) about a week and a half ago for 5.5% on a duplex, 5.75% on a tri for a 30yr fixed. Although I think the 10yr has moved down a bit since I got the quote.
I'm seeing plenty of people happy with 1% and cash flowing around $200 a month, but thats with a 15 year note. Why is the interest rate so high for 30 year fixed?
I honestly thought that is what the current rate was for a rental. I have excellent credit, but I don't see it going any lower than maybe 4.75? What are you seeing these days?
Yeah definitely 4.XX%... with strong credit
Are you sure its still there? I got a quote (in central Illinois) about a week and a half ago for 5.5% on a duplex, 5.75% on a tri for a 30yr fixed. Although I think the 10yr has moved down a bit since I got the quote.
I think my data must be old. I think it was pre-last rate hike.
I'm seeing plenty of people happy with 1% and cash flowing around $200 a month, but thats with a 15 year note. Why is the interest rate so high for 30 year fixed?
I honestly thought that is what the current rate was for a rental. I have excellent credit, but I don't see it going any lower than maybe 4.75? What are you seeing these days?
Yeah definitely 4.XX%... with strong credit
Are you sure its still there? I got a quote (in central Illinois) about a week and a half ago for 5.5% on a duplex, 5.75% on a tri for a 30yr fixed. Although I think the 10yr has moved down a bit since I got the quote.
I think my data must be old. I think it was pre-last rate hike.
My quote was on a really small loan in central Illinois, and it was a couple of weeks ago, right before the interest rate on the 10 year came back down a bit, so I could be off a bit.
The loan from the exact same bank at the first of the year was in line with what the rates were in Dallas, so I figure this one was more or less in line.
End of the day, I think we are in a interest rate rising environment, imo its time to lock in long term debt, clean up the personal balance sheet, sell marginal properties and be very selective on purchases.
I know we are being a lot more selective in the offers we make.
I may PM you more about how to get started in out of state investing. DFW is so hot right now...
Also, are you getting 3 quotes from general contractors? (Do-it-all type?) Assume this is during the due diligence portion, once you are under contract on the property?
@Preston L'Ecuyer may I ask what your final decision has been for the prospective property? I am curious what you decided. I too would not take on an investment property unless I was going to see a realistic 8%+ ROI with property management fees included and if the property is in Texas then I'd also bump the known property tax rate by at least a full point.
According to government researchers, Texas is not only the fastest growing State but the projections also have it staying that way. Which is terrific for those who currently own properties but it may be a barrier for prospective interests. When local governments have statisticians confirming population growth--and no interest in passing a State Income Tax--then local politicians can be expected to boost property taxes as a way to budget their "great ideas" and other "pet projects" which ensured their elections. Consider what is happening in Austin recently and how local residents are protesting the higher appraisals which in turn will affect what their local governments will demand in taxes. I'm not trying to speak negatively about Texas. I am a native who now lives in Nebraska which is right next to Texas with the highest property taxation ranking in the Nation. Many local home owners are getting buried by the recent increases in property taxes in the past few years. I luckily purchased a home for myself that is not demanding that much in property taxes but just last week my taxes went up almost a full $300 over the next year.
But ask I had asked earlier, I'd be really curious to learn what your final decision was--if one has been made.
Thanks for sharing your investment story!
Haven't made a move yet. Still haven't scheduled a walk of the interior of the property. The Owner has been travelling and busy.
Everything is bigger in Texas...even the property tax haha.
@Preston L'Ecuyer Do you search for properties off the MLS? I have had decent success with direct mail. I am sure you are going to find a good property, it just may take awhile. You are doing your homework and taking advice/criticism well. Good luck!