How's this deal look?

Question

I"m in search of my first rental property. Here's one I'm considering putting in an offer in on. It's a 3 bedroom 1 bath 1200 sq ft SFH in Marion, Iowa. It's over 100 years old but looks to be in decent shape and rentable basically as is. I'm estimating $3000 for some carpet and paint to spruce up the place. And possibly to move the washer/dryer hookups. The current placement seems weird because it would block access to the basement. They're asking $66k and it's been on the market the better part of a year.

Estimated Rent: $700

Vacancy: $58 (1 Month/Yr)

Taxes: $105

Maintenance and Repairs: $105 (15% of rent)

Management: $70 (10% of rent, though I'll actually manage it myself)

Insurance: $50 (estimated)

Tenant will pay utilities.

If I assume a 5.25% interest rate, 20% down, and want a 10% Cash on Cash return, the most I could offer is $47k with the seller covering closing costs. That would make the mortgage payment $208. Total cash flow would be $104 per month with $12,400 needed for down payment and up front repairs.

So how do you guys think this deal looks?

Can anyone with knowledge of the area verify if the rent estimate is reasonable?

Adam Moehn · Answer

Thanks all for the replies!

@James Syed The insurance estimate was what my lender used, but I'll get a real quote before I make an offer.

I was including reserves in my "Maintenance and Repairs" estimate. Think it's too low? I've seen others use about 10%-20% of rent. I went with 15% because this is an older property but in pretty good shape. It has an addition that's only about a decade old and the previous owners look to have taken care of it. I see Aaron is suggesting $150.

2% rule sounds nice but I agree it'll probably be hard to find. I don't see much near that in my area except in parts of town I'd rather not invest in. I tried rentometer, as well as rentmetrics and zillow but their estimate seem too high based off of craigslist and my own, admittedly limited, experience.

@William T. Thanks! I'll make sure to have an inspection clause so that I can be safe if it turns out repairs will be significantly more than I expect. I live in a 90 Yr old house myself so I do know you're right about potential problems in old houses. I'm planning to rent and not sell so I don't think ARV too important in this case.

@Aaron Montague Thanks for the tips. I estimated 2k for carpets and 1k for moving the hookups. I got the numbers from some research online but it certainly wouldn't hurt to up the estimate to be safe. My bank actually quoted me 5% but I was using a higher amount to be safe since interest rates could go up and I can't lock the rate until I have a accepted offer.

Aaron Montague · Answer

I'd bump your maintenance number to at least $150/month.

I'd also double your estimate on the initial repair costs.  Carpet is amazingly expensive, at least in my area.  You mentioned plumbing changes as well.  Most plumbers are getting at least $80/hour plus a small fortune in parts for each job.

I'd rerun with those changes and see how the numbers look.  My guess is that this is a decent deal at 35 or 37k.  I'd be looking for at least 15% CoC and $100 monthly cash flow.

You should be able to drive that interest rate down a bit as well.  I'm fairly sure there is a bank out there that will lend in the high 4s to you so long as you move quickly.

A few of my favorite points:

1. Never be afraid to walk away from a deal, even your first

2. If you first offer isn't insulting, it was probably too high

William T. · Answer

@Adam Moehn First of all, congrats on pursuing the purchase of your first investment.  Second, all of your numbers are estimates if you haven't had the priority either inspected or a contractor to review the property for REPAIRS.  Believe me, a 100 year old house is going to need repairs and/or updates if it wasn't done already.  Also, very good deals on the MLS will not last long....  So with that being said, I didn't look at the numbers to calculate anything because your repairs were not taken off the ARV which you also need to know.  Let's start with a good ARV, estimate repairs/updated features, and then work the numbers.  The best of luck to you because you have already taken the first step.  Proceed with doing your due diligence....

James Syed · Answer

@Adam Moehn Great question.

Your deal looks fine except for 2 figures in my opinion.

1. Your insurance will be more like $65 or more.

2. I don't see any funded reserves (replacement cost). This figure is as important as others.

In addition, to be on safe side, use a minimum of 10% vacancy rate. I like it that you went for 10% cash on cash return. Double digit cash on cash return is an excellent to way to start investing.

Last comment is using 2% rule, a purchase price of $35,000 would give you even better results, having said that, it's not very easy to acquire.

As far as rental income is concerned, I am not aware of local rentals. Try rentometer.com, it's a useful website to check rents.

Hope it helps.