Would you do this deal?

Question

Purchase SFR in Piqua Ohio, located in an "A" neighborhood.   I am a buy and hold investor.

Purchase price: $23,000

Repairs: $22,000

Total Investment: $45,000

ARV:$68,000

Gross Rent: $750/month

Tax: $900/yr

Insurance: $500/yr

Repairs/Maint: $1250/yr

Vacancy Cost: $1350/yr (I used 15% but probably closer to 9%)

After all is said and done I will have free cash flow of $415 per month and mortgage of $235/month. I will have $180/month in my pocket. I will borrow 100% as I will cash out a free and clear property on a 30yr at 4.75% fixed.

I would like to hear your opinions...

Ray Browne · Answer

The numbers look good to me Evan, the only thing I question is the repair cost seems like it could be high for a property with a sub $100k ARV. Is there a lot of mechanical work involved (heat pump, boiler)? Are we talking a new roof?

If you are covering the rehab out of pocket prior to financing perhaps supplying material yourself rather than eating the contractor markup on it might be worth looking into. A lot of lumberyards and other suppliers are now posting overstock on Craig's List, I've bought $10,000 of material (flooring, siding, doors) this week for just over $2,000. I was willing to spend a few hours researching on the computer and driving around but it was well worth it.

Evan R. · Answer

@Alan Russell I have included financing costs somewhat.  I have several properties that are free and clear.  So if i pull money out of one to buy another I dont think its fair to pin all the closing costs on the new property.

You will not be able to write off 100% of all "repair costs".  Different types of repairs have different depreciation schedules.  For example carpeting/flooring has a shorter depreciation schedule than a new roof.  And some repairs, like a new faucet, door knob, and painting can be expensed.  Of course this all depends on how aggressive you WANT to be and how aggressive your accountant will LET you be:)

Alan Russell · Answer

Evan, what exactly the investment model I have landed on for myself.  The only caveats are that I would make sure you understand and include the financing costs as part of the cost for the property.  When I finish my current project I am planning on paying for an appraisal before I seek bank financing.  I plan to pull out 80% of the ARV as long as it leaves me with a positive cash flow of at least $100 per month after expenses.

My thoughts are I can get some of the benefits of "flipping" (quick cash out) with out the tax repercussions because I am putting it on the market as a rental.

The only question I am still researching is if I can write off the "Repair costs" in the same year because its a rental or if I will have to depreciate it over time.

Evan R. · Answer

@Bill Jacobsen I would hope to have it ready to rent by April 1st.  Money from refi on other property would come in around April 1st as well.

Evan R. · Answer

@Tim Hoffman , My definition of "A" is very little if any crime, no vandalism, people pay their bills, working class, little to no section 8 around, people mow their lawn etc...

Bill Jacobsen · Answer

When all is said and done, I calculate a 11% cap rate and a cost of money of 4.75%.  It certainly meets my criteria of 3 percentage points above the cost of money.

Two unknowns for me are: how long till the refinance and how long from purchase to rehab and having it rented?

Good luck.

Bill

Tim Hoffman · Answer

I would probably do based on your numbers.  I am a bit skeptical that you can get a house for $23k in an A neighborhood and that an A neighborhood only rents for $750/mo.

I consider a neighborhood and A neighborhood where Upper level managers, business owners and those living way beyond their means like to live.  In most towns and cities that is more than $750/mo.

Good luck

Aaron Junck · Answer

I would personally do this as long it doesnt tie up all my cash until the refinance is complete. Otherwise I would try to bring in private money for part of it.

I personally like the cashflow and LTV on the end of the deal.