Please help me look at this deal. I am getting really close to my first purchase. Have been learning all I can here, but feel nervous about my interpretation of how to analyze a deal and I know many of you can do it with your eyes closed.
Here are the numbers:
Asking price: $36,900
Average rent in the area $650 - $900 I have gathered enough cash from different sources but plan to finance it through a HELOC which requires a payment of $232 per month. No immediate payments, but I want to calculate it all from the start.
$650 rent = $93 cash flow (Not great but close to $100).
$700 rent = $118 cash flow
$850 rent = $193 cash flow
$900 rent = $218 cash flow
2% rule works
$650 rent = $32,500 purchase price
$700 rent = $35,000 purchase price
$850 rent = $42,500 purchase price
$900 rent = $45,000 purchase price
I am using the $650 for my calculations, to look at it from the most conservative angle.
I am going to have an inspection to rule out any major problems and to get an estimate on repairs. That will help me determine my offer keeping the 2% rule in mind.
Am I on the right track? What am I missing? What would you do?
Thank you for taking the time to look this over and send me your feedback,
I think you have made a good start. You do have to get a better handle on what the property you are looking at will rent for. Your range is too wide. Also, understand that your expenses will not change just because you use different rent rates. Maybe you can take the middle ($775) and estimate your expenses at $387.50 and calculate the estimated cash from that.
You will have to estimate the components of expenses to get a better numbers before you close.
Looks like you've lined up your money and done most of your homework.
Is your HELOC at 6.5%? I based that on your borrowing all $36,900 against the HELOC.
I would find out exactly how much the following expense are going to cost you each month:
Sewer and Water
Cap Ex and Ops
Mgmt Fee - as a %
Vacancy- as a %. 8% represents 1 vacant month/unit/year
Once you have a good handle on those, post the numbers back up and I'll tell you what I'd pay for it at the various rent numbers you mentioned.
Your HELOC payment sounds high for that loan amount. Is it interest only payment? What is the interest rate?
Your rent range is way too broad. You have to be within like $50 to $75 at the widest rent range to really evaluate accurately. I suspect you will be at lowest rent for that price of house.
The 2% and 50% rules serve as a starting point. You must get accurate numbers for actual expenses to see whether they align with those rules.
Thank you all so much for your feedback! I am going back to work on the components you suggest.
@Bill Jacobsen I did suspect the rent range was too wide but it’s what I found on Craig’s list, Zillow and Trulia because I am not local. I’ll go with the low number as suggested by Steve.
@Aaron Montague I will use the detailed expense list and post back.
@Steve Babiak and Aaron, these are the HELOC terms:
Loan amount $50,000
Interest rate 3.75%
Monthly Principal and Interest $231.64
Payment term 3 years
Annual account fee $75 (3 years $225)
Prepayment fee $400
Thanks again for helping me think about this!
Congrats on taking another step towards your first purchase. I would try to tighten up the rent range by trying to determine the rent per square foot for comparable units.
Jordan Thibodeau, Check Out My BP Blog | https://www.biggerpockets.com/renewsblog/author/jordanthibodeau/ | Podcast Guest on Show #74
Thank you @Jordan Thibodeau . Teh square foot calculation is not something I considered before.
Great suggestion.! I'm glad I already knew that as I learn I'll only discover how much I have yet to learn. :)
You could also consider checking websites such as Rentometer and Padmapper for rental comps. Also - assuming you purchase the house - if you're planning on hiring a property management company, you could call around to some of them to find out what they think the home would rent for.
Thank you @Jody Michelson . I have used Rentometer but compared to Craigslist and Zillow the median rent I found was higher so I decided to take the lowest number which was also quite common within the zip code. I will try Padmapper as well. See? something new for me to explore.
Thank you so much!
Are you borrowing the entire 50K?
I'm guessing this is a SFH.
How much are the taxes?
How much will your insurance be?
Here is how I see your expenses each month against $650 in rent. Not worth the money in my book.
Mortgage Rate 3.75%
Length of Mortgage in years 30
Monthly Mortgage payment $170.89 (this is $36,900 @3.75% over 30 years, I'm not sure how you are calculating the $231/month number)
Sewer and Water $-
HELOC Fee $6.25
Cap Ex and Ops $150.00 (this is my minimum per roof)
Insurance $50.00 (this I don't actually know, how much would this be?)
Mgmt Fee $65.00
Total Expenses $605.14
Cash on Cash Return 9.79%
Here is how I see your expenses each month against $725 in rent. If you can get it from here on up, I'd buy it. Though there still seems to be a disconnect between some of our numbers.
Mgmt Fee $72.50
Total Expenses $618.64
Cash on Cash Return 23.21%
@Aaron Montague I have a line of credit up to $50,00 but will only draw what I need from it. I am hoping to use those funds along with some savings to finance two purchases I want to complete this year. The line allows me to draw funds for 10 years and begin repayment after 10 years and 1 month. However I can pay it in full after 3 years without penalty.
@Pyrrha Rivers before doing anything, you must do two things:
1) Go see this property, the neighborhood and the city with your own eyes. IMHO this is a mandatory step. If you're unwilling or unable to do this, don't buy.
2) Get a handle on the rent. When you're there, drive the area and write down numbers from for rent signs. Also take note of those signs. Lots means lots of competition. A few means you're in a better position. Ideally you would watch these signs for a couple of months and watch them (hopefully) come and go. The same signs being up for a long time is a bad sign. Look on craigslist, padmapper, etc, but look only for true comps. Here's where driving the area helps. With the huge range you're seeing, you're not seeing true comps. You need to figure out why, and what makes a true comp. Now, having this list, start calling. Find out details about the units and terms. With all this data you have a basis to figure out the correct rent.
Jon Holdman, Flying Phoenix LLC
@Jon Holdman Thank you so much for your tips. I am unable to drive the area because I’m living abroad. My daughter is working with me and lives nearby. She has visited the property twice. Once just to see the area, talked with a neighbor and went back with a Realtor to see the inside. We were just focused on the safety feel of the neighborhood but not on for rent signs. I think your suggestion to take into consideration the number of signs as well as the length of time they are up is an important consideration which I will ask my daughter to go out there again and take note. Getting a handle on the actual rent number to use is crucial at this point, so I will be working on narrowing that down to a reasonable range.
@Pyrrha Rivers don't fall into the "gotta-do-a-deal-itius" syndrome. There will always be deals. I've been considering out of area investments, too. But there is no way I would buy anything without seeing it in person first. I have a trip planned in a couple of months to do some exploring of a potential area.
Jon Holdman, Flying Phoenix LLC
The two big things I don't see are 1) rehab estimates and 2) the quality of the area. If the rehab is minimal and the area is at least decent, it sounds like a good deal.
@Jon Holdman I hear you. I will be going home to GA in June and it may be a better time for me to proceed. However having this discussion here is helping me consider so many things that will be useful whether I buy now or later. I know I must narrow down the rent and do some exploring in the tax commissioner's web site to find other pertinent information.
Thank you so much!
@Andrew Syrios I am arranging an inspection to get the rehab estimates and the area is a well established, older working class neighborhood. It is near one of the Atlanta revitalization zones but not quite in it. So much to find out! :) Thank you for making me think about all of this.
How familiar are you with the area? Rentals in bad areas can look good on paper but be a nightmare in reality. You can check crime statistics here: clrsearch.com or at homefair.com by zip code. But I would also ask around unless you know the area really well. Best of luck!
@Pyrrha Rivers undefined
Congrats on taking a first step on purchasing your first property! Seems like you are doing all the right things and taking proper analysis and due diligence. What area are you usually looking at? I am guessing your target area is Stone Mountain since you are from there?
@Naga A. Thanks for the response. Yes, I feel like I'm getting close but after posting this request for help I don't feel so close any more. I have much work to do before I can answer the many questions colleagues have suggested I consider to insure my decision is solid. The property in question is in Decatur, between Stone Mountain and Atlanta.
How do you perform your inspections? I am looking for an inspector to help determine the major systems are sound as well as provide an estimate for rehab expenses. I had one recommendation but he wanted $325 for the inspection + $100 for the rehab estimate. All of which he told my daughter he wanted payment for at the end of the inspection and he would provide the report a couple days later. I'm not opposed to paying a deposit and the remainder of the required fees upon receipt of the report. I think that protects both the inspector and me. Not comfortable with how this guy expects to be compensated, so I have to keep looking. Do his fees sound reasonable to you? Do you have someone you can recommend?
Inspectors usually do not do a rehab estimate. They are simply not trained to do that. I was surprised to hear that your inspector is willing to provide one for you. The other way to get an estimate is to ask a general contractor to walk through the house and give you an estimate. They might charge $50 -$100 per estimate but typically credit that amount against the entire rehab expenses once you ask him to do the rehab work. One caveat is that you should not ask a general contractor to give you an estimate unless you intend to use him for the rehab work too. They just do not like being asked to give an estimate to someone who does not intend to use him for the rehab work.
P.S. By the way, can we talk on the phone? I will be in Atlanta next week and would like to talk to you before I take off. I will send a PM and give you my phone number.
@Naga A. This is most helpful!
I understand a general contractor not wanting to give an estimate for someone else to do the work. That is certainly fair. Now to the next hurdle. Finding a reputable contractor to use. Do you have a recommendation?
The expense for that estimate is much more along the lines of what I was expecting and I really like it even more if it becomes fart of their rehab fee.
I'll look for your PM and we can certainly talk by phone.
Hi Pyrrha -
I would separate inspection, rehab estimates, and rehab costs from one another.
The inspection is to help you decide whether you should buy the property at the contracted price. The inspector will give you a laundry list of issues some of which must be addressed before renting. Most of which, don't.
You really should already have a rehab estimate based upon your daughter's walk thru and agent input. Before you make an offer, you should have a good list of these repairs/maintenance items and your best guess at the cost.
If you were flipping and/or doing a significant rehab, then you might get contractor bids during due diligence. I don't do this because my estimates are pretty good.
Lastly, get the bids from handymen, electricians, etc. to get the work done. Sounds like you're going to lean a lot about this part as you build your list of contractors. Before asking for GCs, etc. you should get a handle on your rehab list some contractors are good at some things vs. others. I can help you with this.
Ask your agent to give you an estimated rent. Zillow/Craigslist are also pretty accurate.
Hope this is helpful.
Thank you @Rick Baggenstoss !
You are right when you say "You really should already have a rehab estimate based upon your daughter's walk thru and agent input. Before you make an offer, you should have a good list of these repairs/maintenance items and your best guess at the cost." the problem is that at this stage my daughter's eyes are not trained to spot things a professional can. I will ask the realtor, though.
I would really appreciate your help finding the handymen that can provide me with bids for the work to be done. I know there needs to be an air conditioner condenser unit replaced, I also need an electrician.
You are absolutely right about my learning a lot from this one. Whether I end up buying it or not, it already has been a great source of learning for me.
I though I was doing something by plugging numbers into the basic rules formulas, but the BP community has told me that's just the tip of the iceberg, so I have a lot of research to do as well as the contractors list to build and have no idea of how to find them.
Guess this is my case study.
I will add your suggestions to the growing TO DO list the BP experts have given me for this house.
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