First Deal - Pulling the trigger too soon?

9 Replies

I have been considering finding my first property to rent long term (buy and hold).

I haven't spent long looking, however, I feel like I found a deal that fits just about every need I was wanting. My fear is that I am jumping the gun and lunging at the first good deal that appears....Also its odd to me that I could find something that fits my criteria so quickly, most people I have spoken to say that it could take months of searching to really find what you need....My second fear is that I just happened to stumble upon "my deal" of this year perhaps and if I don't act then i will regret it when I cannot find a comparable deal later....

Here are the details:

Chattanooga, TN - Decent market

The home is located in a popular and growing residential part of town, easy access to grocery (2 within 5 miles). Good schools and low crime rates. The home is located directly off of one of the most driven roads in the city and is passed by thousands of cars per day (which I look at as good for finding a renter as a sign in the yard should cover my "marketing" costs). I also see this as a negative due to the fact that it can be kind of noisy during rush hour.

The home was built in 1960 on a quarter acre. limited grass on the property but lots of trees that need some major cuts IMMEDIATELY, limbs just above power lines...If I bought this home I would have to have the tree cutting service already lined up and working the moment I signed the papers which I am ok with so that doesn't bother me.

The details that match my desired list - based upon what knowledge I have gained from bigger so far...

2 bedroom - less people to mess up the place, 1 bathroom - less repair costs, under 1,000 sq ft - not too big and not too small, good location, priced right - listed at right about $60,000 realtor thinks I could get it for $49,000, comes with all major appliances with exception of washer/dryer, tile kitchen, granite countertops, small outside enclosed/locked storage area for tools I can keep on site (separate keys), and a small little back porch with a nice view of the woods (property behind house is a few acres and no home right on top of it).

The tax value for the property is $70,000 with $25,000 going to the land - the remainder to the building. I don't know how to find Capitalization rates for the area...Suggestions?

The financial data: (being an accountant this matters the most).

Purchase price at $49,000 with 20% down conventional loan

Mortgage of $39,200 - estimated monthly outflow for debt-service $325

Realtor thinks I can get about $750 (more if I go section 8)

50% rule - $4,500 expenses

Gross income - $9,000

Expenses - $4,500

Debt Service (not including tax & insurance included in 50% rule) - $2,400 ($200/month)

NOI: $2,100 annual / $175 monthly or 4.3% capitalization

Cash on Cash ROI: 21.4% ($9,800 down).

Please analyze my financial data and situation and let me know if I am missing a major plot hole here because to me its a no-brainer.....

Thanks for your help =)

Tim, Sometimes you can find a great deal quickly, sometimes not. When I run your scenario in my projection calculator, I get about the same numbers. However, here are my assumptions and concerns for you:

1) I have not found a bank willing to lend less than $50k for a mortgage (30yr). I have been told that $50k is the minimum Fannie and Freddie will consider a mortgage. I have used commercial financing for all of my sub-$50k lending. These loans are 5-5-5 ARMs with current rates hovering around 5% w/ 20% - 25% down (depending on the bank).

2) Assumptions:
- $1,000/year taxes
- $400/year insurance
- Renter pays for ALL utilities and you're still getting $750/month (electricity, gas, water, sewer, etc; note: water/sewer may be a lien on your property regardless of who pays for it, meaning that if they don't pay, you lose the property).
-When I use for Chattanooga, $750/month looks reasonable for right downtown. If we move outside of downtown (Dodds Ave), the rent looks less stellar.

3) The way I understand the 50% rule is that 50% of your annual income goes to expenses, not the mortgage/interest payment. The mortgage/interest comes out of the remaining 50%. That being said, my calculator also spits out about $200/month in net cash.

4) Your total cash into the property is low. You should include your closing costs. Using local numbers, I'm at about $12,600 for total costs to close. Maybe not a huge deal, just remember all the cash that goes into these deals.

@Liam Goble thank you for pointing out a few details that remind me of some items I left out of my initial post....I have already received qualification with my lender of choice and they have agreed to lend the money with 20% down for a conventional loan... Property taxes are about $500 a year for this property. All utilities will be the responsibility of my tenant and i will request alerts for non-payment from the utility companies... We are requesting the seller pay the closing costs... This property has been on the market a considerable amount of time....The location is called east brainerd

The thing that would bother me (and I'm not you) is that its a 2/1. Resale for a 2/1 is much tougher (in my opinion) than a 'standard' 3/2.

That might explain why its been on the market so long.

Also does the property need any rehab, I don't see that in your numbers.


@Andy Collins thanks for your questions. Yes I believe its why its been on the market as long as it has. Resale does not bother me as I plan to keep this one long-term. Also, rehab consists of removing a few items at no cost and the trees at a small cost

Isn't your NOI "income - operating expenses", NOT including the debt service? If that's correct, by definition your capitalization rate should be 9.2% ???

Also, completely apart from the numbers, if your tenants have to pull out on to a busy road, it's going to be a problem... And not easily fixed.


We put in an offer on the house, $50k with seller paying $2k towards closing....another offer came in the same day and they offered more money BUT were going FHA (we offered conventional) ... they accepted our offer.

Agent says its because of lack of railing for outside steps and a few minor issues that would delay a FHA closing.

So now the mortgage is gonna be $304 including PITI and we think we can rent it for $750-800 per month and it will include a washer/dryer in the rental. We got a 1-year home warranty on the deal. Closing mid-april!

Grats! You will learn a lot, you seem to have a great handle on the numbers.

Thanks Charles I assume there is a learning curve here but I also assume knowing business I have an advantage

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