Analyse and Advice my first Investment

San Jose, CA · Member since 2014 · 43 posts · 15 votes

I have been reading forums and blogs on BiggerPockets for over a month, and now I am almost ready to make my first investment. My goal for next five years is to generate passive income to cover my monthly expenses. With that context can you please review the numbers, give your feedback and advice.

This is an out of state investment, with a Turnkey provider. This a town home(with HOA) in Kansas City, MO. Would love to hear from experts/locals about the market too.

These are not the numbers from turnkey provider, they showed way more ROI than my numbers below.

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Brant Richardson

Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes

12y

Kansas City has a huge spectrum of properties. Whether this is a decent deal or not would be highly dependent on location. The numbers would look very similar to what I shoot for there except mine don't have an HOA fee. I look for a rent to purchase ratio of 1.5% which you have, but I would want better to cover the HOA. This gets hard to find as you get into better neighborhoods and is very easy to find in worse neighborhoods. Is it a single family 3/1 renting for 900 (preferable)or a cheap duplex 400-500 each unit?

What is the address? If you dont want to give the address, then when you look at this property up on Zillow what is the Zestimate, Zrent and Great schools ratings? Not that Zillow is highly accurate.

I have an awesome realtor in Kansas City who also runs rehabs and property management for out of state investors. Let me know if you want his contact info.

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Gautam Venkatesan
Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
12y
@Kiran R.

Since it is a townhome you may want to check if the HOA covers insurance. The only other expense you may want to add is the leasing fee to find a new tenant each year.
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Gautam Venkatesan
Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
12y
Where are you able to get 1% down loan?
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Walt Payne
Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
12y
@Kiran R. Something I have seen before and was just reminded by a thread I was reading concerns potential problems with FHA financing for some properties that have a HOA. I would check about that, it could limit sales potential. Not necessarily a deal breaker, but a potential issue.

Personally I avoid HOAs because they can be too unpredictable and political, but some have no problem with them. I dealt with a horrible once and it left a sour taste ever since.
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Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
Kansas City has a huge spectrum of properties. Whether this is a decent deal or not would be highly dependent on location. The numbers would look very similar to what I shoot for there except mine don't have an HOA fee. I look for a rent to purchase ratio of 1.5% which you have, but I would want better to cover the HOA. This gets hard to find as you get into better neighborhoods and is very easy to find in worse neighborhoods. Is it a single family 3/1 renting for 900 (preferable)or a cheap duplex 400-500 each unit?

What is the address? If you dont want to give the address, then when you look at this property up on Zillow what is the Zestimate, Zrent and Great schools ratings? Not that Zillow is highly accurate.

I have an awesome realtor in Kansas City who also runs rehabs and property management for out of state investors. Let me know if you want his contact info.
2 Reply
Shawn S.
Rental Property Investor · Kansas City MO · Member since 2013 · 147 posts · 9 votes
12y
Kansas City is where we are investing. I'm curious about the PM fee. 9 percent is not 45 per month if rent is 900. Am I missing something there? If there was no HOA this would be a doable deal. Because there is 110 per month I would avoid this one honestly.
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Kiran R.
OP
San Jose, CA · Member since 2014 · 43 posts · 15 votes
12y
Thank you Guys !!

@Gautam Venkatesan , I am glad you asked this. 1% financing is an option if I use my HELOC - I still have second thoughts about going that route. What do you think ?

@Walt Payne - yes I am also little wary of the HOA, I am still waiting to get the HOA documents and bylaws. I will review them thoroughly. Are there any signs of a bad HOA, which I should be looking for

@Brant Richardson , This is a 3/2.5 Single Family. The property is in 64133(is it called the Raytown ?). This is the first property where the Zestimate is higher than what the TK company has given. zestimate is around 80K. This got me to thinking why would the turnkey guys sell for less than the estiamte( or the zestimate is completely off the mark). zrent is $850. The schools are 6, 5, 5 for elementary, middle and high respectively.

I would love to get the contact info of the realtor. I will send you a pm.
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Kiran R.
OP
San Jose, CA · Member since 2014 · 43 posts · 15 votes
12y
@Shawn S. - Ah I got that wrong, its 5% for the current prop manager, but I wanted to check with 9%. Yes I need to cut down another $40 from the NOI.

I am also not a fan of the HOA. My decision is still contingent up on the HOA documents and bylaws. But on the other side I was thinking the HOA will be taking care of roof, exterior etc, which means I do not have to deal with any capital expenses for roof/exterior etc. Curious to know what you think about this. Any reasons why HOA is a deal breaker for you ?
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Walt Payne
Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
12y
Originally posted by @Kiran Reddy:

@Walt Payne - yes I am also little wary of the HOA, I am still waiting to get the HOA documents and bylaws. I will review them thoroughly. Are there any signs of a bad HOA, which I should be looking for

That is the problem. There are signs of a HOA that is bad, but one that isn't can quickly change. One new board member with an agenda can turn things from well managed and easy to deal with to a total nightmare. And the laws say they can pretty much do what they want. You buy to rent, they decide later that you can't ... you are screwed. They assess a high fee for some reason, you pay it. Can you tell that I am not a fan? Does it show?

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Walt Payne
Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
12y
Originally posted by @Kiran Reddy

I am also not a fan of the HOA. My decision is still contingent up on the HOA documents and bylaws. But on the other side I was thinking the HOA will be taking care of roof, exterior etc, which means I do not have to deal with any capital expenses for roof/exterior etc. Curious to know what you think about this.

Are you sure about that? HOAs can normally assess special fees for capex amounts that exceed budget, and you would be surprised how much those can be sometimes. Enough to turn that cash flowing property into a money pit. Not saying that will happen, but deferred maintenance can catch up with anyone.
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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
12y
Hi @Kiran R. I like Kansas City and Indianapolis a lot for cash flow and ROI. We do turn keys in both the markets. I can send you some information on the KC market if you'd like. Like most cities, there's good areas and bad areas in both so you need to be extremely careful and know the area well. A few things come to mind. First, like some of the other mentioned, I would avoid anything with HOA dues, HOA dues are deal killers in my opinion because they are unpredictable and you want to reduce unpredictability as much as possible. Maybe I'm missing something but when I do the calculations I get a 6.7% ROI on a cash purchase and a 7.4% cash on cash not the 7.15% and 8% you're showing. Even if you're numbers are right, that's not a good return for Kansas City. We do properties with 9% returns on SFR with no HOA. I don't see anything that interests me in this deal. If you want a 7% ROI, you're better off going to Houston or Dallas where you have more appreciation potential. Kansas City is a good cash flow market but this deal just doesn't have it, mostly because of the HOA dues which will only go up. Another big red flag is your comment that the turn key company is show way higher ROI than the numbers you're showing. I would be very careful of someone that is showing exaggerated returns which it looks like they might be doing here. If they're exaggerating the numbers, what else are they misrepresenting? I wouldn't won't work with people that aren't transparent. I know Kansas City well. Feel free to contact me if you'd like more advice or info.

Best wishes,

Mike
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Kiran R.
OP
San Jose, CA · Member since 2014 · 43 posts · 15 votes
12y
@Walt Payne - I am not sure about my assumption of HOA covering capital expenses. I hope I can figure out that info from their financial docs.

@Mike D'Arrigo - Thank you for the insights!! I think you and all the experienced folks here are cautioning about dealing with HOA. So I will tread very cautiously there and reconsider my decision.

When I said the numbers form Turnkey are higher than mine- its because I doubled the maintenance expense to 100/month when they have 50/month, and I added little bit more buffer to all the expenses including taxes. Thanks for offering to advice, I will definitely need it. I just noticed you are based in San Jose. Hope to meet you sometime
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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
12y
@Kiran R. I didn't even notice you were in San Jose too! Give me a call and I'll be happy to share my thoughts and ideas. We're selling turn-keys in Kansas City so I know the market well. You want to be very careful. There are very good areas and very bad areas like in a lot of markets.
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Kendall Chamberlain
Kansas City, MO · Member since 2012 · 16 posts · 1 vote
12y
kiran, shoot me an email. [email protected]

I lived in raytown a year ago.
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Pete Tam
CA · Member since 2013 · 221 posts · 30 votes
12y
@Kiran R. I've heard a bad story about HOA too and agree with these all experts too..
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Kiran R.
OP
San Jose, CA · Member since 2014 · 43 posts · 15 votes
12y
@Kendall Chamberlain , Thank you sent an email to you

@Pete Tam - wow there seems to be a very bad rep for HOA properties !!

Just curious if there are any good things about an investment property with an HOA
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Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
@Kiran R.

I am very skeptical of turnkey companies so I was expecting to tear your investment apart with this information but that was not the case. Schools of 6/5/5 are pretty good, I was expecting the 1-3 zone. 3/2.5 is better than I was expecting too. 900/mo sounds easy for a 3/2.5 in a decent area of Raytown, I was expecting it to be overinflated . Raytown and Independence are the areas I invest in too.

I use a little different numbers for expenses than you to calculate cash flow. 900 - 90 (10%vacancy) - 90 (10% maintenance) - 90 (10% property management) - 50 (insurance, 50-60 in my experience) - 125 (tax) - 260(P&I with 20% down) = 185. Which I would happy with... but then there was a HOA fee of 110. That brings cash flow down to 75. I would say this is a decent deal except the HOA ruins it.

HOA is a good thing for keeping the neighborhood looking nice. There are no couches in the front yards or kooky pink and green color schemes. HOA fees are often a deal breaker though
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Sharon Tzib
Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
12y
The thing about HOA's are, similar to health insurance, every year just like clockwork, you can expect an increase.
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Engelo RumoraBusiness Member
Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
@Kiran R.

Hi Kiran,

Raytown is very decent area. I wouldn't trust Zillow too much.

What you can do is whatever closest comparable sales you see on the Zillow map, take that address and go to the county website to confirm the sales price.

If you can find a few deals within close proximity of your target property that had a decent sale price within the last 6-12 months then this could be used as a value guide.

I have seen quite a fair bit of crazy prices especially in the lower end areas where it is very hard to predict the true value of s property.

For example: House A sold for $5,000 and house B across the road sold for $80,000 2 months earlier.

It gets more stable the higher class area you look into.

Thanks for reading and have a great day.
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Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
@Engelo Rumora

Would you mind sharing the website you use to confirm previous sale prices? My understanding was that MO was a non disclosure state and this information was not available to me.
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Eleena de Lisser
Rental Property Investor · Philadelphia, PA · Member since 2014 · 130 posts · 77 votes
12y
@Kiran R. If there's an HOA involved, run, don't walk, away. You'll live to regret it if you go through with it. HOAs are way too unpredictable as others upthread have already said. With an HOA there's always a chance that you could get hit with an unanticipated assessment out of the blue that would completely erode or significantly take a chunk out of your projected cash flow. And if that happens and you decide to sell, you may have to sell at a much lower price than you paid for the property in order to get any takers.
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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
The property may be great, and KC is a decent market, but I would expect (and require) a substantially higher return than what you show there. Reason being, there are other markets with notably higher returns for notably better properties (just judging based on purchase price) and ones with no HOA.

KC isn't a city expected to have significant growth/appreciation later, and the properties there are typically much older than a lot. Both of those are fine, but because of them I would require a higher return to make up for them. In my mind, the two ways to go are: 1. buy cheap older properties in not as nice areas but in return you get really high cash flow, or 2. buy nicer newer properties in good areas but with a little less cash flow. The cash flow you have here is what I would expect to see on the more expensive nicer property in an area with higher growth potential. See what I mean? This is an extremely low return for an older property in KC. In my opinion.
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Engelo RumoraBusiness Member
Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by @Brant Richardson:
@Engelo Rumora

Would you mind sharing the website you use to confirm previous sale prices? My understanding was that MO was a non disclosure state and this information was not available to me.

Hi Brant,

My apologies for the late reply.

Please see below:

http://www.jacksongov.org/

You can easily find out what the most recent sale price was.

Thanks and have a great day.
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Account Closed
Real Estate Investor · Kansas City, MO · Member since 2014 · 11 posts · 3 votes
12y
Unfortunately, Jackson County no longer logs sales prices of homes after August of 2012. The online search only provides sales prices from 2004-2012. I went to the courthouse hoping they would be able to help but apparently budget cuts have kept them from logging the sale prices into public record. Your best bet is to get in touch with a realtor who can pull comps for you.
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Pyrrha Rivers
Investor · Yokosuka, Japan · Member since 2014 · 631 posts · 184 votes
12y
@Kiran R. You sound a lot like I did a couple of weeks ago. I was so ready to get that first deal done that I made it look better to myself than what the experienced BP members said they saw. However, @Jon Holdman said to me " don't fall into the "gotta-do-a-deal-itius" syndrome. There will always be deals." His very straight forward tone helped me to take a closer look at what others had been clearly telling me all along and I decided to take their advice and wait for a better one. I'm back to the drawing board but I'm at peace with that decision and very grateful for their generosity. I think you will be glad if you listen to what they're saying. To me it sounds like the HOA makes this deal a no-go for those who actually know what they're doing.

Best wishes for success whatever you decide.
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Engelo RumoraBusiness Member
Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
12y
Originally posted by @Account Closed:
Unfortunately, Jackson County no longer logs sales prices of homes after August of 2012. The online search only provides sales prices from 2004-2012. I went to the courthouse hoping they would be able to help but apparently budget cuts have kept them from logging the sale prices into public record. Your best bet is to get in touch with a realtor who can pull comps for you.

That sucks

I didn't even realize lol

The previous sale price I normally like seeing is from before 2006 lollol

Those were some high figures back then.

Thanks and have a great day.
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