Thoughts on my first deal?

19 Replies

With the very helpful advice and feedback from folks here and on some of the members' websites, I've taken the plunge and purchased my first rental.

So thank you all for your help, both solicited, and unsolicited!

I'm curious to see what others think about the following deal:

- East Plano, TX 2 bed, 1.5 bath townhouse

- Walking distance to CVS, 7-11, an elementary school, and a middle school.

- List price $70k. Purchased at $63k. Comps are around $72k

- All cash purchase, so closing costs should be around $600

- Repairs should be under $3k (paint, carpet, drywall repairs)

- Rent should be around $950-$1050 (two PMs and a Realtor pulled existing rental amounts)

- Total monthly expenses $513:

$105 Taxes

$33 Insurance

$67 Vacancy (7%)

$48 Repairs (5%)

$95 PM (10%)

$165 HOA (includes water)

- Monthly cash flow should be around $437

Have I missed anything important? Thoughts? Comments?

@Account Closed - Hi Rick - Why did you do an all cash deal rather than use leverage?

Congrats on your first close! I hope it goes well for you.

Bill Schrimpf, Real Estate Agent in NV (#11844)
(775) 313-0778
Originally posted by @Bill Schrimpf :
@Rick Reed - Hi Rick - Why did you do an all cash deal rather than use leverage?

Congrats on your first close! I hope it goes well for you.

Perhaps a bit of skewed perception, but here it is...

- I see interest on a mortgage as money lost. That means if I pay cash, all cash flow is ROI. With a mortgage, only the principle portion of the monthly mortgage payment is ROI. You never really get the principle payment back.

- If the goal is to pay off a mortgage as quickly as possible, why even borrow if you don't have to?

- I wanted as much buffer in my monthly expenses as possible since I'm just starting out.

- I can build my cash reserves for repairs and vacancies much quicker.

- Is it even possible to get a mortgage for $47,250 (purchase price - 25% down)?

- I saved a few $k in closing costs.

- Leverage for a better deal. The seller was motivated and wanted out. I could close faster and without any concerns of funding the transaction.

- Immediate equity that I can borrow against if need be.


One could very well argue that I tied up a lot of cash that could have otherwise been used for a down payment on another property. But I have plenty of time and a lot of learning before I jump into another property.

Updated over 1 year ago

What I meant to say: - I see interest on a mortgage as money lost. That means if I pay cash, all cash flow is ROI. With a mortgage, only the principle portion of the monthly mortgage payment is ROI. You never really get the INTEREST payment back.

Updated almost 4 years ago

What I meant to say: - I see interest on a mortgage as money lost. That means if I pay cash, all cash flow is ROI. With a mortgage, only the principle portion of the monthly mortgage payment is ROI. You never really get the INTEREST payment back.

A couple of thoughts -

I have heard that repairs should be estimated at 10% and vacancy should be 10%. Also, I have heard on the BP Podcasts that you should be able to cash flow if you assumed that you financed the whole purchase price.

In this case, your additional vacancy will be $28 and the additional repairs will be $47. If you financed the whole purchase price, your payment would be $435. This is an additional $510 per month which would give you a negative cash flow of $73. Also, I see that you have HOA fees so you have to be prepared for special assessments which will add to your costs.

Good to see you take action. I hope you look at leveraging your deal the next time so you get a higher rate of return on your cash. Right now you are getting less than 10% on your cash.

Tom

@Thomas Guertin Can you elaborate on the HOA special assessments?

Yes, my return is under 9%, but I can't think of any other investment today that provides that nice of a monthly return, plus tax deduction, plus appreciation, plus potential increases (from rent increases). I plan on keeping this property for at least 20 years, so inflation should be on my side. It's also near impossible to find good cash flowing properties in the area that do not require a lot of rehab; something I'm not ready to tackle.

This property is really just a dipping of toes into the water so I can get that first one under my belt and do some (fairly safe) learning.

Yes, my next property should be mortgaged, if for no other reason than I simply don't have that kind of cash. My long term goal is to have a mix of cash and leveraged properties. I want a somewhat balanced portfolio.

Originally posted by @Tom Keith:
@Rick Reed Congratulations on Your First! Any photos to show off?

Thank you!

Pics from the posting:

Back patio and storage room:

Community Pool:

If these are the ones I am thinking of, I used to Live there. We enjoyed our time there. Hope it works well for you. There was never any issues keeping them rented when I lived there. Congrats on taking the plunge!

I am not talking from experience but I have heard that if the property needs a new roof, they assess everyone a special fee to pay for the new roof. That is one example but I have heard others as well but I don't want to mis-speak. I don't know if they assess for repaving, sewer repairs, pool repairs, etc. It doesn't look like it needs it now but you need to save for when it happens in 7-10 years.

Tom

Hey @Account Closed glad you at least took action.....you got much further than many.

As per our previous conversations, you know we disagree on leverage vs cash but that looks like a really nice little rental and I'm truly happy for you!

Hit me up for lunch soon. I'm in Plano M-F 9-5.

congratulations on your first deal. I recommend you checkout Ben Leybovitch's video on leverage. It is truly eye opening. I have six rentals now and have used zero of my own money on the last three. Actually I did pay closing costs but that's it. Look for private money, it's all around you.

I appreciate everyone's feedback. It was a bit nerve racking to take the plunge, but with the help of folks here I was able to do so with much more confidence than I would have been able to do without BP.

@Shawn Thom It's near Jupiter & Park.

@Joe Butcher I'll be in touch.

@Ronnie Sparrow Do you have any concerns about being over leveraged?

The hardest step is to actually buy that first property, and you've done that, so it gets easier from here (note I didn't say easy).

You can still finance that property within 6 months of buying it, so I would remember this is an option (find a mortgage broker that deals with investors).

If your wanting to add properties very slowly, buying with cash is an option, but if your wanting to move things along quicker, you will need to use leverage (unless you have an extra $50k or so a month coming in).

Leverage isn't a bad thing if done in moderation and for a property that makes you money. Getting a loan for 80% of what you paid for the property will free up some cash for your next property, but to leverage or not is a personal decision, but make sure you investigate,,or you might kick yourself later.

andy

Hey Rick, congrats on taking the first plunge and getting your " toes" wet.

Best of luck to you!!

@Rick Reed

100% of foreclosures are from homes with mortgages on them, so you've eliminated that risk.

Rick, forgive me but I am not sure I understand what being over leveraged is. Can you explain that one to me?

Originally posted by @Ronnie Sparrow :
Rick, forgive me but I am not sure I understand what being over leveraged is. Can you explain that one to me?

I'm no expert on the topic, nor do I have a background in finance, so my explanation may be a bit weak.

Basically, over leveraging is when a company/individual takes on too much debt. At some point, that debt becomes impossible to make payments on in the event of an unplanned circumstance.

Think of all the folks who finnanced too much for their over valued houses before 2008, using interest only mortgages because they couldn't afford a conventional mortgage. Then borrowed against the false equity for improvements. Most of those folks were probably close to living paycheck to paycheck just to pay debts with the assumptions of never losing income and equity always rising so they could refi later. They overleveraged.

In a rental situation with every property being 100% financed, if a few properties are vacant at the same time, and rent prices drop a bit, one would have no liquidity to help pay the mortgages. What does one do in such a scenario? One has nothing to borrow against because one owns nothing. One may not even be able to get any loans at all because of all the debt already in place. So in a situation like this, one would not be able to borrow to pay back the already borrowed money because one is already overleveraged.

Don't take my examples as gospel. It may be of benefit to research the topic for a deeper understanding.

congratulations rick! Looking forward to a possible partnership in the future, and if you ever need any home repair advice please don't hesitate.

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