Possible First Deal

6 Replies

For those who don't know, I joined BP yesterday, and have only even considered REI in the last week or so.

So, I was thinking of starting with something I can play around with that wouldn't hurt too bad if I really screw something up.

Here's what I found:

2BR/1BA for $32500 ~850sqft, I'm thinking of offering $26k

I drove over there and peeked in the windows and it seems well maintained with nice windows, bath(what I could see) and carpets, also the roof and siding looks good to me.

There was an apartment down the street, that looked about the same size, with a rental sign out front that said $450/mo.

I found it on HomePath.com and they say I can get it for 5% down. Is that right?

Ok, so here are some rough numbers I've calculated. (I hope I'm doing this right)

Rent: $450

50% rule: $225

Down Payment: $1625

Closing Costs: $3000? (I'm not sure how to calculate this, but the last time I refinanced my own house it was about that much).

P&I for 30yrs at 5% would be $191

Out of pocket: $4300? (Not sure if I'm missing something obvious)

Cash Flow: $69.30 / month (low, i know)

Cash over cash: $832 / $4300 = 19%

Did I do that right?

Thanks for helping me figure this stuff out!


If you can get a 5% down loan you will be looking at a PMI charge of some sort. The higher LTV combined with the higher loan costs (from the PMI) will cut into your returns.

Small loans like this are hard to get, too. Many lenders have a $50K minimum. If you do find a lender, the fixed fees (appraisals, underwriting fees, etc.) will increase your costs, as a percentage.

Not sure how you got $69.30 a month in cash flow. $225 - $191 is $34 a month, $408 a year. With your estimated $4625 (not sure where $4300 came from) investment that's 8.8% cash on cash return. That's not bad, but you would need 300 deals like this to reach your $10K/month goal.

A more realistic evaluation assumes a 20% down, 30 year fixed rate loan. For that I get:

Price $32,500

down: $6500

payment $140

Rent: $450

NOI: $225

Cash flow: $85/month, $1025/year

Cash on cash: 16%

I'm ignoring closing costs. $3000 seems high, but $2000 may be realistic. That's still a 12% cash on cash return. And you need only (ha!) 117 deals like this to hit your goal.

You may want to look at higher priced places with higher rents.

Also, as you try to ramp up your business you may want to do the PM job yourself. PMs here charge 10% of collected rent plus half a month to a full month to fill a vacancy. You can earn that for yourself if you take on that job.

I wouldn't recommend purchasing a single family home that only rents for $450 per month as you will generally exceed the 50% rule. A roof on an 850 sqft house costs the same whether it rents for $450 or $1200. Same with paint, a water heater, HVAC, etc. If you replace the roof on that house that's going to cost almost a full year's rent. When a tenant moves out and the property is in "fair" condition you might have $1,500 in make ready expenses and you'll probably only have a security deposit of ~$450.

In my opinion there's just too little cash flow in that deal to have the risk that comes with low rent properties.

@Jon Holdman Great analysis. I see my mistake in the calculations. Thanks so much. And It's good to know what's too small.

@Patrick L. This is a great point. Thanks! I'll now be looking for something with higher rent.

You should be aware that the 5% down is for owner occupants- you can get homepath financing for investments (they also have a product that will allow you to roll some rehab cost into the loan) but that requires 10% down. Still a good deal, compared to the 20% down that is more common.

Generally, a house will rent for at least a bit more than a similarly sized apartment. Lots of variables there though. Research rents for your area on craigslist, rentmetrics.com, trulia, etc

I would suggest doing a little more homework on rent rates in that area then just taking what the sign said as gospel.

Get on rentometer.com and it will give you an idea of what houses have rented for in the past.

Also you can use zillow, hotpads and craigslist to find out what people are currently asking for rent today.

@Sam Washburn Welcome to BP!

As you see this is a great site where experienced investors are always willing to generously give of their time and share their talents to help others out. Do yourself a favor and keep asking questions and learning as much as you can.

Much success in your endeavors!