Rookie crunching data for possible 1st buy

[Matt McLeod]

Hey all. My wife and I are considering making an offer on the following SFH:

3/1 with 1340sq.ft listed at $64,900. Built in 1954. Its an estate sale by the only child of the deceased homeowner. Vacant for over a year; on and off the market since June of 2013. Decent neighborhood. Lots of seniors, blue collar folks and some college kids.

$4500 in DIY renovations estimated: drywall repairs for small mold & water spots; painting interior; ripping up carpet & installing hardwood laminate; ripping up vinyl & installing tile; replacing oven/stove, refrigerator, & dishwasher. Can live with roof and HVAC but will probably need attention w/in 5yrs. We plan on living in it the first year and then renting it out.

20% down for 30yr fixed at 4.3%

Estimate $850/mo. in rent. Median rent in area estimated at $750/mo. Upper end is around $1000/mo.

Estimated cap rate: 7%

Estimated annual cash flow with 10% PM factored in: $3263

What do the BPers think? Thanks!

[Rick H.]

I'm only guessing that Bob Bowling has thrown his hands up in the air by now.

I believe his point about CAP rates is that they are market-driven metrics and are not well-suited for SFR's. Relates more to what investors are willing to pay for a particular product type at a given time in a certain market.

Institutional investors rely heavily on the accuracy of the accounting and strength of management of a project and it makes sense where capital and ongoing expenses are spread over larger number of tenants. They want standardized information in order to compare investments. Much harder to do that with an SFR.

What hasn't been addressed is the intrinsic value that others place in SFR's that not typically found in real estate products built for and intended to to be investments (multi-unit res., commercial, industrial, etc.).

ROI is a good fit for measuring performance on 1-4 units. GRM (gross rent multiplier), maybe. However, I'm not going to use some seller's pro-forma CAP rate to decide if I'm going to buy a particular SFR.

Bottom-line investors don't have much tolerance for fluff. I think ROI fits the bill best for 1-4 units.