Buy & Hold?

Question

Hello once again.

I found a SFH, that might be something i might be interested in for my first deal. Would you mind please sharing with me your thoughts on this?

I don;t see it as a big win, but this could potentially be my first deal.

Here are the numbers:

Asking price - 199,900
	$20k down payment

Closing costs $2500

Prop Tax / Insurance / Utilities are approx $600 Month

Mortgage payment - $895.00

Currently rented for $2500/mo

Doesn't require any immediate repairs so i have repairs listed as $5k

Holding costs 0.00

Interest rate 4.5% over 30 yrs

I see $1,000 a month in positive cash flow after mortgage and expenses.

Am i missing something? Is there more to this that i am not thinking about?

Any and all input is appreciated.

Dave

Sam B. · Answer

Account Closed I'm only seeing about $400 monthly cash flow using the 50% rule, not sure where you're getting 1k.  Still, if you're able to get away with this with only putting 20k down + 2.5k in closing, your cash on cash return is still North of 20%, not a bad deal.

Account Closed · Answer

Thank you everyone for the advice. I will pass on this one based on the feedback i received here. The search continues!

@Brenton Kasselder - Thank you for pointing that out. I have actually read a few of those 50% articles, and thought i was covering my bases. I guess i still have more reading and understanding to do.

@Chris P. - Thanks for sharing. I will keep looking for better properties.

Bill Jacobsen · Answer

I like to earn 3 or more percentage points above my cost of money.  Even when I adjust some of your numbers they are still more than 3 points above your cost of 4.5%.

Good Luck.

Bill

Account Closed · Answer

@Jason Crain  - I don't know the current state with the existing tenants. I haven't gotten that far yet. That's my next step. I believe $2500 for the area is about right for this type of SFH, but i need to investigate that a little more.

@Brant Richardson - Utilities are paid by the tenant, and so it's just taxes and insurance.

Thanks for the responses everyone, I will look deeper into this as it seems like it's worth it. I'll keep this post updated as I move along.

Chris P. · Answer

I usually tell everyone i mentor that they should not get into rental, or Buy and Hold, until they have $25k plus in the bank (which you have) and have experience finding a deal.  A REAL Deal.  Based on what you're saying this seems like a high end rental and here's my biggest concern.  When and if this house goes vacant how many months of cash flow do you loose for every month of vacancy?  Backing out 10% vacancy and 10% repairs on a year by year basis leaves you with $500 per month in cash flow.  So for every single month of vacancy, you loose 3 months of cash flow.  This is a LOT of potential down side...  I bought my last rental for 32x rent at $23,000, put down 10% and and my pay back is 10 years and I still cash flow $200-300+ per month.  When it goes vacant i only have $400 out of pocket on the payment so it only costs me 1-2 months of cash flow.  $1,500 is a big payment is you will BLEED when it goes vacant.  I would pass and look for a cheaper house if possible...

Brant Richardson · Answer

Property tax/utilities/insurance = $600.  Sounds too low.
10% of rent for maintenance.
10% of rent for vancy.

Jason C. · Answer

How long is the current lease? Will you be able to quickly find tenants to fill  vacancies? I ask because in my area, $2,500 is high for an average rental, and it would be slow to fill. But I am not familiar with your area.