Hello BP community!!!!
Several hours ago I viewed a property with my realtor and was very excited about the property potentially being my first- that was until I started crunching numbers. I sure hope my cash flow calculation is incorrect. Please help! And keep in mind this property is in Houston - 2% rule is RARE
Here are the numbers:
Potential Purchase Price: $99,000
Cash to close (downpayment plus closing costs): $19,800 + $5,900 = $25,700
Mortgage: $401/month = $4,812/year
$1200/month = $14,400/year
vacancy rate (10%)= $120/month = $1,440/year
net income = $12,960
Property taxes = $1853/year
Insurance (complete guess): $1380/year
Property management (though I plan to self manage): $1,400/year
Maintenance & repairs: $1,400/year
HOA dues: $411
Total expenses: $6,524
NOI = $12,960 - $6,524 = $6,436
Cash flow = $6,436 - $4812 = $1624 (???)
Cap rate = $6436 / $99,000= 6.5%
***So this translates to only pocketing $1624/ year - more if I self manage and repairs are less than I budget for?
I am trying to figure out if I should make an offer. There are 4 other offers as of today and the home has been back on the market for 2 days. I want to make a smart decision based on the numbers and not on the number of offers.
Thank you for your help!!
Those numbers look correct.
I imagine this is a turn key home ready to rent and it seems like a fair deal. You are buying a property from a Realtor so that means fair market retail price. You want better numbers you will most likely need to look for distressed homes or off market home sellers that just want to sell with out the hassles of listing a home.
If your plan is buy and hold and you have a day job or business and want long term investments then this seems like a great start.
Don't forget you are paying down a mortgage, getting tax write offs, and locking in an exceptional interest rate.
The numbers look good. Make sure you look at the taxes for previous years and if you are buying an owner occupied property your taxes are going to be higher because most likely they have Homestead Exemption.
Good luck and let us know the outcome if you decide to put an offer.
Thank you SO much guys for your responses!
@Patrick Parry - the property is pretty much turn key. Only needs a little paint. It's in really good condition. Perhaps I will try working with wholesalers on my next transaction. I am definitely thinking long term and I do have a great day job.
@Dennis Rodriguez - Thanks for the reassurance and suggestions. I took a look at the Fort Bend County appraisal records for previous years and it looks like the owner did not claim any exemptions, however I chose to use the most recent appraisal rate and calculate taxes based on the current rate.
@Denise Mayo-Walley Call insurance company and get a quote, Also make sure it is not in a flood zone.
Good luck keep us updated
@Denise Mayo-Walley Hey Denise, just curious what all you're including in your closing costs calculation.
And as for the deal itself, it seems okay. Nothing spectacular from my point of view, but absolutely better than sitting on the sidelines.
Best of luck if you choose to pursue it!
Hello @Lyall Storandt - for the closing cost I used the Bank of America closing cost calculator. I am actually using a BOA 30 year 20% down mortgage. I do plan on speaking with them and getting a more accurate estimate of closing costs. Their breakdown included the following:
- BOA fees $1523
- Third party fees $2728
- Estimate prepaids and insurance $898
- Estimated escrow account funds $722
After seeing so many homes fly off the market and also not having an offer submitted over others, I may have to be willing to accept less than spectacular offers. I know that purchasing a home requiring work would result in better cash flow but I really do not want to jump into rehabbing for my first purchase.
Any thoughts about the closing costs?
@Denise Mayo-Walley Got ya. I don't deal with retail transactions much, but I have heard (and seen) those transactions have closing costs in the neighborhood of 4% of purchase price but it really all depends on the lender and what types of fees you're being charged there. If you're using BoA, then you're probably on the right track by using their estimates.
Also, one thing to keep in mind is that if you're buying in the right area, you're going to benefit from the property value appreciating over time as well.
If you do move forward, keep us posted on your progress!
Hello Dennis. Quick question. About how much higher are the taxes if we are purchases for ourselves initially(Owner Occupied?
Also, would you be able to add some input on a very recent post I had about property taxes?
I'm also a new investor in Fort Bend county.
Some if the issues you're experiencing, we have also experienced. Several offers using the 70% rule has gotten us zero purchases.
We've tried several markets in Houston to try find a market where the BP calculators actually ar workable. With the exception of FSBO, we're finding that the 70% rule is averaging closer to 80-85% ARV. There are a lot of people active in the area.
For rentals, it appears an investor is going to have several rental properties to reach a cash flow level to support a normal income level. You are still employed so build your portfolio over time.
If you would like to discuss further, feel free to contact me for our experiences the past 5 months.
First of all, if it were my money I would do this deal.
Couple things to consider. The prepaids and insurance in your closing costs might be double counting property taxes and insurance you already estimated for the first year (if you are escrowing).
I think your insurance guess is high. Depends on age of home and county. Galveston is the worst from a rating standpoint and Harris is bad too. Is till think it's high for a $99k home with a $80k mortgage especially if you are insuring the $80k vs the $99k.
Lastly, if you add back the $1400 for property mgmt you are at $3000 in cash flow which is $250/month. If your insurance is high you may be closer to $300/month.
Anyway, again if my money I'd be closing the deal.
Good luck to you.
I did not see an ARV for his property.
However, the 70% rule will work if you found the deal as a wholesaler. This is the holy grail!
We don't know who he purchased from, but the MLS you definitely will not get 70%
Run the numbers like this guy did and see what your cap rate is, and GRM, and the cash-on-cash is key here. This is my determining factor. I like to see a min of 15% COC.
Those numbers look good to me. Like people said, it's not a bad deal, but not great.
Why did you choose to use cap rate instead of cash on cash return? Interestingly enough your CoC is 6.3% (1624/25700).
I thought I saw you mention that the property only needed paint, but I couldn't find that on second glance. Are there any repairs or make ready required?
You budgeted $1400 for repairs and maintenance, but that could easily get exceeded if you need to do a make ready a year from purchase or if a major expense comes up (water heater, roof, AC). Is everything else fairly new? If so, then I would say that's a fair estimate.
Final note, you could probably bump up your CoC by lowering mgmt costs. I used to have a mgmt co at $120/month and for the lackluster service I was getting, I was paying too much. You're estimating at $116 a month.
Speak with @Jerry Ta about property management if you choose not to self manage.
But make the offer if you're comfortable with it! You gotta start somewhere.
Oh and 2% exists in Houston, you just gotta go to the low income areas.
Gross Rent Multiplier > $99,000 / $14,400 = 6.875 (the lower the better) <8
Gross Rent = 1200/mo
Property Tax = 154.41/mo
Insurance = 115.00/mo
HOA = 34.25/mo
P.M. = 116.66/mo
Vac. 7% = 84.00/mo
Maint 5% = 60.00/mo
Total = $564.32/mo
NOI > $1200-$564= $636.00/mo
CAP Rate > $7632.00 / $99,000.00 = 7.71% (the higher the better)
Cash on Cash > $7,632.00-$4,812.00 / $25,700.00 = 10.97%
Hi @Denise Mayo-Walley I too agree that the numbers look good, but the cash flow is tight. I would ask the Realtor one other question if you haven't already done so. I'm not sure what was used to estimate the rental income, but I would want to know if the house was listed as a rental previously and if so what was the rental list price to ensure I have a good estimate for rental income.
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