1st deal, need some advice

11 Replies

Hello and thank you for reading this post.

My wife and I are about to make our first deal. However, I want to run it by a few people of the Real Estate world, to get your opinions.

We have found a 2 bedroom, 2 bath, with a 2 car garage. It is in a nice area, more of a retirement neighborhood.

The list price is $130,000, the taxes are $1311, and we will rent it for $850 or $875 and we already have a renter.

The house has been recently remodeled, with a newer A/C unit, still waiting to hear back about the age of the roof.

The Realtor told my wife that there is an offer on this property, but that she could put it under contract with some earnest money. The houses in this neighborhood do not sit on the market for long. I work out of town, so I am ultimately buying this property sight unseen. However, my wife went and looked at the property and says that it does look nice and that there was not a lot she could find wrong with it, to use for negotiating. We would of course have a contractor and inspector perform the walk through before we closed.

Here are the numbers on the pre-approval loan that I have received from another outstanding BP member/ Loan officer.

Purchase price $130000

Loan amount $104000

Interest rate 5.00%

PI payment - $556

PITI payment - $717

Rent $850 to $875

This deal does not seem to meet the %50 Rule, but I know it is just a good guideline.

The numbers do not look promising, however I am hoping because things are newly renovated and our Tenant is my Mother-in-law. She has a steady job and has taken very good care of her past rental properties. I know renting to family is frowned upon, but I am not looking for advice on that subject. She is my mother-in-law and I want to make sure she is taken care of. We are still running her through the pre screening process and she will still be held accountable for the property and her rent.

I am in Tulsa Oklahoma and a lot of our properties have not met these " Rules of thumb" yet, so I am asking for some advice on this deal.

Thank you guys in advance for any helpful advice you can lend.

@ Anthony Hill - What do you see as the benefits of this property/scenario vs others? Why is it attractive to you?

How many others have you looked at?

What are your goals?

What criteria have you established for your business?

Do you have a disaster recovery plan (and I don't mean natural disasters - but you should have one of those too!)

There's a reason seasoned professional advise not to rent to family. It's only advice, I understand. At the same time, you're only on your first deal and as good intentions as you may have, "you don't know what you don't know". It may be that unforeseen things happen and you don't (can't) live up to her expectations.

My first question would be the rent amount. Is that amount to accommodate your mother-in-law, or is that market rate for that property? The accommodation factor, if it exists, would make it more attractive as an investment.

Second, a 2/2 is not ideal, I would check to see if a garage pays more than additional bedrooms. I personally find garages for houses that are rented are a negative as a landlord. Flammable storage, junk, and just a pita in general. If you could convert it to a 3/2 or evena4/2 while she lives there, that would be a plus. Again, I would check local rental rates, but especially 4/2 generally are gold. They are hard to find, and easy to rent. Tenants also know how hard they are, so long term is more likely.

Third, is this a great house, or did your wife find a great house for her mother? Neither answer is wrong, but may matter as far as the value as an investment.

Fourth, is it at least a neighborhood where there has been good appreciation historically? Does the outlook indicate it will appreciate over time no matter what the market does? Can you afford to hold it until the right time?

And finally, do the positive aspects balance the negative cash flow? I would normally never consider a negative cash flow property, but in spite of other's advise about family I know there are times when you need to balance family obligations and needs against your own goals. My brother lives in one of my properties to allow him to take care of our mother, and I have no regrets there.

@Anthony Hill  

To answer your question I do not think this is a good deal at all. PITI is $717 and your top end rent is $875 so that leaves a difference of $160 or so. With your monthly expenses did you factor vacancy in it (I guess not since you are renting it to a family memeber), repairs that will be needed at some point, on going maintenance needed, etc. I would take at least 20% a month and apply it to the maintenance and unknowns. So if you do that as someone mentioned you won't be cashing flowing positively on this deal.

So I guess the question to ask are you buying a nice house to help out a family member or are you looking for a good deal.  If you are looking for a good deal then this isn't it.   If you are helping out your mother in law with a house that she will like and you are willing to negatively cash flow on it (or best case break even).   That's an question you have to answer for yourself but I personally wouldn't put $26k down (plus whatever other closing costs)  and negatively cash flow to help out my mother-in-law.   

Originally posted by @Dave D. :
@ Anthony Hill - What do you see as the benefits of this property/scenario vs others? Why is it attractive to you?

How many others have you looked at?

What are your goals?

What criteria have you established for your business?

Do you have a disaster recovery plan (and I don't mean natural disasters - but you should have one of those too!)

There's a reason seasoned professional advise not to rent to family. It's only advice, I understand. At the same time, you're only on your first deal and as good intentions as you may have, "you don't know what you don't know". It may be that unforeseen things happen and you don't (can't) live up to her expectations.

The main benefit would be that this would let us get our feet wet in real estate with a reliable tenant that is understanding about the fact that we are new to this. It is also an appreciating area and a very desired area.

I have looked a dozens others, just not in this area, although it is not too far from where we were first looking.

Our goal is to become established Landlords.

my disaster plan would be to flip, but I would make much of a profit, if any, so I don't have a good disaster plan.

Not sure about the criteria part, just looking for good cash flow properties around the $100k mark, so that I could gain equity and pay the houses off completely and then maybe leverage them later on if needed.

It's looking like this deal may not be a good deal, at least for a starter deal.

I appreciate your input on this deal though, thank you very much for your time.

Originally posted by @Walt Payne :
My first question would be the rent amount. Is that amount to accommodate your mother-in-law, or is that market rate for that property? The accommodation factor, if it exists, would make it more attractive as an investment.

Second, a 2/2 is not ideal, I would check to see if a garage pays more than additional bedrooms. I personally find garages for houses that are rented are a negative as a landlord. Flammable storage, junk, and just a pita in general. If you could convert it to a 3/2 or evena4/2 while she lives there, that would be a plus. Again, I would check local rental rates, but especially 4/2 generally are gold. They are hard to find, and easy to rent. Tenants also know how hard they are, so long term is more likely.

Third, is this a great house, or did your wife find a great house for her mother? Neither answer is wrong, but may matter as far as the value as an investment.

Fourth, is it at least a neighborhood where there has been good appreciation historically? Does the outlook indicate it will appreciate over time no matter what the market does? Can you afford to hold it until the right time?

And finally, do the positive aspects balance the negative cash flow? I would normally never consider a negative cash flow property, but in spite of other's advise about family I know there are times when you need to balance family obligations and needs against your own goals. My brother lives in one of my properties to allow him to take care of our mother, and I have no regrets there.

@Anthony Hill

That rent is equivalent to the rent she is paying now, she lives a few doors down with the same floor plan. However, most of these units rent for the $900 to $950 range. We were wanting to keep her rent the same to help her out financially.

As far as doing away with the garage, Her mother loves her garage so that would not be in our plans.

My mother-in-law suggested to property because she lives in the area and saw it for sale and knew we were looking for our first deal, she suggested being our tenant and allowing us to learn about the business before renting to one of these "Professional Tenants". I have read enough horror stories and it has me concerned, I know those situations are rare, but they still can happen, and I seem to have the worst luck like that.

The neighborhood does have good appreciation value.

I want to help her out but it just would not be wise to do this one, at least not as our first deal.

Thank you for your advice on this deal though.

Originally posted by Account Closed:
To answer your question I do not think this is a good deal at all. PITI is $717 and your top end rent is $875 so that leaves a difference of $160 or so. With your monthly expenses did you factor vacancy in it (I guess not since you are renting it to a family memeber), repairs that will be needed at some point, on going maintenance needed, etc. I would take at least 20% a month and apply it to the maintenance and unknowns. So if you do that as someone mentioned you won't be cashing flowing positively on this deal.

So I guess the question to ask are you buying a nice house to help out a family member or are you looking for a good deal. If you are looking for a good deal then this isn't it. If you are helping out your mother in law with a house that she will like and you are willing to negatively cash flow on it (or best case break even). That's an question you have to answer for yourself but I personally wouldn't put $26k down (plus whatever other closing costs) and negatively cash flow to help out my mother-in-law.

Your correct, I did not figure in vacancy because of already having a tenant, but it would still be good to factor that in there because 'Ya never know', situations changes and we could lose her a a tenant. Stepping back and looking at if, you make a good point, I think I am more concerned about helping her out, and not tosay I can't do that later on, but if I screw things up, right here at the start, I won't be able to help her out at all later on if needed. So I think I will hold off on this deal.

Thank you for your reply though.

Anthony I think that's a good idea.   It's hard when giving ppl advice about their family as all situations are different but as you stated you can't help someone else if it's putting you in a bad situation.  Ideally the house will never need any repair,  your mother in law will live there for a long time and all that but very rarely do things happen exactly how you envision it.  So you always need a contingency account to factor for unforseen expenses and situations. 

If you want to do it for your mother-in-law, good for you, go for it. If you want to maximize your return on investment and learn real estate, I don't see that in this deal. For $100-$130K you could buy 2 or maybe three houses that would cash-flow your socks off. Our last SFR was $58K for a 4/2 and rents for $975.00. In a desirable neighborhood. In Oklahoma City.

@Anthony Hill  

Some things you will want to consider, is this an investment or a favor to your mother in law?

If this is a favor to your mother in law then you will need to decide what level of favor you are willing to provide.

If this is an investment then you need to not look at this property unless you feel there will be significant appreciation over the years to offset the money you will continue to put into this property to keep it cash flow neutral.

Some things to consider with the investor glasses on and not the family ones:

Gross rents/income: 10,500

Vacancy: (630) generally 6% of Gross rents

Gross operating income: 9,870

Expenses-

PITI: (8604) or (717) x 12 (you might want to break this up into the individual components so you can see what each piece is really costing you to identify potential savings also you want to remove the PI payment out of this as it is not an expense and should be taken into account after you get your Net Operating Income (NOI).

This is the only expense chunkyou list out currently but there are so many others if this is truly an investment:

Property management: (1050) generally this is 10% of Gross Rents and even if you are managing it yourself you need to account for it to see if the deal would stand on its own.

Repairs and Maintenance: without knowing if there is an HoA in your PITI there are bound to be small things that need to be replaced over time, think appliances, fixtures both electrical and plumbing. It may be a freshly remodeled property but you need to set something aside for when the inevitable will happen.

Reserves: (This is for major repairs, think roof, A/C, Electrical panel... Major items, again this is something you need to set as part of your monthly/yearly expense to account for what will happen eventually so you don’t have to come up with 5-7k when you need a new roof 10 years down the road.

Lawn Care: again not sure if this is in your PITI

Trash Removal: see above

Utilities: I am assuming you are having the mother in-law pay all these but would it change if you had a tenant that wasn't family?

Without knowing what all of the items are for cost I will use the 50% rule to ball park

Expenses: (5,250) roughly a year

NOI: 4,620

Debt Service: (6,672)

Cash flow: (2,052) per year or (171) per month. Now this is an overtime figure some years you might not lose any money but other years when a major repair needs to happen you will lose a lot. The 50% rule tries to account for all of the ups and downs so you can better analyze an investment over the long run.

Now if you could swing 100% cash on the deal meaning no mortgage payment you would be looking at a cash flow of 4,620 per year or about 3.55% cash on cash return if the seller covered all closing costs and you only had the 130,000 as the amount you would be out of pocket.

I hope this helps, there are a ton of deal analysis spreadsheets all over the forums, I would recommend finding a couple and rethinking some of the math so you can better understand and screen out properties faster.

FYI on this property my calculations have this property needing to rent at 1,183 per month in order to be cash flow neutral when operating under the 50% rule. Or you would need to purchase the property in the 95k - 97k range in order to be cash flow neutral at 875 per month in rent.

I agree. With everything you've posted its obvious you are squandering the potential profitability of the property because you want to take care of your mother-in-law. While this is not a bad thing, you always need to establish the lines between business and family. Think about it this way, you could focus on charity and helping your family now when you are just a newbie, or you could focus on your investing and help them a lot more when you have the money a full fledged investor does. I tend to hold to the warren buffet philosophy of charity, which is i will invest now to give away later, thus increasing the amount i can give away.

@Anthony Hill

Like several others in this thread, I would not buy that property.

You would be much better off buying a $130,000 property that rents for $1,250 a month (easily attainable in OKC, if not Tulsa) and giving your mother-in-law $150 a month to subsidize her rent. You end up with $300 more a month in your pocket, and you never have to evict your mother-in-law if she quits paying.

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