I think I found my first deal!

7 Replies

I think I found my first deal in Kingwood (Houston area).  Long story short:

An old friend of a friend bought this house in 2007.  Lived there for a couple of years got married and moved.  He paid $124,000, tried to sell it in 2010 ish for $117,000 but couldn't.  So he gets a management company and ends up renting it out for $1300 per month.  He makes good money at his job pushing 200K so he's not interested in the rental property business.  So I go out last night and have a few beers with him and some others and I mention that I'm looking at buying rental property and ask how his is going.  He immediately says he will sell his for $117 and jokes about a "verbal contract".  I tell him I am very interested and will run some numbers and get back to him.  I also mention that we can keep realtors out of it to save him %6.  

Here is what I can tell about the property.  1700 sq ft 3 bedroom 2 bath.  built 1980.  Tax appraisal for 2014 is 117,500.  There are currently only 2 active homes in Kingwood listed for less than $120,000. I'm hoping some kingwood investors here can give me some incite. I grew up there but haven't kept up with the area the last 15 years.  This house is in the older section but kingwood schools/neighborhoods are high ranking.  The current tenants 12 month lease just expired and they are going month to month.  They originally wanted a 2 year lease but my buddies management company didn't want them to sign more than a 12 mo????  Do they get commission every lease signing?

My numbers:

77339

$115,000 rent $1300/mo

Gross Operating Income$15,600

Tax (117k *2.91)$3394

Insurance$800

HOA$400

MX (5%)$780

Vacancy$0

Net Operating Income$10,226

Capitalization Rate 10226/115000 = %8.89

20% down$23000

Closing costs$3000

80% loan 30yrs @ 5.5% $523/ month P and I

$523 * 12 months$6276

Net operating Income less debt servicing = $3950

Cash on cash return 3950/26,000 = 15.19%

I can't find anything that will give returns like this in the woodlands, spring, conroe area (thanks Exxon). Thoughts?

Only minor concern.  When he tried to sell it a few years ago he had a buyer that claimed there was foundation damage and wanted $XXXXX off his price.  My friend says he got an engineer out there who said that his foundation was fine.  He suspects the buyer was just trying to manipulate him to come down on price so the deal fell through.  I'll be sure to have the foundation checked out well.  

What do I do now?  I printed off a texas realestate contract.  

Thanks

I like the numbers Mike! It's nice when someone else is paying your mortgage.

What you do now is make everything official. I know he's your friend but be careful there. Nothing kills a friendship faster than arguments about money when one person thinks the "verbal" terms were something different than you do.

Get an official offer letter drawn up and have him accept. Then get an inspection (don't let him refer you to anyone, pick your own guy). If the inspection comes through fine and all is well, then all that's left is the closing (and all that goes with it....financing, appraisal, etc)

I'll repeat, just because he's your friend, don't circumvent anything you would normally do if you didn't know the seller and you'll be fine.

And trust me on this one. If at any point during this transaction things get heated, immediately just say "Hey, looks like we can't come to terms, let's just forget about the deal and go have a beer". A real estate deal isn't worth a friendship so the moment things start to go the wrong way (if they do), put an end to the deal (unless you don't really care about the friendship that is). I know it's a friend of a friend, but that can still have an affect on the friend that's not involved.

Thanks!  I completely agree about negotiating and ruining friendships.  Its not worth it.  I'm going to give him a written offer of $113,500.  This number is his asking price, minus half of the realtor fees he will be saving.  Win win for both of us I figure.  

@Mike Landry  

 - I'm afraid that in your zest to become a real estate investor and get that first deal under your belt, that you may have become a motivated buyer.  It's looks to me that you are going to be paying very near full market value for this house.  And your cash-flow analysis has $0 for vacancy.  And unless I missed it, you don't have anything for maintenance, repairs, and property management.

My advice (for what it's worth) - slow down a bit.  Even if this turns out to be an OK deal, there's probably better deals out there.  And I'm not sure that this is an OK deal at this point.

Also, ask your friend for his tax returns so that you can see his expenses and income on the property.

If it were me, I would budget the following:

Management  $2,067

Vacancies    $780

Maintenance and Capital reserves $2,000. I would reduce this depending on what the HOA pays for. You currently have $780 for maintenance.

My estimate of NOI is $4,067 less than yours.

Good Luck.

Bill

Hi Mike,

Those numbers look great and it seems like you have done your homework. Kingwood is a great investment area, and has great potential for the future.

Good luck,

Andres J.

Thanks for the gut check .  I appreciate you guys telling it like it is.  

Vacancy rate should be something other than 0.  I first ran this comparison against one of my parents rentals where they have had the same renter for 5 years.  I wanted apples to apples.  But I DO want to anticipate long term vacancy rates of 5 to 10%.  I missed that thanks.  

I have MX at 5%. What is a rule of thumb you guys use for long term mx?

I'm going to manage it myself.  I live a little further than I would like (45 min) but I think it is manageable.

Capital reserves - Big Dave Ramsey fan.  We have emergency funds for our emergency funds.  But really we like to keep $3000 in the bank reserve fund per rental property.  What do you do?

I live over in the woodlands where prices have skyrocketed. Wholesalers are selling at %85 ARV but even with that the CAP rates are running 6% to 7%. I'm not a cash buyer. And I look at opportunity lost by spending 3 months rehabbing to rent out. The local real estate club was discussing how the deals are drying up and things feel bubbly. I'm tempted to sit it out and wait for the market to turn.

Butttt.....that is what lead me over to Kingwood. Things haven't gotten completely out of control but are accelerating fast. Right now there are only 5 houses listed for sale on the mls less than $130,000. Only 6 houses for rent under $1500. The neighborhood is a master planned upper middle class neighborhood that has excellent schools. An over 8% CAP rate for a turnkey property in a good neghborhood/schools seams reasonable to me. What am I missing? I would love to do better and maybe I should keep looking.

That being said I am going to sit back and reflect on my doubts and concerns.  I also need to verify the condition of the property.  Everything has been updated except the kitchen.

Thanks for your perspectives!

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