I was presented with a tentative offer for a buy and hold property in Sacramento, and am looking for some guidance on if this seems like a decent investment:
Property is a SFH in a Class C neighborhood. Built in 1983, it is a 2/1 and about 821 SQFT with 230 SQFT for the garage. It is in a HOA of about 10 units. I have not seen the inside and have minimal numbers:
I can negotiate the price to $75000 - 85000
Currently renter occupied at $700
average rent within 1 mile is $860
I am told there is no rehab work needed, and the renter would be staying.
Principle and interest with 25% down or $18750 is $270 a month
HOA dues are $95 a month, renter pays utilities.
I have only estimated taxes and insurance at $150 a month
Not sure about closing costs or other fees yet.
By those numbers total monthly expenses would be around $515.
Cash flow is $185 a month.
Comps and other estimates put the retail value at $90k
Anyways, These are only rough numbers but the seller needs to know within the next couple of days if I am interested. Anything else I should be considering for expenses? How do the pictures look? What do you guys think?
I worked some figures and came up with about $256 in cash flow before monthly HOA of $95 per month. I estimated a 5% IR and $500 annual insurance and $1,200 annual taxes. Your looking at around $161 in monthly cash flow assuming you manage yourself. If you dont manage your close to break even and to me that is not that great.
I always use the SFH_Rental_Analysis in the "fileplace" under resources. Makes sure you don't forget any of the numbers.
At a glance, at $700pm with a property cost of $75,000, it barely hits the "1% rule". Others can correct me, but in a class C neighborhood you want to do better than that.
That being said, I'm always nervous about taking over someone else's tenant. Maybe the tenant is great but make sure you do full due diligence and get rental receipts to see they pay on time.
As the other posters have stated, taking over someone else's Tennant can be a risk. Do you know why the current owner is selling? How long has the current renter been in place and how long has the rent been at 700 (especially since the area value are quite a bit higher). Any deferred maintenance? I have seen several deals where the current owner's view of "no rehab needed" is a stretch of the imagination.
Lastly, what are the HOA's responsibilities? From the pictures, I'm not seeing a whole lot of common area maintenance.
Overall the deal sounds a bit on the thin side. I'd look hard at the risk reward and take a pass if it doesn't add up.
Thanks for the responses. I had not thought about the dangers of taking over a tenant, my first thought was just "How great I dont have to find a renter". The cash flow does seem slim now that I see those numbers, and that rental analysis spreadsheet is awesome!
Updated information I found out today:
The seller will go as low as 65,000
He owes 800 dollars in delinquent property taxes (leads me to believe he may not be in a great financial situation, or his renter is NOT paying rent)
The seller also owns and lives in one of the other units and is the HOA manager, which is not a positive looking at the place.
Still no information on interior or deferred maintenance, or renter reliability or payment history.
At 65,000, the cash flow is slightly better. Also, considering how low cost it is, would paying cash for it be a smarter option to remove the interest on a loan? Also, would I have any options if I did purchase on removing the renter for a new one with higher rent/and or increasing rent to market average of 800? Are there laws against that?
I feel like 65,000 and the ability to get the rent to 800 would make this a more feasible deal cash flow wise. Thanks everyone!
You can simply make it a condition of your offer that the house is vacant on transfer. You don't have to give a reason. Of course, the current tenant could put in a new application to rent the house from you and you could assess that application based on your tenant screening standards and requirements. Maybe you'll meet the tenant when you go see the place? Get your first impressions and see what you want to do.
The potential drama of your seller also being the HOA manager and a future neighbor... I'd give that some thought.
I would never tell you to not take risks (only you know your tolerance level). It seems like you know what the risks are, just research each one and, if you decide to do this, your eyes are wide open going in.
the rent/cost is only just slight better than 1%. Do you think you're getting any built equity? If nlt, I would probably pass. It just looks too tight. And remember to include some for maintenance and recurring capex in your expenses.
How can you talk numbers without seeing the inside? I wouldn't talk to this guy one second more without seeing EVERYTHING you are thinking about purchasing. If he owes taxes he is in no position to be picky! Howdid you hear about this place?
I turned down this deal, thanks in large part to the feedback I received. This was a cold call to a wholesaler who I had been speaking with and he passed it off to me. Pretty much the guy wanted way to much for this property.
HI Tyler. Good idea to turn down that deal. Plus there's so many deals out there that are remodeled, have a 1.5 to 1 rent ratio and are in better neighborhoods.
Always remember- don't rush investing. Just look at each deal as a separate business and make your buying decision based 100% on numbers and research.
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