Good Investment or Look for Another?

17 Replies

Hi! I'm new to this so I'd appreciate help in analyzing this deal. Here we go:

Home: 301 Cline Falls Dr, Holly Springs, NC

Info: Built 2005, 1470 Sq Ft

Purchase Price: $169,900

Downpayment (20%): $33,980

Estimated Monthly Rent: $1,300

Gross Annual Rental Income: $15,600

Mortgage: $8,264.24

Taxes: $1,701

Insurance: $500

Vacancy (10%): $1,560

Repairs and Maintenance (5%): $780

HOA: $996

Monthly Cash Flow: $149.06

Yearly Cash Flow: $1,788.76

Cap Rate: 5.92

Cash on Cash Return: 32.54

Are my estimates reasonable for vacancy, repairs and maintenance?

What do you think of the cash flow, cap rate, and cash on cash?

I dont personally think this is the greatest deal. The HOA dues hurt, the rental income is a little low for the purchase price, repairs seems a little low.

I would personally pass.  The only way this might be a good deal is if the same tenant stayed in the home for the next 10yrs with no maintenance. 

This market you should be able to get at least 1% rule for your cash flow. 

Good luck

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

@Christopher R. , you need a line for Capex.

Don't use a cap rate for a SFR. They are really for commercial properties not 4 or less units.

Your cash on cash return is more like 3% not 32%, although with Capex I think you are negative.

Bad deal. And how exactly did you calculate that CoC? Even using your numbers (which don't include closing costs or cap ex, and are low on maintenance) it is more like 5%.

As others have said this is a bad deal given the information you gave. I think your estimation of expenses is definitely low. 

Of course there are other factors, like what is the market value of the home. If the market value is $400,000 it is a good deal. If the market value is $150K it is even worse than your number suggest.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Christopher R. I'm looking at the Raleigh MLS and I'm curious what jumped out at you about this property? Is Holly Springs an area with higher than average rents? I'm wondering if something in Raleigh might let you cut out the HOA and get similar rents, maybe even spend a bit less.


Would something like this be an option?
http://www.realtor.com/realestateandhomes-detail/4...

-$108,900

-no HOA mentioned

-2005 construction

-1345sq ft 3bed 2.5 bath

-similar distance from Cary

I don't know anything about the area, so I'm probably way off but I'm curious what you have to say. 

@Matt Mason  - Thank you so much for this. I read the article by Ali Boone and started with a spreadsheet. But then I also found a more comprehensive blog post by J Scott so I'll try to redo my spreadsheet using his formulas. I will try to add Capex to my spreadsheet.

@Ned Carey  - Please help me with estimating expenses. How should I do it? What formula should I use?

@Alexander Lafreniere  - I picked Holly Springs because I'm familiar with the area. It's not a very big city. You are right in that Raleigh is much bigger and there are a lot more houses to chose from.

@Terry Hershberger  and @Ned Carey - I'd like to be good in telling if a deal is good or bad. Please teach me. So with this example, what makes this deal a bad deal? What numbers should I look for to consider a deal passable or great?

CORRECTIONS/ADDENDUM:

Closing Costs: $2,800

Improvements: $0

Cash on Cash Return: 4.89

i definitely think you need CapEx budget. While items such as you roof are likely ok for now, 10 years is where other things like appliances, water heater and even HVAC really start to kick in and may have to be replaced. Also, you may need exterior paint (often deferred longer than it should be). Also I don't see property management included. You'll have significant negative cashflow and I don't see Holly Springs as a huge appreciation play, so I'd way : walk

@Andrew S.  - Thanks for this. It seems everyone is saying it's not a good deal. If any, I'm learning how to analyze investments based on this property. 

I did put a budget for Repairs and Maintenance (5% of rent) at $780. Should I put a separate budget for CapEx? 

In another spreadsheet, I have the numbers where property management is included and the numbers look more dismal, with a cash on cash of 1.62%!

This is been my dilemma with the Triangle Area in general. When finding properties on the MLS, I'm finding that the rent is not high enough in relation to the purchase price.

@Christopher R.  

- yes, CapEx is in addition. Like I said, I don't see how you'll have positive CoC on this deal. Not long-term anyway.

Yes, the Triangle has heated up a lot - it's hard to find deals that work well for cash flow unless you are willing to go into some really dicey neighborhoods.  That said, plenty of folks still manage to find something that works for them.  Keep at it!

@Christopher R.  

Cap ex = Capital expenses.  a water heater will last 6 years, it will cost $600 to replace. That water heater is costing you $100 a year. Do that kind of analysis on every system in the house and you will see there is a lot of money that is in hidden future expenses.

There is something talked about on the site called the 50% rule. It says that over time over a portfolio of houses you expenses are likely to be about 50% (not including financing) of the rent. Without actual verifiable expenses you should count on at least that much.

You have nothing in there for management. There is noting wrong with managing you own properties. But any but any extra income that comes from doing it your self is earned by YOU not the money you invested in the prperty.

Some examples of other expenses:

  1. Yard maintenance
  2. utilities
  3. turnover cost
  4. licenses and fees
  5. accounting costs
  6. tenant screening
  7. tenant placement

You may not have all of these or at least for not all of the time but when the property is vacant utilities are on you.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

@Ned Carey  @Andrew S.  

Is there a quick way to incorporate the CapEx in my spreadsheet? For example, can I compute it as a percentage of the rent? How do you guys normally estimate this number?

Originally posted by @Christopher R.:

@Matt Mason - Thank you so much for this. I read the article by Ali Boone and started with a spreadsheet. But then I also found a more comprehensive blog post by J Scott so I'll try to redo my spreadsheet using his formulas. I will try to add Capex to my spreadsheet.

@Ned Carey  - Please help me with estimating expenses. How should I do it? What formula should I use?

@Alexander Lafreniere  - I picked Holly Springs because I'm familiar with the area. It's not a very big city. You are right in that Raleigh is much bigger and there are a lot more houses to chose from.

@Terry Hershberger  and @Ned Carey - I'd like to be good in telling if a deal is good or bad. Please teach me. So with this example, what makes this deal a bad deal? What numbers should I look for to consider a deal passable or great?

Please don't use turnkey provider set ups for your pro-formas.  They have to understate the expenses and overstate the returns to market their deals to newbies.  They almost always understate repairs and leave nothing for cap ex., which is absolutely ridiculous.

Ned Carey gave you some good examples of why you need a cap-ex. budget.  That roof, water heater, and dishwasher don't last forever.  You have to include a yearly cost for those numbers.  Otherwise you will be in for a shock.

Your repairs number at $780 a year might get you through one turn if you are lucky, but then you don't have anything in your budget to cover anything else.  Doesn't make sense when you think about it.  Try to really think about each scenario when you out together your numbers.

I think the triangle area is one of the best areas in the country for future economic growth. If I were you, I would go to the local REIA to get educated and meet some local people in the know. Maybe look at 2-4 units too.

You are not going to get a cash on cash in that market that is similar to some of the Midwest markets, but you are probably better off in the long run in a market like the greater Raleigh area, but that doesn't mean you can go after any piece of real estate like this.  Pay attention to areas that are gentrifying and the so called Path of Progress.  Also, you may have to look for more value add plays in your market.

Good luck.

Originally posted by @Christopher R.:

@Ned Carey @Andrew S.  

Is there a quick way to incorporate the CapEx in my spreadsheet? For example, can I compute it as a percentage of the rent? How do you guys normally estimate this number?

 The 50% rule includes money for cap ex. I once did a reserve calculation for capital expenses and figured it should be about $1300 a year for a row house in Baltimore. I think that is a pretty conservative number. Now I simply figure about $1500 a year for repairs and capital expenses per Rowhouse.  By the end of this year I should have enough history to adjust that number based on our actual results. 

Our properties here in Baltimore are often 50+ years old. We took a property that we thought would need little work becuase the tenant seemed quite happy. Only after we acquire the property did she mention that the old landlord had to clean out the drain line every few months.  We had an $1800 bill to run a new drain line to the curb because the original was full of roots. The point being older housing stock may have more unexpected expenses.

If you want to build a reserve chart on a spreed sheet it is pretty easy just list all the items down one column, the list how long they will last, then list the prices, then calculate how much is needed per year.

WH - 6 years - $600 =$100/yr

furnace - 10 years - $3500 = $350/yr

Windows - 20 years - $2500 = $125/yr

do this for Roof, flooring, appliances, etc

If you are buying an existing property you can estimate the remaining life of the items. A roof might last 20 years but the roof on your property may only have 9 years of life left.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

What Ned said.

FWIW, some landlords of my acquaintance use the following rule of thumb for purchasing a property: it must generate at least $300 in monthly cash flow. Could you negotiate your purchase price down enough to to achieve that? But even then the HOA fee works against you--and that could go up at any time, arbitrarily and unpredictably.

You'll find a better deal. Best of luck.