How does this deal look? Anything else to consider?

3 Replies

Hello BP community,

I would like to get some opinions on a buy & hold property I've bought.

I just closed on my first buy and hold rental property on Friday. Here are the numbers and estimates so far:

Property Type: Two-family, side by side, 3 bed / 1 bath each (vacant)
Location: Honesdale, PA

Ask Price: $77,000
Buy Price: $70,000
Closing Costs: $3,341.45
Estimated renovation costs: $25,000
ARV: $120,000
Taxes: $1,840
Water: $1,200
Sewer: $1,140
Maintenance: $500
Insurance: $1,611
Miscellaneous: $600
Rent: $750 / $900 (tenants pay for gas & electric)

My plan is to put in new bathrooms & kitchens and clean up the rest of the areas. Currently the attic space is split between the two units, but I plan to close it off from one side, and make it a bonus room / bedroom for the other unit (hence the higher rent for that one).

Once completed and rented, I will do a cash-out refi to obtain my optimal ROI numbers (I paid all cash for the house and will probably use a home equity line of credit to do the renovations). On $120,000 @ 70% LTV for an investment property I can finance $84,000 (unless someone can point me to a lender that will do 80% LTV for a 30-year fixed rate cash-out refi on an investment property).

Therefore;
Investment: $73,341.45 + $25,000 - $84,000 = $14,341.45
Income: $1650 x 12 = $19,800
Expenses: $6,891
Mortgage: $84,000 @ 4.875% = $444.53 / mo = $5334.36 / year
Cash flow: $19,800 - $6,891 - $5334.36 = $7574.65
ROI = Cash flow / Investment = $7574.65 / $14,341.45 = 52.81%

Now obviously this might change depending upon what happens, but I feel I've given myself a comfortable cushion to make "newbie" mistakes on this deal. If my ROI comes out at anything over 30% I will have met my goal for this property.

Is there anything glaring that I've miscalculated or left out?  Opinions?

Thanks all!

-Joshua

You have expenses at $6891.  And it appears this includes about $2400 for water and sewer that you're paying for your tenants.  Putting your other expenses, rent loss and capex at about $4500 on about $20K gross income.

This seems tremendously low to me.  

You haven't included anything for vacancy, turn-over, capex, lawn care, legal costs (when you have evictions), other utilities (when units are vacant), etc.  Even if you're doing your own property management, I would expect your expenses/rent loss/capex to be closer to 40% of gross rents on a long-term basis.

Long-term, I think your ROI will be about half of what you're forecasting. That said, that's still a pretty good deal given that you'll be generating about 20-30% COC on the deal.

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I would estimate your expenses at about $11,000 including property management.  Given rents of $18,000 that gives you a cap rate of around 7.1%.  Only you can tell whether this meets your required rate of return.

Good Luck.

Bill