How do you analyze a Single Fam Buy & Hold?

Question

Bought the most inexpensive Single Fam in my area. Literally, the cheapest SF in this particular section of Mass! Purchased a 2 bedroom home (600+ sq ft) for less than $100,000 in a nice town. Interest rate is 4% for 10 years which means the mortgage and taxes will be ~$1,100.

Will rehab (needs new stairs, interior cosmetics, landscaping, etc) and then live in for a couple years and then most likely make it a rental property (could probably cover the mortgage and taxes if rented now). Need to look at rehab costs more closely, but it definitely needs a fair amount of work.

What data can I analyze to further validate that this is a good deal? I'd be happy to share the address.

Chris L. · Answer

Hi Kevin,

That does not produce a great cash flow especially if you consider the potential appreciation.

For example, let's say that you can sell it for 180K and then walk away with a 50K tax free profit (if you live there for at least 2 yrs),  In addition to your 50K in profits, you would have an additional 20K in principle pay down over that first 2 yrs as well giving you 70K to invest.

As a rental, your $1100 per month in rent yields an after expense income of $550 (using the 50% rule).  You now have to pay your mortgage for the next 8 yrs which yields a negative cash flow during that time frame.

My calculation is that you could take your 70K in cash from this investment and either repeat the process or find another investment.

Kevin Barrett · Answer

@Chris L. Thanks for the clarification! The buy & hold vs fix/flip arguments are more clear to me.

Kevin Barrett · Answer

@Mike H.  after reviewing the comps if you put $30K into it, which is probably close to what it needs, then you could probably sell it for $180,000. Even at $180,000 it would still be the lowest priced sale in the town this year.

@Chris L. I bought it thinking I had a couple options. I am going to live in it for a few years, but then I could fix and sell or I could rent it long term for cash flow and appreciation. Either way I'm confident it is profitable.

Chris L. · Answer

Kevin,

It sounds like you are going to live there for a while and then turn into a rental.

What is your goal for the property?  Are you in this for future cash flow or appreciation?

It sounds like it will be a cheap place to live for a period of time.  After that, you should determine what your exit strategy will be.

Once you have lived there, you need to determine if the best use of the funds will be to sell or keep as a rental.

Good luck

Mike H. · Answer

The first thing you need to know is how much is the house going to be worth when the rehab is completed?  Ultimately, just because it cash flows positive doesn't make a good deal.  It may be cash flowing even though you're paying over retail. Not likely but just making the point.

So if you want to analyze whether you have a good deal, you need to come up with the estimated rehab costs. Then add that to your purchase price. Then compare that with the ARV (after repair value) of the property.

Hopefully, once you purchase (100k) and rehab(???), you should be all-in at 70% or better.

So lets say your purchase is 100k, and your rehab is 30k - your all in price would be 130k. That house should be able to appraise out at around 187k or so to say you got a good deal.

That being said, you may not need to come in at 70% ARV in order to have a deal worth taking down. Maybe its a great cash flow area so maybe coming in at 75 or even 80% ARV wouldn't be bad.

There is no exact science to whether its a good deal or not. To me, its a combination of the two items - the LTV you're getting all-in at and the cash flow the house will be generating. You might give up some of one thing to get more of the other.

Kevin Barrett · Answer

Rent would be $1100. Mortgage, taxes, and insurance equal the rent. Going to eventually manage by myself. According to your criteria this supports my thinking that this is a long term play.

Jon Holdman · Answer

How much is the rent?  Are you going to manage it yourself or use a PM?  Using a PM I assume 50% of gross rents go to expenses, capital and vacancy.  From the remaining 50% you have to cover your debt service (P&I only, taxes, insurance, etc are in the first 50%.)

A 10 year fully amortized loan will hurt your cash flow.  But if you can handle that then it gets you a paid off property and more cash flow after 10 years.

How do you analyze a Single Fam Buy & Hold?

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