Would like some feedback on my latest rental purchase

17 Replies

I've been doing this for a few years now and feel like I know what I am doing, but I also know it's good to get feedback from other investors to keep myself in check. I guess I'm looking for validation that I am on the right path.

Anyway, here is my latest deal. Thoughts?

Purchase Price and closing costs - $30,000

Rehab -               $5,000

All in Price -         $35,000

Market rent is  $750 a month but I like to go below market to get it rented fast. So $725 for rent.

Gross Annual Revenue - $8,700

Effective Gross Revenue (10% vacancy)  - $7,830

Expenses

Mortgage 15 year at 5% (15% down) - $2,820 per year  ($235/month)

Taxes - $400 per year

Insurance - $500 per year

Capex 10%- $830 per year

Routine Maintenance 10% - $830 per year

Property Management 10% - $830 per year (although I do self manage)

Profit of $1,620 per year

Thanks for your time.

what's the timeline for your major maintenance (roof, furnace, water heater) ?

@Christopher McGuire  Some might say that your vacancy rate and cap ex allowances are too low, given the very low starting price from which to deduct your "standardized percentages" off. That is to say, the lower the purchase price, (usually) the riskier the neighborhood, and the higher the percentage that should be allowed for vacancy and cap ex (because for example, a new roof costs much the same whether the property cost $30k or $200k).

Looks like there is plenty of wriggle-room though. I say, well done. Cheers...

Roof has about 5 years left.

Water Heater is new

Heat/AC unit is new

Thanks, Brent. This is actually a relatively decent part of town. B/C neighborhood. I agree with your capex comments. I may need to revise those estimates going forward.

Appreciate you guys responding. 

from my research, not from hand on experience, capex will be greater than what you've assumed. At least $200 per month. 

I don't know your area but, in mine, unpaid water, sewer, and garbage follows the property rather than a tenant, so I include that in my expenses. You may have a different situation. If not, you may consider paying those and adjusting rental pricing to account for it.  

How are you calculating your percentages?  10% of your gross income is 870, not 830.   10% of your effective gross income is 783, so I'm confused by that number.  

You may consider adding to your expenses any advertising costs (for instance, $5 x 365 x vacancy rate) so that the cost of advertising during your vacancy would be foreseen.  

My calculations for financing came up a little different to: $241.19 per month rather than $235.  

Even so, if you don't pay the utilities I mentioned, your NOI is pretty decent ($344.79/month). I understand it's a single family but, if you were looking for a cap rate, it would be 11.82% which is quite good.

Even if you switched to my calculations on percentages and financing, you would be cash flowing $103.60/month and $1243.20/year.  Sounds like a decent deal to me.

Looks like a good deal to me.

What does the seller know that you don't that would justify him selling you the property for only 4 times the gross rents?  

I doubt anything. It was a foreclosure that I inspected as well as had my regular inspector look at. I live in a fantastic market for wannabe landlords (or so I think). I'm scaling as fast as I can and most of my deals are similar to this one. 

Originally posted by @Christopher McGuire :

  I live in a fantastic market for wannabe landlords (or so I think).  

But the market is only willing to pay 4 times gross rents.  Well actually you were the only one willing to pay 4 times gross rents.  Why do you think this market is fantastic?

Humm...this dialogue will be helpful Bob.

I've been investing in similar properties about five years now so if I'm doing it all wrong I'm glad we are chatting. :)

I'm a cashflow investor and the cashflow numbers on these properties seem good. My first deal was almost identical to this and it paid itself off last year. I've got another one almost paid off as well. I guess I'm not following when you ask about gross rents vs. purchase price. 

What would you pay for this rental? I appreciate you having this conversation with me. I'f my margins aren't good I need to figure out a new approach.

@Bob Bowlingundefined

Originally posted by @Christopher McGuire :

Humm...this dialogue will be helpful Bob.

I've been investing in similar properties about five years now so if I'm doing it all wrong I'm glad we are chatting. :)

I'm a cashflow investor and the cashflow numbers on these properties seem good. My first deal was almost identical to this and it paid itself off last year. I've got another one almost paid off as well. I guess I'm not following when you ask about gross rents vs. purchase price. 

What would you pay for this rental? I appreciate you having this conversation with me. I'f my margins aren't good I need to figure out a new approach.

@Bob Bowlingundefined

 I'm asking how well you know your market.  Are valuations typically only 4 times the gross rents?  Why has the market determined it will ONLY pay that?  Are the properties losing value and the cash flow you are getting is really your own money back slowly over time?  You have bought into an upward market.  How will things look on the downward side?  

I would really want some shot at decent appreciation, and being able to sell to a retail buyer as an exit strategy (at least a shot) sometime in the future.   

Christopher, your numbers look good imo. I have 30 rental units myself and I would buy based on your numbers in most (not all) areas in my market. Regardless of appreciation, your cash on cash return is good. While it is true that capex could significantly lower your returns, you should be fine since you included mgt fees and you self manage.

Did you pay the renovation costs out of pocket? What is your total cash contribution here?

@Christopher McGuire

  where are you getting your mortgages at .. with that low of loan balance.

and can you only get four and your done.. or is this a local portfolio lender?

Why is this such a good idea when you could invest in a mutual fund and get typical 8% return on your money (35000*.08 = $2800).  Much less effort overall as well. I am sure I am missing something. Can someone elaborate?

Originally posted by @Bob Roach :

Why is this such a good idea when you could invest in a mutual fund and get typical 8% return on your money (35000*.08 = $2800).  Much less effort overall as well. I am sure I am missing something. Can someone elaborate?

Bob, you forgot one thing: his $1,620 profit per year is from an outlay of just $5,250 (15% down). Try getting THAT from your mutual fund! Cheers...

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