Help looking at my first deal

24 Replies

Im looking at a townhouse investment. This is my first potential deal. I like it for several reasons. For one, it appears to be virtually turnkey. This is a new townhouse development that is not yet complete in construction. They've already sold 30% of their inventory, and leased every unit except for one so far, and they have gotten their $2,400 rent price on all units. The seller/developer has his own property management company that will handle this property, and currently handles other properties in the surrounding area. Below is an overview of the numbers.

  • 4bed/4.5bath    
  • 1,760sq ft    
  • Attached 1st level garage    
  • Private fenced and grass backyard for each unit
  • Modern appliances and design
  • Community amenities such as pool and bbq areas

Initial Investment:

  • Asking price: $239,900
  • Initial Investment: $48,000 (20% down) + $8,000 (closing cost est)
    • $56,000 total

Monthly Income:

  • Rental rate: $2,400

Monthly Expenses:

  • HOA Monthly fee: $125
    • Covers everything exterior... painting, fencing, mowing, etc
  • Projected taxes: $450/month
  • Hazard Insurance: $55/month
  • Management company: $168 (7%) 
  • Projected Mortgage Note: 30yr note assuming fixed 4.5% interest rate
    • $970
  • TOTAL: $1,768/month

Net Cash Flow: $632/month

Does anyone have any initial thoughts or things I may be overlooking? I would likely be looking to hold this for 5 years and then evaluate the market. Obviously, I would be willing to adjust my exit strategy dependent on the market. 

It seems you missed vacancies and interior maintenance. It gets pretty expensive repainting, recarpeting, hauling junk out, and fixing any other issues during a turnover. I would suggest at least 5% each

I should probably have stated a few of my assumptions. When I'm looking at this I'm assuming 11 month occupancy years. I'm also assuming $100/month to go to turnaround repairs, or $1,200 year to save for repairs and turnaround. That cuts my cash flow to $532. That gives me $5,800/year and roughly $29,000 over a 5 year period. 

Bump for any other advice

who pays utilities?  if it's the occupier, I'd be very skeptical on who will pay $3,000 a month to live in a townhouse that costs $239,000

The renters pay the utilities. Theyve already rented out every unit that has been sold thus far. The $2,400 rental rate is actually at or under the rate going for comparative properties, so I know they will be able to get the $2,400 rent + whatever utilities the tenants sign up for on their own. 

and when you say 11 month assumption for revenue, does this mean the rent is 2400/month and therefore effectively 2200/month for budgeting purposes?  (2400*11/12)

That's correct. 

Ok, all other things being equal, your best case scenario net cash flow looks closer to $332 per month.  By the sound of the thread, it seems the seller (assuming the builder) is quoting rental rates.  I would not trust the seller, but if you feel that those are the correct rates, I would say 300 bucks a month is your net cash (using your assumptions).

thanks for your feedback! What expenses have you added to my scenario that I didn't list above? 

Even with holding $100/month back for repairs I can't see the monthly cash flow being less than $500. Interested to see what other expenses you see me missing

and I live in the wrong country to be a real estate investor when you can buy a townhouse for 239k and rent it out non-inclusive of utilities for $2400/month.  Maybe thats why the smell test doesn't seem right for me with price to rental rate.  Don't let my skepticism dissuade you, I may just be in a completely different market.

Oh, I adjusted your monthly rental income to $2200 (as per your 11 month strategy to account for vacancies).  brings net income to $432/month.  then subtracted your $100/month that you had said you budgeted for turnaround repairs to get to $332.

@Ty - I agree with Tyler when it comes to the rental rate; who are you getting this information from? If it's the developer/seller/property manager I'd try to get a local realtor to get you a market analysis to confirm the potential rental rate.

Raul

Using your numbers I get the following. Unless I anticipated HIGH grown with a long term flip as the exit, there isn't enough meet on the bones for me. I know the gulf coast is anticipating decent growth but with the slow down in oil I would be cautious. For the money I would be looking north of Houston, maybe a couple SFR?

Returns Net Operating Income (NOI) $16,574

Cash Flow     $4,910 

Capitalization Rate (Cap Rate)   6.69% 

Cash-on-Cash Return (COC) 8.77%

And as the Raul and Tyler mentioned, these appear to be pro forma rent numbers that I would verify directly.

Originally posted by @Mark Shaffar :

It seems you missed vacancies and interior maintenance. It gets pretty expensive repainting, recarpeting, hauling junk out, and fixing any other issues during a turnover. I would suggest at least 5% each

 I respecfully disagree on the "5% each". I'm documenting <1% of rental income on interior maintenance, thats on 30+ year old construction (albeit condos with no roof or hvac maintenance). This is brand new construction. Do the math.

@Andrey Y.

 I'm talking more turnover maintenance than bigger capex stuff. That mostly depends on the quality of your tenants. I know I pay a lot more for my turns in marginal areas of St. Paul.

Originally posted by @Mark Shaffar :

@Andrey Y.

 I'm talking more turnover maintenance than bigger capex stuff. That mostly depends on the quality of your tenants. I know I pay a lot more for my turns in marginal areas of St. Paul.

 Do you envision him spending ~$1500 per year on simply turnover maintenance? If tenants leave it dirty that's from their security deposit. Carpets last 3-5 years. Other floors longer. New construction.

Agree with all, confirm rental and vacancy rates.

The broker who is representing the property for the developer (not directly employed with developers company), is a local broker who has done property management/ real estate agent/ commercial real estate/ investment real estate experience in the area for a long time. He also has a property mangement company that is handling likely most all of the units. He is the one who gave me the $2,400/month rent rate as that is what he is offering them for rent as the property manager of the units that have already sold. He told me he has signed each unit for that asking amount so far, and thats without a product for students to even walk through. So unless hes a bold faced liar, I feel good I can get the $2,400/month rent. 

Also, I know for certain 6 years ago I paid $700/room for something not nearly as nice as this, and it was the going rate for things like this at that time, and still is. That was about the time this area saw rental properties with ammenities attached to them make the jump into this range. The townhomes come with a privately fenced back yard as well as a garage. 

I have placed some calls around town to cross check that number, but havent heard back from anyone yet. I appreciate the recommendations. I expect to have relatively no repairs needed in the first 2 years that the renters deposit wont cover, but I will carry $100/month from earnings in holding until the end of the year, at which point I will hold and only replenish if I use it. 

My plan is to hold for atleast 5 years. At which point the equity I will have amounted (est 7%) will atleast cover nearly all closing cost if I were to sell the home at the same price I purchased it for, leaving me with just my cash flow earnings and a nice 8-10% annual return. Ultimately, I feel like its a safe place to store cash as my first investment with it being a turnkey type property. I really appreciate the comments that have been given so far and hope they keep coming. Its certainly making me look at things differently. 

How would you confirm vacancy rates for a new build?

I did just call the townhouse community next door to this one. They have similar town-homes that were built 5 years ago. Do not offer a garage, and not all units have grass back yards. 

They rent those for $2,200/month, but the property management told me they expect that to go up once they are done adding their amenities. Also, they have 100% occupancy for the units they manage themselves, and their avg vacancy rate is 8 days, the time it takes them to clean and turn it around. They do offer internet and cable included in the rent though. 

The broker that is representing my townhouse is the one who was the broker for the development for the community I called on across the street. The vacancy rate I expect is actually 8 days, and the full month is more of a really bad case scenario. The 

Which area of Houston is this?  I can probably help confirm rental pricing.

Jimmy,

It's actually College Station. 

Ty,

Welcome to Bigger Pockets I'm in Cali now, but attended Texas A&M. My first deal I brought to bigger pockets was for a town home. There is a lot of hesitancy in general for HOA fees as they can change at any time and eat into your cash flow. Definitely see how that fee is allowed to change year to year. Knowing BCS pretty well,albeit I left in 2007 but go back frequently, I would say that there are many non-new options where you could potentially get a better deal. Assuming the HOA fee is stagnant though it doesn't seem like a bad deal.

During the inspection period I would definitely look at the property with an inspector to review the build. I know many of the town homes in the Heights in Houston were built with non-code pvc pipe in the attic which caused huge leaks that were 5k plus to fix. Obviously this isn't the same builder, etc. but after my experience living there I am always worried about town homes. If you haven't looked at a ton of deals I recommend seeing what else is out there just to make sure that this is the best you will get in that market.

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