Cincinnati, OH - Rental Property - Theo Hicks and Joey Palmer - Went into contract phase of second investment property and looking for feedback

4 Replies

The Deal

  • Property Details
    • Oakley, OH (this place has been exploding the past 5 years)
    • the street is one of the last places in Oakley that hasn't been improved (until now :) 
    • last year, one the other end of the same street, a investor bought up 10 lots for $650k (average property values were ~$100k and they are building a 200+ unit luxury apartment complex
    • There are about 5 of these types of complexes that have been built within that last 5 years (3 in the last year)
    • Any thoughts/feedback on buying rental properties near these massive luxury complexes?
  • Purchase Price: $82,000 (seller pays closing costs)
  • Renovations: $60,000
  • Loan: 203k loan, 5% interest rate, 30 years, 15% reno contingency
  • Down Payment: 25%
    • My partner only have $33k in cash for down payment which allows us to take get a $132k loan: $82k purchase price + $50k for renovations + 15% contingency ($7500)
    • My thoughts were to get the $132k loan and then add 15% contingency: $7500 @0% down, 5% interest, 30 years = $40.26 per month)
    • Additional $2,500 or more in renos will be paid out of pocket by me (credit cards) since I cannot just give my partner the extra cash for the down payment (just his name will be on the loan and we will alternate so we can get 8 conventional loans (4 each) vs. putting both our names on the loans and getting only 4)
    • After 1 year, we take a home equity loan to repay our out-of-pocket reno costs and to use to buy more properties 
    • Thoughts on this strategy?
  • Unit 1 currently rents for $850, after improvements (adding central air to whole property, W/D in basement) we will rent for $950
  • Unit 2: Total gut job and we will rent for $1,150

Income/Expenses

  • Total Monthly Income: $2,100
  • Expenses: $830.57, Saving: $315, Total = $1145.37
    • P&I: $531.45 + $40.26 (additional $7,500) = $571.71
    • Insurance: $100 per month
    • Property Taxes (yearly): $2387
    • 5% vacancy, 5% repairs, 5% CapEx (we are replacing roof, gutter, new A/C, and 2nd unit will be brand new everything) = $315 per month
  • Monthly Cashflow: Before Saving: $1269.63, After Saving: $954.63
    • For our calculations, we use the before saving value because we both have full-time jobs and will be dumping a large portion of our paychecks plus cashflows from this property and other properties into an account so we will have ample fund if something were to come up)

ROI:

  • Purchase Price = $82,000
  • $33k (down payment) + $2.5k (extra cash needed) = $35,500
  • Total Monthly Income = $2100
  • Monthly Expense = $830.37
  • Monthly Cashflow = $1269.63
  • ROI = 12 * $1269.63 / $35,500 = 42.92%
  • ROI (w/ savings) = 12 * $954.63 / $35,500 = 32.27%
  • Cap Rate = 26.36%
  • Cap Rate (w/ saving) = 21.75%

Additional Factors:

  • As stated above, this is one of the last parts of Oakley that is being improved upon and the average home value is $199,500
  • The house next door (that is the exact same as this property) sold last summer for $165,000
  • With the combination of the two above, one of our exit strategies is converting the property into a single family down the road

Thank you for reading! We are really excited about this deal but would love some feedback or advice on ways we can improve!

@Joey Palmer

Hey Theo,

Just a few things that jumped out to me immediately when reading your post.The first is how you're planning on financing the property. If you're using a 203K loan, are one of you planning to use this as your primary residence for a year? This is the only way you'd be able to use a 203k loan, as the FHA doesn't lend to investors. The second thing is, I don't think the numbers make sense as a rental property. I'm not sure how you calculated the Cap rate, but it's not 26%. Cap is NOI / Acquisition Cost. Here's what I get:


NOI = $11,448 ($954x12)

Acquisition Cost:   $142K (82K Purchase Price + 60K Reno)

Cap Rate = 8% ($11,448 / $142,000)

As far as flipping it, if the house next door sold for 165K, I'd comp yours around there. (Assuming that property was in retail condition). You said there was 60K in reno cost, but that was for a rental. How much would the reno be to convert it back to a Single Family, and get full retail? Even if you could do it at the 60K, and flip it for 165K, you'd probably just break even after paying selling/closing costs.

I'm not trying to be negative here man, it just doesn't sound like a good deal to me.

Update: We decided to make the reno loan 60k instead of 50k so here are the new numbers:

The Deal

Purchase Price: $82,000

Reno: $60,000

Total 203k Loan: $142,000

Down Payment 25%: $35,500

Expenses

Mortgage: $571.72

Property Taxes: $198.92

Insurance: $100

Repairs, Vacancy, and CapEx: $315

Total Expenses: $1,185.63

Income

Rent: $2,100

Monthly Cashflow: $2,100 - $1,185.63 = $914.37

NOI: = $914.37*12 = $10,972.42

NOI (after 30 years): $914.37 + $571.72 = $1,486.08*12 = $17,833

___________________________________________

The Results

Cash on Cash ROI: = $10,972.42 / $35,500 = 30.91%

Cap Rate: $17,833 / $142,000 = 12.56%

@Matthew Bond

Thanks for your response! I thought that 203k loans were only for FHA owner-occupied as well, but we found a bank (I see you are from Florence, that is where the bank is) that provides 203k loans for investors! All you need is 25% down payment. DM me if you are interested in learning more about this bank, it is definitely a game changer!

So in this case, instead of putting down $20,500 for the home and $60,000 for renovations ($80,500 total investment, 17.23% ROI, 12.56% Cap Rate) we put down $35,500 (30.91% ROI at the same cap rate). So at the same purchase price and renos, using a little creative financing allows us to cut out "cash down" by more than half, which almost doubles our ROI!

Usually when we calculate the cap rate, we are looking to determine what the ROI is if we were to buy the property with all cash (we use this to negotiate the purchase price) and really only pay attention to the ROI (we are buy-and-hold), so we don't include the mortgage payment in that calculation! If this is the incorrect way of doing it, let me know. I am still very new to this.

@Theo Hicks

I'm going to PM you, I'm definitely interested in hearing more about this loan! If the only thing you're looking at is the return on cash invested, you're looking at Cash and Cash Return (CCR). If your doing Cap rate, you need to consider the entire acquisition cost, including the full loan amount, closing costs, and rehab costs. In your other post, you said the NOI was $10,972.42, then when you did your Cap rate calculation, you changed the NOI to $17,833. Where did you get that extra 7K from?

Edit: Never mind, I see where the 7K came from.