First Deal! How does this deal look to smart people?

14 Replies

Hello out there in BPland! I would be grateful for any thoughts on this potential deal. It is my first and I'm nervous because it looks pretty good to me, so I must be screwing something up! 

I have a deal in contract for a sweet little 2 story, 1300 sq ft 3/1 row home in East Mt. Airy, Philadelphia. One block from Germantown Ave, near Carpenter Ave.

$49,500 purchase price. $52K including closing costs and seller tax reimbursement.

Needs medium level renovation. I'm allowing for $25K up to $30K. I will do some of the work myself.

For total out of pocket cost of +\- $80K.

Buying cash via Heloc on primary home, renovating via same Heloc.

Plan is to buy it, renovate, rent it, cash out re-finance after 6 months seasoning, and then repeat with a new property. 

Rental expectation $1,100 monthly or $13,200 yearly

The house needs to appraise at $110K after repair to allow 75% LTV refinance = $82.5K

Once refinanced, the mortgage + property taxes + insurance costs = $630 monthly, or $7,560 yearly. Assuming a 5% interest rate.

Annual rental income of $13,200- $7,560 debt service, tax and insurance, leaves a difference of $5,640.

If I follow the 50% rule, I'll earmark half of that to expenses, yielding cash flow of $2,820 annually or $235 monthly.

Does that check out? I'm new at this! I figure I'm missing something.

Thanks in advance! Thank you to all of the BP community. Without this group, I would be only dreaming and not doing. 

Garrett M., Pleasant Street Properties, LLC

3/1's have lower resale value generally. Is there room to add on a second bathroom somewhere??

Are all other properties in the area 3/1's?? What are the resale spreads for a 3/2 in the area versus a 3/1??

For example if 3/1's are selling 1,300 sq ft  for 120k but 3/2's are selling for 145k and it costs 10k to add the second bath then you should be up 15k more than the investment or a 150% return on the improvement by adding it. Even if not a full bath then maybe a half bath increases the value some or even if a breakeven helps it be more salable down the road. You have to not be thinking of what the inventory for sale is but what do the buyers want to purchase and try to make your property into that.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

As long as you're not over-building the neighborhood and it's in a decent area, I like the numbers. Will the ARV be at $110k? Either way, generally a purchase price of $82k and monthly rent of $1100 should cashflow just fine for you. I'm not a rehabber and haven't factored in the time, effort or holding costs of that. But otherwise, sounds like a nice find @Garrett M. !

Congratz on your deal.

Heloc is awesome. Like previously mentioned you needn't worry too much about holding cost, as hard money rehabbed do

The assumptions include management or are going to self-manange?

As Joel stated, adding the bathroom might be feasible, IMHO, it would only allow for ROI if other properties in your area already have them. If you add it an they don't my be an inconsequential addition and not worth the effort; notwithstanding, it would be a great selling feature, but not so much on a rental. I've learned it's all about the bedrooms for rentals.

On its face sounds good. $200+ cashflow, plus equity building is great.

Good luck, keep us posted.

The numbers look good. I'd buy that deal. Rent seems on the lower end, you might be able to squeeze in another 100 bucks or so. How did you determine your rent price? 

You don't have to wait 6 months to refi. With a 5 - 5.25% you can get a refi without seasoning from a local bank like Valley Green. Sometimes is better to get a second home heloc from TD, since the rates are much lower (3.65%), and there aren't closing costs. I did that and refied it later after 2 years once I had a chance to use all the cash. That gives you the chance to shop for a deal without hurry because you are paying interest. 

For 52k, are you paying the whole transfer tax or just half? People usually split. 

You are not calculating for vacancies and capex and repairs, but the numbers are good enough to fit that expense.

Once you close, PM me and I can help you out with some contractors if you need.

@Garrett M. , I believe the area you are purchasing the deal is in the 19138 zip code.  Your rent projection is better much on the mark for that section of East. Mt. Airy. 

Also, 3 beds/1 bath is the norm in Philadelphia in many, many areas of the city.  People have come to expect that this is the way and not one shies away from a property because it has one bathroom.

1. Your property taxes are most certainly going to go up at the next appraisal - be sure to underwrite you cash flow to new and improved projection of PT...

2. $1,100 - where does this land in terms of your city. In other words, what is the range? Is it $400/mo - $1,300/mo, or is it $800/mo - #3,400/mo? Your economic loss numbers will be a function of this in a lot of ways.

Thanks to you all for the great comments! 

@Joel Owens I will consider adding a half bath on the first floor. I do need to get to know the neighborhood market better before I budget. I really want to expand existing the uncomfortably tiny full bath (35 sq feet) maybe adding a separate toilet closet. Thanks for the tip. 

@Steve Vaughan  Thank you,  I will need to remind myself not to overdo it with the reno. 

@Davon Lowery very excited about the Heloc method too! To answer you, I am accounting for management fees of %10.

I am using the 50% rule. In theory, I would receive $470 per month, but I am earmarking half of that, $235, for management, vacancies, expenses and capital expenditures. I do plan to manage myself for now but wanted to leave it in the calculations. 

Garrett M., Pleasant Street Properties, LLC

@Garrett M. Everything sounds good as far as I can judge. Congratulations on taking this step. 

As @Joel Owens mentioned, adding another bath or half bath might make sense. In my experience, you can generally find space in Philly row homes to add a half bath on the first floor off the kitchen or living space. 

@Rafael Floresta correct me if I'm wrong but the 50% rule, while not exact, accounts for vacancy and Capex.

+1 to @Paulette Midgette

@Ben Leybovich  

#1-while this is probably true in most places, it is unlikely in Philly at anytime in the foreseeable future (as far as I'm concerned) 

#2 can you elaborate on what you mean by economic loss as a function of the city's variance? 

Originally posted by @Rafael Floresta

You might be able to squeeze in another 100 bucks or so. How did you determine your rent price?

I used rentometer.com, and I cold called a landlord I found on Craigslist who is currently renting in a similar house up the street. She ended up being an investor herself! She was a great help in learning about the neighborhood as well as rental comps in the area. A lucky find.

Thank you for your advice on doing a quicker refinance, these tips are invaluable. 

Garrett M., Pleasant Street Properties, LLC

Thanks @Troy S. Getting the funding seriously tried my patience!! But it gave me a lot of time to evaluate other deals and I think by the time I saw this I was ready to spring. Thanks for being so generous with your own experience. 

Hi @Paulette Midgette !

I always love your posts. The house is in 19119 zip code.  Does that affect your assessment? 

Garrett M., Pleasant Street Properties, LLC

Hi @Ben Leybovich ! I can't believe we got Ben on this! I watch you on YouTube man. 

In 2014, Philadelphia did their first property tax reassessment in like a million years. My taxes on my primary residence went up from $1,800 yearly to $6,000. I appealed it and got it down to $4,000. 

This new house was reassessed in 2015 at $116,000, which is too high.  I guess the owner did not contest it.  I plan to appeal it as soon as I close. I think I have a pretty good chance of getting the taxes lowered actually.

But speaking to your point about taxes going up after I have the refinance appraisal, I feel that the house will likely only have an ARV of 125K.

Not sure if the city of Philadelphia will pay attention to updates to appraisal values or not.

But to be honest, I don't know what happens from here with Philadelphia's property tax assessments. Does anyone know? Are they going to continue to be reassessed on an annual basis?

And I'm with @Lucas Pfaff on your second point. You lost me at "economic loss"

Philly is huge and radically diverse in rental costs. I think this is a b/c neighborhood where most places rent for roughly $1 a square foot. 

Garrett M., Pleasant Street Properties, LLC

@Garrett M. , it is Monday and I am never as on my game on Mondays as with other days of the week. I meant to write '19119'.  Sorry...I hope all is forgiven.    As you move west towards Chestnut Hill as you can image the rents increase.  The section of 19119 you are in, the rent is on target I think. 

To piggyback on @Lucas Pfaff .  The smaller homes such as the one you are buying, the half bath is located in the basement.  One to add another option to keep in mind when/if you decided to add a bath.

If you put it in a land trust and then sell the land trust, the property taxes will not go up (should not), since there is no sale of the property, only the paper. Other than that, the deal looks solid. Congratulations.