First time RE inv opportunity, right next door?

10 Replies

Hey all, 

First post here on BP, so hopefully you can help me out! The owners of the house across the street (previously rented) from our primary residence is being prepared for listing, but I approached them today to see if they were interested in looking to do a private sale. My wife and I would like to get into rental real estate and I'm not seeing too many negatives about this potential situation. Based on informal discussions, they would be looking for sale price of approx $125k and current rents for $1,200. Would love any feedback on pros/cons of renting something so close to our primary residence. This would be our first rental so needless to I am excited just hearing about this potential opportunity. 

Thanks for all your help! 

Erik

Morning Erik!

Is the asking price in-line with the area? With setting up a private deal you can probably offer a bit less as you would be cutting out fees from a realtor. 

Also, do you have an idea what their current expenses are? You will need to take that into consideration along with taking out for repairs/maintenance, cap/ex, vacancy, taxes.

It's good to factor each expense individually to be as accurate as you can. 

Hi Tim,

That $125k price is based on aprox 7-10% savings from not going through a realtor. Just looking at basic comps for type of house it could probably be listed around $135k. I just caught the owner while she was doing some quick updates so we haven't sat down and gone through any expenses. She did take me through the house and it looks like appliances have 3-4 years left, HVAC appears ok, but windows are original. The positives of this deal would be the turn-key plus neighborhood. Vacancy has been 100% since they've owned (3 years), but are selling due to some other flips they are working on. 

Did you have any thoughts on renting to someone who would literally live 100 feet from my wife and i? Thanks for your response!

Strictly from a math/ROI stand point:

If you pay cash for $125K property that generates $1200/month in gross rents.  You can expect about 50% of the income to go towards operating expenses and capital expenses, leaving about $600/month in net income. 

That's about $7200/year in net income, which represents about 5.8% cash-on-cash return.  If you do your own property management, you can move about 10% more of the gross rents to the bottom line, and bring your cash-on-cash returns to about 6.9%.

At those returns, leverage could help you or hurt you.  If you get a FNMA loan (20% down, about 4.5% interest, 30 year amortization), you could get your returns to about 10% cash-on-cash if you do your own management, but if you outsource management, your returns would likely drop to about 4.5% on those terms.  Any other loan product would probably reduce your returns.

Potential 10% returns like @J Scott mentioned are great, but the real value in a project like this might be the 'return' you get in the form of the learning process. Being next door helps you in that you know the neighborhood,  property is easy to visit, and you can keep an eye on it. Plus there's the added benefit of having control over who lives across the street.

If you find out you don't like real estate, the worst case is you could resell the property in a year or so and break even.

Thank you all for responses. I think they originally had not looked at what houses in our neighborhood were selling for ($140k-$150k), so they are hoping to list on MLS in the upper $140k's. After having a great discussion with them, we came to a price of $132k so now I need to have a discussion with my wife and discuss financing options (probably have to stick with financing vs cash) if we decide to proceed.

Property taxes for 2016 are $2,998: monthly 250

HO Ins: $900: monthly 75

Mortgage: 4.625%  (quoted from local bank) with 20% down is $583 monthly

Repairs/Maint: 15%: 180

Looking at approx $1384 NOI with no vacancy. With equity inv of $26,000 (down) that would be about 5% cash on cash before any vacancy.

Ill have to run some more scenarios, but i"m looking at conventional bank financing :/

Not sure if the return is worth it in this case, but would love to hear thoughts!

Personally I would pass on the deal. Not sure if you included capex in your maintenance/repair estimate. That comes out to around $115/mo in cashflow with 20% down. Most investors try to get a minimum of $100/door with 0% financing to help give a better idea of what the purchase price could be. Is there anything that could be rehabbed/upgraded to increase rents?
Originally posted by @Erik Sorensen :

Thank you all for responses. I think they originally had not looked at what houses in our neighborhood were selling for ($140k-$150k), so they are hoping to list on MLS in the upper $140k's. After having a great discussion with them, we came to a price of $132k so now I need to have a discussion with my wife and discuss financing options (probably have to stick with financing vs cash) if we decide to proceed.

Property taxes for 2016 are $2,998: monthly 250

HO Ins: $900: monthly 75

Mortgage: 4.625%  (quoted from local bank) with 20% down is $583 monthly

Repairs/Maint: 15%: 180

Looking at approx $1384 NOI with no vacancy. With equity inv of $26,000 (down) that would be about 5% cash on cash before any vacancy.

Ill have to run some more scenarios, but i"m looking at conventional bank financing :/

Not sure if the return is worth it in this case, but would love to hear thoughts!

You left out capital expenses, turnover costs, utilities, vacancy and other will eat intoyour net income.  My guess is that you'll be losing money every month if you pursue this deal.

Originally posted by @Joe Fornasiero :
Personally I would pass on the deal. Not sure if you included capex in your maintenance/repair estimate. That comes out to around $115/mo in cashflow with 20% down. Most investors try to get a minimum of $100/door with 0% financing to help give a better idea of what the purchase price could be. Is there anything that could be rehabbed/upgraded to increase rents?

 I think we are leaning toward passing on the deal as well. I dont think much could be done to increase rents. Pretty basic layout, old 70s style ranch home with 3br/1ba upstairs and 1br/.75ba down. Wife and I are just crossing our fingers for owners to offer to good neighbors ha! Minimal returns plus timing (wife due in February!), just keep pushing me further away from this deal. I will say I've already learned a ton in just the 24 hours since first talking with the owners - at least I'm getting some joy in that aspect. Thanks for your help, Ill keep up with updates. 

Erik, Unless you can get the property for $100k or less, I would pass and keep looking for another. Home built in the 70's will start having capital expenses soon. Good luck

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