Potential 1st Buy- Need Deal Feedback

16 Replies

Hello All-

I'm still in the process of walking through houses, analyzing deals, and networking.. I have not yet pulled the trigger on my 1st property. My current approach is to run analysis on properties which are coming to me off the MLS through a realtor, and determine a target purchase price based on est Expenses and Cash Flow. I then plan to place offers based on calculated target price, and through the inspection period verify my assumptions through Contractor and PM walk throughs.

Below is a recent listing that I'm contemplating making a low offer on based on a walk through yesterday, and would appreciate any feedback:

Property is in a C+ area (For those Metro Detroit investors, West Dearborn), and is Bank Owned. 3BR, 1.1 BA, 1,164 Sq Ft

Asking price is $64K. Comps show estimated $70k ARV. (not sure why such a large gap..)

Est Rent based on comps = $1,050/mo (rent/asking price ratio = 1.6%).

Gross income = $11,466 (assuming 9% vacancy loss) annual

Est initial Expenses: $15K total

Property requires the following est 'rent ready' improvements: New carpet in 1 room, new back doorwall, main floor bathroom updates, new fixtures, paint, etc..

No central AC; I calculate based on comps I could get $100/mo. more with AC.. est $3-5K

Additional initial expense risks: Water seems to be leaking through cinder block foundation in 1 spot... no idea how much this would cost to repair/mitigate.

Furnace looks very old; city winterization report shows it was functional, however no clue how much life is left...

Recurring expenses:

Taxes/Insurance- $4,450 annual // $379/month

Variable cost PM (10%), with 9% vacancy loss-  $96/mo

I assume $500 annual expense/repairs plus $100/mo in reserves

I assume $300 annual advertising/admin expenses

Total annual recurring expenses = $6,592

NOI = $4,874

In order to net $200/mo cashflow with PM (my own arbitrary target for my market) and yield >9% cash ROI, I need to purchase this property for $45K, assuming a 30yr, 20% down mortgage.

This property would yield (with PM): $215/mo cashflow, 9.75% Cash ROI, 11.79% Total ROI

This property would yield (without PM): $310/mo cashflow, 14% Cash ROI, 16% Total ROI

Final rent/price ratio would be 2.3%

thoughts ?

Personally speaking, I think your repairs are low, also 100 bucks is eaten up easily with a single repair... and 500 bucks could be wiped clean with a new water heater...Im in TN, my properties take brutal ICE storms and sometimes these are costly.  I assume you are paying cash...Personally this doesn't look like a deal to me financing wise. I buy properties, finance them, pay taxes and insurance, and still make 200 bucks per door...Just an example.

Hello Erik congrats on looking at your first deal both exciting and freaking terrifying at the same time here are some of my thoughts and they are just that my thoughts take from them what you will.

Area- Good area, and good size house. My first question are you looking to wholesale, flx and flip or hold the property?

The central air is nice but being in a C area when and if your unit is vacant how sure are you that you won't have the unit stolen. 

If you have a leak on your foundation, may not be anything too serious, basements leak in Michigan, however if you look around the whole basement wall and you see large cracks then I would worry about foundation issues. You can fix the grading around the property to assist with lessening the leak, but of course that won't be free and with the weather getting ready to change it would be something to consider

So if you need to replace your furnace, look at about $700 bucks to purchase and install, better to be safe than sorry especially when the winter hits..Now what you can do is risk it, see if it works and sign up with DTE for their Monthly core protection plan at about 16 bucks a month, if the furnace goes out and they can't fix it they replace it. you could save some money there. 

Taxes..WOW  that is a lot, my rule of thumb is to not exceed 2K in taxes, granted I don't have properties in Dearborn and I know the taxes are higher there, but if I am going to pay that much in taxes I will need to be in a C+ to B or better area. those taxes are KILLING your cash flow!

Property management...I would say scratch that, you live in Michigan, if I can manage properties 3000 miles away here in Cali, I know you can do it in Michigan. For one property it would not be worth it.

Your annual expenses I agree are low, but if you rehab the property right the first time you should be good for the first year or so and of course you screen the tenants

Annual expense for advertising and admin expenses, seems okay, I would advertise on craigslist for free!

Final thoughts, if you go a few blocks over you are in Detroit and you can get a property for a lot cheaper and heck may be able to get a rent for about 800 a month. Just some food for thought, People will often times use Detroit as a punching bag but I say if you have not tried it don't knock it, heck I have and do try it and I praise and curse it a the same time, but that is with any market if your dealing with tenants. 

All in all I wish you all the best!

Thanks all, appreciate the feedback so far. I will look to dial up my expenses. in future calculations.

@Kyle Penland- My assumed cashflow is with a conventional 30 yr 20% down mortgage; so this property would cashflow $300/mo without PM, with a mortgage.

@Theodore B.- I'm interested in your investment profile, given you're living in Cali and investing in Metro Detroit locally; I feel you're correct.. if you can gainfully manage properties with that distance, I certainly can..but I always try to factor in PM as a safeguard. I'd be interested to talk to you about your team and local partnerships with your out of state arrangement.

Hi Eric,

I would try looking in North Redford. You can hit your numbers but the taxes would be roughly 2k annually. I agree with Theodore on that one. My partner and I own 47 single family houses in Redford. There's too much to respond to in this post but if you want to meet up sometime let me know. There's also a great meeting tonight from 6-8 or 9. Renegade Detroit Investors. Tons of active investors. Just google it. Good Luck!

Mike Dundon

Eric I think this could potentially be a relatively low cost first lesson in real estate for you. I get the feeling that you have definitely done enough homework and learned what estimations can be made from a distance. However there is no teacher like experience and at some point you have to get a few offers out there and maybe land a deal. Even if you throw out low ball offers who cares? What's the worst thing they can say.... No?

If you live in the Michigan area and can visit and tend to this property yourself and speak to tenants face to face then you may want to just start by tackling this one. You will learn so much more by doing than you do in the forums. As vast as the knowledge is in here, the only way to learn is to do. Good luck!

C. Beyer

Thanks @Christian Beyer,

I'm anxious to get the first deal done for the exact reasons you mentioned; just want to mitigate making a bad deal. In one of the BP podcasts that I listened to (can't remember which one), the guest spoke about taking the approach of analyzing many deals straight off MLS and regardless of the list price, making offers which support his conservative analysis. This guy was running numbers on something like 20 properties per day, making as many as 30 offers a week.. of course 98% of those offers did not yield a deal.. but there is the 1 in 100 which will yield in a deal.

I don't think I'm at that level of course, and I recognize that today's market is less likely to yield these diamond in the rough opportunities via MLS, but the idea stuck in my head and is similar to the approach I'm taking here. i.e. Regardless of what the property is listed at, run numbers based on conservative expense & comp assumptions, and make offers.. regardless of how low.

thanks for the input

Erik

Originally posted by @Erik R. :

Hello All-

I'm still in the process of walking through houses, analyzing deals, and networking.. I have not yet pulled the trigger on my 1st property. My current approach is to run analysis on properties which are coming to me off the MLS through a realtor, and determine a target purchase price based on est Expenses and Cash Flow. I then plan to place offers based on calculated target price, and through the inspection period verify my assumptions through Contractor and PM walk throughs.

Below is a recent listing that I'm contemplating making a low offer on based on a walk through yesterday, and would appreciate any feedback:

Property is in a C+ area (For those Metro Detroit investors, West Dearborn), and is Bank Owned. 3BR, 1.1 BA, 1,164 Sq Ft

Asking price is $64K. Comps show estimated $70k ARV. (not sure why such a large gap..)

Est Rent based on comps = $1,050/mo (rent/asking price ratio = 1.6%).

Gross income = $11,466 (assuming 9% vacancy loss) annual

Est initial Expenses: $15K total

Property requires the following est 'rent ready' improvements: New carpet in 1 room, new back doorwall, main floor bathroom updates, new fixtures, paint, etc..

No central AC; I calculate based on comps I could get $100/mo. more with AC.. est $3-5K

Additional initial expense risks: Water seems to be leaking through cinder block foundation in 1 spot... no idea how much this would cost to repair/mitigate.

Furnace looks very old; city winterization report shows it was functional, however no clue how much life is left...

Recurring expenses:

Taxes/Insurance- $4,450 annual // $379/month

Variable cost PM (10%), with 9% vacancy loss-  $96/mo

I assume $500 annual expense/repairs plus $100/mo in reserves

I assume $300 annual advertising/admin expenses

Total annual recurring expenses = $6,592

NOI = $4,874

In order to net $200/mo cashflow with PM (my own arbitrary target for my market) and yield >9% cash ROI, I need to purchase this property for $45K, assuming a 30yr, 20% down mortgage.

This property would yield (with PM): $215/mo cashflow, 9.75% Cash ROI, 11.79% Total ROI

This property would yield (without PM): $310/mo cashflow, 14% Cash ROI, 16% Total ROI

Final rent/price ratio would be 2.3%

thoughts ?

Erik, taxes kill the deal. I don't even have to look at your evaluation.  That number wont get go any lower for the city of Dearborn.

Will the bank provide a C of O? Dearborn inspectors will get every dollar they can get, if they know its a rental. Trust me, it hurts

Don't worry about an AC unit, Dearborn will get good rent and renters with or without it. The house is not very big, and window units are suffice. 

Good luck with 45k offer, unless your west telegraph/south Michigan or its sorta of a weird layout.  Cant say it cant be done though, never ever hurts to submit the offer in. From experience with West Dearborn homes, you are up against  with high dollar local investors/entreprenuers that are directly attached to the realtors on majority of bank owned and hud homes. 

On a first deal, I see your going very conservative and that's great. But don't shy away from other areas that get you great rent returns, less hassle on inspection, and most importantly lower taxes. You know where to go for that.

Thanks @Mike Carino.

Good advice on the Dearborn inspections.. regarding tax, I figure if I can meet my metrics on the deal with taxes burdened into the assumptions, then it doesn't really matter.. but understand that from a general market perspective, it would make more sense to farm a market with less taxes and more opportunity for profit.

I've also looked at Redford and Westland, however do not know the neighborhoods as well and am indeterminate on the demographic of renters. I know Dearborn very well- I lived there until my early 20s- What is your view on quality of renter between Dearborn, Redford, and Westland?

thx again

Erik

Originally posted by @Erik R. :

Thanks @Mike Carino.

Good advice on the Dearborn inspections.. regarding tax, I figure if I can meet my metrics on the deal with taxes burdened into the assumptions, then it doesn't really matter.. but understand that from a general market perspective, it would make more sense to farm a market with less taxes and more opportunity for profit.

I've also looked at Redford and Westland, however do not know the neighborhoods as well and am indeterminate on the demographic of renters. I know Dearborn very well- I lived there until my early 20s- What is your view on quality of renter between Dearborn, Redford, and Westland?

thx again

Erik

 I think it depends on the areas of each of these cities. South Redford West of Telegraph can be pretty solid. Some parts are better than others. North Westland(Livonia Schools) is almost as good as Livonia at 80% of the cost. And again, there are pockets that are better than others. You can get a great quality tenant in both Redford and Westland... That being said can get some crappy ones two. 

Screen, Screen, Screen.

Originally posted by @Erik R. :

Thanks @Mike Carino.

Good advice on the Dearborn inspections.. regarding tax, I figure if I can meet my metrics on the deal with taxes burdened into the assumptions, then it doesn't really matter.. but understand that from a general market perspective, it would make more sense to farm a market with less taxes and more opportunity for profit.

I've also looked at Redford and Westland, however do not know the neighborhoods as well and am indeterminate on the demographic of renters. I know Dearborn very well- I lived there until my early 20s- What is your view on quality of renter between Dearborn, Redford, and Westland?

thx again

Erik

If you want to see some Redford Properties, let me know. I know South Redford very well. It is my favorite market for rentals. The city is a pain in the ***, but manageable.

thanks @Joshua Woolls.

I'm out of country next week due to my day job, but may take you up on your offer the week following if you're up for it. I like some of the numbers I've seen in Redford, but long term market sustainability and quality of tenants have caused me to take pause.

appreciate it

Erik

Taxes hurt this deal.  Also, at $45K most banks won't write a mortgage, because Fannie/Freddie don't insure less than $50K, lots of investors are cash on these deals...

I'm not a Dearborn guy, but @Mike Carino and @Joshua Woolls work that part of town, they can probably point you to something.

Forgo using a PM, just find a "Handyman" unless you are handy. I managed 10+ units from Kuwait for 7 months, while I was deployed. My civilian job also requires LOTS of travel(40 weeks a year). You can do it.

Now, my favorite line... have you considered a Duplex? Lots of those available in your part of town below $125K with 25% down payment.  You are talking about $30K to close, you get two units(mitigate lost income), you get two units to generate revenue(2 x $700 > 1 x $900).  Plus, it will probably cash flow better.  Appreciation is nice, but cash every month fuels expansion, property improvements, or fun toys you want to buy :)

Cash is SO important, because any additional lending will require 2 years of aged income before they start counting it, but the debt is counted right away. Of course HML won't care once you have 6-12 months they will play ball(at a higher rate/shorter term).

Originally posted by @Christian Hutchinson :

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Now, my favorite line... have you considered a Duplex? Lots of those available in your part of town below $125K with 25% down payment.  You are talking about $30K to close, you get two units(mitigate lost income), you get two units to generate revenue(2 x $700 > 1 x $900).  Plus, it will probably cash flow better.  Appreciation is nice, but cash every month fuels expansion, property improvements, or fun toys you want to buy :)

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There is an area in Westland that has Duplex's that rent pretty good. There is one at 38332 Cherry Hill for 96k. I am guessing $850-$900 per month per side.

I'd like to second what @Mike Carino said about Dearborn inspections.  I own a property in Dearborn, and every 3 years when the C of O inspection comes up, I start having nightmares.  Cracks in the driveway concrete, vacuum breakers on the outdoor spigots, etc, will nickle and dime you (or at times, hundreds or thousands) at every inspection.  My tenants and I take very solid care of the property, but the inspectors still find things you'd never think of.  Its a nice town, and I have great tenants, but the city is very strict - prohibitively so.  For this reason, I'm looking in the surrounding areas for my next property, as others have mentioned, not in Dearborn.

@Thomas Smith @Mike Carino

Thanks again for all the feedback on Dearborn, Michigan.. good to know that even if taxes were to be overcome by the #s on a deal, the inspections are a huge issue.

Does anyone know whether Dearborn Heights is more lenient on inspections compared to Dearborn, or is the frequency and scrutiny fairly the same?