Potential First Deal St Louis- Any advice on the numbers?

Question

I'm looking for my first deal in St. Louis. This is a four family in the North Hampton neighborhood. My question is does the analysis look sound? Is this the type of return I should be looking for or can I do better? The list price is $147K but the property only has one tenant and has been listed for 3 months. The analysis is based on getting just under a 20% discount off list or $120K.

The property currently only has 1 tentant and will need about $4000 per unit to paint, update the kitchen and re-tile the bathrooms. Any advice is appreciated!

DropBox Link to Analysis

The property currently only has 1 tentant and will need about $4000 per unit to paint, update the kitchen and re-tile the bathrooms. Any advice is appreciated!

DropBox Link to Analysis

Kathy Henley · Answer

CJ Z.

I aim for $100/door cash flow.  To get to this number, I take 35% from the gross rents for vacancy, management fee, repairs and capital reserves (repairs that will be later), less the principal, interest, property tax and insurance.  I like undermanaged buildings, like the one that you have your eye on, because the first year is good equity increase by doing the improvements and attracting good tenants, getting the best rents for the area. Rents have gone up in the last two years, my mortgage payment has not.

Kathy Henley · Answer

It is the things that one doesn't know yet that can ruin the first analysis. CJ Z. I own property in your zipcode. First, your insurance looks a little low, but if you have an agent that gave you a quote, use the number.  Your kitchen update sounds low, but if you are doing your own work, fine.  These brick buildings are over 50 years old. This is good because the structure may be solid.  It is the age and condition of roof, furnace and windows that need a closer look.  And the basement, does it smell damp?  If so, find out why.  I check the slope of the concrete, the sidewalks surrounding the building.  They must slope away from the building to keep the basement dry.   The bid must be contingent on the inspection report. If the big ticket items need replacing in the next few years, you may need to negotiate the price.  If you wish to get the cash out in a few years, you must buy it considering all of the above and with real contractor bids.

CJ Z. · Answer

@Kathy Henley, thanks again for the advice. You have given me more confidence to move forward.

CJ Z. · Answer

@Kathy Henley Thanks for the advice. For the kitchen remodels, the cabinets are fine but need paint, and I want to take out the top half of one of the walls to open it up. I would do demo and paint myself and hire out to refinish the plaster.

Will definitely be putting in an inspection clause and renegotiate if necessary.

What type of returns are you getting in this zip code? Am I close or shooting too low? What about purchase price?

Travis Scribner · Answer

Happy to help! We are all here to help see fellow investors succeed! I wish you the best of luck with your investments! Please feel free to ask any more questions, and if you need someone to take a look at the property with you, keep me in mind.

CJ Z. · Answer

@Travis - The GPR is between $2000-2200 and each unit is 1 bed / 1 bath. This area is a good blue collar neighborhood. Their are window units in this property. Thanks for the advice on due diligence, I will definitely be getting a good inspection done if I get an offer accepted.

@ Mackal. I plan to manage the first property myself to learn the ropes and then switch to a a management company if all goes well and I buy more properties. I want to do a mix of cash-flow and equity plays but the cash flow will help accelerate the rate I can buy properties so I am focusing there first.

Per the price - there are fully rented turn-key buildings selling for $160-$180 on the same street with GPR at $2200. My thought was $120K purchase + $16K Repairs with an ARV of $160K would allow me to pull some cash out after seasoning to use in the next deal.

Thanks for the help!

Mackal Smith · Answer

I buy properties pretty close to that area (primarily a little more east and a little south in the Dutchtown area). That price seems high to me. For 120K,  a single bedroom quad should really be pretty turn key. Your rents are pretty much right on (500 to 550 for single bedroom in that area is about right). I couldn't really tell but are they central air or window units? Do you have an accepted offer yet?

As an example, I just had a deal a couple of streets over from the nice restaurants area on South Grand. It was a 2 bedroom quad unit completely turn key with rents at 700/mo for 152K. You can make some money with your property, but be aware that in that area your property values will be about the same in 5 years as they are now. That area is good for cash flow and good for buy and hold. Just make sure that you're ok with the income *and* be sure and plan on reinvestment and vacancies. Will you have a management company take care of it for you or will you be managing it yourself?

Travis Scribner · Answer

Whats the GPR(Gross Potential Rent) fully rented out? Next, what ROI do you want? How many bed/baths are the units? Looks like the area is away from the state streets, so thats good. South city is not my forte as in comps for the area, but I do know the rehab side of them.

Be very cautious of S. City properties, lots of these old buildings have deffered maintenance that can be very expensive. Tuckpointing, flat roofs, electric/plumbing, etc. I would highly recommend before purchasing having a trusted rehabber look at the property to let you know the overall condition of the property. There are a lot of investors who have lost a lot of money in S. City because on paper, a property may have a huge positive cashflow, but they see that sucked up and have to invest thousands more because the property was not maintained over the years.

Thats why I always recommend having a property vetted before it's purchased. Let someone educated on the rehab/turn side of the business let you know what is going on and what could happen. Some of these out of town investors who buy sight unseen, get caught dumping sometimes 10-30k more into a property then whats expected because of the issues.

Good luck! Don't let that shy you away from the deal! Just do your due diligence to ensure your investment works for you. Not the other way around. ;)