First Deal - am I missing something?

Question

So here is the story:

I am looking into purchasing land and building a SFH in Birmingham, AL

The deal I am looking into is $156,500 for a 4 bd, 2.5 bth.

Rent will be $1550

after all expenses my net profit will be $1200.

From what I have read my expenses should be 50% correct? but I am not getting to that number.

I should note that I am paying all cash since I cannot qualify for a loan or mortgage (I am not a citizen/resident).

does this sound like a good return (8%)? I am happy with the data regarding location. My cash on cash is low because I can't take a loan.

This is my first purchase and am constantly second guessing myself.

what else should I be thinking about?

thanks

Alexander Felice · Answer

@Jarrod Cook yeah it doesn't meet the 1% rule, I agree with that (although .99% is pretty freaking close lol) I simply pointed out that this doesn't mean its a 1% return on investment, which you said it was. They are different, that's all I wanted to make clear.

@Yael Fuerst the 1% rule is a good metric to check against. this unit would be .99% so essentially the same thing. You would earn a 5% CoC though and that is a bit low, especially considering you can earn 3% through certain non-risk investments.

Your market will determine what is reasonable for returns.

Without the ability to leverage your returns will be a bit lower, but you should be able to get closer to 8-10% for sure I would think.

Alexander Felice · Answer

CoC = income / investment. I come up with 5-7%

1550 * 40% expenses = 11160 / 156,000 = .071 OR

1550 * 50% expenses = 9300 / 156,000 = .059

If you're going to pay cash for a house, I would recommend buying a much better deal than this one. Why not spend 50k on a place that rent for 800-1000.

expenses should look something like:

5% capex

5% maintenance

8% vacancy

10% property management

taxes

insurance

if this comes to 40% you're doing good!

Jarrod Cook · Answer

@Yael Fuerst this is not even 1% return on your money. Just curious, what is drawing you to this deal? If you'd like, I can speak with you about deals for 1/3 the initial investment and with way better returns. Good luck.

Anastasia Jordan · Answer

I had too google those zip codes. 35244 is Hoover. 35050 is Calera. I could see 1550 rent in Hoover. But that figure seems a little high for Calera.

John Stovall · Answer

Yael,

I buy only nicer places where I can get the best tenants. For this, I use the 1% rule -- and actually try to do even better and get twice my mortgage. (20% down, 15 year.) My expenses are much less in nicer neighborhoods because I have few evictions, they stay rented, they are nice when people move out, etc. I think they will appreciate but I'm confident they are not going to depreciate. I like all my tenants, and most are or become friends.

Others can use the 2% rule, but of those people, many are buying and renting in more challenging areas. (OK, I know not all. I have a couple of 2%'ers in the above.)  This is great if your objective is cash flow, but it is hard, and often, you have to be hard on your tenants. More damage, more evictions, and a higher cost of doing business.

Finally, there are those of us who invest for an appreciation for the property, and if that is what this one is, it may be a good investment. You're getting just shy of 1%, but if you feel you're getting a big discount on the property, it may be a good investment.  If I found a house for $156,000, felt it was worth $200,000, but I got a good deal because of cash, I might purchase it in a second if I could get $1550 AND I felt it would appreciate even more in a few years.

I do agree with others: Where did the $1550 come from?

Yael Fuerst · Answer

@Anastasia Jordan Looking at 2 areas 35244 and 35040

Anastasia Jordan · Answer

What zipcode?

Yael Fuerst · Answer

Thank you everyone for your input.

So if I could only purchase with cash only what kind of numbers should I be aiming at?

what should be my first macro test? the 1/2% rule? CoC?

I am really trying to make the most with my money and see how I can best leverage it build my empire and take over the world :) but I'll settle for not worrying about my future expenses and retirement. I see I have a lot more to learn.

Jarrod Cook · Answer

@Alexander Felice

1550/156,000 = .009 which is lower than 1%, meaning it doesn't meet the 1% rule, which was my point all along. Why are you trying to make this more difficult than it needs to be?

First Deal - am I missing something?

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