Close to first deal...thoughts?

Question

house, built in mid 90's 4br 3.5 ba.  
Value about 140k, I can get it for about 105k, it needs paint and some carpet but that is about it.

Will rent for $1400 with no issues,

According to my math it works out, thoughts?

Jon Holdman · Answer

Historically, appreciation has just matched inflation.  We're still in a dodgy period where who knows what will happen.   I wouldn't predict anything buy continued volatility and uncertainty.

That said, I evaluate potential properties a bit more optimistically.  For one, I think we do have some potential for forced appreciation in my farm areas.  I'm looking to buy at similar discounts to the peaks.  We didn't see the same peaks other places saw.  We're about where I think we should be, adjusting for inflation.  We have pretty good job growth.  I'm willing to manage them myself and not collect anything for that.  So, I use 40% for expenses (that's the "manage for free" piece) and I'm not going for any immediate cash flow (I have, at least for the moment, a full time job).  Using those criteria (40% for expense, $0 cash flow), I get a max price of $126K, less rehab.   That puts you at $123K.

OTOH, I saw your later post, and that looks like a better deal.  If I could find deals like that locally, I'd buy those over this one.

Nothing wrong with having a mix of cash flow and speculative properties.  Just depends on your goals.  Mike's are immediate cash flow.  Mine are long term wealth building.

Rob A. · Answer

one more question...

I plan to hold for 5-10 years so how does appreciation play in??

This unit cash flow's OK not great but is in an area that I think will appropriate very well...this unit sold for over 300k a few years ago, I don't expect that anytime soon, but the size of the unit and the neighborhood are desirable.

It makes some sense to me to get into something that cashflow's well enough but will appreciate well?

Advice/thoughts??

Rob A. · Answer

Thanks Jon.
I am really more concerned with long term over immediate cash also.

The two I am looking at are pretty different... This one is a much nicer and more modern place built in the 90s, 4bed 3.5 bath, the neighborhood is comfortable and nice.  I would happily here.
The other is a not as nice in that it is smaller only 3 bed 2.5 bath built in the 80s.  Mainly due to age the neighborhood is not as nice, yards are a little less cared etc.... but it is quite a bit cheaper...

decisions decisions... too bad there is not always a 'right' answer.  Thanks for all of the feedback.

Rob A. · Answer

Jon,
Thanks for the reply, I was using the second of your calculations.  But I came out a little differently...
I think the 2 differences were that I was planning on putting 10k down and I am able to get less than 6% financing (but using 6 for the calculations. )

So:
Rent: $1400
Expenses: $700
NOI: $700
Desired cash flow: $100
Max payment: $600
Max loan: $100,000
Rehab $3000
Max I can pay $ ??? My math says 107 is OK if I am putting down 10k??  (I would put down 7k and use 3k for the rehab.) Which makes a 105k purchase seem ok.... but, Where does the down payment fit in?

I am sure I am missing something, so I appreciate any advice.

Jon Holdman · Answer

Exactly!

Rob A. · Answer

Wow that was fast.

Thanks again for the info, this one might not make it...but every step gets me closer.

Jon Holdman · Answer

Putting money down doesn't change the calculation.  You could always pay all cash, and be sure to have cash flow.  But, you could still have a bad deal.  So, do the evaluation assuming 100% financing to see if its a good deal.  That's the same as paying yourself the same return on your cash as you're paying for the loan, and making the deal stand on its own.

Then, do a second (or third) calculation to evaluate your cash on cash return.  In your case, you put down $10K and get back $100 a month.  That's $1200 a years, or a 12% cash on cash return.  Much better than CD's, but not exactly stellar for a risky, high-hassle real estate deal.

Both calculations are saying this is an OK, but not great, deal at the price you're wanting to pay.

I don't doubt you can get financing below 6%, but I do doubt you can get it for 10% down.  Investment properties typically require at least 20% these days.

Jon Holdman · Answer

Two different analysis.

Value:
$140K
70% = $98K
fixup = $3K
max price = $95K

Rent:
Rent: $1400
Expenses: $700
NOI: $700
Desired cash flow: $100
Max payment: $600
Max loan: $94,926
Rehab $3000
Max you can pay $91,926

So, I'd say $92K is the max you should pay.