I am hoping you can help me out on the analysis of a potential property.The property is a 2 bed/1 bath located in Indianapolis.
Notes per the agent:
- There are NO appliances in the home (assuming I need to add about $1200-1500 for a fridge and oven immediately)
- The roof is “older” (900 sq ft home- I am assuming it will cost about $5000 to replace in a few years?)
- Heating and cooling is ~10 years old (assuming it would cost $3000 to replace in a few years?)
- Electric is 100 amp service
- ‘Some’ plumbing has been updated
- Newly painted and carpeted (good- no costs immediately there)
- Basement gets seepage (??? No idea how much this would cost, or if it even needs to be fixed since the basement is unfinished and just used for laundry)
Below are my calculations of the property based on the list price, not taking into account the status of the components.My question is: what would be a good offer price based on the information above, and the given assumptions below? Should I just run? Any critiques would be much appreciated!
List price: $45,000
Down Payment: $6750 (assuming 15% down, due to lender allowing 15% down)
Loan amt: $38250
Monthly mortgage payment assuming 4.5%, 30 year mortgage: $193.81
Per Month Calculations:
Rent: $700 ($750 Zillow estimate, so just assuming less than that to be safe)
Less Vacancy (8%): ($56)
Net Rental Income: $644
Insurance: Assume $66 (based on another similar property we have in Indy totaling about $800 per year)
Property Taxes: $67 (based on ~$810 annual)
CapEx (8%) at $56
Maintenance (6%): $42
PM (10%): $64.40
Total expenses: $296.57
Net Profit before mortgage pmt: $347.42
Less Mortgage payment: $193.81
Net Cash Flow per month: $153.63
Initial down: $6750
Closing costs: $1800 (assumption based on 4% of list price)
Total cash paid: $8550
Cash on Cash return: 21.6%
Payback period: 4.64 years
Thank you in advance!
There is no context for those numbers. If the property is in a great area, it 'might' be a good investment. If it is is an average or poor area, it might be a terrible investment. Assuming it is the latter & making a generalization, there is nothing particularly exciting about a 2/1 that is $45k and that needs substantial renovations in Indianapolis.
Thanks for your input, Matthew. This is in a good area. Would you recommend just leaving the property altogether or trying to develop an offering price that encompasses the assumed repairs? If the latter, how would you recommend accounting for those items to reduce the sales price?
The listing price should take into account the quality of the home, so it should already be a reduced price based on all the potentials repairs needed. This just seems like a deal that could yield an average return IF everything went well. BUT you already have $10k in repairs over the next few years (appliances, roof, heating/cooling), plus whatever basement seepage could lead to. As Matthew said, there's nothing too exciting about this deal, and you should likely look for another one.
As a follow-up, let me ask one more basic questions. You said that the property is in a 'good' area - have you driven the neighborhood, and importantly, the couple of blocks surrounding the property? In Indianapolis, even in 'good' neighborhoods, things can change dramatically (e.g. 50% change in sales prices / market value) in the space of a few blocks.
Thank you both for your help! I will take those factors into consideration on if and what I should be offer.
I dunno bro. It sounds alot like a $5k car and what I mean by that is this.
Lets say someone buys a car and they have a choice between a $5,000 car thats 14 years old vs. a 3 or 4 year old car that costs $15,000. The 5k car is going to demand at least DOUBLE the cost in order to get it up and running because of major mechanical problems that need addressing. Taking that into account, you can spend just a little bit more in my scenario and you will have a nearly new one owner car with modern safety, gas mileage, entertainment system, etc.
In other words, I would look for another property because this sounds like somethign that will require A LOT of patience, downtime, and work to get it up to speed. It might be good to just demolish and rebuild from the sounds of it.
Dan Poske what is your normal charge for a rehab estimate? Looking at our first property for a fix and flip that is going to need A LOT of repairs but depending on estimate could be a great buy.
@Mike G. A few red flags go up for me. You didn't say where the property is but $45K properties with $700 rent in Indianapolis are not in good areas. It looks like there are some significant deferred CAP EX expenses that you will have to deal with in the short term. Are you ok with putting that much more in to a lower end asset? $153/mth cash flow is extremely thin. You've projected an 8% vacancy rate which is a turn over every year. You can easily spend your entire year of cash flow getting the property rent ready with every turn over. The numbers just don't work.