New potential deal, any thoughts - go or no go?

Question

Hello BP community!

I've come across a potential deal that I'd appreciate any feedback or thoughts on the soundness of it.

It is a 700 sf 1bd/1ba condo that is in an area where vacancies should be very low.  Here are the #'s:

Purchase: $90,000

Down:  20% = $18,000

Monthly Loan PITI payment:  $475.00

Monthly HOA: $275.00

Property Management: $100.00

Total Monthly Expenses: $850.00

Expected Monthly Rent: $975.00

Expected Monthly Cash Flow: +$125.00

I'll need to put about $4,000 into rehab.  What do you guys think?  Worth it or pass?

Thanks much for taking the time to review this with me!

Thomas Sill · Answer

That number is fairly subjective and depends on your investment strategy.  I'm sure you know what your strategy is but I don't : )

How long will you hold it?  What cycle is MN on currently?  When will taxes be reassessed?  That could be a killer on a tight deal meaning your looking for appreciation and 3 to 5% isn't even close to what you would need.

If your looking at 3 to 4 deals a week that's a great number.  How long do those deals sit on the market?  Asking the seller to pay CC is fairly customary here in Cincinnati as well and as long as it isn't just added into the eventual note because you paid more/financed your closing costs then that's ok.  Thats where the negotiations have to be strong in your favor.  Every market it different though and it's diffiicult for me to say not knowing what your up against.

Todd English · Answer

Thanks @Thomas Sill, I think I'm passing on this one.  I expect the closing costs to be paid by the seller, it seems to becoming more customary here.  I try to analyze 3-4 deals a week... that said, sometimes there are not enough deals in my particular segment to look at.  Which is why I was considering even this lean deal :(

What should I be shooting for as a minimally acceptable monthly cash flow per door?  I'm new to this, so would appreciate any input!

Thomas Sill · Answer

Dont forget about closing costs as well.  Some look at it as just a cost that has to be paid but this is an investment and as such must go into the numbers.  If you thought it was tight already then it just got really tight.  If you have 18k plus reserves I would look at other options.  How many deals are you currently analyzing?  That number should be pretty high or you are limiting yourself.

Todd English · Answer

Thanks @John K., you are correct!  I should account for vacancy and maintenance.  I typically do not allot much for maintenance the first year or two on a condo or townhouse arrangement since I replace most everything when I buy it and exterior maintenance is taken care of by the HOA.  If I add in 8% for vacancy (projecting one to rehab and get it leased up = $78/month), it changes the math to +$47/month which could be argued that the small amount may be gobbled up by potential maintenance.  Year #1 is tight.

Where should I go from here?

John K. · Answer

@Todd English

You said the vacancy should be low in the area, and it seems you did not account for it when analyzing the deal. Personally I would always account for vacancy as it is never going to be rented from the day you purchase the property. Also although its a 1bd/1ba condo you still have to account for maintenance no? Probably not as much as a MFH, but still probably a good idea to add that in there for a piece of mind.

Todd English · Answer

Thanks @Thomas Sill all really good points on expected vs. actuals, payback time, as well as reserves.  Let's assume I have the reserves.  Appreciation rates are about 3-5% right now.  Market is tight and deals are hard to come by.  Should I pass and wait for a potential bigger fish?

Thomas Sill · Answer

What are the appreciation rates in your area?  "Expected Monthly Cash Flow" and Actuals are always different.

If you put 4k into rehab with your expected monthly income you will be around 3.5 years just to get your rehab funds back.  Don't forget to include/hold back around 6 months in reserves.