Interesting opportunity has opened up, would love your thoughts

13 Replies

Hello,

I started out here in early 2015 and for about three months tried to learn everything I could about REI. Long story short, life happened and I felt very stifled and limited living in Manhattan as I was priced out of nearly everything.

Anyways, fast forward to today, the house across the street from my parents in Montgomery County, MD is for sale. It's been on the market for a couple months without an offer according to my parents and we know the owner is trying to sell quickly. 

Now I'm scrambling and trying to go back and read my old notes and read up on basic fundamentals again. In the back of mind, I keep remember read rule #1 is don't invest in something you don't understand. However, this opportunity seems perfect in terms of location. As far as numbers go, I was hoping you can help me on that. They don't seem to make sense to me but one of my good friends is a local realtor and I'm meeting with him tomorrow. I just think the house is too much. Below are the numbers I've crunched, please let me know if I'm missing something. Your feedback is appreciated!

Your buying costs are too low. Go to the close it calculator on Federal Titles website to get a more accurate estimate. 

Also $65k is a large discounts to talk a seller into. Can't hurt to make the offer, but don't get your hopes up. Also not impossible, I have a contract on a property $100k below the initial list price right now. 

Also I'm not sure where your property is exactly....but $2200 rent on a $450k property is generally low in Montgomery County. Some of the places where the rent might be that low are Clarksburg, Montgomery Village, Germantown. If it's in another area you rent estimate might be low.

Are you looking at this as a rental (as your spreadsheet would suggest)? If so, you really already had your answer two lines in. In most areas, you cannot buy a house for $450k with a note and rent it for $2200 and make any money. Just having a vague idea of 1% (i.e., renting a house for at least 1% of the price of the house [for me, it's all-in price, but at least the purchase price]) would have eliminated this house in 10 seconds.

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Yes, I'd use it as a rental. I thought $2,200 is conservative but my RE agent said to use that but he felt it could rent for more like $2,300-$2,400. 

@Russell Brazil It's in a great area definitely not on the outskirts of MoCo. 4 bed, 2 bath maybe I am totally under estimating the rent but again I got that from my friend. However, in using the "2% Rule" for rent, that would mean the rent is $9K which makes no sense. 

I know where I live in Silver Spring, you would most likely see $2200 - 2500 rents for SFH that will run you nowadays, 400-450K. My house was appraised for around $450K this Summer and Rentometer says I could get around $2200 in rent for it.

I'm no expert but I don't see the upside in this deal.  There's almost zero cash flow so you're betting on further appreciation in a market that has had a significant run up the past 2-3 years.  Could it continue?  Sure, but enough for you to recoup costs?  Not sure.

I don't know where this property is, but if it's been on the market for a while, chances are most investors have seen it and decided to pass. MOCO seems to have picked over for the most part (at least the part I see on a regular basis), Look for something better.

Originally posted by @Mark K. :

Yes, I'd use it as a rental. I thought $2,200 is conservative but my RE agent said to use that but he felt it could rent for more like $2,300-$2,400. 

@Russell Brazil It's in a great area definitely not on the outskirts of MoCo. 4 bed, 2 bath maybe I am totally under estimating the rent but again I got that from my friend. However, in using the "2% Rule" for rent, that would mean the rent is $9K which makes no sense. 

 Throw out the 1% and 2% rules for single families in MoCO. They don't hold up. I own a number of MoCo single families that perform extremely well. Depending on where it is, it might be very stable and appreciate well. 

To put the rents in perspective in terms of price, I have a sfh in silver spring valued at about 435k rents for 2800. Sfh in Rockville valued at 400k rents for 2400, Sfh silver spring valued at 400 rents for 2500.

That's why I think your rents low...but again all depends on where the property is. A 450k property in say clarksburg is going to rent for 2000.

Potential appreciation rates are going to vary through out the county. I'd say the best locations at those price points are going to be Rockville, Silver Spring along the red line, Gaithersburg west of 270, North Potomac. 

Also at these higher priced properties and rental rates some people not familiar with the area may rule them out, but they don't take into consideration the fact that a far far lower percentage of your rents go to repairs and cap ex. Take the 50% rule for instance. If I were spending 50% of my 2800 a month rent on expenses...something has gone dire ly wrong. I couldn't spend that much on repairs and cap ex if I tried.

If you self manage, a reasonable cash on cash return is going to be about 5%. While low, you will also have your property going up in value $1,000 to $2,000 a month in the current environment. (Current environment, can always change in a heartbeat). Most of the increase though will be squished into the Spring season when MoCo prices typically have their yearly big jump.

@Mark K.

Few things to consider: 

1) I'm in NY also so I know what you mean as far as feeling priced out, but you don't necessarily have to buy properties here to hold. In fact most of our deals in NY I wholesale to other investors who fix & flip. (They might hold a few if the #s work). All the money we make in wholesaling, we are looking to park it out of state, where it makes sense cashflow wise.

2) Numbers on this property doesn't look too promising. If similar ratios were achieved, but you had risk spread across multi-units, and it was a combination of cashflow & appreciating market, then it might be a different story. But as a single family, even if all the ratios were better than what you show on your screen shot, you have no way to spread that risk if the unit ever became vacant or you had to evict someone out due to lack of experience in being able to screen tenants properly, etc. And the hypotheticals you run on a spread sheet is very different than what happens in the real world.

(BTW, I know some people talk about how if it's 1-4 residential, valuation should be based just on sold comps, but I do like running #s on even 1-4 residential when you're looking to hold because it provides a more precise way of seeing how a property can make money today, without speculating, which is what I feel comps are at times.) There's an investor in NJ who started his whole career by running #s on cheap 1-4 residential properties in Newark & Philadelphia and now has a portfolio of over 130 units. So keep analyzing deals, even if they are 1-4 residential. 

3) I don't know your friend, so don't take this the wrong way, but just because someone's a realtor, doesn't mean that they know how to analyze a deal. Being an investor is totally different than being a realtor. It's like oil and water. Both liquids, but chemical make up is completely different. So realtors may be in the same field, but unless they also invest, the lens they see the real estate world through is totally different. No offense to @Russell Brazil or any other agents reading this, but I think most investors would agree; and just as I expected after reading his last post, he also invests. So I'm glad you decided to post this here and get some feedback from BP members, instead of relying on 1 person's opinion simply because they're in the real estate field. 

Originally posted by @Johnny Kang :

@Mark K.

3) I don't know your friend, so don't take this the wrong way, but just because someone's a realtor, doesn't mean that they know how to analyze a deal. Being an investor is totally different than being a realtor. It's like oil and water. Both liquids, but chemical make up is completely different. So realtors may be in the same field, but unless they also invest, the lens they see the real estate world through is totally different. No offense to @Russell Brazil or any other agents reading this, but I think most investors would agree. So I'm glad you decided to post this here and get some feedback from BP members, instead of relying on 1 person's opinion simply because they're in the real estate field. 

I definitely don't take offense but I'd suggest one thought on your statement. When you say most investors, I think that's more like most investors on BP. And I make a lot more on rental free cash flow than those people on these types of properties and so do the investors I'm friends with that invest in these types of properties. Generating $1000 in free cash flow per door on an appreciating asset is going to likely produce a higher IRR than 5 $200 per door assets that don't apprecrate at all. And one can self manage 5 or 10 doors themselves with tenant bases that take care of most of a properties problems themselves, while it is a lot harder to self manage say 50 doors of PIA tenants.

That's often the dichotomy that's experienced in our market, which is the one in question. Cheap cash flow properties that do not go up in value and carry a high risk tenant base, combined with an asset that has a high degree of risk to install capital, or. High priced property in a high income area that produces a lower cash on cash return, but a higher IRR. Typically those with limited capital go for for the former while those looking to deploy large amounts of capital go for the latter.

I've owned all kinds of rentals, high priced, low prices, 1% rule, 2% rule, singles, multi, condos, townhoiseses etc. and the ones that perform the best in reality as opposed to on paper are the more expensive ones in high income areas like the one the op asked about.

@Russell Brazil

Yes, I totally agree. There are many drawbacks to properties that only cashflow, but are in areas that do not appreciate. Tenant base is different, you can't scale, etc. What I should've included in section "2" of my post was that there's a balance of property class type and location class type. And in conjunction to my thoughts on section "3," in trying to figure out what he feels comfortable with, he should listen to people who are investing, and not just listen to someone who's in the same field, but isn't doing what he's trying to achieve (unless his friend already has rental properties).  

I feel if you have over 100k in the bank you can use that to purchase alot more units if your plan was to buy and hold.  Thats what I would do...you might have to travel a bit to get that though.  Seems that area is extremely inflated in price just like areas here in NJ.

I don't know this area. I assume you want it because it's an appreciation play and since you know the area. My thoughts on your numbers (again, I don't know your local area) - they appear to be too generous on the upside and too low on the downside.

  • Insurance on a $450K property is only $650? 
  • No maintenance costs? 
  • No office expenses? 
  • Nothing other than insurance and taxes are going to eat away at cash flow? 
  • 3.41% interest rate on a rental property? 
  • Taxes of $6000? Have you checked the county website for the real numbers? (https://www.montgomerycountymd.gov/Finance/Resourc...)

Honestly, if I had $121K sitting around doing nothing, I would not be considering this as an opportunity. You'll be making less than 1% on your money if not losing money every year. Just because it's across from your parents house and you know the area well doesn't make it a good investment opportunity.

Unless you're considering this an appreciation play and won't mind continued contributions of your own capital over time. 

Oh yeah. Ron above me helps notice a few issues with your numbers I glanced over. Insurance is likely around $950 a year. Taxes should be about 1% of the properties value. So a $450k property will have about $4500 a year in taxes plus or minus a few hundred depending on the assessment. $6000 is high unless it is in Takoma Park or Gaithersburg which have their own city taxes

^^^agreed, Also to tie $100,000 for those #s seems to be investing just to invest. That's a lot of money you could better use. PS I need to learn how to quote others post's and Include there names.

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