Need help analyzing my first deal - Inkster, MI (near Detroit)

Real Estate Deal Analysis & Advice
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Need help analyzing my first deal - Inkster, MI (near Detroit)

Kris H.
Insurance Agent · Ypsilanti, MI · Member since 2014 · 4 posts · 0 votes

Hey guys!

New to the game, but have researched for a few months. Decided to get creative and just took out a HELOC (closed yesterday) that I'll be using as a down payment to purchase my first buy & hold with. I was approved for $30k but don't want to use more than about ~$10k of it - especially on my first deal.

That said, I've got my eye on a "deal" but would really appreciate a second opinion before moving forward. 

3bed 1 bath, 915 sq ft. w/ Garage.

City: Inkster, MI (near Redford, Dearborn Heights)

Purchase Price: $33k | Down payment: 25% ($8,250) | Interest Rate: 4.875%

Closing Costs: Approx $2400

Expenses:

Taxes: $1400/yr. | Insurance: $600/yr.

Water: $850/yr. (which I will pay)

Expected rent

$850/mo

Possible Rehab:

In General: Home is in nice condition, appears move in ready. Would of course have an inspection contingency. 

Furnace: Meh - Appears to be from 1998 but apparently works fine. Expect to replace within 3-5 years. 

Roof: Good - approx 8-10 years old

Water Heater: Good - 2006

My thoughts

By my estimate I'll cash flow approx $400/mo with 45% Cash on Cash. My biggest concern is the Inkster area - will it rent? Since it's my first deal I also feel like I may be too "green" and not wanting to make a mistake of jumping on the "first deal that knocks on the door" so to speak. But I also don't want to pass up a genuinely GREAT first deal - ya know? The reason I'm paying the water is due to the fact that I don't want a lazy tenant risking a lien being put on my property from the Detroit water authority. However, my assumption of $850/yr is also just that - an educated guess. If anyone knows any more accurate number for water costs in the Detroit area, I'm all ears. 

Anyone want to chime in? Am I missing anything? I appreciate it!

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Jeff Tallard
Rental Property Investor · Madison, WI · Member since 2017 · 16 posts · 12 votes
9y

Your water heater is 11 years old and could very well be near the end of its useful life.  The one thing that I do not like about houses in this rental price range is that repairs end up being an extremely high percentage of rent.   It cost the same amount to repair a house that rents for $800 as it does to repair a similar house that rents for twice that amount.   Obviously you will pay more for the house that generates more rent. I have seen a seasoned investors fooled by properties that sold for low prices and had low rents because the repairs end up being such a high percentage of rent.  

 I agree that you should have the tenant pay for the water.    Just make sure they pay it or bill them when you receive the bill. 

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  • Matt Souza
    Investor · Ann Arbor, MI · Member since 2016 · 69 posts · 38 votes
    9y

    Hi @Kris H., welcome to BP.

    I invest in the Metro Detroit area. Inkster is definitely on the lower end of Metro cities for investing, but there is still potential. That said, I have three things to note about your property analysis:

    1. Rent - $850 seems a little high for the area you are looking at. I would estimate closer to $750 in rent, $800 max. Always best to err on the conservative side.
    2. CapEx/Repairs - you mention the condition of the furnace, roof, and water heater, but still need to account for unplanned expenses. On an older home, I typically budget around 15% of gross rents for capital expenditures and repairs.
    3. Water - most of the time tenant's will pay for water in SFHs. Yes, the city can hold a lien on your property for unpaid water/sewage bills, but this just means you need to keep on eye on it. You can either pay the water and charge the tenant, or have them pay and get a second copy from the city.

    Just my two-cents. Feel free to reach out to me directly with any other questions. Good luck!

    2Reply
  • Jeff Tallard
    Rental Property Investor · Madison, WI · Member since 2017 · 16 posts · 12 votes
    9y

    Your water heater is 11 years old and could very well be near the end of its useful life.  The one thing that I do not like about houses in this rental price range is that repairs end up being an extremely high percentage of rent.   It cost the same amount to repair a house that rents for $800 as it does to repair a similar house that rents for twice that amount.   Obviously you will pay more for the house that generates more rent. I have seen a seasoned investors fooled by properties that sold for low prices and had low rents because the repairs end up being such a high percentage of rent.  

     I agree that you should have the tenant pay for the water.    Just make sure they pay it or bill them when you receive the bill. 

    3Reply
  • Kris H.
    OP
    Insurance Agent · Ypsilanti, MI · Member since 2014 · 4 posts · 0 votes
    9y

    Invaluable advice from both of you! Thank you so much gentlemen. After adjusting the rent down to $750 and stashing 15% for CAPEX it's only yielding about $150/mo, which seems a little light... Especially considering that neighborhood seems unlikely to see much appreciation anytime soon. The search continues! It's very nerve wracking doing you first deal lol

    Anyhow, thanks again. 

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  • David O
    Investor · Detroit, MI · Member since 2012 · 119 posts · 64 votes
    9y

    Yeah it's a decent deal but a bit risky for your first deal. I'm not a huge fan of Inkster though and I don't see that city ever getting better.

    1Reply
  • Jeff Tallard
    Rental Property Investor · Madison, WI · Member since 2017 · 16 posts · 12 votes
    9y

    Be patient and wait for the good deal to come to you.  If there's any doubt wait.   When the right deal comes along you'll barely be able to contain your enthusiasm. Let that be your barometer. Just keep looking,  focusing, working hard  and networking and  you'll find the right investment. 

    1Reply
  • Terry Penny
    Wholesaler · Ann Arbor, MI · Member since 2013 · 1 post · 0 votes
    9y

    Hi Kris,

    I'm just not sure if a price of 33k (in that condition) is a good deal.  It really depends on the street.  I can get you two houses right now on a decent street, already rented (one at $850, one at $800 - and they're paying for water), with Certificate of Occupancy, new roofs and furnaces, for less than 33k each.  (I have them both under contract.)  Also, I would definitely use a property manager (I can refer a great company, if needed) for your rentals. 

    Just my two cents, but I've been investing in Inkster since the 90s. 

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