Potential FIRST rental property. Good or Bad Deal? HELP!

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Potential FIRST rental property. Good or Bad Deal? HELP!

Mason English
Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes

Hey guys! I want to get my first rental property this year (as soon as I can really), and I want to know what you guys think about this option. Long story short, my grandma lives in a small town in Texas, and is selling her house this summer. She mentioned some other investors are interested in her home. I asked her to give me first choice to buy the property. I think it would be good to keep the house in the family considering all the memories I have there. Also I live 4-5 hours away, and will most likely get a property manager. This is my first time to run through a property using the BP calculators, so here are the numbers and tell me what you think. 

3 Bed/ 1 Full 1 Half Bath/ 1,432 sq ft/ Built in 1958/  2 Car Garage/ 1 story 

Current Value (Realtor.com)= $125,000 (purchase price for example)

ARV (estimating)= $140-$160K .. current median listing price is $159,000

Repair= $5-10K Cosmetic

20% Down- $25,000... Loan of $100,000... 3.9% interest (guess)

Monthly P&I= $471.67

Monthly Income= $1,500/mo

Monthly Expenses= $1,341.25

Cashflow= $158.75

NOI= $7,565

COC ROI= 5.15%

Estimated Cash Needed =$37,000 ($25k DP, $10K Repairs, $2K Closing costs)

I have almost $20,000 saved, and $15,000 Line of Credit available. 

My parents live 10 minutes away from the house, so they could drive by to check on the property, help fix minor repairs if needed. 

**Also, I currently live in San Antonio, TX. I want to invest here as well, but I don't want to miss this opportunity if it may be a good one for me to start with, and that I get first choice. But, would you invest in SA first instead because obviously the real estate market is better?

Is this a reasonable first deal? If so, what would you recommend the best way to go about financing? Thanks you for your advice!

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Tyler Roicki
Investor · College Station, TX · Member since 2016 · 150 posts · 37 votes
9y

Hey @Mason English! I'd recommend making sure you are viewing that particular property from an objective point of view. You mentioned the memories... While memories are priceless, caution their ability to influence a financial decision by bringing emotions to the picture. On that same note, I'd caution the tendency there may be to skew the numbers more favorably than the market cares to bare. It may or may not be the right opportunity! Either way, just be sure you are checking emotions at the door on that one.

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  • Tyler Roicki
    Investor · College Station, TX · Member since 2016 · 150 posts · 37 votes
    9y

    Hey @Mason English! I'd recommend making sure you are viewing that particular property from an objective point of view. You mentioned the memories... While memories are priceless, caution their ability to influence a financial decision by bringing emotions to the picture. On that same note, I'd caution the tendency there may be to skew the numbers more favorably than the market cares to bare. It may or may not be the right opportunity! Either way, just be sure you are checking emotions at the door on that one.

    1Reply
  • Brandon Kelly
    Investor · Roanoke, VA · Member since 2016 · 14 posts · 2 votes
    9y
    How much are you planning to set aside for capex, repairs,vacancy and PM? Are those included in the expenses shown? Also, I think your mortgage rate might be low. It would be worth digging into more before moving to far.
    0Reply
  • Mike ReynoldsPro Member
    construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
    9y

    @Mason English You said 4-5 hours away so its still in Texas. How much will the tax be when its not homesteaded? You need to consider that too because it will  go up. 

    If its out my way I'd be happy to vet the repair cost for you if you need. Its what I do and if its not too far from me I would do it for the connection of a fellow REI. I have been interested in SA/NB area and maybe we could trade out.

    0Reply
  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Brandon Kelly Yes, those are included in the tots expenses. Thanks for the help. Mike Reynolds It's actually near Beaumont, Tx. And the house is actually in good shape, but I figured maybe a few improvements to help it look more appealing to tenants and not so dated.
    1Reply
  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Tyler Roicki Thanks for the info. You're right about the "memories". I wouldn't let myself get influenced by that, but just figured it would be good to keep it in the family as an investment property (if it works)..
    1Reply
  • Mike ReynoldsPro Member
    construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
    9y

    @Mason English thats a good area really. I know of more than a few big hitters buying up Nederland industrial areas for the last year and a half. All those old warehouses are being rented out and construction is up in the area. You probably knew that already and thats why the other investors are hitting it too. Best of luck. 

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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Mike Reynolds Yeah, the property is in Nederland. I would assume with all the refineries expanding and more workers coming in, they will need a place to live. So I assumed it was something to look in to. Thanks for the advice!
    1Reply
  • Mack McPhatter
    Contractor · Nederland, TX · Member since 2015 · 27 posts · 16 votes
    9y

    @Mason English Your ARV is high. Depending on what part of town it is in, I would say $100 a foot on the high end which would put you around $140k.

    1Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    does she own it free and clear? if so why not just work a private deal with her as the bank.

    or.....
    if she's really nice have her sell it to you for the outstanding mortgage balance (which should be pretty low considering you have "memories" in it) so like if she owes 50k, just buy it for that much. and you can repay her the spread through a separate private deal? or just hugs and kisses.


    Also note: you cannot use a line of credit for a downpayment unless its been sitting in your bank for at least 2 months up to when you apply for a loan

    1Reply
  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Mack McPhatter I figured it was maybe around the $140K range. It's off Nederland Ave, near Highway 69. Do you do a lot of work in Southeast TX?
    0Reply
  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    David Zheng She owns it free and clear. The Line of Credit was for repairs if needed, its been longer than 2 month so I can use some for DP if needed? Didn't know that.. I will discuss that with her and see what she thinks. Thanks for the info!
    1Reply
  • Mack McPhatter
    Contractor · Nederland, TX · Member since 2015 · 27 posts · 16 votes
    9y
    Originally posted by @Mason English:

    Mack McPhatter I figured it was maybe around the $140K range. It's off Nederland Ave, near Highway 69. Do you do a lot of work in Southeast TX?

    Yeah, I'm from Nederland and I am a Realtor, contractor, investor etc.   I can run by and check it out if you need me to.  

    0Reply
  • Cole Lehmann
    Investor · Conroe, TX · Member since 2015 · 3 posts · 0 votes
    9y

    If I were in your situation I would do this...

    Purchase the house as a for sale by owner and save the % the agents would have taken (usually around 6%). This will help you with the line of credit issue for repairs. 6% of 125k is $7500. 

    I would do some research on the area and find some sold homes to make your own estimate on potential sale AND lease prices, don't use realtor.com or zillow.com those are often not market specific. 

    The best piece of advice you'll receive has already been given... DON'T make this a personal issue because the home has memories. Make it a business decision

    Mack is right with the ARV... don't use the houses that are on the market... they are on the market still for a reason (often because the seller is asking for too much).

    My last piece of advice would be to try and do everything yourself for the first house. This is for a few reasons. If you use a realtor to find a tenant, they will take one months rent as commission. This will leave you with little to no cash for inevitable repairs needed especially with an older home. This applies to the property manager as well, although they take a smaller amount they still take cash out of your pocket. They often find the most convenient contractor to fix the problems, perhaps you "hire" your parents as a property manager as needed and buy them dinner in return.

    Good luck!

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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Mack McPhatter Ok thanks. I will get in touch with you if everything works out, and need to have work done on the property.
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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Cole Lehmann Thanks man, that's great advice! I really appreciate it.
    0Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    9y

    I would buy it.  Start swinging and making some moves.  Most people are never take any chances.


    Franklin

    1Reply
  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Frank Romine Exactly what I was thinking. Thanks for the encouragement!
    1Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Mason English Here's my advice, as I have several rent houses in Nederland - while it is one of the best areas in SETX, it's also one of the most expensive. I have houses in the $75k range there that rent for $1,000-$1,200. With that said,  it is not a screaming deal relatively speaking. 

    Also, if you are buying it for $135,000 ($125k+$10K) and it'll be worth $140k, it is not a great deal. Not saying that it might not be worth it, but you're basically buying at retail. Which is fine, just not great.

    Keep in mind with rentals the Law of Diminishing Returns. The higher the price of the home goes up, the smaller the rent increases... i.e. a $100k house that rents for $1,000 in the same city as a $200k house that rents for $1,500

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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Jason Hirko Thanks man. I ran the numbers a while back
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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y
    Jason Hirko I ran the numbers again and I think the best bet would be for $80k (if she would agree) $100,000 sale price $80,000 loan $20,000 down payment I would work out a plan with her, and she would (hopefully) agree to keep just $80k, and I would get my $20k back to help re invest in another property. Then later on, after improvements and time, refinance and get some cash back and give her the extra amount she wanted in the beginning. And whatever is left I will use towards another property. That way everyone is happy and I'm able to get started. Do you think that's a good option?
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  • Robert E BoginoPro Member
    Real Estate Agent · Alpharetta, GA · Member since 2017 · 151 posts · 76 votes
    9y

    @Mason English Have you done comps in the area to make sure of the rent you can get?

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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y

    @Robert E Bogino Not at the moment. I'm in the process of finding a real estate agent in the area to work with. From other sources, I think I could get between $1300-$1375. 

    1Reply
  • Robert E BoginoPro Member
    Real Estate Agent · Alpharetta, GA · Member since 2017 · 151 posts · 76 votes
    9y

    Check your sites and see what similar places are renting for in the area as well. Trulia, Zillow, Craigslist etc.  If you are looking for prperty managers ask them as well what they get for their comps.

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  • Mason English
    OP
    Rental Property Investor · Mckinney, TX · Member since 2017 · 22 posts · 8 votes
    9y

    @Robert E Bogino Realtor.com says the estimate is $1325. Using that number, the deal shows it can work (if purchasing at $80K like I hope she agrees to). I will definitely look into the other sites as well. Thanks for the advice! 

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  • Bowman Fawcett
    Investor · Vidor, TX · Member since 2016 · 6 posts · 1 vote
    9y

    I would be careful using realtor.com or Zillow rent estimates. In this area, $1325 seems to be a bit on the high side for a 3/1.5.  You may be able to get it if the house has been recently updated.  I would take a look at actual rents in the area comparing specs to your perspective property. A great site to check out would be http://www.wecanmanageit.com/rented-portfolio#rented. This site manages A LOT of properties in the area. You can see what actual rented rates are as well as see the pictures of the property to get a more accurate comparison. Hope that helps. 

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