Real Estate Agent · Holmdel, NJ · Member since 2014 · 38 posts · 11 votes
Hey everyone. After years of studying and preparing, I'm ready to make an offer on my first investment property. I've run the numbers and the deal looks good, but could really use a second look from someone more experienced.
Purchase price: $220,000, putting 20% down
Principal and interest: $900/month
Property Taxes: $4,500 ($355/month)
Budgeted expenses to be paid:
$350/month to cover cap ex (5%), vacancy (7%), and maintenance/repairs (5%)
$100/month insurance
$100/month to cover water, sewer, and garbage
Estimated rent $2,000/month
I calculate positive cash flow of $230/month
My questions are:
Have I budgeted enough for cap ex, vacancy, and maintenance?
The house was a rental. What evidence can I ask the owner to show in terms of income and expenses?
The house was vacant, but the owner just allowed a "friend" to occupy it this past month. There are 3 people living there with cats and, safe to say, no lease and rent-free. What precautions should I take when dealing with the current tenants?
I don't own any rental properties, but I'd ask the seller for their pro-forma showing what they spent and what they earned over the last 12-24 months on the property. Also, did you include property management in your estimate? Or are you going to self-manage?
As for the tenants, check with an attorney on tenant rights and landlord rights in your state. You may inherit something awful that puts you in a very bad spot.
I think you are skinny on your cap ex, repairs, and vacancy in addition to needing to add property management whether you intend to use a service or not.
I'm conservative, so I use 10% for each of these for a total of 40%. I think this would put you cash flow negative.
When analyzing the deal, I recommend a more conservative estimate of expenses. If you over estimated expenses then the additional upside will be a pleasant surprise. If you under estimate expenses you are potentially in for a nasty surprise.
@Steven Primiano - With the details you provided this seems to be not so ideal deal. In a pure cash flow market I always look for close to 1.5% rent. If you could ride the market for some time and there is potential for appreciation then this could be OK deal.
@Bob Okenwa will definitely check with my attorney.
@jay dean
@Jay Dean I'll up the percentages when running numbers on this and other properties.
@Vivek Khoche thanks for the rule of thumb on cash flow.
Other consideration is that I was pretty pessimistic on the rent. I think I could get a few hundred more but wanted to see how solid the numbers were with low rent. I'll do some more due diligence on the rent estimates, edit the numbers to your suggestions, and see where we come out. Thanks again for the advice.
Your Cash Flow is off based on the expense numbers you provided. Your math is also off on your monthly tax ($4,500 / 12 mo = $375) and your expenses 5% ($100), 7% ($140), 5% ($100) = $340.
You should include Property Management (10%) when you analyze properties. Even though you may self manage you might need to use a PM in the future as your portfolio grows. It would be hard to compensate for it later if it was not included in the beginning. If you do not use a PM then it's your gain.
For CapEx I would use 10% not knowing the age and condition of the property. At until you are able to have the property inspected to determine the current condition and usable life expectancy of all major components and appliances. Once you get the report you can develop a more accurate CapEx reserves requirement and if there are and immediate Rehab costs needed.
So if you add the additional $100 (5%) for CapEx and $200 (10%) for PM your Cash Flow becomes negative ($185 - $300 = -$115). Even without the PM it is marginal.
Have you determined the ARV based on recently sold comps? Is $2,000 the median rental rate for similar properties?
As far as asking for rent collection proof you can as for a T12 (trailing 12 months of rental collection) report. No guarantee you will get it. I would not be to concerned about it unless there is a current lease in effect. Do your own research about the rental market, Property Value, Insurance, etc. Do not over pay for the property.
Make sure you have proper contingencies in a contract if you move forward with an offer. Specifically, inspection and current tenant move prior to closing.
@John Leavelle thanks so much for the input. My partner lives around the corner from the place. I plan on managing the property myself but will include a percentage for PM.
All good advice. Definitely getting a home inspection but furnace and hot water heater all newer. Lots to consider. Appreciate the input. I've been looking for a long time and anxious to take the plunge but want to make sure my research is sound. Thanks again.