What do you think about this deal for my first rental?

Question

I came across this listing on Zillow. It's currently pending, but I'm doing a hypothetical analysis just to see if it would be a good deal, or not. Who knows; I might put in an offer if it becomes available.

Here is the analysis that I ran with the biggerpockets rental calculator.

Rentometer says that, based on 15 3-bedroom rentals in a 1.96 mile radius, the average rent is $881 with the median being $795. I looked at one of the houses that is supposedly renting for $750 and it looks comparable, but perhaps a little nicer than the one I am analyzing. Thus, I'm going with $700 as a (hopefully) conservative amount for rent. Perhaps this would be closer to $750 or even more with some rehab, which this property needs.

From looking at the pictures, new flooring and paint pretty much throughout the entire house seems needed. At 1,196 square feet (assuming that I put vinyl plank down in every room), I estimate about $2,300 for vinyl plank flooring, after tax. Assuming that every room/ceiling needs a new paint job, I conservatively estimate $350 for paint, also after taxes (which would purchase 8 gallons, though I'm guessing more like 6 would be needed).

Also, it seems that new cabinets are needed, as there appears to be a lot of damage. I really have no idea on this one, but I would hope I could get some cheap cabinets for $3,000 or less (for the kitchen and utility room).

All told, I'm currently looking at $5,650 in repairs, but let's round up to $6,000 even. And this is just for the things that I'm able to see in the pictures.

If the roof doesn't need to be replaced just yet, and the HVAC system is in working order, what other things might need work which would quickly add to the estimated rehab cost? I'm going to round up to $10,000 to account for the unknown factor.

So, based upon all this as well as the analysis that I linked to above, what do you think about this deal? Are my estimates of the rehab conservative, or liberal? Am I somewhere within the ballpark as it relates to my assumptions as to what probably needs to be done based upon the pictures, the age of the property (built in 1986), and the other details within the listing? I am planning on doing the work myself -- in the age of youtube, is this feasible for someone like myself without any experience in rehab, whatsoever? What other considerations are there to be made before making an offer on a property like this?

John Leavelle · Answer

@Lucas Mills

You could be right about the appraised values.  Just be cautious and make sure you are using the correct appraisals.  Try to find out why they are selling so soon.  Why would you sell a property 25% lower than you purchased it 8 months prior?  There could be a perfectly legitimate reason.  Just double check everything.

Lucas Mills · Answer

@John Leavelle

Why is it a red flag that the property sold for 51k 8 months ago? Is it because of the price it sold for, or the fact that it was sold within 8 months, or both?

Based on quick and dirty comps, it seems that, once fixed up, this property would likely appraise for anywhere between 60k and 70k. So, 56k in 2016 doesn't seem to far off the mark, especially assuming that it hadn't had any recent rehab work done.

But it's entirely possible that I'm missing the point and not understanding what exactly the red flag is here. Could you elaborate on that?

John Leavelle · Answer

@Lucas Mills

Microwave, dishwasher, washer and dryer are optional.  It depends on what the local Rental Market requires.  If competing rental properties have them, then, you had better have them too.

Did you see this property was sold for $51K just 8 months ago?  Red flag!  You should have an experienced GC walk the property with you and provide a bid for everything that needs immediate Rehab. You may or may not need to pay them for their time.  The GC along with a formal inspection should reveal items that you can handle and the ones you may need help with.  On some projects you will need the GC experience and their ability to pull permits.

If you haven't already, you should go to one of the big box stores to price common materials and appliances.  Go with durable goods, but, not high end items.  You want it to look nice and be able to take abuse.  Again, check the finishes that are common in other rental properties.  I have put matching "Scratch n Dent" appliances in some of my rentals for half the cost of the same regular retail appliances.  Try to use the same type door locks in all your rental properties.  When a tenant moves out it is easy to change the locks.

You need to provide additional data to determine if it is a good Cash Flow analysis.  You indicated 20% down payment of $7,600 and a loan for $30,400.  Have you started shopping for loans yet?  You will find it difficult to get loans under $50,000 for investment properties.  Allowing that you are able to do so your basic analysis is good.  You are able to achieve $200 plus in monthly Cash Flow using the 50% rule for expenses and below market rental income.  You need to start finding a Lender to get pre-Qualified/Approved. That way you know what rates and terms you should have.

There are still a lot of questions and unknowns regarding this property and this deal.

Lucas Mills · Answer

@John Leavelle

Thanks for the reply. I didn't consider appliances -- we're primarily talking refrigerator, microwave, and oven, right? Doesn't the tenant usually bring their own washer/dryer?

Also, those other things you mentioned are good to keep in mind. I'm hoping that, barring some kind of unforeseen issue with the foundation or sewer lines (or something else), the additional 4k I tacked on should be enough to take care of those things.

I know there are a lot of unknowns at this point, but based on what is currently known, and assuming that there aren't any other significant issues requiring immediate and costly attention, do you feel that this is potentially a good/manageable rehab project for a first-timer, with good performance as a rental property given the potential for cash flow?

John Leavelle · Answer

Howdy @Lucas Mills

The first thing you need to do is establish a good ARV based on recently sold comps.  You can do this two ways.  First find an investor friendly Realtor to run the comps for you.  Second use Zillow or Realtor.com to search for recently sold properties in the same area.  Make note of sold price (and listing price if possible), square footage, number of Bedrooms/Bathrooms, etc.  Also make note of condition of those properties.  I'm sure you will discover the ARV to be more than the $38,000 you have in your analysis.  It should be higher just from the Rehab work you do.

Are you sure the cabinets need replacing and not just refurbished?  That can save a lot of money.  Refinish/paint and new hardware is best unless they are damaged.

Be sure to inspect/change all the electrical fixtures.  Outlets, switches, and light fixtures.

Do not forget about curb appeal.  Exterior condition must look fresh.  Paint, landscape, driveway, walkway, patio need inspected and attention.  Just from the pictures the landscape and rear patio need help.

Don't overlook foundation issues.  Could be why the list price is so low.

If this will be a rental you need to add new appliances to your Rehab costs.  There are none in the pictures.

The last thing is don't short change yourself on rental income.  Once you put new lipstick on the property it should be in the median range for rent.  Not below the low end.  Try to find out the Value on those 15 properties you used from rent-o-meter.  What condition are they in?  That will tell you where your rent should be.

If you did put an offer in be sure to have the property inspected.  You need to determine the current condition and usable life expectancy of all major components and appliances.  Use that report to help determine what repairs are required immediately and what your CapEx reserves requirement needs to be.