Is this a good 1st rental?

5 Replies

Hello BP,

Last night I came across a good deal where I feel this can be a great opportunity to acquire my first rental but wanted more insight heres the breakdown:

The property is located in the city where there is some crime but the address is on a decent street

It is turnkey with current tenants paying 1125/month

Tax assessed at 30k, the seller is asking for 24k

It is a 5br 2bth home

I am assuming it needs no work since its currently rented, should I attack this deal or walk away? Personally I do think its a good deal and I would like to negotiate for a better price but I wanted more insight from experienced and seasoned investors.

Thank you!

Howdy @Andre Wilson

I am not at all familiar with your area.  But, the numbers seam off.  Red Flags are going up.  Really need additional data to make a better evaluation.  

5 Br/2 Ba SFR for only $24K??? What is square footage? Renting for $1,125 per month? Wow?

What makes you say it is Turn-Key?  Seller statement?  Did they just rehab it?  Do not assume property condition.  You need to physically walk through it and have it inspected if you proceed with the purchase.  Are you sure it is not in a "War zone" or high crime area?

Have you evaluated the area for the Fair Market Valve of similar properties?  What are the Market rent rates in the area?  Contact a Realtor to help evaluated the deal.

Not sure why you need to negotiate a lower price if it is "Turn-Key" and rents for $1,125.  That would be incredible Cash Flow.

How were you planning to finance the deal?  All cash?  Conventional loan?  You will have a difficult time finding a Loan for that small amount.

Like I said I need a lot more data to provide a better response for you.

Originally posted by @John Leavelle :

Howdy @Andre Wilson

I am not at all familiar with your area.  But, the numbers seam off.  Red Flags are going up.  Really need additional data to make a better evaluation.  

5 Br/2 Ba SFR for only $24K??? What is square footage? Renting for $1,125 per month? Wow?

What makes you say it is Turn-Key?  Seller statement?  Did they just rehab it?  Do not assume property condition.  You need to physically walk through it and have it inspected if you proceed with the purchase.  Are you sure it is not in a "War zone" or high crime area?

Have you evaluated the area for the Fair Market Valve of similar properties?  What are the Market rent rates in the area?  Contact a Realtor to help evaluated the deal.

Not sure why you need to negotiate a lower price if it is "Turn-Key" and rents for $1,125.  That would be incredible Cash Flow.

How were you planning to finance the deal?  All cash?  Conventional loan?  You will have a difficult time finding a Loan for that small amount.

Like I said I need a lot more data to provide a better response for you.

 Thanks for your response 

After doing some research I found out that the property does need a little bit of cosmetic work I'm doing a walkthrough this Sunday so I will have a better idea of what work needs done the property was once a double that was de-converted, also there is a lien on the property of about 18k which raises great concern, seller says they will take care of the lein at closing.

Thats all the info I have for now until Sunday.

@Andre Wilson ,

There are 3 key factors that go into evaluating an investment property: Location, Property Condition & Financial Analysis.

Before buying anything, you need to get acquainted with the area. Is the property located in a neighborhood with a lot of crime? How good/bad is the area? Are there a lot of boarded houses or abandoned buildings? What type of tenant is likely to live in the property (by type I mean white collar, blue collar, no collar), and how stable is their financial situation? A 5 bedroom house that's for sale for $24k and has a tenant paying $1125 per month is a home run...if the tenant pays the rent.

Next, when you evaluate the property condition, be realistic. Most of the time we are all very poor estimators. Whether it's time, distance or construction costs, we all tend to underestimate. I have a rule of thumb when looking at a potential rental. If I can't be sure it will last for 10 years, I budget to replace it. Make sure your mechanicals and structure are solid and then worry about the "cosmetics." On a 5 bedroom house, I'm betting it costs around $35-55k to renovate this building. I haven't seen it, but "cosmetic repairs" usually means it needs everything.

Last, be a stickler on the numbers. How much can you actually COLLECT for rent in the area? What's the REAL vacancy and turnover rate in the neighborhood. Be sure to calculate licensing fees, utility costs, taxes and insurance, leasing fees, maintenance costs, management fees and capital expenditures into your cash flow analysis. These numbers put a little damper on a super-sexy 50% ROI, but they'll let you know whether the property is really going to make you money.

Last point and I'll get off my soap box.

There's always another deal. Always! Remember this when you look at every property. Err (sp?) on the side of caution. And when the right deal comes along, don't be afraid to pull the trigger.

Good luck!

@Andre Wilson   You  said "I am assuming it needs no work since its currently rented..."

That statement scares me.  It tells me that you don't really know what you're getting in to - and that's nightmare fuel.

When you do your walk through, do it with a trusted general contractor or a licensed home inspector.

As @Joshua Weidman said, you have to do your due diligence regarding the area, the rents for similar homes in the neighborhood, vacancy rates, etc - and you have to do it with a mix of pessimism and realism.

Then do your budgeting.  Be sure to do all the usual holdbacks - capex, vacancy, advertising, etc.

Absolutely NO ERASER MATH (ignoring numbers that you don't like).

Finally, a $24,000 home bringing in $1125/month sounds WAY too good to be true.  The rent would pay off the entire principle in just over 22 months!

There has to be a lot more to the story, but good luck!