Sanity check on my first deal!

10 Replies

Hello, BP. I'm under contract on my first deal and I'm wondering if I can get some feedback. Everything seems to be good, but I could use a sanity check to make sure I'm not missing something. This is for half of a duplex.

Asking price: $75,000

Offer: $75,000 (Yes, I offered what they were asking because there was a lot of competition and their asking price was way under market value)

ARV: ~$110,000

Down payment: $15,000

Rehab: $5,000

Closing Costs: $2,000

Total out of pocket: $22,000


Rent: $1,000

Total monthly income: $1,000

Expenses:

Mortgage: $313 ($60k @ 4.75%)

Taxes: $100

Insurance: $80

Flood ins: $0

HOA: $0

Maintenance: $100 (10%)

Capex: $100 (10%)

Management: 0$ (I will self-manage)

Vacancy Allowance: $50 (5%)

Total Expenses: $749

NOI = income - expenses = $1,000 - $749 = $251/month cash flow.

Wealth gain = ARV - mortgage balance - down payment - rehab - closing costs = $110k - $60k - $15k - $5k - $2k = $28,000


CoC = 13.7%


So, to me this seems like a really good deal and I'm worried I'm missing something because it almost seems too good to be true. The owner is out of state and I'm wondering if he just doesn't know what it's worth. The house needs some repair - flooring throughout, paint, and a few odds and ends, but nothing major. I've estimated $5k for repairs. I have an inspection next week, but I have a contingency in my contract that let's me back out if inspection isn't good.

Also, I've run the numbers and if I follow the BRRRR method and refinance my capital backout, I'm still cash-flow positive ($136/month) and I now have an infinite ROI and $22k to reinvest.

Thoughts?



Also, I've run the numbers and if I follow the BRRRR method and refinance my capital backout, I'm still cash-flow positive ($136/month) and I now have an infinite ROI.

Keep an eye on the inspector's report. More often than not I think that is where new investors make mistakes. For instance, I had clients who purchased a house and the husband thought that it would be super easy to do 90% of things. Then he got the contractors in and he found out exactly how much everything was going to cost and was a little surprised. The expenses were more than he expected despite that all of the major systems in the home were in great shape. 

I would presume that if you have an absentee owner, there might be quite a bit of deferred maintenance, not just cosmetic fixes. 

I might also see about getting a better rate on that loan. Paying nearly 5% interest seems quite high. I'm definitely biased on that end though because I work mostly with ARMs.

Keep plugging away!!! Looks good.

Originally posted by @Kristina Heimstaedt :

Keep an eye on the inspector's report. More often than not I think that is where new investors make mistakes. For instance, I had clients who purchased a house and the husband thought that it would be super easy to do 90% of things. Then he got the contractors in and he found out exactly how much everything was going to cost and was a little surprised. The expenses were more than he expected despite that all of the major systems in the home were in great shape. 

I would presume that if you have an absentee owner, there might be quite a bit of deferred maintenance, not just cosmetic fixes. 

I might also see about getting a better rate on that loan. Paying nearly 5% interest seems quite high. I'm definitely biased on that end though because I work mostly with ARMs.

Keep plugging away!!! Looks good.

Thanks for the feedback! I have the inspection next week and I'm going to walk through with the inspector so I'll keep a careful lookout. The home as a newer roof, new siding and paint, new concrete slab out back, and newer windows. I'm unsure of the age of the furnace/AC, but it's not original. The home was built in '82. I'm not concerned about asbestos or lead paint.

I agree with @Kristina Heimstaedt make sure you understand your repair costs and the home inspection as they can be huge money sucks!

@Nathan Churchill 5% vacancy is not enough. 8% is only 1 month a year. By the time you evict (if you have to) and prep for new tenants you will be closer to 2 months vacant plus re-Hab costs. You always figure a pm. You limit your own growth potential by not allowing for a pm. ( how many units can you manage yourself??). There would be nothing worse than having 10 units and have to stop buying because none of them would support a pm. RR

Originally posted by @Ralph R. :

Nathan Churchill 5% vacancy is not enough. 8% is only 1 month a year. By the time you evict (if you have to) and prep for new tenants you will be closer to 2 months vacant plus re-Hab costs. You always figure a pm. You limit your own growth potential by not allowing for a pm. ( how many units can you manage yourself??). There would be nothing worse than having 10 units and have to stop buying because none of them would support a pm. RR

 Ralph, I did account for maintenance. I'm still $150 cashflow positive even with maintenance. All of the advice I've seen on here (from Brandon's analysis videos and others) says to set aside 5% for vacancy. That covers 1 month every 2 years. This will be my only property, so I should be able to manage it.

Originally posted by @Daniel P. :

I agree with Kristina Heimstaedt make sure you understand your repair costs and the home inspection as they can be huge money sucks!

I'm using this as a huge learning opportunity. I've estimated $5k (conservatively), but I can handle a bit more than that if I need to. I plan to do all the work with my wife. I will definitely pay close attention during the inspection, though!

Those numbers look good to me. As mentioned before, watch out for unexpected large expenses that might have been overlooked on the initial walkthrough. For me, those happen at the most inopportune times. 

As far as going with the BRRR method on this, that's up to you and depends on a lot of things including your personal income from your job and how signifacant $22k is to you. Depends if you're trying to get a handful of properties paid off quickly or maximize number of properties or maximize monthly cash flow. Lots of variables to consider that are based on your specific situation. For me, not needing that cash flow to survive, I'd probably opt to finance it all out because I know that I can make better use of that $22k than saving the 4.75% financing cost. Another thing to consider is that you're limited to 10 conventional mortgages, so you'd hate to run up against that wall at some point and have a bunch of small mortgages. Refinancing can remedy that, but just something else to consider. Lastly, having a larger monthly cash flow, especially on your first property, will make it easier to build up a cushion in your rental account for unforseen large repairs or vacancy.

I'l quickly touch on an angle I've used while acquiring rental properties, especially those in poor condition or those where the price is already reasonable for what it is. I have offered at asking or slightly below in order to get it under contract. Do your inspection and note all the things that need to be repaired. Once a good amount of time has been wasted during the inspection period, come to the sellers with the list and a realistic total estimate that you have for the repairs. At that point, offer a new lower price somewhere between the original accepted off and the cost of the repairs with those repairs in mind and be willing to not require those repairs to be performed and still take it as is. The sellers may have already got it in their head that the property is sold just because its in escrow and be willing to make an adjustment on price in order to keep you on the hook and not have to start all over putting it back on the market. This method has worked for me several times. Be prepared for them to decline your new offer, but it has saved me big money several times.

Darren

@Darren Newberger , thanks for taking the time to reply!

I will definitely be on the lookout for expenses that might creep up!

Honestly, I don't know if I'll refi. When my wife and I got into this, we agreed we'd do so slowly. We're pretty risk averse. We understand and accept that some degree of risk is necessary, but we would definitely be more comfortable with more cash flow; at least right now. Our goal was actually to buy our first property by Summer 2018 so we're ahead of schedule! If we refi and only cash flow $100 a month that would be a little too low cash flow for me. If we ever had to get a management company we would make zero cash flow. Our plan is to have enough rentals some day that we can replace my income. You're right about only having 10 mortgages, but since we're going to go slowly I'm not concerned about it right now. It will be a good problem to have when we get there. Right now our goal is to have 5 properties by 2025. We may go faster, but that is our minimum goal. We'll see. I don't want to get too leveraged.

I appreciate the tip about trying to do some re-negotiating last minute. I may try that. It depends what comes back out of the inspection. The listing said that they were selling the property "as-is" so I don't anticipate they'll pay for much. They were asking WAY below market value, probably because they just want to move on.

Thank you for the thoughtful and detailed reply!

@Nathan Churchill @Daniel P. You might even consider bringing a general with you on the inspection. I had a client do that so that his contractor could give him a better idea of the numbers on the spot. You might need to pay for the contractor's time, but it's going to give you the most accurate numbers you can get. 

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