Need help with first deal

9 Replies

Not sure what info is needed but check out the below and let me know what you all think. What am I missing? Thanks so much!

3br 1 bath 870 sq ft single family in Richmond, va

Listed for $65k (my agent expects a sale price closer to $70-$75k)

Approx $2000 for repairs and improvements

Rent $1100-$1200

30yr Mortgage, tax, insurance approx $425/month

Management fee & and repairs approx $330/month

Cash flow- approx $350

Rookie here, looking at comps in the area, the other 3 beds with low sq footage are older homes. So, I'd double check your repair and improvement number. Second, make sure you check the rent number with multiple sources (management companies, craigslist, or drive neighborhood). Yours would likely be the smallest 3 bed available for rent. That's all, I'll let other chine in.

870 sq ft and it has 3 bedrooms and a bath? interesting

I think you are missing vacancy projection.

Using the 50% rule, you'd cash flow about $175 with rent of $1200/mo or $75 with rent of $1100/mo.  Just a guesstimate. 

@Rob MacSwan - You have some good advice on here. Someone took a look at the local comps (kudos to @Ronald Martin ) and made a good point that your estimated repairs may be low.

Out of curiosity, where did you come up with the $2000 repair and improvement? Will you be doing the work yourself? What all were you including in this (paint and general cleanup?)? For an older home, $2000 might be low unless if it only needed some lipstick. What is the age of the roof, water heater, furnace, etc?

It looks like you used roughly 10% for maintenance, repairs, and CapEx (guessing that's where the $330/month came from) - if so, you're on the right track for estimating expenses. The only thing missing is vacancy.

I would strongly suggest taking another look at the age of the property and determine whether you should increase the percentage for maintenance and CapEx if you expect any of the big ticket items to wear out in the near future (5 years or less).

What I would do:

Determine age of the home and have an inspection done if you aren't experienced. From that, get an estimate on how much repairs and improvements will cost. 

Determine how much CapEx and maintenance you should set aside per month (percentage of income). 10% is a good starting point for each, but consider increasing that percentage based on the age of the property.

Find out how much rent will be. I use RentOMeter or RentJungle to find these numbers.

Decide how much cash flow you want to see

Back-calculate the purchase price based on the above data. Maintenance, CapEx, taxes, insurance - these are all "set" values that you shouldn't play with in order to "create" income. Yes, you can increase cash flow by decreasing CapEx savings. Don't do it. Instead, you can increase cash flow by decreasing your financing payments - decrease the purchase price, find a lower interest rate, etc.

Unless if there are major issues with the inspection, this could be a good property to purchase. You'll have to do a little legwork to decide what the purchase price is.

Thanks for the feedback everyone. Looks like repairs will be closer to $4k. Have no idea on cap x until I do the inspection. Nothing jumps out to the eye. Confirmed $1150-$1200 rent is competitive in the area. My agent told me vacancy might be a couple weeks at worst.

I put in an offer for $70k. Apparently there are multiple offers. Let's assume my offer is accepted and I have to spend a little on cap x. How much in cap x is tolerable before this deal becomes a poor investment?

@Rob MacSwan Well to decide if this is a poor investment there is one key thing we are missing. How much are you putting down? When we know that we can determine your ROI (which in my opinion is a lot more important than just overall cash flow). If you only put down 10% and you cash flow around $100 a month, then you are looking at an ROI of about 14% which isn't too bad, however if you put down 20% and cash flow the same $100, well then your ROI is only 7%.. Which is not good in real estate.

Putting down 20-25%. Haven't decided yet. 20% for 5% interest or 25% for 4.75% interest. Don't know if the 25% is worth it. Thoughts? Thanks!

Check the plumbing. What part of town is this in? 

Price makes me think North of 9 Mile, or Southside near McGuire. You can get $1000-1200 section 8 in these neighborhoods.

Vacancy calculate 5%. Assess the life that the roof has on it. What's the exterior material? Wood siding is more costly to repair than vinyl or brick (in your cap ex estimates). Is the electrical updated? Does it have central heat/air? Laundry? For the higher rent in the lower neighborhoods, I find these features are paramount; especially the laundry amongst these types of tenants.

Again, I'm not sure what neighborhoods your talking, so this applies to southside or north of 9 mile, etc because those are the rental markets that I know.

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