ROI Low- getting cold feet
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What’s the cash flow?
Have you done your due diligence?
Taking your agents word on the rental income numbers may be a mistake. Unless they are really in tune with local rental rates.
Used the four square method. Mortgage with tax and interest is $1817. I’ve been adding a flat $450 for expenses (100 each for repairs and capex, 30 each for gas and water, 5% vacancy, lawn care). To cash flow a little, we need 2300 in rent. The problem is although the house is completely done, gorgeous kitchen, adorable- it’s really small and on a main road just off a great neighborhood. They say 2 beds but first floor br is small (like maybe fit a full size bed) and upstairs br is more of a loft without a door. Rentals in our area are all over the place and few and far between. Most normal sized two bed homes rent for 2300-2700. 2 bed apts in homes go for 1800.
Vacancy is a little low at 5%, typically I use 8%. Seems like there’s not enough juice to squeeze out of this one :/
It depends on your goals, if you intend to continue acquiring properties and renting them out, etc then once you have more the low cash flow on this one won’t seem as bad when you have others that are cash flowing really well (if you accomplish that).
If this is going to be your one and only or if there is a a major repair (roof, water heater, A/C etc) it could set you back and make a good positive cash flow take even longer to achieve.
Also what’s “to cash flow a little”?
$25/month? $100/month? $150/month?
This deal seems way too slim. I'd get out of it and look for something with better numbers.
So which is it - 1% or 3%? And did you remember that inflation is 2%, thus 1% would cost you money :)
On a cash flow basis, anything under 8 is going to hurt. Are you banking on a lot o appreciation, or what?
And here's the question - if you are looking at 3% return (although I am not at all clear what that means), why even bother?! Tenants, leaky toilets, landlord/tenant laws, debt, etc. all for 3%?!
Why not sell something on Amazon and call it a day...:)
Renegotiate to a lower price based on information you gathered during due diligence. If you can't get a price that makes the numbers work then walk away.
In hindsight do you think the "highest and best" was a bluff or do you think there really were multiple offers?
Laura Granelli Based on the (limited) info provided, I’d say “back out”. If there are really 5 offers you’re not getting a great deal with built-in equity. Pesky free-market. Since it’s your first deal, odds are you’ll underestimate everything. Not by a ton but by a little...in each category. You don’t have enough cushion at a 1-3% ROI to stomach those mistakes. I’ll just guess that you’re bidding against owner-occupants who can pay with emotion, aren’t looking for ROI, etc. That puts you at a disadvantage from the start. Pass on the deal and move on. And stop using your agents rental rate projections...
Run your numbers with the worse case scenario. Something like rent at $1750 and plenty for cap ex. I had a similar feel on my first offer. You should feel ok about offering a lower amount after due diligience, and/or walking away if the numbers don't work out. Worst scenario if you leave is that the seller is educated that they are asking too much and someone else gets a slightly better deal. good luck!
That ROI is way too low. I shoot for 10 -18% or I walk away.
Thank you all for your sage advice! This is definitely a learning process.
We’ve not only used our agents projections but I looked up comps. There’s just so few active rentals and recently rented properties that’s it’s difficult to project.
Josh Sohar cash flow is between 75-250. depends on what we can get in rent. We’re realizing the house price is at the top of the market as is the rent required, so this won’t appreciate and if the market tanks we won’t get that rent.
@derekkirkwood yes there were 4 other offers. They went with ours because the agents have a good relationship with our lender.
