Under Contract for First Rental Property

11 Replies

Good Morning BP!

Last night I put a property under contract that will be my first rental property.  I have experience with flipping and wholesaling properties, but this is a new venture for me.  I am looking for advice and potential obstacles to look out for in the process.  Anything you can offer is much appreciated!

The property is a 3 bed/1.5 bath townhouse in the Pike Creek area of Wilmington, DE.  It is 1750 sq. ft., built in 1978, and will rent for $1,450 a month.  It is a Fannie Mae Homepath property that the bank did a lot of work on.  They have replaced the roof, installed a new water heater and HVAC system, replaced the carpet, painted the entire interior, replaced the kitchen with new cabinets, counter tops and flooring, as well as rehabbed both bathrooms.  After a new refrigerator, washer & dryer, blinds, and few minor repairs the property will be in rent-ready condition.  The listed price was $144,900 and my offer of $136,000 all cash was accepted.  

My plan is to borrow private money to fund the purchase price and then do a cash-out refinance as soon as possible (within 3-6 months).  The property is conservatively worth $185,000 and I was given an unofficial BPO of $200,000.  I would look pull out $148,000 (80% of value) on a 30-year fixed rate mortgage through a local bank.

If you see any red flags or something I should be concerned about please let me know.  Thank you!

It looks like you have a solid BRRR on your hands. My only advice is don't over leverage on the refinance. If your appraisal comes back at $200K, consider still only pulling out enough to pay back your private investor. Many people think we're due for a correction, and if rent prices decrease, you still want your mortgage to be covered. However, leverage is still good, especially if we see inflation in the future, so it's a balance.

Good luck!

@Sam Grooms Thank you for the feedback.  I wouldn't pull out more than $148,000.  Like you said I want to maintain solid cash-flow and not over leverage.

Originally posted by @Shawn Kostoff :

Good Morning BP!

Last night I put a property under contract that will be my first rental property.  I have experience with flipping and wholesaling properties, but this is a new venture for me.  I am looking for advice and potential obstacles to look out for in the process.  Anything you can offer is much appreciated!

The property is a 3 bed/1.5 bath townhouse in the Pike Creek area of Wilmington, DE.  It is 1750 sq. ft., built in 1978, and will rent for $1,450 a month.  It is a Fannie Mae Homepath property that the bank did a lot of work on.  They have replaced the roof, installed a new water heater and HVAC system, replaced the carpet, painted the entire interior, replaced the kitchen with new cabinets, counter tops and flooring, as well as rehabbed both bathrooms.  After a new refrigerator, washer & dryer, blinds, and few minor repairs the property will be in rent-ready condition.  The listed price was $144,900 and my offer of $136,000 all cash was accepted.  

My plan is to borrow private money to fund the purchase price and then do a cash-out refinance as soon as possible (within 3-6 months).  The property is conservatively worth $185,000 and I was given an unofficial BPO of $200,000.  I would look pull out $148,000 (80% of value) on a 30-year fixed rate mortgage through a local bank.

If you see any red flags or something I should be concerned about please let me know.  Thank you!

What numbers are you using on your analysis of the cash flow for this?

@James Masotti

The property will rent for $1,450.

Taxes = $150

Insurance = $75

Vacancy = $70

Maintenance = $140

Cap Ex = $140

Debt Service = $772

Considering those numbers the property will cash flow $103 a month.  I will be managing the property myself.  I don't anticipate the Cap Ex or Maintenance to be that high since the property was fully rehabbed at the end of 2017, but I wanted to assume those numbers anyways.  The cash flow isn't crazy by any means, but I will be in this deal for no money out of my pocket and with at least $40,000 in equity.

Originally posted by @Shawn Kostoff :

@James Masotti

The property will rent for $1,450.

Taxes = $150

Insurance = $75

Vacancy = $70

Maintenance = $140

Cap Ex = $140

Debt Service = $772

Considering those numbers the property will cash flow $103 a month.  I will be managing the property myself.  I don't anticipate the Cap Ex or Maintenance to be that high since the property was fully rehabbed at the end of 2017, but I wanted to assume those numbers anyways.  The cash flow isn't crazy by any means, but I will be in this deal for no money out of my pocket and with at least $40,000 in equity.

Check with your lender for the cash out refi phase plans. They can tell you what they allow. I was only able to secure 75% LTV for a cash out refi where purchase loans might allow 80% LTV. Just so you can be fully aware of what you should be allowed to borrow...

Originally posted by @Shawn Kostoff :

@James Masotti

The property will rent for $1,450.

Taxes = $150

Insurance = $75

Vacancy = $70

Maintenance = $140

Cap Ex = $140

Debt Service = $772

Considering those numbers the property will cash flow $103 a month.  I will be managing the property myself.  I don't anticipate the Cap Ex or Maintenance to be that high since the property was fully rehabbed at the end of 2017, but I wanted to assume those numbers anyways.  The cash flow isn't crazy by any means, but I will be in this deal for no money out of my pocket and with at least $40,000 in equity.

 Got it. I'm usually looking to cashflow $100+ so it's not bad. I just usually have property management included in my numbers. It's great that you'll have the equity there with no money in the deal though. Makes for a great cash on cash return. Just be careful how many you buy without property management cost baked into the deal. There is always a property management expense...whether you do it yourself or someone else does. If you ever get to a point when you don't want to do the PM any more and it's not in your cashflow analysis you'll be stuck unless you liquidate properties and refinance/pay off in order to reduce your monthly debt obligations.

Looking forward to hearing more about it as you get it up and running.

Congrats again!

Originally posted by @Shawn Kostoff :

@James Masotti

The property will rent for $1,450.

Taxes = $150

Insurance = $75

Vacancy = $70

Maintenance = $140

Cap Ex = $140

Debt Service = $772

Considering those numbers the property will cash flow $103 a month.  I will be managing the property myself.  I don't anticipate the Cap Ex or Maintenance to be that high since the property was fully rehabbed at the end of 2017, but I wanted to assume those numbers anyways.  The cash flow isn't crazy by any means, but I will be in this deal for no money out of my pocket and with at least $40,000 in equity.

No HOA fee for the townhouse? I saw that missing from the numbers above. Just know that you will not have the luxury of handing over to PM at any time in the future or risk negating all future annual cashflow. So if you have to move in future, you will likely need to sell.

@James Masotti @Jeff Bridges

Thanks for the feedback guys. There is an annual HOA fee of $40, but I built that into my insurance number, which is overestimated by about $25, so I am good there. I have thought about property management and right now I am comfortable managing myself. If in the future there comes a time where I can't manage the property anymore I feel like I have enough room between my cash flow and maintenance numbers to be able to support property management. I would probably break even each month, which I am okay with because of the fact that I am in for no money out of my own pocket. Like anything else, we'll see what happens.

In almost any other deal I would build in PM costs, but since this property is literally a five minute walk from my personal residence I am comfortable taking the risk at this time.

Originally posted by @Shawn Kostoff :

@James Masotti @Jeff Bridges

Thanks for the feedback guys. There is an annual HOA fee of $40, but I built that into my insurance number, which is overestimated by about $25, so I am good there. I have thought about property management and right now I am comfortable managing myself. If in the future there comes a time where I can't manage the property anymore I feel like I have enough room between my cash flow and maintenance numbers to be able to support property management. I would probably break even each month, which I am okay with because of the fact that I am in for no money out of my own pocket. Like anything else, we'll see what happens.

In almost any other deal I would build in PM costs, but since this property is literally a five minute walk from my personal residence I am comfortable taking the risk at this time.

 The important thing is that the numbers are solid enough for your first buy and hold deal. The makeup and strategy of your portfolio will change over time. Since this is a solid single family in a good neighborhood, you'll be able to 1031 in a few years to a property that might provide better cashflow at that time. There's also something to be said for the lack of headache you'll have on this property if you get the right tenet in there. Cheers!

If everything goes well and you do end up with $100/mo cash flow, I don't think it will be scalable if you plan to grow in a similar manner as your DTI/DSCR will likely become an issue. If there really is that much equity in the place, and you plan to grow over time, I would consider looking to unload it at some point instead of considering it a buy and hold rental.

I know people discuss wanting to make $100/door, but that metric is better for someone with 100 units than someone with very few regardless of your cash outlay.  It would take a lot of risk and properties making $1,200/yr to make any money.  A risk I surely would not like to take.

I would caution you about relying on an appraised value of $185k - $200k, either your area does not have a lot of demand or you are over valuing this property.  If this as indeed a fully remodeled house it would not be sitting with that much equity.  If it is listed in an active market this house would have been purchased right away by anyone looking for a home or someone willing to list it at market value and make some money.  I have purchased many Homepath properties and I have never seen them renovate kitchens and baths.  New paint and carpet sure but I would guess many of the renovations are not as new as you think.

Second - I have also heard of a few banks that will not go higher than 75% on a cash out refi but I am not sure this is technically what you are doing since you are paying back a private lender.  Many banks also have a policy in place where they will only loan the lesser of a percentage of purchase price or appraised value.  Clearly a percentage of your purchase price would be lower than the appraised value....  I would talk to your bank quickly about this.  I had a house a while back that I purchased for $110k, renovated, appraised at $200k, and I could only get a loan for $77K on it....  Could have been the bank and maybe things have changed.  Also banks like to know what renovations have been completed to justify the higher number.  In your case it sounds like you are just going to buy some cheap appliances and say you have $50k in equity...  Hard sell to a bank.

Last - I assume you are paying interest on private money?  I imagine this is not a favorable interest rate, if the S#!T hits the fan on the financing side I am guessing you will be negative on cash flow so there is some risk to this.

Hope all goes as planned.

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