You should determine the monthly cost for property taxes, insurance, repairs/maint, capex & maybe vacancy. Does it need any rehab before new tenants? It seems like this won’t cashflow.
Oops. Misread your comment. Thought your payment was $650!
You should certainly run this through the BP Rental Property or BRRRR Calculators and see the results... And go based upon what it returns - But at first glance it appears to be a FREE House for you in 10 years that also puts money into your pocket each month! I'd personally go the Section 8 route, but make sure to follow the advice of @Dennis W. and be sure to plug in Taxes, Insurance, and Reserves for Repairs / Maintenance, Vacancy, CapEx, and Property Management (even if you will be doing it yourself). Also, does the property need any rehab to be ready to pass the Section 8 inspection? And is it of a quality and location that a Section 8 Tenant would WANT to live there - or would they just take it because it is all they can find before their voucher expires? The former will result in a better tenant than the latter. Also, you MUST be good at tenant screening when dealing with Section 8. Lookup my recent posts and view another I just made about Section 8 Tenant Screening and the one posted just above mine by @Brian Garlington.
@Abel Rodriguez Make sure you know what's involved with Sec 8 rentals. In my area it almost always requires including all of the utilities so if that's the case for you don't forget to factor in those add'l expenses.
@Abel Rodriguez , if $25k is common for the area (or at least not unheard of), just how rough is the neighborhood? If the current owner is prepared to give you what some might call a "deal", the question is: why? (Just $2.5k upfront is hardly a good incentive to sell).
The fact that the "landlord isn’t sure he wants to mess with getting new tenants" could prove to be an understatement! Which means: why would you want that "mess"?
[Any sensible Landlord will already have sussed the cost/benefit/possibility of hiring a PM].
I didn't quite understand your $5k down idea. Why not the $2.5k down option? Cheers...
@Dennis W. yes payment will be $250. Thank you for that, im looking at the property this week to determine how much if any work will be needed to get it section 8 ready.
@Jonathan Taylor Smith Thank you for the suggestion on the tenant screening posts! It is a fairly low income area. while the area is rough, its actually on the much nicer side of town, not that it really helps, as I mentioned I'm viewing the property this week and plan on doing some more thorough neighborhood recon.
@Ryan Murdock I'm fairly confident utilities aren't required but am getting in touch with the correct people to clarify all section 8 landlord requirements.
@Brent Coombs He doesn't seem like he really ever wanted to deal with landlording. More so moved and kept the home for some cashflow during a move and doesn't need the property anymore.
The deal thing:
Purchase would be done $2500 down w/ $250/month x 120 months=$32500
Selling exit strategy would be structured as a rent to own $5000 down w/ $650/month for 10 years. netting me positive $2500 to start, then cashflow after expenses.
PLEASE get a home inspection, period. An inspector you hire....not the current owner. Also, different places have different rules regarding Section 8 as far as utilities, but the bottom line is the tenant should always pay electricity. You most likely will be responsible for water/sewer and you might, I say might be responsible for providing a stove/refirgerator although this varies by area.
Also, what kind of neighborhood is this? Others here on BP may think differently but here's my quick break down
A & B Neighborhood? Usually GREAT tenants, but your NOI for what you get in rent vs. your mortgage and expenses may make it difficult to even get the 1% rule
C Neighborhood? My favorite and actually a sweet spot. Good, and possibly great NOI and you are usually able to collect rent consistently if you've screened the tenant properly. I have 3 properties in Cleveland in C Neighborhoods and they all are 3% to 4% rule. In the San Francisco Bay Area (SUPER EXPENSIVE) I have a rental in a D Neighborhood and it still doesn't meet the 1% rule, but it's close. I also have a rental in the Bay Area in a C neighborhood and it also does not meet the 1% rule but it's close...and I know I overpaid for it.
D Neighborhood? Higher NOI.....but good luck consistently collecting rent and/oir dealing with tenants that may be a little on the high maintenance side.
F Neighborhood? D Neighborhood problems on Steroids. Even IF you get Section 8 to pay their rent, Section 8 generally does not cover all their rent.
Speaking of Section 8. You want to be careful in "estimating what Section 8 will pay. I actually like Section 8 rentals and almost half my units are Section 8 tenants.....that I've personally screened. You want to be pretty firm in what Section 8 will pay. When you look up info on the Housing Authority Website, where it says "Fair Market Rent" Does NOT mean that's what Section 8 will pay. I made that assumption, twice. Now I know better. You can go on Rentometer.com and whatever the median or just below the median may be a good idea of what Section 8 will pay.
Finally....If the guy has told you he wants $25,000 cash, I would wonder, why that amount? You're an investor so why agree to "his price". Why not $22,500? You may want to tell him you'll pay $25K Contingent on Appraisal and Inspection, JUST to see what he says. If he doesn't balk at this then go for it. You may need to come out of pocket and pay an appraiser $500 as well as another $500 for an inspector but the inspector will find things you won't see and that can get you a better price on the property. As for the appraisal, if it's determined the home is worth only $22,500 you are still ahead of the ball game.DO NOT RELY STRICTLY on ZILLOW.
@Abel Rodriguez , aah.
"Purchase would be done $2500 down w/ $250/month x 120 months=$32500"
"Sale would be done $5000 down w/ $650/month x 120 months=$83000".
Originally posted by @Abel Rodriguez :
So, I’ve got a pretty good lead on a possible first deal! Would be a long term buy and hold property, now the numbers!
Owner wants: $25k cash
$2500 down $250 a month for 10 years Total cost: $32500
The home is currently rented for $500 a month, upon research I found out the Home is under market rent at $625 current tenants move out next month, landlord isn’t sure he wants to mess with getting new tenants.
Upon more investigating I found that section 8 will pay around $900 a month for a 3 bed 1 bath in that area.
My plan is to buy at option 2.
Rent to own at $5k down and $650 a month for 10 years
Section 8 the home and hold potentially forever.
Am I missing something or do those numbers look fairly decent?
If you can get the rent up above $700 then it sounds like a solid play. If you can't it's tough. Ya see it's actually hard to profit on a single family rental property that rents for only $500. By the time you factor in insurance, taxes, PM, vacancy, CapEx, repairs, utilities that tiny amount of rent usually isn't enough to keep the thing a float.
@Brian Garlington I am intending on doing a home inspection as well as a home appraisal. I would say the home is in a c-class to d-class neighborhood, any tips on finding out for sure? Ive searched but frankly haven't found anything. That Section 8 estimate was lower than the section 8 website stated, but I am intending on contacting the housing authority to verify what the landlord regulations and what they would be willing to pay for said home in the area. his original asking price was $35k, I've slowly worked him down to this point. upon more investigating it looks like the median home price for the area is around $40k, so I am wary about repairs.
@James Wise thats the number I was really hoping to rent for or more. I plan on doing more due diligence and research about the community and the rental rates.
thank you all for all the suggestions and help so far!
Regardless how you finance it, the market will tell you if it's correctly priced or not.
We rent out 3/1s within a month, to really great tenants at around $800-850 to working people... section 8 in our area allows up to $1200, there is a rental in the market for $1150, obviously trying to get section 8... it sits.. and sits, and sits.. I want to say for around 6+ months now, and it will continue to sit. Is it that there are no section 8 in the area? nope! it's section 8 people still want cheaper rent-- no reason to max it out when they can rent for $800-$900! So I strongly recommend, using the market to determine your rental price-- not section 8.
You may want to do a google search to see if someone has compiled anything that says what class the neighborhoods are in the area you are looking. If nothing pops up then find a property manager or an agent who's company also does property management and ask them.
Another little trick I learned is to go on Zillow and type in DUPLEXES for sale in the zip code you are looking at buying. Those agents that have listings in that zip code will most likely be more inclined to work with investors than the ones that are selling SFR's. They will also know who some property managers are that work in those C/D areas because they have listings in those areas.
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