First Deal Analysis Feedback

2 Replies

Hello everyone!

I work full-time as a general contractor and have my Residential Building Contractor and Residential Real Estate Broker licenses in Minnesota. From 2011-2014 I flipped roughly 30 houses, so I have a solid background in comping properties, rehab costs, etc.

This year, I'm aiming to pickup my first buy and hold investment property. If things go well, I'd like to own 4 units by the end of 2018, and continue to scale from there.

With the above in mind, I'm analyzing as many deals as I can and would greatly appreciate feedback regarding the below property (whether you feel anything is missing, your thoughts on the returns/cash flow, etc). I think I should pull the trigger, but I would welcome both agreeable and dissenting opinions!

Student Rental (4BR/1Ba) - $90,000 List Price

Offer: $80,000 purchase price, 3% seller paid closing costs, 20% conventional financing

Cash Outlay: $20,000 ($16,000 down payment, $4,000 rehab)

Rent: $1,240/mth

Mortgage Payment (P&I): $344/mth ($64,000 @ 5% interest, 30 year am)

Taxes: $133/mth

Insurance: $150/mth

Vacancy: $112/mth (9% - playing this conservatively)

Maintenance: $75/mth

CapEx: $125/mth

Management: $149/mth (~12% rents collected, conservatively assuming full occupancy)

Utilities: N/A (covered by tenants)

I like this deal for a couple of reasons. First, it has fairly low entry cost for my first property (relatively speaking). I'm factoring $20,000 out of pocket for this deal; however, since it's rented through March 2019 the "rehab" money I'm noting ($4,000) shouldn't be needed until first tenant turnover. This gives me a maintenance/CapEx cushion from the outset, if there's a break down or emergency.

Second, the property seems poorly managed. Similar properties (4BR) are renting for $1,400/mth + utilities ($350 + utilities per bedroom). With proper management and updates, I should be able to increase gross rents by $160 monthly ($1,920 annually) after the first year. I also have 12% projected as management cost and I’m figuring that cost at full occupancy to remain conservative; however, based on conversations so far I believe I can get this down to 10% of rents collected.

I see this property throwing off roughly $1,812in cash flow ($151/mth). COC return is 9%. Equity accrued is $944, for a total first year ROI of ~13.8% ($2,756/$20,000). If the rent increase goes as planned, second year cash flow increases by roughly $125 (after accounting for the increased vacancy and management allowances). COC jumps to ~16.6% and total ROI 21.5% (equity of $993 accrued in year 2). Those figures are the reason I'm interested in the property, especially since it's a long term play.

I know there are many investors who caution against student rentals; however, I’m younger (29) and don’t have an issue with the extra time/headaches required to manage these types of rentals. For each “con” to this niche, I see an offsetting “pro”.

I hope the above makes sense. If you have a moment, I’d greatly appreciate your feedback!

@Keith Linne , sounds like a plan. Ideally (and in future), what you want to see is that after rehab, your Lender's appraisal would come in at say $130k (for this example), so that when you come to Refinance 70% of ARV (per the "BRRRR strategy"), you'd get back all your initial deposit and rehab cost, which would enable you to scale your buys much quicker than having to save your own $20k every time you want to buy. [ie. Always ask yourself: How much of a bargain is it?]

As for Managing, which is it? Either, 1: "I believe I can get this down to 10% of rents collected"?

Or 2: "I’m younger (29) and don’t have an issue with the extra time/headaches required to manage these types of rentals"? [I recommend going with option 1]. Good luck...

@Brent Coombs - I appreciate you taking the time to look this over! Coincidentally, I had thought a bit about the BRRRR strategy (forgot to mention that piece in my initial post). The agent I'm working with thought we could hit an ARV appraisal value of ~$125,000. My hope is that I can pull out the full investment, which would definitely be a huge bonus.

As far as management is concerned, kind of a hybrid of your points (1) and (2). I should be able to get it down to 10% of rents collected with a professional management company; however, I'm assuming since this is my first property there will be some headaches with coaching them how I'd like to approach ongoing communications, repairs, etc.

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