Help!! What am I missing to make this a good deal?

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Matt A. · Answer

Short answer - if it were me I would self manage and I would have tenants cover utilities.  Longer answer below :)

• I'm glad you have vacancy in there, although 3% may be a tad too low depending on your market.  I usually run an 8% assumption on vacancy.
• Capex and Repairs at 7% are probably ok, although if you are putting $35k into repairs upfront you may have lower Capex and repairs on the unit for the first 5+ years.  
• Do you have to have property management?  That alone makes you profitable after the refi.If you keep property management you should see if you can negotiate down to something like 5-8% of rent.  In my market I usually see something like 10% of rent, max of $120/month.
• If you keep property management you should see if you can negotiate down to something like 5-8% of rent.  In my market I usually see something like 10% of rent, max of $120/month.
• Electricity, Garbage, Water & Sewage are combined to 28% of your expenses.  That's a huge number in this P&L.Can you have the tenants cover the utilities?  In my market, 95% of the time the tenants responsibility for these expenses.  If you can have them cover that then this is a great deal.
• Can you have the tenants cover the utilities?  In my market, 95% of the time the tenants responsibility for these expenses.  If you can have them cover that then this is a great deal.

• If you keep property management you should see if you can negotiate down to something like 5-8% of rent.  In my market I usually see something like 10% of rent, max of $120/month.

• Can you have the tenants cover the utilities?  In my market, 95% of the time the tenants responsibility for these expenses.  If you can have them cover that then this is a great deal.

John Pierce · Answer

What repairs are you planning to do for $35,000?  If that $35,000 includs a lot of cosmetic upgrades in the kitchen and bathroom, you could skip those and rent the home to a Section 8 tenant for $1100 a month.  In 2-3 years you could still upgrade the finished and rent to a market rate tenant.

Brian Ellis · Answer

Maybe flip it instead? Then take the 95k and put it towards a property that will give you more cash flow.

Andria Kobylinski · Answer

Thank JD, YES! Rookie move and that changed everything on my calculations. Put an offer in on this property but did not get it. On to the next...Thanks Again!

JD Martin · Answer

As soon as you remove utilities your numbers look better. Your vacancy figure may be too low. Property taxes are a little on the high end IMO based on your monthly expected rent - I aim for about 1-1 of monthly rent, thereabouts - i.e. if a place rents for $1000/month I would be looking for annual property taxes of $1,000. That works less and less the more expensive a place you live, so that might not be applicable where you are, but when that is the case it's usually made up for by a much higher monthly rent (i.e. high property tax areas usually mean high cost of housing). But, ultimately, this is not a screaming deal because your cash on cash return before refinancing is only about 6%. You could get that a little better by self-managing (8.5%), but you are putting a lot of money into this place on repairs.

Andria Kobylinski · Answer

Thanks for the feedback Matt, all good things to consider!

Matt A. · Answer

Maybe back up a step - what is your goal on this property?  Your original question was "What am I missing to make this a good deal" - what defines a good deal to you and your investing strategy?  Is Cash on Cash your main metric or is it cashflow or something altogether different?

Cash on cash return is just one number of lots of metrics you can use to judge good or not good on a given deal.

Andria Kobylinski · Answer

Matt, thanks for your quick response. After looking at it 10x I realized I included all of the utilities which, yes, I would have tenant pay. (I originally added them in to toss around the idea of an AirBnB).

I am still stuck on how to get the Cash on Cash ROI higher. Is it a matter of spending less on the Reno? I believe I can do it for 20-25k but was trying to be conservative.

Help!! What am I missing to make this a good deal?

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