[Calc Review] Help me analyze this deal

5 Replies

View report

*This link comes directly from our calculators, based on information input by the member who posted.


Hello everyone. I have a question about using the calculator. I have found a property that I would like to use a 203k loan on to include rehab costs. If I would buy the house for 24k, and I am estimating 20k in repairs, would I just assume a 44k loan and 0 repairs for the calculator? This is my first time using the calculator, so please rip me hard about your objections to my analysis.

Also. Tell me what you think about this property with these numbers. How soon would you recommend a refinance?

Howdy @Jarrod Frankum

The calculator should reflect the correct numbers:  Purchase Price $24,000, Estimated Repair Costs $20,000.

The loan information is where they are combined.

How confident are you about your ARV? Purchase price? Repair costs? Rent? the reason I ask is your expense numbers are conservative. That's good. However, any increase in your costs reduce your already slim Cash Flow. When you Refinance you are required to leave a certain amount of equity in the property. In this case it will probably be 20%. So the new loan amount will be ruffly the same ($44,000) if the ARV is correct. The problem is the interest rate may be higher which increases your mortgage payment and reducing cash flow. So my question is what do you hope to achieve by refinancing? Removing PMI? Check with your lender. You may be able to do that without the refi after you reach 20% equity. Problem with that thought is you are starting with 3.5% equity. If you can get $55,000 for the new appraisal then you have a shot.

There is something you need to consider. As long as the property is not rented you are incurring Holding Costs. That can includes (but not limited to) mortgage payments, taxes, insurance, utilities, HOA fees, etc. In other words negative cash flow. Do you have the means to cover these costs until it is rented? You are required to stay in the house for at least one year because of the FHA loan. You should include this in your overall calculations.

Did you know you are required to use a licensed contractor to complete the repairs when using a 203K loan?

Personally I would not go for a SFR that will only cash flow $105.

@John Leavelle I am fairly confident about arv and I expected to go with licensed contractors anyway. I am moving to Lubbock so I am planning to live there at first. I wanted to have conservative numbers on expenses. What are your numbers on a SFR if 100 per month doesn't work? Average rent is another 50 higher for same type property. This was just a simple analysis. I figured 20k would be a very healthy budget for rehab. I've yet to rehab a house before.

Hey @Jarrod Frankum

First of all, this is great that you put this much effort into analyzing the numbers. Even more so that you put it online for others to critique and hopefully learn from!

Questions: Are you planning to occupy the property? If so, for how long? Where is your closing cost estimate coming from? I see $829 in “loan points”, are you buying down your rate? When does the current lease expire? How much do you have saved up? Have you spoken to any lenders about getting qualified?

There are a few areas of concern with your numbers. (if anyone would like to chime in or correct me, please do)

1. A 203K loan is an FHA loan. I am not sure that property would qualify with FHA guidelines. FHA does not allow peeling paint, cracked windows, heating/cooling issues, electrical issues, and a bunch of other items. I can see from the picture that the fascia boards have peeling paint. **Im not sure if FHA allows you to use a 203K to improve the property up to FHA standards.

2. With an FHA loan you are correct, 3.5% down payment is required. However, you will also have Mortgage Insurance added to your monthly payment and FHA charges a funding fee as well. For what you're looking at, I would estimate about $30/m. This does NOT go away when you his 20% equity in the home. Only way to get it to go away is to refinance the property with another loan program. **you can only have 1 FHA mortgage at a time. So if you use it on this property, then want to buy a quad-plex with 3.5 down, you will need to sell this property

3. Your closing costs are pretty low. This becomes a big issue with traditional mortgages with low-priced properties. You will pay a lot of the same costs for the mortgage with a $40,000 house or a $300,000 house (appraisal, survey, attorney fees are the same with $40K as $300K). With a more expensive property its not as big of a deal. But after I ran some numbers (these are only estimates) I would expect your closing cost to be closer to $5,000-6,000 (origination fees, appraisal, survey (if needed), closing, doc prep, attorney fees, flood cert, title, prepaid insurance/taxes/mortgage insurance, and initial deposits to escrow) Paying 15% of the value of the home in closing costs is pretty high. This would raise your total cash outlay to $6-7K

4. Your insurance quote seems quite low. Insurance premiums are not linear with home values. For instance, a brand-new house worth $150,000 should have insurance < $100/m. A $120,000 home built in the 80’s with a 10+ year old roof could be $125-250. A lot of times a lower priced home will not have drastically cheaper insurance. I would estimate this home would be close $60-100/m (I am by no means an expert with insurance. I would suggest speaking with a few insurance companies).

4. The home is in a lower income area. I’m sure there are good people who live there but I am not sure I would feel safe. Also, who do you think will rent the property? I don’t know many TTU kids in that area. I think it’s safe to say you should factor a little more into your vacancy cost (this can go for evictions as well). Also, what shape will the home be after they move out?

5. Like John mentioned, if you were to refi the property, you will likely get 80% of the value. (most lenders require 80% LTV) Then, depending on how you are refinancing the property, you will have more closing costs.

Make sure you really want to be in this area. I have never lived over there and I can’t say I would feel comfortable/safe. Talk to a bank about purchasing the home with a bank loan. With a mortgage company, you will have a lot more closing costs. I would also talk with a mortgage company (Prime West Mortgage would be my choice 😉 ) Also, call some landlords and even the police department and get their take on the area. At the end of the day it really comes down to what your goals are, how much you have saved up, and what you can qualify for right now. If all three of these lead back to only this property, then I would consider it. It might not be the best deal ever, but either way you will learn more about real estate, make connections, and be less afraid to take action. 

Good luck man and I hope this helps! 

@Jarrod Frankum I'm glad you're thinking through the numbers but I caution you from that area. It is high crime and it will likely not attract high quality tenants. Trust me that high quality tenants matter much more than cashflow on a spreadsheet. I would utilize experienced realtors, property managers, and Trulia's Crime Heat Map to choose your investment areas. Good luck.

@Jarrod Frankum for my Market I require SFR to Cash Flow a minimum of $200 per month (After renovation). There are many miscellaneous expenses that you did not include in your initial analysis (most investors don't). Such as Pest Management, Accounting, Lawn Care/Snow removal, Legal, Administrative, Marketing, etc... All these type of expenses may only occur once or twice a year. If you have poor quality tenants or the property is in a bad area you may have more repair/maintenance cost than originally expected. $100 may not cover the compilation of these expenses. You will be able to identify many of them during due diligence.

$20,000 may or may not be enough.  My Rehabs run between $20K and $50K.  But I only buy distressed properties.

@Cameron Lambo 1. The property should qualify for a 203K loan. The whole purpose of that type loan is to be able to do renovations. Not cosmetic repair. 2. If you check his Report you will see he included PMI in the Cash Flow analysis. Totally agree with the remainder of your comments.