Would appreciate feedback on potential first deal

Question

I would love feedback on things I need to consider or whether this is a good deal to get started in real estate investing in.

Details:

-4 different town home units, each unit is 2 bed 2 bath town home.

- 90k / unit. 360k total investment

- Owner financing from family friend who owns them. 5k (1,250 per unit) down. 355k financed at flat 5% interest rate. No PMI. 30 year amortization table.

Cash flow stats:

Costs: $476.43 principal+interest, $47 insurance, $70 taxes monthly, $35 HOA monthly dues, $55 Property manager

Total monthly costs (for 1 unit): $683.43

Each Unit currently rents for $825 / month with very fast turnover so very little vacancy.

Cash flow: Positive $141.57/ month / unit (total $566.28 monthly).

This seems like a great deal. Is there something I am not taking into consideration?

Thanks in advance for any feedback!

Caleb Heimsoth · Answer

Capex is separate then maintenance.  Maintenance is (for example) my toilet is clogged so I unclog it.  Capex is big stuff.  Like a hailstorm took out my roof, now I need a new one.

Vacancy varies by area, you’ll want to get a good understanding of that.  In my experience it’s usually around a month or 8 percent, give or take a week or two.

Matt Gooding · Answer

What is the rule of thumb for accounting for vacancy? I have read different things, only account for 10 months of the year being rented? 11 months?

Also from my understanding with these being ranch style town homes the opportunity for capex (I assume this was what you were referring to as maintenance?) expenses isn't quite as high as it would be in other real estate.

I should also clarify that my goal when approaching this deal is not to add monthly income to my budget. I plan on opening an entirely separate bank account that will explicitly run these units through. Should I reach the point where I have a standing 3-5k in that account to cover large capex expenses I would then use the extra cash flow per month to start paying off one of the units until I owned them all out right. I am totally open to losing money on these units in some years (short term) if large capex expenses occur in order to build long term wealth.

The reason I am only putting 5k down is not because it is all I can afford but rather because the financing terms are so favorable with so little down. The properties (unless I am missing something major) still cash flow positive with so little down. I am viewing this as a very long term wealth building tool and not a way to increase my monthly income.

@Caleb Heimsoth Thanks for your input though, please let me know if there is anything else I am unaware of with this being my first deal.

Caleb Heimsoth · Answer

@Matt Gooding you’re not accounting for vacancy or maintenance either in addition to not accounting for capex.  I’d pass on this deal Unless you can put more down

Matt Gooding · Answer

Good to know. I know the roofs were 30 year roofs put on in 2003 so they should have some life on them. I know at least 2 of the 4 HVAC units have been replaced. I will be viewing them next week so if there is anything else I should be on the look out for please let me know.

Anthony H. · Answer

Capex = capital expenditures. Basically your future big expenses like roof, AC or any other issue that may surface due to normal wear and tear. You should set aside some cash each month.

Matt Gooding · Answer

I am unsure what capex means, but there have been 2 that have sold in the past 2 years. They sold for 87.5 and 95. So right in the middle of that. They were built in 2003 and the person I am buying them from bought them brand new then and has owned them the whole time so I trust the condition fairly well (better than I think I would if I didn't know the seller which I guess is most cases).

Anthony H. · Answer

How about your capex? How old are the townhomes? DId you check the comps in the area to make sure you pay the right price?