Rental property analysis

6 Replies

I have only just begun researching real estate investment so I've been analyzing random properties for practice, and I came across one that seems really good to me but I'm wondering what I might be missing. I've tried to be conservative on all my numbers. Here's the property https://www.redfin.com/TN/Knox... 

Location: Outskirts of Knoxville, TN 37920. I think the area would be considered B class or maybe B-. Here's the Bestplaces page.

Purchase price: $205k

For simplicity and to be conservative I will assume this is the fair market value.

Down payment: $51,250 (25%)

Closing costs: $2500 I got this number by googling "average Tennessee closing costs", seeing $2366 and rounding up.

Rehab: $0. The property appears to be in turnkey condition. 

Total cash invested: $53,750

Rent: $2400. The property is 3 units: 2/1, 2/1, and 1/1. Nearby rentals on Craigslist are $895 for a 2/1, and $700 for a 1/1. That would suggest a total of $2490 but we'll round down. It should be noted that this property is much nicer and more recently renovated than these comps.

Vacancy: $192 (8%)

Property tax: $106. City website says $2.4638 per $100 of assessed value, where the assessed value is 25% of the market value which I'm using the purchase price for. ((205,000 * 0.25) / 100) * 2.4638 = $1262 per year or ~$106/month

Insurance: $100. I googled "average tennessee homeowners insurance" and got answers from $900-1100 per year. I will use $1200/year.

Maintenance: $120 (5%)

CapEx: $240 (10%)

Utilities: $100. Tenant pays electric (which runs the heat), and this thread suggests around $40 each for water and garbage. Round up to $100.

Total expense: $858 or 35% of rent.

Mortgage: $862.98. $153,750 @ 5.5% (conservative as I have poor credit) over 30 years

Cash flow: $669

Cash on cash return: 14.94%

So what do you think? 

Nice job on the numbers! Couple tidbits: 

Your closing costs will be about double that. If using financing there would be lender processing fees, origination fees, appraisal, lender's title insurance, and some other nonsense fees. Closing costs are way less for all cash deals of course.

Nobody recommends paying retail for a turn key property in the peak of a market cycle. I'd try to get it with a good amount of built in equity. Remember the age old saying in real estate investing is that you "make money when you buy." But if you're in it for the long haul, are OK with parting with 50K, want to grow slowly and steadily, and don't try to sell if you get upside down, then this looks like a nice little property. Knoxville is on fire right now with some big things happening for job growth, and I'm very optimistic about buy / holds there.

Originally posted by @Daniel Beaulieu:

Nice job on the numbers! Couple tidbits: 

Your closing costs will be about double that. If using financing there would be lender processing fees, origination fees, appraisal, lender's title insurance, and some other nonsense fees. Closing costs are way less for all cash deals of course.

Nobody recommends paying retail for a turn key property in the peak of a market cycle. I'd try to get it with a good amount of built in equity. Remember the age old saying in real estate investing is that you "make money when you buy." But if you're in it for the long haul, are OK with parting with 50K, want to grow slowly and steadily, and don't try to sell if you get upside down, then this looks like a nice little property. Knoxville is on fire right now with some big things happening for job growth, and I'm very optimistic about buy / holds there. 

 Good to know re: closing costs. Thanks.

Totally understand your second point, but that's kind of why this deal seemed exceptional to me. In the sense that, if it already cash flows >$200/door and with a 15% return even at the asking price and conservative estimates, it must be a great deal for an investor who can get it for less. Right? I dunno. I've run the numbers on probably 100 properties so far in various markets and this is the first one that didn't require liberal estimates or make-pretend fudging of the purchase price/ARV to get more than $100 cash flow or 7-8% returns, so that's why I brought it up here. Thanks for the feedback!

@Justin Clemmer - Here's a few thoughts I have.

1. One expense I don't see mentioned is lawn care. This says 1 acre of land so that could end up being a big lawn care bill depending on how much grass there is. 

2. Closing Costs will be closer to $5,500-$6,000 rather than $2,500. 

3. Don't assume rehab is $0. There may be some things that come up on the inspection you need to address so keep at least an extra $5,000 aside for that.

4. Make sure it's legally a triplex. It's listed on the property assesor's website as a single family. 

5. Looks like it's on a main road which isn't ideal. 

Aside from that, it looks like it's in good shape and has been well maintained!

Originally posted by @James Allen :

@Justin Clemmer - Here's a few thoughts I have.

1. One expense I don't see mentioned is lawn care. This says 1 acre of land so that could end up being a big lawn care bill depending on how much grass there is. 

2. Closing Costs will be closer to $5,500-$6,000 rather than $2,500. 

3. Don't assume rehab is $0. There may be some things that come up on the inspection you need to address so keep at least an extra $5,000 aside for that.

4. Make sure it's legally a triplex. It's listed on the property assesor's website as a single family. 

5. Looks like it's on a main road which isn't ideal. 

Aside from that, it looks like it's in good shape and has been well maintained!

 Good points, thank you. What are the implications regarding the "legally a triplex" part? Must the city legally recognize it as a triplex before I'm allowed to rent it out as such? If it's not legally a triplex, what is the process to make it so? Thanks.

@Justin Clemmer - It has to do with the fact that proper permits may not have been taken out when they made additions. It's not really my area of expertise but i believe some counties/cities just give you a penalty/fine to pay but it may really depend place by place. I would suggest looking into it. I do know that it will make it harder to sell/transact vs a permitted triplex and thus your price point may take a hit.