Hi @Matt Ten and welcome to BP!
I think your repairs and capex are both very low. How old is the house? Often, I see approx 13% for capex (5%) and repairs (8%) combined. But you could also do a flat amount, such as $50/month or $200/month, or whatever. My concern would be that you're not leaving a whole lot of room for error.
Also, vacancy may be low, but that depends on the market.
What are your investing goals? Are you looking for cash flow? 5-6% with relatively aggressive (in my opinion) expense projections is not a good investment for cash flow purposes. On the other hand, if you're looking for asset appreciation and loan paydown - I don't know this market, but this could be a great play, and you may get 5-6% cash flow to boot!
Feel free to shoot additional/more specific questions over if you have any.
@Simcha Davidman hey thanks for all the great insights. The area is in Westchester and the appreciation of the town is about 3 percent a year so can’t get in it for just the appreciation alone.
The house is in decent condition but will likely need a new roof and boiler within the next two years. I figured 25k for that plus 50k for some basic renovations - two new bathrooms, some landscaping, windows, re-carpet, some new kitchen appliances. I figured for 75k all-in with the new boiler and roof I’d be okay with a low capex.
I am looking to rent out for 4250 which I think is doable and to high net worth individuals which is the core of this area.
So the numbers would be 425k purchase + 75k renovations + 2.5k closing. The after repair value of the house would be 600k based on at least three nearby comps. And With low mortgage rate I could cash flow 1k a month (even after accounting for about 15k per year taxes). I thought that’s pretty good/safe for my first investment; but maybe I’m wrong?
Zillow's rent estimate is $2,700. Do comparable houses (post-renovation) rent for $4,250 in that area?
Also, it's listed for 575k. Is it realistic for you to get it for 425k-450k?
@Pavel Bennett good questions. Not much rental data in Zillow for the area but I feel confident based on my Broker’s experience within the area that 4250 is achievable.
It’s an estate so I’m really going through the exercise of seeing what my “best and final offer” should be-trying to take emotion out of it. Even if they don’t drop to that price (I have put in the offer at 420k), this exercise is sort of getting me more comfortable with my maths.
@Matt Ten I lived in Westchester for 18 years! (From White Plains). Miss it! (Minus the HCOL & angry people lol).
How did you come up with your ARV?
@Matt Ten, You insurance estimate of $600 per year is likely very low. My insurance on a similarly priced house in southern westchester is $1800 per year. With that said, it is a multifamily, so there is likely a premium paid for that.
I would also expect repairs to be more the $42.50 per month. Even if you do a rehab, it is likely an older house; things break.
I would call some property management companies in the area and ask about the rent rates on the prospective property and surrounding areas. Brokers can be a bit of a "optimist" when it comes to rent rates.
If I could afford $4000 a month in rent, I would just buy. Your pool of applicants is going to be ridiculously small.
Take your money and put it into C/B assets with more meat on the bone for rentals. Also be ultra conservative in your numbers. I've estimate 10% CAPEX and 10% maintenance on my duplex and I've blown those numbers out of the water. Things break or need replacement.
@Matt Ten Capex does not care if it everything is brand new. You said you will put in a new boiler and roof for $25k. Use 25 years as life span = $1000 per year /12 months in a year= $83 per month for a boiler and roof that you just replaced and that is in today's dollars not 25 years from now. You still have to account for flooring,appliances,painting,cabinets,gutters,hvac,hot water heater,etc. The capex for one item already exceeds your repair and capex budget. Be prepared to bring cash out of pocket. I use 8% vacancy,5% repairs,and 10% capex.
On thing to consider is that 3% appreciation on a property is not all bad. If you're putting down only 25%, it's really like a return of 12% (3% / 25%) (not including the reno costs for simplicity), plus loan paydown - so it's not really bad at all. Just bear in mind that as your equity takes up a larger part of the asset, you will get less of a boost from the leverage.
Have you used this broker for anything before? He's the broker trying to sell you this property? Is he yours or the seller's? Do you know with certainty that he regularly lists and rents out houses? Have you seen his list of available rentals, or recently rented out properties? Generally assume that brokers projections are on the high end. If you cut the rent by 10%, what happens to your returns?
I think you're right - having that $1k cash flow every month will make things that come up fairly easy to absorb. You need to bring a plumber or electrician in for something stupid and it costs $200, it's way higher than your $42.50 budgeted, but you're also not going to pull money out of your savings to make the mortgage payment.
On the other hand, if you're sinking $191k into this, is it really the best use of all that money to earn 3-5% cash returns. You may determine that it is. I'm not saying it's not a good move. I don't know your financial situation (I'm not asking :) ) or what your short and long term goals are. Just in terms of safety, assuming the rents are really that high, I would think you should have a pretty nice margin of safety. Other than that, it becomes a lot more subjective.
I think the exercise of going through the math and putting the offer in is beneficial in and of themselves, whether or not you proceed and whether or not you get the deal.
@Joe P. Great point. For my first investment in trying to stick closer to home and something a bit less risky. Which is why I’m aiming to convert a B into a B+. But maybe this just doesn’t make sense.
@Thomas Hundtoft that’s a good idea. The more I think about this property the more I think it may be better as a flip. If purchased at 420k, I think for 100-125k I could turn this into a 600k property in about 6-9 months. What’s killing the numbers on a rental for me is:
- risk that it won’t get 4250 per month rent
- risk that capex expands even with some new systems
- 15k per year taxes
- risk of higher vacancy rate than I’ve anticipated
@Matt Ten , one other point. You should verify the rent that the agent/broker suggests on RentOMeter or a similar service. I believe it is a 3 bedroom. RentOmeter suggests that the Average Rent is around 2600 and Median Rent is 2800. The Rent you propose is almost 61% higher.
CapX should be 5-8%
Repairs should be 5-8%
Depending on the area vacancy rates can vary. On multifamily properties I like to have enough vacancy taken out to cover the entire building sitting empty for a whole month (which is very unlikely to happen in my opinion on a 3-4 unit building). So if I make 3000$ a month on a 3 unit property, I like to take out enough vacancy per month so that after 12 months I have 3000$ in reserves. Also going into the deal I have enough in reserves to cover the initial purchase tenant turnover. Again I like to have 1 whole month of the buildings rent in reserves at purchase time.
I normally figure 8-10% depending on what gets me my monthly rent roll number.
Hi @Matt Ten just going to put in my 2 cents. The upper Westchester market is not a strong single family house rental market for a couple reasons. As mentioned before the cost to rent a house in this market is extraordinary as in your example above. You can find renters willing to pay these prices but they are few and far between. Many of these types of renters are on temporary assignments to work in the city and don't want to live in the city but would probably want to live closer to it than Katonah (like the rivertowns for example). Bottom line is that you COULD find someone to pay that high of rent for a 3br house (when a 3br apt is under $3000 in most parts of the county) but it could sit vacant for a LONG time and you would have difficulty replacing tenants with long bouts of vacancy for each turnover. Let's talk more! It makes much more sense as a flip as you said before and if you want to learn more about this area feel free to message me!