Please Help Analyze - First Potential Property

9 Replies

Hello all, looking to take the plunge and pick up our first (intentional) investment property. The logistics of BRRRR are a little too daunting for us right now, having not built a very robust network (particularly in the way of contractors); we've had a hell of a time finding people to work on our own home, much less on a property we are on strict timelines for.

So for now, we are looking predominantly for cash flowing rentals that are mostly turnkey, and we are hoping for, but not relying on long term appreciation/equity as our main focus.

3/2 Townhouse - Zip Code 27834
1496 SqFt

Asking price: $92,000
Comps:  $86,000 - $90,000
Offer: $83,000
Repairs: ~$3,000 - $4,000 -- just needs paint as far as we can tell during our walkthrough

Rent: Currently not rented, but should rent for $900 - $950 based on comps.

P&I: $301
Taxes: $73
Insurance: $32
HOA: $27
Management: 8%
Maint: 5%
CapEx: 8%
Vacancy: 8%
Holding/Repair Time: 1-2 months (approx $600 - $1,200)
Closing Costs: ~ $3,300

Financing:
25% down
30 Year Fixed @ 4.125%

Total Cash in (including repairs): $28,837

Operating Expenses: $407.50
NOI: $542.50
Cash Flow: $240.81

Cash on Cash: 9.8% - 10.02%
Cap Rate: ~7.15%

Notes: The property is a townhouse (1 half of a duplex) in Greenville, NC. Class B/C as best as I can tell with my limited experience. Well kept with new floors and carpets, siding looks good, fixtures in good condition, and no overt signs of major repairs needed. We find some comfort in the townhouse and the HOA in that hopefully it will limit some CapEx over time.

A lot hinges on the $950 rent. $900 drops us to 8.5% CoC, and anything lower would better be put into the stocks as far as I'm concerned, unless maybe I'm missing something? I have a mental block for figures under 10%, but I'm not really clear on what's considered reasonable in this respect... I come from a heavy dividend stock portfolio background

And of course it ALL hinges on getting our offer accepted... Increased purchase price to $86,000 takes us almost below 9%.

Happy to receive input, and thanks for taking the time!

The deal looks tight to me. I expect a better rent to price ratio. At that price range my guess is you are not looking at solid appreciation that you can count on. 

@Elliot Fuller the rent comps look optimistic to me. Rentometer is giving me a median rent of $750 for a 3-bedroom in that zip code, and a 75th percentile rent of $913.  Given you said that so much of this deal's success depends on your rent projections, I'd think you'd want to err on the side of pessimism with your rent projections.  If you did that, the 25th percentile is $561.

And all that assumes you don't have any surprises, like HOA assessments for a roof repair or cracking foundation, a water heater that needs to be replaced, etc. Or even just a higher-than-expected vacancy period that eats into your income. It's hard to say more without more specific property info, but I'd tread very lightly on this deal. Definitely push back on the asking price, as you mentioned.

How long has the property been on the market for?  Also, why are you putting down more than the minimum 20% as a down payment?

@Elliot Fuller one last thing I just noticed on Rentometer is that average rents across the board for that zip code are lower today than they were a year ago.  If the lynchpin of your strategy is strong and stable rents, this downward trend on local rents indicates you should proceed with extreme caution:

Solid advice, thank you.

Kevin, I am working with a property manager now to try to feel out how reasonable the $950 is.

Richie, I feel the same way. It seems like $900 is a major rent plateau in this area, and generally speaking I've had a difficult time finding trends from area-to-area and house to house. So I am trying to put in the work now estimating fair rent price before even making the offer.

The place has been listed for only about a week, but this is a strong seller's market and some really unusual deals are selling pretty quickly at unusual prices that I have a hard time understanding how they'd be profitable.

The lenders I've spoken with were offering anywhere between 4% and 4.88% loans with between 20% and 35% down. The 4.125% @ 25% down yielded the strongest CoC return.

We also have a LLC which we tried to get quotes for financing but all the rates and terms are considerably worse for it.

Lastly, this is a pretty lively college town with a large hospital.  On the same token a good portion is low income, typical east North Carolina, without much growth.

What do you think would cause that kind of disparity in 3 bedroom rents in particular year over year?  That's probably a pretty broad question but worth a shot...

@Elliot Fuller I'm in a similar situation with numbers close to yours. I was looking to rent my property but after researching and reading more flipping it makes more sense. My cash flow will be terrible like, <$100 per month.

Do you have any value add opportunities? If you can negotiate well maybe a quick flip is the better option. 

There are some value add opportunities popping up here and there but it is a race to grab them. Many of the fixer uppers are listing and selling for nearly what I'd assume is their ARV so I'm not sure how someone is making profit from them, but I guess I'll wait and see if they pop up back on the market in a flipped state to see...

I work 90 minutes away, and trying to coordinate contractors is a full time job in itself out here... so until I get some experience and some reliable networking done, I think I'd only lose money and time trying to coordinate a flip or BRRRR.

I'm happy with a 9% CoC return for the most part, as long as it's secure and stable.

@Elliot Fuller I'd only be speculating, but I'd guess there's a correlation between the drop in 3-bedroom rents over the last year, the fact that you mention it's a strong seller's market, and the difficulty in finding candidate properties on the MLS. 3BR properties may be in high demand with renters in your local market, and if that's the case then investors will gravitate toward that type of property and bid up the purchase prices. A subsequent glut in the rental supply might lead to a drop in rents if demand doesn't rise to keep up.

I'm not surprised that banks would charge you more if the loan was in the LLC's name. I feel like I've read about that in these forums before. If this is a conventional loan, the LLC likely doesn't have the same credit history that you do personally, so the loan would be riskier, right? FYI there are many pros and cons (tax implications, etc.) with applying under the LLC's name vs. applying in your name. I'm not a licensed investment advisor or anything, so please take what I say with a grain of salt.

Based on your description of the local market, it sounds like off-market deals is the way to improve your deal flow pipeline, in order to purchase at a price that gives you elbow room for repairs and a healthy profit. Driving for dollars, direct mail, and SEO / social media advertising are all various strategies that folks in these forums can talk about with way more authority than I can. I personally am leaning toward social media ads, since people who click on them are likely easier to close than people getting a random postcard in the mail. But everyone is different. Experiment with everything and see which has the best ROI for you.

Lastly, if you don't understand how some deals can be profitable, there can sometimes be pressure to do a deal that doesn't make sense, in order to "get in the game".  Hopefully I'm stating the obvious here, but it would be a mistake to do so.  Warren Buffett has this concept of his "circle of competence", which basically means he doesn't invest in things he doesn't understand.  If that kind of idea is good enough for him, it's probably good enough for us mere mortals as well.

BTW @Elliot Fuller , one value-add strategy that Brandon Turner sometimes mentions on the BiggerPockets podcast is taking an over-sized 2-bedroom property (i.e. one whose square footage is already closer to a 3-bedroom) and actually converting it into a 3-bedroom.  If I'm correct about the drop in average rent and what it implies about investor competition, this means that there may be less competition for 2-bedroom and 4-bedroom properties (especially 2-bedroom ones).  So maybe consider Brandon's strategy as a way to get into the 3-bedroom bracket at a relatively low price point.  Although you'd be moving the property from a bracket with little downward rent pressure into one with relatively greater pressure, so factor that in as well.